Mortgage Loan Glossary
A
Amenity: a feature of the home or property that
serves as a benefit to the buyer but that is not necessary to its use; may
be natural (like location, Woods, water) or man-made (like a swimming pool
or garden).
Amortization: repayment of a mortgage loan through monthly
installments of principal and interest; the monthly payment amount is
based on a schedule that will allow you to own your home at the end of a
specific time period (for example, 15 or 30 years)
Annual Percentage Rate (APR): calculated by using a standard
formula, the APR shows the cost of a mortgage loan; expressed as a yearly
interest rate, it includes the interest, points, mortgage insurance, and
other fees associated with the mortgage loan.
Application: the first step in the official
mortgage loan approval process; this form is used to record important
information about the potential borrower necessary to the underwriting
process.
Appraisal: a document that gives an estimate of a property's
fair market value; an appraisal is generally required by a lender before
mortgage loan approval to ensure that the mortgage loan amount is not more
than the value of the property.
Appraiser: a qualified individual who uses his or her
experience and knowledge to prepare the appraisal estimate.
ARM: Adjustable Rate Mortgage; a mortgage loan
subject to changes in interest rates; when rates change, ARM monthly
payments increase or decrease at intervals determined by the lender; the
Change in monthly payment amount, however, is usually subject to a
Cap.
Assessor: a government official who is responsible
for determining the value of a property for the purpose of
taxation.
Assumable mortgage: a mortgage loan that can be
transferred from a seller to a buyer; once the mortgage loan is
assumed by the buyer the seller is no longer responsible for repaying it;
there may be a fee and/or a credit package involved in the transfer of an
assumable mortgage.
B
Balloon Mortgage: a mortgage loan that
typically offers low rates for an initial period of time (usually 5, 7, or
10) years; after that time period elapses, the balance is due or is
refinanced by the borrower.
Bankruptcy: a federal law Whereby a person's assets are
turned over to a trustee and used to pay off outstanding debts; this
usually occurs when someone owes more than they have the ability to
repay.
Borrower: a person who has been approved to
receive a mortgage loan and is then obligated to repay it and any
additional fees according to the loan terms.
Building code: based on agreed upon safety
standards within a specific area, a building code is a regulation that
determines the design, construction, and materials used in
building.
Budget: a detailed record of all income earned and
spent during a specific period of time.
C
Cap: a limit, such as that placed on an adjustable
rate mortgage, on how much a monthly payment or interest rate can increase
or decrease.
Cash reserves: a cash amount sometimes required to
be held in reserve in addition to the down payment and closing costs; the
amount is determined by the mortgage lender.
Certificate of title: a document provided by a
qualified source (such as a title company) that shows the property legally
belongs to the current owner; before the title is transferred at closing,
it should be clear and free of all liens or other
claims.
Closing: also known as settlement, this is the
time at which the property is formally sold and transferred from the
seller to the buyer; it is at this time that the borrower takes on the
mortgage loan obligation, pays all closing costs, and receives title from
the seller.
Closing costs: customary costs above and beyond
the sale price of the property that must be paid to cover the transfer of
ownership at closing; these costs generally vary by geographic location
and are typically detailed to the borrower after submission of a mortgage
loan application.
Commission: an amount, usually a percentage of the
property sales price, that is collected by a real estate professional as a
fee for negotiating the transaction.
Condominium: a form of ownership in which
individuals purchase and own a unit of housing in a multi-unit complex;
the owner also shares financial responsibility for common
areas.
Conventional loan: a private sector mortgage loan, one that
is not guaranteed or insured by the U.S. government.
Cooperative (Co-op): residents purchase stock in a
cooperative corporation that owns a structure; each stockholder is then
entitled to live in a specific unit of the structure and is responsible
for paying a portion of the mortgage loan.
Credit history: history of an individual's debt
payment; mortgage lenders use this information to gouge a potential
borrower's ability to repay a mortgage loan.
Credit report: a record that lists all past and present
debts and the timeliness of their repayment; it documents an individual's
credit history.
Credit bureau score: a number representing the
possibility a borrower may default; it is based upon credit history and is
used to determine ability to qualify for a mortgage loan.
D
Debt-to-income ratio: a comparison of gross income
to housing and non-housing expenses; With the FHA, the monthly mortgage
payment should be no more than 29% of monthly gross income (before taxes)
and the mortgage payment combined with non-housing debts should not exceed
41% of income.
Deed: the document that transfers ownership of a
property.
Deed-in-lieu: to avoid foreclosure ("in lieu" of
foreclosure), a deed is given to the mortgage lender to fulfill the
obligation to repay the debt; this process doesn't allow the borrower to
remain in the house but helps avoid the costs, time, and effort associated
with foreclosure.
Default: the inability to pay monthly mortgage
payments in a timely manner or to otherwise meet the mortgage loan
terms.
Delinquency: failure of a borrower to make timely mortgage
payments under a mortgage loan agreement.
Discount point: normally paid at closing and generally
calculated to be equivalent to 1% of the total mortgage loan amount,
discount points are paid to reduce the interest rate on a
mortgage loan.
Down payment: the portion of a home's purchase
price that is paid in cash and is not part of the mortgage
loan.
E
Earnest money: money put down by a potential buyer to show
that he or she is serious about purchasing the home; it becomes part of
the down payment if the offer is accepted, is returned if the offer is
rejected, or is forfeited if the buyer pulls out of the deal.
EEM: Energy Efficient Mortgage; an FHA program
that helps homebuyers save money on utility bills by enabling them to
finance the cost of adding energy efficiency features to a new or existing
home as part of the home purchase
Equity: an owner's financial interest in a
property; calculated by subtracting the amount still owed on the mortgage
loan(s)from the fair market value of the property.
Escrow account: a separate account into which the
mortgage lender puts a portion of each monthly mortgage payment; an
escrow account provides the funds needed for such expenses as property
taxes, homeowners insurance, mortgage insurance, etc.
F
Fair Housing Act: a law that prohibits discrimination in all
facets of the homebuying process on the basis of race, color, national
origin, religion, sex, familial status, or disability.
Fair market value: the hypothetical price that a willing
buyer and seller will agree upon when they are acting freely, carefully,
and with complete knowledge of the situation.
Fannie Mae: Federal National Mortgage Association
(FNMA); a federally-chartered enterprise owned by private stockholders
that purchases residential mortgages and converts them into securities for
sale to investors; by purchasing mortgages, Fannie Mae supplies funds that
mortgage lenders may loan to potential homebuyers.
FHA: Federal Housing Administration; established
in 1934 to advance homeownership opportunities for all Americans; assists
homebuyers by providing mortgage insurance to mortgage lenders to
cover most losses that may occur when a borrower defaults; this encourages
mortgage lenders to make mortgage loans to borrowers who might not
qualify for conventional mortgages.
Fixed-rate mortgage: a mortgage with payments that remain
the same throughout the life of the mortgage loan because the
interest rate and other terms are fixed and do not change.
Flood insurance: insurance that protects
homeowners against losses from a flood; if a home is located in a flood
plain, the lender will require flood insurance before approving a
mortgage loan.
Foreclosure: a legal process in which mortgaged
property is sold to pay the mortgage loan of the defaulting
borrower.
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM);
a federally-chartered corporation that purchases residential mortgages,
securitizes them, and sells them to investors; this provides
mortgage lenders With funds for new homebuyers.
G
Ginnie Mae: Government National Mortgage Association (GNMA);
a government-owned corporation overseen by the U.S. Department of Housing
and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed
loans to back securities for private investment; as With Fannie Mae and
Freddie Mac, the investment income provides funding that may then be lent
to eligible borrowers by mortgage lenders.
Good faith estimate: an estimate of all closing fees
including pre-paid and escrow items as well as mortgage lender
charges; must be given to the borrower within three days after submission
of a mortgage loan application.
H
HELP: Homebuyer Education Learning Program; an
educational program from the FHA that counsels people about the homebuying
process; HELP covers topics like budgeting, finding a home, getting a
loan, and home maintenance; in most cases, completion of the program may
entitle the homebuyer to a reduced initial FHA mortgage insurance
premium-from 2.25% to 1.75% of the home purchase price.
Home inspection: an examination of the structure and
mechanical systems to determine a home's safety; makes the potential
homebuyer aware of any repairs that may be needed.
Home warranty: offers protection for mechanical systems and
attached appliances against unexpected repairs not covered by homeowner's
insurance; coverage extends over a specific time period and does not cover
the home's structure.
Homeowner's insurance: an insurance policy that combines
protection against damage to a dwelling and it's contents with protection
against claims of negligence or inappropriate action that result in
someone's injury or property damage.
Housing counseling agency- provides counseling and
assistance to individuals on a variety of issues, including mortgage loan
default, fair housing, and homebuying.
HUD: the U.S. Department of Housing and Urban
Development; established in 1965, HUD works to create a decent home and
suitable living environment for all Americans; it does this by addressing
housing needs, improving and developing American communities, and
enforcing fair housing laws.
HUD1 Statement: also known as the "settlement sheet," it
itemizes all mortgage closing costs; must be given to the borrower at or
before mortgage loan closing.
HVAC: Heating, Ventilation and Air Conditioning; a home's
heating and cooling system.
I
Index. a measurement used by mortgage lenders to
determine changes to the Interest rate charged on an adjustable rate
mortgage loan.
Inflation: the number of dollars in circulation exceeds the
amount of goods and services available for purchase; inflation results in
a decrease in the dollar's value.
Interest: a fee charged for the use of money .
Interest rate: the amount of interest charged on a monthly
mortgage loan payment; usually expressed as a percentage.
Insurance: protection against a specific loss over a period
of time that is secured by the payment of a regularly scheduled
premium.
J
Judgment: a legal decision; when requiring debt repayment, a
judgment may include a property lien that secures the creditor's claim by
providing a collateral source.
L
Lease purchase: assists low- to moderate-income homebuyers
in purchasing a home by allowing them to lease a home with an option to
buy; the rent payment is made up of the monthly rental payment plus an
additional amount that is credited to an account for use as a down
payment.
Lien: a legal claim against property that must be satisfied
When the property is sold
Loan: money borrowed that is usually repaid with
interest.
Loan fraud: purposely giving incorrect information on a
mortgage loan application in order to better qualify for a
mortgage loan; may result in civil liability or criminal
penalties.
Loan-to-value (LTV) ratio.- a percentage calculated by
dividing the amount borrowed by the price or appraised value of the home
to be purchased; the higher the LTV, the less cash a borrower is required
to pay as down payment.
Lock-in: since interest rates can change frequently, many
mortgage lenders offer an interest rate lock-in that guarantees a
specific interest rate if the mortgage loan is closed within a
specific time.
Loss mitigation: a process to avoid foreclosure; the
mortgage lender tries to help a borrower who has been unable to make
loan payments and is in danger of defaulting on his or her
mortgage loan.
M
Margin: an amount the mortgage lender adds to
an index to determine the interest rate on an adjustable rate mortgage
loan.
Mortgage: a lien on the property that secures the Promise to
repay a mortgage loan.
Mortgage banker: a company that originates
mortgage loans and resells them to secondary mortgage lenders like
:Fannie Mae or Freddie Mac.
Mortgage broker: a firm that originates and
processes mortgage loans for a number of mortgage lenders.
Mortgage insurance: a policy that protects
mortgage lenders against some or most of the losses that can occur
when a borrower defaults on a mortgage loan; mortgage insurance is
required primarily for borrowers with a down payment of less than 20% of
the home's purchase price.
Mortgage insurance premium (MIP): a monthly payment -
usually part of the mortgage payment - paid by a borrower for mortgage
insurance.
Mortgage Modification: a loss mitigation option
that allows a borrower to refinance and/or extend the term of the
mortgage loan and thus reduce the monthly payments on the mortgage
loan.
O
Offer: indication by a potential buyer of a
willingness to purchase a home at a specific price; generally put forth in
writing.
Origination: the process of preparing, submitting,
and evaluating a mortgage loan application; generally includes a credit
check, verification of employment, and a property appraisal.
Origination fee: the charge for originating a
mortgage loan; is usually calculated in the form of points and paid
at closing.
P
Partial Claim: a loss mitigation option offered by
the FHA that allows a borrower, with help from a mortgage lender, to
get an interest-free loan from HUD to bring their mortgage
loan payments up to date.
PITI: Principal, Interest, Taxes, and Insurance - the four
elements of a monthly mortgage payment; payments of principal and interest
go directly towards repaying the mortgage loan while the portion that
covers taxes and insurance (homeowner's and mortgage, if applicable) goes
into an escrow account to cover the fees when they are due.
PMI: Private Mortgage Insurance; privately-owned
companies that offer standard and special affordable mortgage insurance
programs for qualified borrowers with down payments of less than 20% of a
purchase price.
Pre-approve: mortgage lender commits to lend to a
potential borrower; commitment remains as long as the borrower still meets
the qualification requirements at the time of purchase.
Pre-foreclosure sale: allows a defaulting borrower
to sell the mortgaged property to satisfy the mortgage loan and avoid
foreclosure.
Pre-qualify: a mortgage lender informally
determines the maximum amount an individual is eligible to
borrow.
Premium: an amount paid on a regular schedule by a
policyholder that maintains insurance coverage.
Prepayment: payment of the mortgage loan before
the scheduled due date; may be Subject to a prepayment penalty.
Principal: the amount borrowed from a
mortgage lender; doesn't include interest or additional
fees.
R
Radon: a radioactive gas found in some homes that,
if occurring in strong enough concentrations, can cause health
problems.
Real estate agent: an individual who is licensed
to negotiate and arrange real estate sales; works for a real estate
broker.
REALTOR: a real estate agent or broker who is a
member of the NATIONAL ASSOCIATION OF REALTORS, and its local and state
associations.
Refinancing: paying off one mortgage loan by
obtaining another; refinancing is generally done to secure better loan
terms (like a lower interest rate).
Rehabilitation mortgage: a mortgage that covers the costs of
rehabilitating (repairing or Improving) a property; some rehabilitation
mortgages - like the FHA's 203(k) - allow a borrower to roll the costs of
rehabilitation and home purchase into one mortgage loan.
RESPA: Real Estate Settlement Procedures Act; a law
protecting consumers from abuses during the residential real estate
purchase and mortgage loan process by requiring mortgage lenders
to disclose all settlement costs, practices, and relationships
S
Settlement: another name for closing .
Special Forbearance: a loss mitigation option
where the mortgage lender arranges a revised repayment plan for the
borrower that may include a temporary reduction or suspension of monthly
mortgage loan payments.
Subordinate: to place in a rank of lesser
importance or to make one claim secondary to another.
Survey: a property diagram that indicates legal
boundaries, easements, encroachments, rights of way, improvement
locations, etc.
Sweat equity: using labor to build or improve a property as
part of the down payment
T
Title 1: an FHA-insured loan that allows a
borrower to make non-luxury improvements (like renovations or repairs) to
their home; Title I loans less than $7,500 don't require a property
lien.
Title insurance: insurance that protects the
mortgage lender against any claims that arise from arguments about
ownership of the property; also available for homebuyers.
Title search: a check of public records to be sure
that the seller is the recognized owner of the real estate and that there
are no unsettled liens or other claims against the property.
Truth-in-Lending: a federal law obligating a
mortgage lender to give full written disclosure of all fees, terms,
and conditions associated with the mortgage loan initial period and
then adjusts to another rate that lasts for the term of the
mortgage loan.
Underwriting: the process of analyzing a
mortgage loan application to determine the amount of risk involved in
making the mortgage loan; it includes a review of the potential
borrower's credit history and a judgment of the property value.
VA: Department of Veterans Affairs: a federal
agency which guarantees mortgage loans made to veterans; similar to
mortgage insurance, a mortgage loan guarantee protects
mortgage lenders against loss that may result from a borrower
default.
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