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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