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The mortgage industry has many confusing terms and concepts. Getting familiar
with them can help you to become an "informed consumer" -one who asks the right
questions and makes smarter decisions.
Acceleration Clause -
A provision in a mortgage that gives the lender the right to demand payment of
the entire outstanding balance if a monthly payment is missed.
Adjustable
Rate Mortgage (ARM) - A mortgage with and interest rate that fluctuates according
to the movements of a predetermined index. There are several types of ARM's, some
change quicker than others, but all have a ceiling cap.
Alternative
Financing - Mortgage options available below market rate including ARM's,
buy down's and graduated payment mortgages (GPM's).
Amortization
- The gradual repayment of a mortgage by installments.
Amortization
Schedule - A timetable for payment of a mortgage showing the amount of each
payment applied to interest and principal and the remaining balance of the loan.
Annual Percentage Rate (APR) - The total cost of your mortgage loan
expressed as an annual interest rate. This includes the base interest rate, mortgage
insurance, origination fees, and some other related fees.
Appraisal
- An opinion by a licensed real estate appraiser regarding the fair market value
of a property.
Appreciation - Difference between the increased
value of a property and the original cost of the property.
Assumable
Loan - Usually for a small assumption fee, a new buyer can take over or assume
the loan of the previous homeowner, saving closing cost and loan origination fees.
Some are non-qualifying most are through qualification.
Balloon Payment
- A loan with monthly payments insufficient to pay off the balance in the specified
term; the balance must be paid in full when the loan comes due.
Broker
(Mortgage) - An individual or company that for a fee acts as an intermediary
between borrowers and lenders.
Broker (Real Estate) - A person
who has a real estate broker's license, who may not only make real estate transactions
for others in exchange for a fee, but also may operate a real estate business
and employ salespersons and other brokers.
Cap - A provision of
an ARM limiting how much the interest rate or mortgage
payments may increase
or decrease.
Cash Reserve - A requirement of some lenders that
buyers have sufficient cash
remaining after closing to make the first two
monthly mortgage payments.
Clear Marketable Title - A title that
is free of liens or legal questions as to
ownership of property.
Closing - The meeting at which a sale of a property is finalized by the
buyer signing the mortgage documents and paying closing cost. Also known as "settlement."
Closing Costs - Expenses (over and above the price of the property)
incurred by
buyers and sellers in transferring ownership of a property. Also
called "settlement
costs."
Community Home Buyer's Program
- An alternative financing option that allows households of modest means to qualify
for mortgages using nontraditional credit histories, 33 percent housing-to-income
and 38 percent debt-to-income ratios, and the waiver of the usual two payments
cash reserves at closing.
Condominium - A form of property ownership
in which the homeowner holds title to an individual dwelling unity plus an interest
in common areas of a multi-unit project, and sometimes the exclusive use of certain
limited common areas.
Contingency - A condition that must be met
before a contract is legally binding.
Conventional Mortgage -
Any mortgage that is not insured or guaranteed by the
federal government.
Convertible ARM - An adjustable-rate-mortgage that can be converted
to a
fixed-rate mortgage under specified conditions.
Cooperative
- A type of multiple ownership in which the residents of a multi-unit
housing
complex own shares in the corporation that owns the property, giving each
resident the right to occupy a specific apartment or unit.
Covenant
- A clause in a mortgage that obligates or restricts the borrower and that, if
violated, can result in foreclosure.
Credit Report - A report
of an individual's credit history prepared by a credit bureau and used by a lender
in determining a loan applicant's credit worthiness.
Debt-to-Income
Ratio - Formula used to qualify borrowers. The ratio expresses, as a percent,
the amount of monthly debt payments in relation to the amount of monthly income
of a borrower(s).
Deed - The legal document conveying title to
a property.
Deed of Trust - The document used in some states instead
of a mortgage; title is
conveyed to a trustee rather than to the borrower.
Default - The failure to make a mortgage payment on a timely basis
or to otherwise comply with other requirements of a mortgage.
Delinquency
- A loan in which a payment is overdue but not yet in default.
Depreciation
- A decline in the value of a property; the opposite of "appreciation."
Disclosure - Document which describes all conditions of mortgage loan
including
terms and interest rates.
Discount Points - A one
time charge by the lender to increase the yield of the loan. A point is one percent
of the amount of the mortgage.
Down Payment - The part of the
purchase price which the buyer pays in cash and
does not finance with a mortgage.
Due-on-Sale Clause - A provision in a mortgage allowing the lender
to demand
repayment in full if the borrower sells the property securing the
mortgage.
Earnest Money - A deposit made by the potential home
buyer to show that he or she is serious about buying the house.
Equal
Credit Opportunity Act (ECOA) - A federal law that prohibits lenders from
denying mortgages on the basis of the borrower's race, color, religion, national
origin, age, sex, marital status, or receipt of income from public assistance
programs.
Equity - A homeowner's financial interest in a property.
Equity is the difference
between the fair market value of a property and the
amount still owed on the
mortgage.
Equity Loan - A loan based
on the borrower's equity in his or her home.
Escrow - The holding
of documents and money by a neutral third party prior to
closing; also, an
account held by the lender (or servicer) into which a homeowner
pays money
for taxes and insurance.
Exclusive Agency Listing - A listing
contract in which the agent has the sole right to sell the home, though the sellers
are not bound to pay the commission if they produce the buyer.
Exclusive
Right-to-Sell Contract - A listing contract in which the seller gives the
real estate broker the sole right to sell; the person receives a commission, regardless
of who produces the buyer.
Fair Credit Reporting Act - A consumer
protection law that regulates the disclosure of consumer/credit reports by consumer/credit
reporting agencies and establishes procedures for correcting mistakes on one's
credit record.
FHA Mortgage - A mortgage that is insured by the
Federal Housing Administration. Also referred to as a "government" mortgage.
First Mortgage - A mortgage that has first claim in the event of default.
Fixed Rate Mortgage - A mortgage in which the interest rate does not
change
during the entire term of the loan.
Flood Insurance
- Insurance that compensates for physical property damages
resulting from
flooding. It is required for properties located in federally designated
flood
areas.
Forbearance - The lender's postponement of foreclosure
to give the borrower time to catch up on overdue payments.
Foreclosure
- The legal process by which a mortgaged property may be sold when a mortgage
is in default.
Graduated Payment Mortgage (GPM) - A mortgage that
starts with low monthly payments that increase at a predetermined rate. The initial
monthly payments are set at an amount lower than that required for full amortization
of the debt.
Hazard Insurance - Insurance coverage that compensates
for physical damage to a property from fire, wind, vandalism, or other hazards.
Homeowner's Insurance - An insurance policy that combines personal
liability
coverage and hazard insurance coverage for a dwelling and its contents.
Homeowner's Warranty (HOW) - A type of insurance that covers repairs
to
specified parts of a house for a specific period of time. It is provided
by the builder or property seller as a condition of the sale.
Impound
- The portion of a borrower's monthly payments held by the lender to pay taxes,
hazard insurance and mortgage insurance.
Index - The interest
rate to which changes in an adjustable-rate-mortgage are
pegged.
Interest Rate - The fee charged for borrowing money.
Late Charge
- The penalty a borrower must pay when a payment is made after the due date.
Lien - A legal claim against a property that must be paid off when
the property is
sold.
Lifetime Cap - A provision of an ARM
that limits the highest rate that can occur over the life of the loan.
Listing Contract - A contract with a broker or firm the sellers hire to
represent them in the sale of their home, according to the terms of sale that
they specify. In exchange for producing a ready-willing-and-able buyer, the agent
is paid a commission.
Loan Application Fee - A lender's fee, usually
ranging from $75 to $300, which the buyer must pay when applying for a mortgage.
Loan Commitment - A formal offer by a lender stating the terms under
which it
agrees to lend money to a home buyer.
Loan Origination
Fee - A fee charged by the lender for processing a mortgage.
Loan
Servicing - The collection of mortgage payments from borrowers and related
responsibilities of a loan servicer.
Loan-to-Value Ratio (LTV)
- The relationship between the unpaid principal balance of the mortgage and the
appraised value (or sales price if it is lower) of the property.
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 set percentage
the lender adds to the index rate to determine the
current interest rate of
an ARM.
Market Rate - The average rate charged by lenders for
conventional, fixed-rate
loans.
Mortgage Banker - A company
that originates mortgages exclusively for resale in the secondary market.
Mortgage Broker - An individual or company that for a fee acts as
an intermediary between borrowers and lenders.
Mortgage Insurance
- (Also known as Private Mortgage Insurance (PMI)) Insurance provided by nongovernmental
insurers that protects lenders against loss if a borrower defaults. Fannie Mae
generally requires private mortgage insurance for loans with loan-to-value (LTV)
ratios greater than 80 percent.
Mortgage Insurance Premium (MIP)
- The fee paid by a borrower to FHA or a private insurer for mortgage insurance.
Mortgage Note - A legal document obligating a borrower to repay a
loan at a stated interest rate during a specified period of time; the mortgage
note is secured by a mortgage.
Mortgagee - The lender in a mortgage
agreement.
Mortgagor - The borrower in a mortgage agreement.
Multiple Listing Service (MLS) - A networking system, frequently on
computer, in which a number of real estate firms share information about their
client's homes that are for sale.
Negative Amortization - A gradual
increase in the mortgage debt that occurs when the monthly payment is not large
enough to cover the entire principal and interest due. The amount of the shortfall
is added to the unpaid principal balance to create "negative" amortization.
Notice of Default - A formal written notice to a borrower that a default
has occurred and that legal action may be taken.
Offer to Purchase
and Acceptance - An offer of purchase that has been signed
by both buyer
and seller. A firm contract that outlines all details of the
property transaction.
Also known as a contract of sale or sales contract.
Offer to Purchase
or Purchase Offer - A document that list the price,
conditions, and terms
under which the buyer is willing to purchase a property.
Also known as an
earnest money agreement, contract of purchase or deposit
receipt.
Open Listing - A listing contract in which sellers hire more than one firm
or person to sell their home, and only the one who produces the buyer is entitled
to the commission,
Origination Fee - A fee paid to a lender for
processing a loan application; it is stated as a percentage of the mortgage amount.
Payment Cap - A provision of some ARM's limiting the amount by which
a borrower's payments may increase regardless of any interest rate increase; may
result in negative amortization.
PITI - Acronym for principal,
interest, taxes, and insurance - the components of a
monthly mortgage payment.
Points - A one time charge by the lender to increase the yield of
the loan; a point is 1 percent of the amount of the mortgage.
Pre-approval
- The process of determining that a borrower is credit approved up to a predetermined
amount. The borrower is credit approved pending the locating of a home that meets
the predetermined loan criteria.
Prepayment Penalty - A fee that
may be charged to a borrower who pays off a loan before it is due.
Prequalificiation
- The process of determining how much money a prospective
home buyer will
be eligible to borrow before a loan is applied for.
Principal
- The amount borrowed or remaining unpaid; also, that part of the monthly payment
that reduces the outstanding balance of a mortgage.
Private Mortgage
Insurance (PMI) - Insurance provided by nongovernmental
insurers that
protects lenders against loss if a borrower defaults. Fannie Mae
generally
requires private mortgage insurance for loans with loan-to-value (LTV)
percentages
greater than 80 percent.
Purchase and Sale Agreement - A written
contract signed by the buyer and seller stating the terms and conditions under
which a property will be sold.
Qualifying Ratios - Guidelines
applied by the lenders to determine how large a loan to grant a home buyer.
Radon - A radioactive gas found in some homes that in sufficient concentrations
can cause health problems.
Rate Lock - 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. Also known as Lock-in.
Real Estate Agent -
A person licensed to negotiate and transact the sale of real
estate on behalf
of the property owner.
Real Estate Settlement Procedures Act (RESPA)
- A consumer protection law that requires lenders to give borrowers advance notice
of closing costs.
Realtor - A collective membership mark that
may be used only by real estate
professionals who are members of the National
Association of Realtors and
subscribe to its strict code of ethics.
Refinancing - The process of paying off one loan with the proceeds from
a new loan using the same property as security.
Reverse Mortgage
- Also called "equity conversion mortgage," these loans permit senior
citizens to convert the equity in their homes to income. The lender makes monthly
cash payments to the homeowner, and repayment is deferred for a set period or
until the homeowner dies and the house is sold.
Second Mortgage
- A mortgage that has a lien position subordinate to the first
mortgage.
Secondary Market - The buying and selling of existing mortgages.
Seller Take-Back - An agreement in which the owner of a property provides
financing, often in combination with an assumed mortgage.
Settlement
- The meeting at which a sale of a property is finalized by the buyer
signing
the mortgage documents and paying closing cost. Also known as "Closing."
Settlement Sheet -The computation of costs payable at closing that
determines the seller's net proceeds and the buyer's net payment.
Survey
- A drawing or map showing the precise legal boundaries of a property,
the
location of improvements, easements, rights of way, encroachments, and
other
physical features.
Tenancy by Entirety - A type of joint ownership
of property that provides right
of survivorship and is available only to a
husband and wife.
Tenancy in Common - A type of joint ownership
in a property without right of
survivorship.
Title - A legal
document evidencing a person's right to or ownership of a
property.
Title Company - A company that specializes in examining an insuring titles
to
real estate.
Title Insurance - Insurance to protect the
lender (lender's policy) or the buyer
(owner's policy) against loss arising
from disputes over ownership of property.
Title Search - A check
of the title records to ensure that the seller is the legal
owner of the property
and that there are no liens or other claims outstanding.
Treasury
Securities - Treasury securities and T-Bills are common indexes for
adjustable
rate mortgages (ARMS).
Truth-in-Lending (TIL) - A federal law
that requires lenders to fully disclose, in
writing, the terms and conditions
of a mortgage including the "annual
percentage rate (APR)" and other
charges.
Underwriting - The process of evaluating a loan application
to determine the
risk involved for the lender. It involves an analysis of
the borrower's credit worthiness and the quality of the property itself.
VA Loan - A loan that is guaranteed by the Department of Veterans Affairs.
Also referred to as a "government" mortgage.
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