Mortgage
Loan Glossary |
Our California
Mortgage Glossary lists the terminology
used in many real estate and mortgage loan contracts. It
can give you an indepth understanding of the terms most
often used to buy a new home or secure the mortgage financing
needed for your home.
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A |
Acceleration
The right of the mortgagee (to demand the immediate repayment
of the mortgage loan balance upon the default of the mortgagor
(borrower), or by using the right vested in the Due-on-Sale
Clause.
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 re
negotiable rate mortgage, the variable rate mortgage or the
Canadian rollover mortgage.
Agreement
for Sale
A document in which the purchaser agrees to buy certain estate
(or personal property) and the seller agrees to sell under stated
terms and conditions. Also called sales contract, binder or
earnest money contract.
Amortization
Gradual debt reduction. Normally, the reduction is made according
to a predetermined schedule for installment payments.
Annual Percentage Rate (APR)
A term used in the Truth in Lending Act to represent the full
cost of a loan including interest and loan fees.
Appraisal
A formal, written estimation of the current market value of
a home.
Appraiser
The appraiser decides the market value of a home based on its
condition and the selling prices of comparable homes recently
sold in the area. His or her job is to compute a fair estimate
of market value to help the lender decide a reasonable loan
amount.
Appreciation
An increase in value, the opposite of depreciation.
Assessed Valuation
The value that a taxing authority places upon personal property
for the purposes of taxation.
Assumption
The agreement between buyer and seller where the buyer takes
over the payments on an existing mortgage from the seller. |
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B |
Balloon
(Payment) Mortgage
Usually a short-term fixed-rate loan which involves a set interest
rate for a certain period of time (usually 5 or 7 years), and
one large payment for the remaining amount of the principal
at the conclusion of that time frame (may be able to convert
or refinance).
Borrower
A mortgagor who receives funds in the form of a loan with the
obligation of repaying the loan in full with interest, if applicable.
Broker
One who receives a commission or fee for bringing buyer and
seller together and assisting in the negotiation of contracts
between them.
Building Code
The local regulations that control design, construction and
materials used in construction. Building codes are based on
safety and health standards. |
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C |
Cash-Out
Cashing out refers to the refinancing of a loan where the borrower
will take out money on their own home. If a home is appraised
at $100,000 and the borrower's outstanding mortgage loan is
$60,000, it is possible to enter into an 80% cash-out refinance
transaction for a loan of $80,000 (80% of $100,000). The new
mortgage of $80,000 will pay off the $60,000 loan and leave
$20,000 cash-out to the borrowers.
Certificate
of Occupancy
Written authorization given by a local municipality that allows
a newly completed or substantially completed structure to be
inhabited.
Chattel
Personal Property.
Closing
The conclusion of a transaction. In real estate, closing includes
the delivery of a deed, financial adjustments, the signing of
notes, and the disbursement of funds necessary to the sale or
loan transaction.
Closing
Costs
All of the costs to the buyer and seller individually that are
associated with the purchase, sale or financing of real property.
They include, but are not limited to, perorating of agreed items
such as taxes and rents, the cost of title insurance policies,
and the cost of credit reports, recording fees and escrow fees.
Closing Statement
A financial disclosure giving an account of all funds received
and expected at the closing, including the escrow deposits for
taxes, hazard insurance, and mortgage insurance.
Collateral
Property pledged as security for a debt, such as real estate
as security for a mortgage.
Commitment
An agreement, often in writing, between a lender and a borrower
to loan money at a future date subject to compliance with stated
conditions.
Contingency
A condition that must be met before a contract is binding. For
example, the sale of a house might be contingent upon the seller
paying for certain repairs.
Contract
of Sale
A contract between a purchaser and a seller of real property
to convey a title after certain conditions have been met and
payments have been made.
Conventional Mortgages
A conventional loan is the most common type of mortgage. With
low down payments, conventional mortgages are usually insured
by private mortgage insurance companies (PMI). Private mortgage
insurance adds a relatively small cost to your financing ( about
6/10 of one percent of the loan amount per year, or $600 per
year on a $100,000 loan), but it allows you to buy a home with
a lower down payment.
Credit
Rating
A rating given to a person to establish willingness to pay obligations
based upon one's past history of timely payment.
Credit Report
A report to a prospective lender on the credit standing of a
prospective borrower, used to help determine credit worthiness. |
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D |
Debt-to-Income
Ratio
Long-term debt expenses as a percentage of monthly income. Lenders
use this ratio to qualify borrowers for mortgage loans, typically
setting a maximum debt-to-income ratio of 36%.
Deed
of Trust
In many states, this document is used in place of a mortgage
to secure the payment of a note.
Department
of Veteran Affairs (VA)
An independent agency of the federal government created in 1930.
The VA home loan guaranty program is designed to encourage lenders
to offer long-term, low down payment mortgages to eligible veterans
by guaranteeing the lender against loss.
Discount
Fee
In an ARM with an initial rate discount, the lender gives up
a number of percentage points in interest to give the borrower
a lower rate and lower payments for part of the mortgage term
(usually for one year or less). After the discount period, the
ARM rate will probably go up depending on the index rate.
Down Payment
When you borrow money for a home, any lender will ask you to
contribute some of your own money to the purchase of the house.
A lender will usually require a down payment of at least 20%
of the sales price unless the buyer purchases mortgage insurance.
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. |
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E |
Earnest
Money
A sum of money given to bind a sale of real estate; a deposit.
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 home owner's interest in a property; the difference between
fair market value and the current amount the owner owes on the
property.
Escrow
An amount set up by the lender into which the borrower makes
periodic payments, usually monthly, for taxes, hazard insurance,
assessments, and mortgage insurance premiums. |
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F |
Fair
Market Value
The price at which property is transferred between a willing
buyer and a willing seller, each of whom has reasonable knowledge
of all pertinent facts and neither being under any compulsion
to buy or sell.
Fannie
Mae
See FNMA.
Farmers Home
Administration (FmHA)
Provides financing to farmers and other qualified borrowers.
Federal Home Loan Mortgage
Corporation (FHLMC)
Is a quasi-governmental agency that purchases conventional mortgages
from insured depository institutions and HUD-approved mortgage
bankers. Also called Freddie Mac.
FHA
FEDERAL HOUSING ADMINISTRATION - A division of the Department
of Housing and Urban Development. It's 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)
A taxpaying 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 (loan amount varies by region), they are generous
enough to handle moderately-priced homes almost anywhere in
the country.
FHA Mortgages
The Federal Housing administration, a government agency created
in 1934, provides insurance on some types of mortgage loans.
An FHA-insured loan also allows you to buy a house with a low
down payment, ranging from 3% to 5% depending on the price of
the home. The buyer pays a one-time fee of 3.8% of the loan
amount for the mortgage insurance premium at closing time, and
there is an additional annual fee for low down payment loans.
First Mortgage
A real estate loan that creates a primary lien against real
property. Also known as First Trust.
FNMA
FEDERAL NATIONAL MORTGAGE ASSOCIATION - A private corporation
created by Congress to support the secondary mortgage market.
FNMA sells mortgage-backed securities backed by pools of conventional
loans. Payment of principal and interest on these securities
is backed by the U.S. Government. Popularly known as Fannie
Mae.
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 (loan amount varies by region), they are generous
enough to handle moderately-priced homes almost anywhere in
the country.
FHA Mortgages
The Federal Housing administration, a government agency created
in 1934, provides insurance on some types of mortgage loans.
An FHA-insured loan also allows you to buy a house with a low
down payment, ranging from 3% to 5% depending on the price of
the home. The buyer pays a one-time fee of 3.8% of the loan
amount for the mortgage insurance premium at closing time, and
there is an additional annual fee for low down payment loans.
First Mortgage
A real estate loan that creates a primary lien against real
property. Also known as First Trust.
FNMA
FEDERAL NATIONAL MORTGAGE ASSOCIATION - A private corporation
created by Congress to support the secondary mortgage market.
FNMA sells mortgage-backed securities backed by pools of conventional
loans. Payment of principal and interest on these securities
is backed by the U.S. Government. Popularly known as Fannie
Mae.
Freddie Mac
Federal Home Loan Mortgage Corporation.
Fixed
Rate Mortgage
A mortgage on which the interest rate is set for the term of
the loan.
Foreclosure
In the event that the borrower fails to pay back the loan through
mortgage payments, the lender has the right to put the home
up on the market for sale to recover the money owed to the lender.
This is known as foreclosure. |
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G |
Good
Faith Estimate
An estimate of all the costs associated with a purchase, or
refinance. This may include points, closing costs, escrow.
Government National Mortgage
Association (GNMA)
Also known as Fannie 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 amount of consistent and stable income that an individual
receives each month, averaged over a period of time. This amount
includes overtime pay, bonuses, commissions and income from
dividends or interest, provided that the individual can show
a consistent history of receiving such income. |
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H |
Hazard
Insurance
A contract that pays for loss on a home from certain hazards,
such as fire.
Homeowners
Association
An organization of homeowners residing within a particular development
whose major purpose is to maintain and provide community facilities
and services for the common enjoyment of the residents. |
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I |
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
The measure of interest rate changes that the lender uses to
decide how much the interest rate on an ARM will change over
time.
Interest
Money paid for the use of money -- that is, money paid for a
loan.
Investor
A money source for a lender. |
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J |
Jumbo
Loan
A loan which is larger 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. These loans involve
amounts between $214,600 to $650,000. |
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L |
Lender
Any person or institution that provide money to a borrower.
Lien
A claim on the property of another as security against the payment
of a just debt.
Loan
An amount of money a borrower will take out from a lender to
pay for a purchase.
Loan-to-Value
Ratio
The relationship between the amount of a home loan and the total
value of the property. For example, if you receive a loan of
$80,000 on a home that costs $100,000, the loan-to value ratio
is 80%.
Lock-In Rate
A commitment from a lender to make a loan at a preset interest
rate at some future date, usually for not more than 90 days. |
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M |
Margin
The number of percentage points the lender adds to the index
rate to calculate the ARM interest rate at each adjustment.
Market Value
The highest price that a willing buyer would pay and the lowest
a willing seller would accept.
Mortgage
An interest in real property given as security for the payment
of an obligation.
Mortgage
Insurance
A policy that allows mortgage lenders to recover part of their
financial losses if a borrower fails to full repay a loan. Mortgage
insurance makes it possible to buy a home with as little as
5% down.
Mortgage Investor
Any person or institution that invests in mortgages. By buying
mortgage loans from lenders, the mortgage investor gives the
lender funds that can be used for more lending.
Mortgage
Life Insurance
A type of term life insurance. The amount of coverage decreases
as the mortgage balance declines. In the event that the borrower
dies while the policy is in force, the debt is automatically
paid by insurance proceeds.
Mortgagee
A lender to whom property is conveyed as security for a loan.
Mortgagor
One who borrows money, giving as security a mortgage or deed
of trust on real property. |
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N |
Negative
Amortization
Occurs when the monthly payments on the mortgage do not cover
all of the interest cost. The interest cost that isn't covered
is added to the unpaid principal balance. |
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O |
Origination
Fee
The fee charged by a lender to prepare loan documents, process,
underwrite, make credit checks, inspect and sometimes appraise
a property (lenders profit is also included). |
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P |
PITI
Principal, Interest, Taxes and Insurance are the components
of a mortgage payment.
Point
A dollar amount paid to a lender for making a loan. A point
is one percent of the loan amount. Also called discount points.
Power of Attorney
A legal document authorizing one person to act on behalf of
another.
Prepaids
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.
Pre-qualification
Qualifying a borrower for a loan amount before looking for a
home. Final approval subject to appraisal of property.
Principal
The original balance of money loaned, excluding interest. Also,
the remaining balance of a loan, excluding interest.
Purchasing
Obtaining a mortgage loan for the acquisition of a property,
usually a home. |
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R |
Rate
A percentage of the monthly mortgage payment paid to the lender.
Real Estate Broker
The seller of the house pays the real estate broker to attract
potential buyers and help negotiate the contract between the
seller and the buyer. The broker identifies available properties
for buyers and shows them homes that meet their criteria.
Real Estate Settlement Procedures
Act (RESPA)
Short for the Real Estate Settlement Procedures Act. RESPA is
a federal law, which in part allows consumers to review information
on known or estimated settlement costs, once after application
and once prior to or at a settlement.
Realtor
A member of the National Association of Realtors.
Refinance
Obtaining a new mortgage loan on a property already owned. Often
to replace existing loans on the property.
RESPA
Real Estate Settlement Procedures Act. RESPA is a federal law
that requires lenders to provide home mortgage borrowers with
information about known or estimated settlement costs. |
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S |
Second
Trust
A mortgage made subsequent to another mortgage and subordinate
to the first one.
Servicer
After a mortgage loan closes, the loan servicer collects the
payments, manages escrow accounts, pays escrow taxes and insurance,
and manages delinquent payments. Lenders often "release"
servicing to another business, which means that a home buyer
will not necessarily send house payments to the original lender.
Settlement
The closing of a mortgage loan. |
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T |
Title
The evidence of the right to or ownership in property. In the
case of real estate, the documentary evidence of ownership is
the title deed. Title may be acquired through purchase, inheritance,
gift, or through foreclosure of a mortgage.
Title
Insurance
A policy, usually issued by a title insurance company, which
insures a home buyer against errors in the title search (Owners
Title Insurance). 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. Policies are also available to protect the lender's
interests Title Insurance).
Truth-in-Lending
Act
A federal law requiring disclosure of the Annual Percentage
Rate to home buyers shortly after they apply for the loan. Also
known as Regulation Z. |
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U |
Underwriter
He/she who performs the analysis of the risk involved in making
a loan to a potential home buyer based on credit, employment,
assets, and other factors; and the matching of this risk to
an appropriate rate and term or loan amount.
Unsecured
Note
A loan that is not backed by collateral (property). |
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V |
VA
Mortgages
If you are current in the United States military, or if you
have ever served in U.S. armed forces, you may be eligible to
get a loan insured by the Veterans Administration. If you qualify,
this special government benefit to veterans might be a good
option.
Variable Rate Mortgage (VRM)
See Adjustable Rate Mortgage (ARM).
Verification
of Employment
A document signed by the borrower's employer verifying his/her
position and salary. |
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W |
Wraparound
Mortgage
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 their share. |
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