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Glossary: Terms You Should Know
 

Here are the definitions to the most widely used mortgage terms.

 

Acceleration Clause: Allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should you default on you loan

Additional Principal: Additional Principal occurs when the monthly payments cover only part of the interest then due. The interest cost that is not covered is added to the unpaid principal balance. This additional amount is additional principal. It may also be called "negative amortization."

Agreement of Sale: The legal contract between buyer and seller of a property including the sale price, settlement date, and all conditions and terms of the sale.

Adjustable Rate Mortgage (ARM): Is a mortgage in which the interest rate is adjusted periodically based on a pre selected index. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage

Adjustment Interval: On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index

Amortization: Means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

Annual Percentage Rate (APR):  An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.

Appraisal: An estimate of the value of property, made by a qualified professional called an "appraiser."

Assumption: The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing costs and new, possibly higher, market-rate interest charge will apply.

Assessed value: The valuation placed upon property by a public tax assessor for purposes of taxation. Assumable mortgage A mortgage that can be taken over by the buyer when a home is sold.

BALLOON (PAYMENT) MORTGAGE - Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

Binder: A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.

BROKER - An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

BUY-DOWN - When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

CAPS (INTEREST) - Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan

CAPS (PAYMENT) - Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.

Cash reserve: A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two monthly mortgage payments.

 CLOSING - The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement.

Certificate of Occupancy: A certificate issued by a local building department to a builder to a builder or renovator, stating that the building is in proper condition to be occupied and stating the legally permissible use.

CLOSING COSTS - Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount.

COMMITMENT - An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

Conforming Loan: Amount A Fannie Mae (FNMA) established maximum loan amount based on the property's legal number of units ( 1 family, 2 family, etc. ) Loan amounts up to this maximum dollar amount are considered "conforming loans."

Contract of Sale: Written contract signed by both parties in which the seller agrees to sell and the buyer agrees to buy under certain specific terms and conditions.

CONSTRUCTION LOAN - A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

CONVENTIONAL LOAN - A mortgage not insured by FHA or guarantee by the VA or Farmers Home Administration (FMHA).

Convertible ARM: An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.

Counteroffer: An offer to extend credit on different terms than the applicant originally requested.

Debt Ratio- The ratio, expresses as a percentage, which results when a borrower's monthly payment obligation on long term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (conventional loans). See housing expenses-to-income ratio.

DEED OF TRUST - In many states, this document is used in place of a mortgage to secure the payment of a note.

DEFAULT - Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

DEFERRED INTEREST - See negative AMORTIZATION.

DELINQUENCY - Failure to make payments on time. This can lead to foreclosure.

DEPARTMENT OF VETERANS AFFAIRS (VA) - An independent agency of the federal government which guarantees long-term, low- or no-down payment mortgages to eligible veterans.

DISCOUNT POINTS - See points.

DOWN PAYMENTS - Money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 10 percent to 20 percent of the sales price on conventional loans, and no money down up to 5 percent on FHA and VA loans.

DUE-ON-SALE-CLAUSE - A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

EARNEST MONEY - Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

EQUAL CREDIT OPPORTUNITY ACT (ECOA) - Is 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 - The difference between the fair market value and current indebtedness, also referred to as the owner's interest.

ESCROW - Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.

FANNIE MAE - See Federal National Mortgage Association

FARMERS HOME ADMINISTRATION (FMHA) - Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) - Also called "Freddie Mac," is a quasi-governmental agency that purchases conventional mortgage form insured depository institutions and HUD-approved mortgage bankers.

FEDERAL HOUSING ADMINISTRATION (FHA) - A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - Also known as "Fannie Mae." A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

FHA LOAN - A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans ($124,875), they are generous enough to handle moderate-priced homes almost anywhere in the country.

FHA MORTGAGE INSURANCE - Requires a small fee (up to 3.8 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount to either $2,850 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount, the more years the fee must be paid.

Finance Charge: The total dollar amount your loan will cost you. It includes all interest payments during the term of the loan, any interim interest paid at closing, your origination fee and any other charges paid to the lender or to a third party or an incident or a condition of the extension of credit. Certain charges like the appraisal, credit report and the title search charges are not included in the finance charge calculation.

FIXED-RATE MORTGAGE - A mortgage on which the interest rate is set for the term of the loan.

FORECLOSURE - A legal procedure in which property securing debt is sold by the lender to pay the defaulting borrower's debt .

FREDDIE MAC - See Federal Home Loan Mortgage Corporation.

GINNIE MAE - See Government National Mortgage Association

Good Faith Estimate: An estimate of charges which a borrower is likely to incur in connection with a settlement.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - Also known as "Ginnie Mae," provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

GRADUATED PAYMENT MORTGAGE (gpm) - A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. this type of mortgage has negative amortization built into it.

GROSS MONTHLY INCOME - The total amount the borrower earns per month, before any expenses are deducted.

GUARANTEE - A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.

HAZARD INSURANCE - A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.

HOUSING EXPENSES-TO-INCOME RATIO - The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (conventional loans). See debt-to-income ratio.

IMPOUND - That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

INDEX - A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs- of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Interest: A share or right in some property. Also, money charged for the use of money (principal).

INVESTOR - Money source for a lender.

JUMBO LOAN - A loan which is larger (more than $275,000) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

LIEN - A claim upon a piece of property for the payment of satisfaction of a debt or obligation.

LOAN-TO-VALUE RATIO - The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage

Lock-in: A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.

MARGIN - The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

MARKET VALUE - The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time

Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.

MORTGAGE INSURANCE - Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.

MORTGAGEE - The lender.

MORTGAGOR - The borrower or homeowner.

NEGATIVE AMORTIZATION - Occurs when your monthly payments are not large enough to pay all the interest due on the loan. this unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan.

NET EFFECTIVE INCOME - The borrower's gross income minus federal income tax.

Note: A written agreement containing a promise of the signer to pay to a named person, or order, or bearer, a definite sum of money at a specified date or on demand.

NON-ASSUMPTION CLAUSE - A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

NON-CONFORMING- A Loan that does not have to CONFORM to standard guidelines. Generally these loans are for not-so-perfect borrowers and 2nd mortgages.

ORIGINATION FEE - The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of face value of the loan.

Owner financing: A property purchase transaction in which the property seller provides all or part of the financing.

PITI - Principal, interest, taxes, and insurance. Also called monthly housing expense.

POINTS (LOAN DISCOUNT POINTS) - Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

POWER OF ATTORNEY - A legal document authorizing one person to act on behalf of another.

PREPAIDS - Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

PREPAYMENT - A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

PREPAYMENT PENALTY - Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia.

PRINCIPAL - The amount of debt, not counting interest, left on a loan.

PRIVATE MORTGAGE INSURANCE (PMI) - In the event that you do not have a 20 percent down payments, lenders will allow a smaller down payment-as low as 5 percent in some cases. With the smaller down payments loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on your loan's structure. On a $75,000 house with a 10 percent down payments, this would mean either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.

Qualifying Ratios: The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you can afford to borrow.

Rate Cap: A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.

Rate Lock-in: A written agreement in which the lender guarantees the borrower a specified interest rate, provided the loan closes within a set period of time.

REALTOR - A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

RECESSION - The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

RECORDING FEES - Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

RENEGOTIABLE RATE MORTGAGE (RRM) - A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage

Residential Mortgage Credit Report: A report requested by your lender that utilizes information from at least two of the three national credit bureaus and information provided on your loan application.

RESPA - Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish information after application only.

REVERSE ANNUITY MORTGAGE (RAM) - A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security.

SECOND MORTGAGE-These loans are often referred to as equity loans. They are called Second Mortgages because they are in second position on your title policy.

SERVICING - All the steps and operations a lender perform to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

SETTLEMENT/SETTLEMENT COSTS - See closing/closing costs.

SURVEY - A measurement of land, prepared by a registers land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.

TERM MORTGAGE - See balloon payment mortgage.

TITLE - A document that gives evidence of an individual's ownership of property.

TITLE INSURANCE - A policy, usually issued by a title insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller.

TITLE SEARCH - An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Total Debt Ratio: Monthly debt and housing payments divided by gross monthly income. Also known as Obligations-to-Income Ratio or Back-End Ratio.

TRUTH-IN-LENDING - A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.

TWO-STEP MORTGAGE - A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10 years), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time, The lender sometimes has the option to call the loan, due within 30 days notice at the end of seven or 10 years. also called "Super Seven" or "Premier" mortgage.

UNDERWRITING - The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

VA LOAN - A long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

VA MORTGAGE FUNDING FEE - A premium of up to 1 7/9 percent (depending on the size of the down payments) paid on a VA backed loan. On a $75,000 30-year fixed-rate mortgage with no down payments, this would amount to $1,406 either paid at closing or added to the amount financed.

VARIABLE RATE MORTGAGE (VRM) - See adjustable rate mortgage.

VERIFICATION OF DEPOSIT (VOD) - A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.

VERIFICATION OF EMPLOYMENT - A document signed by the borrower's employer verifying his/her position and salary.

WRAPAROUND - Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.
 

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