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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