MABS Mortgage 101
Real Estate and Mortgage Glossary & Definitions
acceleration clause
A clause in your mortgage which allows the lender to demand payment of the
outstanding loan balance for various reasons. The most common reasons for
accelerating a loan are if the borrower defaults on the loan or transfers title
to another individual without informing the lender.
adjustable-rate mortgage (ARM)
A mortgage in which the interest changes periodically, according to
corresponding fluctuations in an index. All ARMs are
tied to indexes.
adjustment date
The date the
interest rate changes on an adjustable-rate mortgage
amortization
The loan payment consists of a portion which will be applied to pay the
accruing interest on a loan, with the remainder being applied to the principal.
Over time, the interest portion decreases as the loan balance decreases, and
the amount applied to principal increases so that the loan is paid off
(amortized) in the specified time.
amortization
schedule
A table which shows how much of each payment will be applied toward principal
and how much toward interest over the life of the loan. It also shows the
gradual decrease of the loan balance until it reaches zero.
annual percentage rate (APR)
This is not the note rate on your loan. It is a value created according to a
government formula intended to reflect the true annual cost of borrowing,
expressed as a percentage. It works sort of like this, but not exactly, so only
use this as a guideline: deduct the closing costs from
your loan amount, then using your actual loan payment, calculate what the
interest rate would be on this amount instead of your actual loan amount. You
will come up with a number close to the APR. Because you are using the same
payment on a smaller amount, the APR is always higher than the actual not rate
on your loan.
application
The form used to apply for a mortgage loan, containing information about a
borrower’s income, savings, assets, debts, and more.
appraisal
A written justification of the price paid for a property, primarily based on an
analysis of comparable sales of similar homes nearby.
appraised value
An opinion of a property's fair market value, based on an appraiser's
knowledge, experience, and analysis of the property. Since an appraisal is
based primarily on comparable sales, and the most recent sale is the one on the
property in question, the appraisal usually comes out at the purchase price.
appraiser
An individual qualified by education, training, and experience to estimate the
value of real property and personal property. Although some appraisers work
directly for mortgage lenders, most are independent.
appreciation
The increase in the value of a property due to changes in market conditions,
inflation, or other causes.
assessed value
The valuation placed on property by a public tax assessor for purposes of
taxation.
assessment
The placing of a value on property for the purpose of taxation.
assessor
A public official who establishes the value of a property for taxation
purposes.
asset
Items of value owned by an individual. Assets that can be quickly converted
into cash are considered "liquid assets." These include bank
accounts, stocks, bonds, mutual funds, and so on. Other assets include real
estate, personal property, and debts owed to an individual by others.
assignment
When ownership of your mortgage is transferred from one company or individual
to another, it is called an assignment.
assumable mortgage
A mortgage that can be assumed by the buyer when a home is sold. Usually, the
borrower must "qualify" in order to assume the loan.
assumption
The term applied
when a buyer assumes the seller’s mortgage.
balloon mortgage
A mortgage loan that requires the remaining principal balance be paid at a
specific point in time. For example, a loan may be amortized as if it would be
paid over a thirty year period, but requires that at the end of the tenth year
the entire remaining balance must be paid.
balloon payment
The final lump sum payment that is due at the termination of a balloon
mortgage.
bankruptcy
By filing in federal bankruptcy court, an individual or individuals can
restructure or relieve themselves of debts and liabilities. Bankruptcies are of
various types, but the most common for an individual seem to be a "Chapter
7 No Asset" bankruptcy which relieves the borrower of most types of debts.
A borrower cannot usually qualify for an "A" paper loan for a period
of two years after the bankruptcy has been discharged and requires the re-establishment
of an ability to repay debt.
bill of sale
A written document that transfers title to personal property. For example, when
selling an automobile to acquire funds which will be used as a source of down
payment or for closing costs, the lender will usually require the bill of sale
(in addition to other items) to help document this source of funds.
biweekly mortgage
A mortgage in which you make payments every two weeks instead of once a month.
The basic result is that instead of making twelve monthly payments during the
year, you make thirteen. The extra payment reduces the principal, substantially
reducing the time it takes to pay off a thirty year mortgage. Note:
there are independent companies that encourage you to set up bi-weekly payment
schedules with them on your thirty year mortgage. They charge a set-up fee and
a transfer fee for every payment. Your funds are deposited into a trust account
from which your monthly payment is then made, and the excess funds then remain
in the trust account until enough has accrued to make the additional payment
which will then be paid to reduce your principle. You could save money by doing
the same thing yourself, plus you have to have faith that once you transfer
money to them that they will actually transfer your funds to your lender.
bond market
Usually refers to the daily buying and selling of thirty year treasury bonds.
Lenders follow this market intensely because as the yields of bonds go up and
down, fixed rate mortgages do approximately the same thing. The same factors
that affect the Treasury Bond market also affect
mortgage rates at the same time. That is why rates change daily, and in a
volatile market can and do change during the day as well.
bridge loan
Not used much anymore, bridge loans are obtained by those who have not yet sold
their previous property, but must close on a purchase property. The bridge loan
becomes the source of their funds for the down payment. One reason for their
fall from favor is that there are more and more second mortgage lenders now
that will lend at a high loan to value. In addition, sellers often prefer to
accept offers from buyers who have already sold their property.
broker
Broker has several meanings in different situations. Most Realtors are
"agents" who work under a "broker." Some agents are brokers
as well, either working form themselves or under another broker. In the
mortgage industry, broker usually refers to a company or individual that does
not lend the money for the loans themselves, but broker loans to larger lenders
or investors. (See the Home Loan Library that discusses the different types of
lenders). As a normal definition, a broker is anyone who acts as an agent,
bringing two parties together for any type of transaction and earns a fee for
doing so.
buydown
Usually refers to a fixed rate mortgage where the interest rate is "bought
down" for a temporary period, usually one to three years. After that time
and for the remainder of the term, the borrower’s payment is calculated at the
note rate. In order to buy down the initial rate for the temporary payment, a
lump sum is paid and held in an account used to supplement the borrower’s
monthly payment. These funds usually come from the seller (or some other
source) as a financial incentive to induce someone to buy their property. A
"lender funded buydown" is when the lender
pays the initial lump sum. They can accomplish this because the note rate on
the loan (after the buydown adjustments) will be
higher than the current market rate. One reason for doing this is because the
borrower may get to "qualify" at the start rate and can qualify for a
higher loan amount. Another reason is that a borrower may expect his earnings
to go up substantially in the near future, but wants a lower payment right now.
call option
Similar to the acceleration clause.
cap
Adjustable Rate Mortgages have fluctuating interest rates, but those
fluctuations are usually limited to a certain amount. Those limitations may
apply to how much the loan may adjust over a six month period, an annual period,
and over the life of the loan, and are referred to as "caps." Some ARMs, although they may have a life cap, allow the interest
rate to fluctuate freely, but require a certain minimum payment which can
change once a year. There is a limit on how much that payment can change each
year, and that limit is also referred to as a cap.
cash-out refinance
When a borrower refinances his mortgage at a higher amount than the current
loan balance with the intention of pulling out money for personal use, it is
referred to as a "cash out refinance."
certificate of deposit
A time deposit held in a bank which pays a certain amount of interest to the
depositor.
certificate of deposit index
One of the indexes used for determining interest rate changes on some
adjustable rate mortgages. It is an average of what banks are paying on
certificates of deposit.
Certificate of Eligibility
A document issued by the Veterans Administration that certifies a veteran’s
eligibility for a VA loan.
Certificate of Reasonable Value (CRV)
Once the appraisal has been performed on a property being bought with a VA
loan, the Veterans Administration issues a CRV.
chain of title
An analysis of the transfers of title to a piece of property over the years.
clear title
A title that is free of liens or legal questions as to ownership of the
property.
closing
This has different meanings in different states. In some states a real estate
transaction is not consider "closed" until the documents record at
the local recorders office. In others, the "closing" is a meeting
where all of the documents are signed and money changes hands.
closing costs
Closing costs are separated into what are called "non-recurring closing
costs" and "pre-paid items." Non-recurring closing costs are any
items which are paid just once as a result of buying the property or obtaining
a loan. "Pre-paids" are items which recur
over time, such as property taxes and homeowners insurance. A lender makes an
attempt to estimate the amount of non-recurring closing costs and prepaid items
on the Good Faith Estimate which they must issue to the borrower within three
days of receiving a home loan application.
closing statement
See Settlement Statement.
cloud on title
Any conditions revealed by a title search that adversely affect the title to
real estate. Usually clouds on title cannot be removed except by deed, release,
or court action.
co-borrower
IAn additional individual who is both obligated on
the loan and is on title to the property.
collateral
In a home loan, the property is the collateral. The borrower
risks losing the property if the loan is not repaid according to the terms of
the mortgage or deed of trust.
collection
When a borrower falls behind, the lender contacts them in an effort to bring
the loan current. The loan goes to "collection." As part of the
collection effort, the lender must mail and record certain documents in case
they are eventually required to foreclose on the property.
commission
Most salespeople earn commissions for the work that they do and there are many
sales professionals involved in each transaction, including Realtors, loan
officers, title representatives, attorneys, escrow representative, and
representatives for pest companies, home warranty companies, home inspection
companies, insurance agents, and more. The commissions are paid out of the
charges paid by the seller or buyer in the purchase transaction. Realtors
generally earn the largest commissions, followed by lenders, then the others.
common
area assessments
In some areas they are called Homeowners Association Fees. They are charges
paid to the Homeowners Association by the owners of the individual units in a
condominium or planned unit development (PUD) and are generally used to
maintain the property and common areas.
common
areas
Those portions of a building, land, and amenities owned (or managed) by a
planned unit development (PUD) or condominium project's homeowners' association
(or a cooperative project's cooperative corporation) that are used by all of
the unit owners, who share in the common expenses of their operation and
maintenance. Common areas include swimming pools, tennis courts, and other
recreational facilities, as well as common corridors of buildings, parking
areas, means of ingress and egress, etc.
common law
An unwritten body of law based on general custom in
community property
In some states, especially the southwest, property acquired by a married couple
during their marriage is considered to be owned jointly, except under special
circumstances. This is an outgrowth of the Spanish and Mexican heritage of the
area.
comparable sales
Recent sales of similar properties in nearby areas and used to help determine
the market value of a property. Also referred to as
"comps."
condominium
A type of ownership in real property where all of the owners own the property,
common areas and buildings together, with the exception of the interior of the
unit to which they have title. Often mistakenly referred to as a type of
construction or development, it actually refers to the type of ownership.
condominium
conversion
Changing the ownership of an existing building (usually a rental project) to
the condominium form of ownership.
condominium hotel
A condominium project that has rental or registration desks, short-term
occupancy, food and telephone services, and daily cleaning services and that is
operated as a commercial hotel even though the units are individually owned.
These are often found in resort areas like
construction loan
A short-term, interim loan for financing the cost of construction. The lender
makes payments to the builder at periodic intervals as the work progresses.
contingency
A condition that must be met before a contract is legally binding. For example,
home purchasers often include a contingency that specifies that the contract is
not binding until the purchaser obtains a satisfactory home inspection report
from a qualified home inspector.
contract
An oral or written agreement to do or not to do a certain thing.
conventional mortgage
Refers to home loans other than government loans (VA and FHA).
convertible ARM
IAn adjustable-rate mortgage that allows the borrower
to change the ARM to a fixed-rate mortgage within a specific time.
cooperative (co-op)
A type of multiple ownership in which the residents of a multiunit housing
complex own shares in the cooperative corporation that owns the property,
giving each resident the right to occupy a specific apartment or unit.
cost of funds index (COFI)
One of the indexes that is used to determine interest rate changes for certain
adjustable-rate mortgages. It represents the weighted-average cost of savings,
borrowings, and advances of the financial institutions such as banks and
savings & loans, in the 11th District of the Federal Home Loan Bank.
credit
An agreement in which a borrower receives something of value in exchange for a
promise to repay the lender at a later date.
credit history
A record of an individual's repayment of debt. Credit histories are reviewed my
mortgage lenders as one of the underwriting criteria in determining credit
risk.
creditor
A person to whom money is owed.
credit report
A report of an individual's credit history prepared by a credit bureau and used
by a lender in determining a loan applicant's creditworthiness.
credit repository
An organization that gathers, records, updates, and stores financial and public
records information about the payment records of individuals who are being
considered for credit.
debt
An amount owed to another.
deed
The legal document conveying title to a property.
deed-in-lieu
Short for "deed in lieu of foreclosure," this conveys title to the
lender when the borrower is in default and wants to avoid foreclosure. The
lender may or may not cease foreclosure activities if a borrower asks to
provide a deed-in-lieu. Regardless of whether the lender accepts the
deed-in-lieu, the avoidance and non-repayment of debt will most likely show on
a credit history. What a deed-in-lieu may prevent is having the documents
preparatory to a foreclosure being recorded and become a matter of public
record.
deed of trust
Some states, like
default
Failure to make the mortgage payment within a specified period of time. For
first mortgages or first trust deeds, if a payment has still not been made
within 30 days of the due date, the loan is considered to be in default.
delinquency
Failure to make mortgage payments when mortgage payments are due. For most
mortgages, payments are due on the first day of the month. Even though they may
not charge a "late fee" for a number of days, the payment is still
considered to be late and the loan delinquent. When a loan payment is more than
30 days late, most lenders report the late payment to one or more credit
bureaus.
deposit
A sum of money given in advance of a larger amount being expected in the
future. Often called in real estate as an "earnest money
deposit."
depreciation
A decline in the value of property; the opposite of appreciation. Depreciation
is also an accounting term which shows the declining monetary value of an asset
and is used as an expense to reduce taxable income. Since this is not a true
expense where money is actually paid, lenders will add back depreciation
expense for self-employed borrowers and count it as income.
discount points
In the mortgage industry, this term is usually used in only in reference to
government loans, meaning FHA and VA loans. Discount points refer to any
"points" paid in addition to the one percent loan origination fee. A
"point" is one percent of the loan amount.
down payment
The part of the purchase price of a property that the buyer pays in cash and
does not finance with a mortgage.
due-on-sale
provision
A provision in a mortgage that allows the lender to demand repayment in full if
the borrower sells the property that serves as security for the mortgage.
earnest money deposit
A deposit made by the potential home buyer to show that he or she is serious
about buying the house.
easement
A right of way giving persons other than the owner access to or over a
property.
effective age
An appraiser’s estimate of the physical condition of a building. The actual age
of a building may be shorter or longer than its effective age.
eminent domain
The right of a government to take private property for public use upon payment
of its fair market value. Eminent domain is the basis for condemnation
proceedings.
encroachment
An improvement that intrudes illegally on another’s property.
encumbrance
Anything that affects or limits the fee simple title to a property, such as
mortgages, leases, easements, or restrictions.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally
available without discrimination based on race, color, religion, national
origin, age, sex, marital status, or receipt of income from public assistance
programs.
equity
A homeowner's financial interest in a property. Equity is the difference
between the fair market value of the property and the amount still owed on its
mortgage and other liens.
escrow
An item of value, money, or documents deposited with a third party to be
delivered upon the fulfillment of a condition. For example, the earnest money
deposit is put into escrow until delivered to the seller when the transaction
is closed.
escrow account
Once you close your purchase transaction, you may have an escrow account or
impound account with your lender. This means the amount you pay each month
includes an amount above what would be required if you were only paying your
principal and interest. The extra money is held in your impound account (escrow
account) for the payment of items like property taxes and homeowner’s insurance
when they come due. The lender pays them with your money instead of you paying
them yourself.
escrow analysis
Once each year your lender will perform an "escrow analysis" to make
sure they are collecting the correct amount of money for the anticipated
expenditures.
escrow disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage
insurance, and other property expenses as they become due.
estate
The ownership interest of an individual in real property. The
sum total of all the real property and personal property owned by an individual
at time of death.
eviction
The lawful expulsion of an occupant from real property.
examination of title
The report on the title of a property from the public records or an abstract of
the title.
exclusive listing
A written contract that gives a licensed real estate agent the exclusive right
to sell a property for a specified time.
executor
A person named in a will to administer an estate. The court will appoint an
administrator if no executor is named. "Executrix" is the feminine
form.
Fair Credit Reporting Act
A consumer protection law that regulates the
disclosure of consumer credit reports by consumer/credit reporting agencies and
establishes procedures for correcting mistakes on one's credit record.
fair market value
The highest price that a buyer, willing but not compelled to buy, would pay,
and the lowest a seller, willing but not compelled to sell, would accept.
Fannie Mae (FNMA)
The Federal National Mortgage Association, which is a congressionally
chartered, shareholder-owned company that is the nation's largest supplier of
home mortgage funds. For a discussion of the roles of Fannie Mae, Freddie Mac
(FHLMC), and Ginnie Mae (GNMA), see
the Library.
Fannie Mae's Community Home Buyer's
Program
An income-based community lending model, under which mortgage insurers and
Fannie Mae offer flexible underwriting guidelines to increase a low- or
moderate-income family's buying power and to decrease the total amount of cash
needed to purchase a home. Borrowers who participate in this model are required
to attend pre-purchase home-buyer education sessions.
Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development (HUD). Its
main activity is the insuring of residential mortgage loans made by private
lenders. The FHA sets standards for construction and underwriting but does not
lend money or plan or construct housing.
fee simple
The greatest possible interest a person can have in real estate.
fee simple estate
An unconditional, unlimited estate of inheritance that represents the greatest
estate and most extensive interest in land that can be enjoyed. It is of
perpetual duration. When the real estate is in a condominium project, the unit
owner is the exclusive owner only of the air space within his or her portion of
the building (the unit) and is an owner in common with respect to the land and
other common portions of the property.
FHA
mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Along
with VA loans, an FHA loan will often be referred to as a government loan.
firm commitment
A lender’s agreement to make a loan to a specific borrower on a specific
property.
first mortgage
The mortgage that is in first place among any loans recorded against a
property. Usually refers to the date in which loans are recorded, but there are
exceptions.
fixed-rate mortgage
A mortgage in which the interest rate does not change during the entire term of
the loan.
fixture
Personal property that becomes real property when attached in a permanent
manner to real estate.
flood insurance
Insurance that compensates for physical property damage resulting from
flooding. It is required for properties located in federally designated flood
areas.
foreclosure
The legal process by which a borrower in default under a mortgage is deprived
of his or her interest in the mortgaged property. This usually involves a
forced sale of the property at public auction with the proceeds of the sale
being applied to the mortgage debt.
401(k)/403(b)
An employer-sponsored investment plan that allows individuals to set aside
tax-deferred income for retirement or emergency purposes. 401(k) plans are
provided by employers that are private corporations. 403(b) plans are provided
by employers that are not for profit organizations.
401(k)/403(b) loan
Some administrators of 401(k)/403(b) plans allow for
loans against the monies you have accumulated in these plans. Loans against
401K plans are an acceptable source of down payment for most types of loans.
government loan (mortgage)
A mortgage that is insured by the Federal Housing Administration (FHA) or
guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing
Service (RHS). Mortgages that are not government loans are classified as
conventional loans.
Government National Mortgage
Association (Ginnie Mae)
A government-owned corporation within the U.S. Department of Housing and Urban
Development (HUD). Created by Congress on September 1, 1968, GNMA performs the
same role as Fannie Mae and Freddie Mac in providing funds to lenders for
making home loans. The difference is that Ginnie Mae
provides funds for government loans (FHA and VA)
grantee
The person to whom an interest in real property is conveyed.
grantor
The person conveying an interest in real property.
hazard insurance
Insurance
coverage that in the event of physical damage to a property from fire, wind,
vandalism, or other hazards.
Home Equity Conversion Mortgage (HECM)
Usually referred
to as a reverse annuity mortgage, what makes this type of mortgage unique is
that instead of making payments to a lender, the lender makes payments to you.
It enables older home owners to convert the equity they have in their homes
into cash, usually in the form of monthly payments. Unlike traditional home
equity loans, a borrower does not qualify on the basis of income but on the
value of his or her home. In addition, the loan does not have to be repaid
until the borrower no longer occupies the property.
home equity line of credit
A mortgage loan,
usually in second position, that allows the borrower to obtain cash drawn
against the equity of his home, up to a predetermined amount.
home inspection
A thorough
inspection by a professional that evaluates the structural and mechanical
condition of a property. A satisfactory home inspection is often included as a
contingency by the purchaser.
homeowners' association
A nonprofit
association that manages the common areas of a planned unit development (PUD)
or condominium project. In a condominium project, it has no ownership interest
in the common elements. In a PUD project, it holds title to the common
elements.
homeowner's insurance
An insurance
policy that combines personal liability insurance and hazard insurance coverage
for a dwelling and its contents.
homeowner's warranty
A type of
insurance often purchased by homebuyers that will cover repairs to certain
items, such as heating or air conditioning, should they break down within the
coverage period. The buyer often requests the seller to pay for this coverage
as a condition of the sale, but either party can pay.
HUD
median income
Median family
income for a particular county or metropolitan statistical area (MSA), as
estimated by the Department of Housing and Urban Development (HUD).
HUD-1 settlement statement
A document that provides an itemized
listing of the funds that were paid at closing. Items that appear on the
statement include real estate commissions, loan fees,
points, and initial escrow (impound) amounts. Each type of expense goes on a
specific numbered line on the sheet. The totals at the bottom of the HUD-1
statement define the seller's net proceeds and the buyer's net payment at
closing. It is called a HUD1 because the form is printed by the Department of
Housing and Urban Development (HUD). The HUD1 statement is also known as the
"closing statement" or "settlement sheet."
joint tenancy
A form of
ownership or taking title to property which means each party owns the whole
property and that ownership is not separate. In the event of the death of one
party, the survivor owns the property in its entirety.
judgment
A decision made
by a court of law. In judgments that require the repayment of a debt, the court
may place a lien against the debtor's real property as collateral for the
judgment's creditor.
judicial foreclosure
A type of
foreclosure proceeding used in some states that is handled as a civil lawsuit
and conducted entirely under the auspices of a court. Other states use
non-judicial foreclosure.
jumbo loan
A loan that
exceeds Fannie Mae’s and Freddie Mac’s loan limits, currently at $227,150. Also called a nonconforming loan. Freddie Mac and Fannie Mae
loans are referred to as conforming loans.
late charge
The penalty a
borrower must pay when a payment is made a stated number of days. On a first
trust deed or mortgage, this is usually fifteen days.
lease
A written
agreement between the property owner and a tenant that stipulates the payment
and conditions under which the tenant may possess the real estate for a
specified period of time.
leasehold estate
A way of holding
title to a property wherein the mortgagor does not actually own the property
but rather has a recorded long-term lease on it.
lease option
An alternative
financing option that allows home buyers to lease a home with an option to buy.
Each month's rent payment may consist of not only the rent, but an additional
amount which can be applied toward the down payment on an already specified
price.
legal description
A property
description, recognized by law, that is sufficient to locate and identify the
property without oral testimony.
lender
A term which can
refer to the institution making the loan or to the individual representing the
firm. For example, loan officers are often referred to as "lenders."
liabilities
A person's
financial obligations. Liabilities include long-term and short-term debt, as
well as any other amounts that are owed to others.
liability insurance
Insurance
coverage that offers protection against claims alleging that a property owner's
negligence or inappropriate action resulted in bodily injury or property damage
to another party. It is usually part of a homeowner’s insurance policy.
lien
A legal claim
against a property that must be paid off when the property is sold. A mortgage
or first trust deed is considered a lien.
life
cap
For an
adjustable-rate mortgage (ARM), a limit on the amount that the enterest rate can increase or decrease over the life of the
mortgage.
line of credit
An agreement by a
commercial bank or other financial institution to extend credit up to a certain
amount for a certain time to a specified borrower.
liquid asset
A cash asset or
an asset that is easily converted into cash.
loan
A sum of borrowed
money (principal) that is generally repaid with interest.
loan officer
Also referred to
by a variety of other terms, such as lender, loan representative, loan
"rep," account executive, and others. The loan officer serves several
functions and has various responsibilities: they solicit loans, they are the
representative of the lending institution, and they represent the borrower to
the lending institution.
loan origination
How a lender
refers to the process of obtaining new loans.
loan servicing
After you obtain
a loan, the company you make the payments to is "servicing" your
loan. They process payments, send statements, manage the escrow/impound
account, provide collection efforts on delinquent loans, ensure that insurance
and property taxes are made on the property, handle pay-offs and assumptions,
and provide a variety of other services.
loan-to-value (LTV)
The percentage
relationship between the amount of the loan and the appraised value or sales
price (whichever is lower).
lock-in
An agreement in
which the lender guarantees a specified interest rate for a certain amount of
time at a certain cost.
lock-in period
The time period
during which the lender has guaranteed an interest rate to a borrower.
margin
The difference
between the interest rate and the index on an adjustable rate mortgage. The
margin remains stable over the life of the loan. It is the index which moves up
and down.
maturity
The date on which
the principal balance of a loan, bond, or other financial instrument becomes
due and payable.
merged credit report
A credit report
which reports the raw data pulled from two or more of the major credit
repositories. Contrast with a Residential Mortgage Credit Report (RMCR) or a
standard factual credit report.
modification
Occasionally, a
lender will agree to modify the terms of your mortgage without requiring you t
refinance. If any changes are made, it is called a modification.
mortgage
A legal document
that pledges a property to the lender as security for payment of a debt.
Instead of mortgages, some states use First Trust Deeds.
mortgage banker
For a more
complete discussion of mortgage banker, see "Types of Lenders." A
mortgage banker is generally assumed to originate and fund their own loans,
which are then sold on the secondary market, usually to Fannie Mae, Freddie
Mac, or Ginnie Mae. However, firms rather loosely
apply this term to themselves, whether they are true mortgage bankers or simply
mortgage brokers or correspondents.
mortgage broker
A mortgage
company that originates loans, then places those loans with a variety of other
lending institutions with whom they usually have pre-established relationships.
mortgagee
The lender in a
mortgage agreement.
mortgage insurance (MI)
Insurance that
covers the lender against some of the losses incurred as a result of a default
on a home loan. Often mistakenly referred to as PMI, which is actually the name
of one of the larger mortgage insurers. Mortgage insurance is usually required
in one form or another on all loans that have a loan-to-value higher than
eighty percent. Mortgages above 80% LTV that call themselves "No MI"
are usually a made at a higher interest rate. Instead of the borrower paying
the mortgage insurance premiums directly, they pay a higher interest rate to
the lender, which then pays the mortgage insurance themselves. Also, FHA loans
and certain first-time homebuyer programs require mortgage insurance regardless
of the loan-to-value.
mortgage insurance premium (MIP)
The amount paid
by a mortgagor for mortgage insurance, either to a government agency such as
the Federal Housing Administration (FHA) or to a private mortgage insurance
(MI) company.
mortgage life and disability insurance
A type of term
life insurance often bought by borrowers. The amount of coverage decreases as
the principal balance declines. Some policies also cover the borrower in the
event of disability. In the event that the borrower dies while the policy is in
force, the debt is automatically satisfied by insurance proceeds. In the case
of disability insurance, the insurance will make the mortgage payment for a
specified amount of time during the disability. Be careful to read the terms of
coverage, however, because often the coverage does not start immediately upon
the disability, but after a specified period, sometime forty-five days.
mortgagor
The borrower in a
mortgage agreement.
multidwelling units
Properties that
provide separate housing units for more than one family, although they secure
only a single mortgage.
negative
amortization
Some adjustable
rate mortgages allow the interest rate to fluctuate independently of a required
minimum payment. If a borrower makes the minimum payment it may not cover all
of the interest that would normally be due at the current interest rate. In
essence, the borrower is deferring the interest payment, which is why this is
called "deferred interest." The deferred interest is added to the
balance of the loan and the loan balance grows larger instead of smaller, which
is called negative amortization.
no cash-out refinance
A refinance
transaction which is not intended to put cash in the hand of the borrower.
Instead, the new balance is caculated to cover the
balance due on the current loan and any costs associated with obtaining the new
mortgage. Often referred to as a "rate and term
refinance."
no-cost loan
Many lenders
offer loans that you can obtain at "no cost." You should inquire
whether this means there are no "lender" costs associated with the
loan, or if it also covers the other costs you would normally have in a
purchase or refinance transactions, such as title insurance, escrow fees,
settlement fees, appraisal, recording fees, notary fees, and others. These are
fees and costs which may be associated with buying a home or obtaining a loan,
but not charged directly by the lender. Keep in mind that, like a
"no-point" loan, the interest rate will be higher than if you obtain
a loan that has costs associated with it.
note
A legal document
that obligates a borrower to repay a mortgage loan at a stated interest rate
during a specified period of time.
note rate
The interest rate
stated on a mortgage note.
no-cost loan
Almost all lenders offer loans at "no points." You will find the
interest rate on a "no points" loan is approximately a quarter
percent higher than on a loan where you pay one point.
notice of default
A formal written
notice to a borrower that a default has occurred and that legal action may be
taken.
original principal balance
The total amount of principal owed on
a mortgage before any payments are made.
origination fee
On a government loan the loan
origination fee is one percent of the loan amount, but additional points may be
charged which are called "discount points." One point equals one
percent of the loan amount. On a conventional loan, the loan origination fee
refers to the total number of points a borrower pays.
owner financing
A property purchase transaction in
which the property seller provides all or part of the financing.
partial payment
A payment that is not sufficient to
cover the scheduled monthly payment on a mortgage loan. Normally, a lender will
not accept a partial payment, but in times of hardship you can make this
request of the loan servicing collection department.
payment change date
The date when a new monthly payment
amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment
mortgage (GPM). Generally, the payment change date occurs in the month
immediately after the interest rate adjustment date.
periodic payment cap
For an adjustable-rate mortgage where
the interest rate and the minimum payment amount fluctuate independently of one
another, this is a limit on the amount that payments can increase or decrease
during any one adjustment period.
periodic rate cap
For an adjustable-rate mortgage, a
limit on the amount that the interest rate can increase or decrease during any
one adjustment period, regardless of how high or low the index might be.
personal property
Any property that is not real
property.
PITI
This stands for principal, interest,
taxes and insurance. If you have an "impounded" loan, then your
monthly payment to the lender includes all of these and probably includes
mortgage insurance as well. If you do not have an impounded account, then the
lender still calculates this amount and uses it as part of determining your
debt-to-income ratio.
PITI reserves
A cash amount that a borrower must
have on hand after making a down payment and paying all closing costs for the
purchase of a home. The principal, interest, taxes, and insurance (PITI)
reserves must equal the amount that the borrower would have to pay for PITI for
a predefined number of months.
planned unit development (PUD)
A type of ownership where individuals
actually own the building or unit they live in, but common areas are owned
jointly with the other members of the development or association. Contrast with
condominium, where an individual actually owns the airspace of his unit, but
the buildings and common areas are owned jointly with the others in the
development or association.
point
A point is 1 percent of the amount of
the mortgage.
power of attorney
A legal document that authorizes
another person to act on one’s behalf. A power of attorney can grant complete
authority or can be limited to certain acts and/or certain periods of
time.
pre-approval
A loosely used term which is
generally taken to mean that a borrower has completed a loan application and provided
debt, income, and savings documentation which an underwriter has reviewed and
approved. A pre-approval is usually done at a certain loan amount and making
assumptions about what the interest rate will actually be at the time the loan
is actually made, as well as estimates for the amount that will be paid for
property taxes, insurance and others. A pre-approval applies only to the
borrower. Once a property is chosen, it must also meet the underwriting guidelines of the lender. Contrast
with pre-qualification
prepayment
Any amount paid to reduce the
principal balance of a loan before the due date. Payment in
full on a mortgage that may result from a sale of the property, the owner's
decision to pay off the loan in full, or a foreclosure. In each case, prepayment
means payment occurs before the loan has been fully amortized.
prepayment penalty
A fee that may be charged to a
borrower who pays off a loan before it is due.