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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