Mortgage Terms Glossary
Acceleration
Acceleration is the right of the mortgagee (lender) to demand the immediate repayment (within 30 days) of the mortgage loan balance upon the default of the mortgagor. (borrower) Acceleration is most frequently triggered by the sale of a property without the underlying mortgage being paid off. This "Due-on-Sale Clause" found in standard deeds of trust is the language that triggers acceleration. Acceleration almost always results in foreclosure.
Adjustable Rate Mortgage (ARM)
This is a mortgage in which the interest rate is adjusted
periodically based on a pre-selected index. The most common
indexes are the one year treasury bill (T-Bill), the one year
moving average of 1 year treasury bills (MTA), the Cost of
Funds Index used by some savings and loans (COFI) and the one year
London Interbank Offered Rate. (
LIBOR) Generally there is a mark-up called a margin over the
index. The margins are generally 2.5% to 2.875%. FHA
offers ARM's with a 2.0% margin and most Subprime loans carry
margins as high as 6 to 8%. There is also a time period
between the introductory or start rate and the first
adjustment period. For a 3/1 ARM the start rate is fixed
for 3 years and then the mortgage rate is adjusted annually
thereafter. For an Option ARM, the start rate is only
one to three months. (however, the payment is fixed for one
year) ARM's are also
sometimes known as the re-negotiable rate mortgages or
variable rate mortgages. These four rates differ in their volatility. That is some of them move up or down more rapidly that others. This feature is important if a borrower is expecting interest rates to move up or down. The most volatile rate is the LIBOR followed by the 1 year T-Bill . The least volatile rates are the MTA and the COFI. Generally, but not always, the COFI is the slowest moving of the rates.
Adjustment Period (for ARM's)
On an adjustable rate mortgage, the time (interval) between changes in
the interest rate and/or monthly payments is called the
adjustment period. This period is typically one, three
or five years.
ARM,
Option
Please refer to
Option ARM listed
alphabetically in this glossary.
Amortization
Amortization is the length of time to pay off a mortgage.
Amortizations are typically 30,20, or 15 years.
Amortization schedules may call for equal periodic (monthly)
payments of principal plus interest (a decreasing total
payment schedule) or they most commonly call for equal periodic payments
of principal and interest. (level payments for term of the loan)
Annual percentage rate (A.P.R.)
APR is 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 point and other credit cost. The APR allows home
buyers to compare different types of mortgages based on the
annual cost for each loan.
Appraisal
Appraisal is an estimate of the value of property, made by a qualified
professional called an "appraiser". In most
states appraisers are licensed.
Assessment
A local tax levied against a property for a specific purpose,
such as improvements for water, sewer or street lights.
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
cost and new, probably higher, market-rate interest charges
will apply.
Conventional loans are not assumable. FHA and
VA loans are assumable but only if the buyer is qualified.
Assumptions
are most common when the existing market interest rate is
above the assumable note rate.
B, C, AND D Mortgages
Please refer to Subprime
Loans later in this Glossary.
Banker as in Mortgage Banker
Please refer to Mortgage Banker in this Glossary.
Balloon (payment) mortgage
Usually a short-term fixed-rate loan which involves small
payments for a certain period of time (generally 5 or 7
years) and one large (balloon) payment
for the remaining amount of the principal at a time specified
in the contract.
Balloons loans have lost
popularity because then must be paid off or refinanced at the
balloon date. Balloon loans have been mostly replaced by 5/1 and 7/1 ARMS.
Blanket Mortgage
A mortgage covering two or more pieces of real estate as
security for the same mortgage.
Borrower (Mortgagor)
One who applies for and receives a loan in the form of a mortgage
(i.e. secured by real estate with a deed of trust)
with the intention of repaying the loan in full.
Broker
An individual in the business of assisting in arranging funding
or negotiating contracts for a client buy who does not loan
the money himself. Brokers usually charge a fee or receive
a commission for their services. Brokers close the loans in
the name of their lenders. They do not provide their own
funds at closing.
Buy-down
When the lender and/or the home builder subsidized 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.
Cash Flow
The amount of cash derived over a certain period of time from
an income-producing property. The cash flow should be large
enough to pay the expenses of the income producing property
(mortgage payment, maintenance, utilities, etc).
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.
Certificate of Eligibility
The document given to qualified veterans which entitles them
to VA guaranteed loans for homes, business, and mobile homes.
Certificates of eligibility may be obtained by sending DD-214
(Separation Paper) to the local VA office with VA form 1880.
(request for Certificate of Eligibility)Certain eligible mortgage brokers and mortgage bankers can obtain this form on-line.
Certificate of Reasonable Value
(CRV)
An appraisal issued by the Veterans Administration showing
the property's current market value
Certificate of Veteran Status
The document given to veterans or reservists who have served
90 days of continuous active duty (including training time)
It may be obtained by sending DD 214 to the local VA office
with form 26-8261a (request for certificate of veteran status).
This document enables veterans to obtain lower down payments
on certain FHA insured loans.
Closing and Closing Costs
The meeting between the buyer, seller and lender or their
agents where the title to the property and funds legally change hands.
This transaction is also called settlement. Closing costs usually include an origination
fee, discount points, appraisal fee, title search and insurance,
survey, taxes, recording fees, credit report charge and
other costs assessed at settlement. The cost of closing usually
are about 3 percent to 6 percent of the mortgage amount.
Commitment
A promise by a lender to make a loan on specific terms or
conditions to a borrower or builder. A promise by an investor
to purchase mortgages from a lender with specific terms or
conditions. An agreement, often in writing, between a lender
and a borrower to loan money at a future date subject to the
completion of paper work or compliance with stated conditions.
Construction loan
A short term interim loan to pay for the construction of buildings
or homes. These are usually designed to provide periodic disbursements
to the builder as he progresses.
Contract sale for deed:
A contract between purchaser and a seller of real estate to
convey title after certain conditions have been met. It is
a form of installment sale.
Conventional loan
A loan that meets the underwriting standards set by Fannie
Mae and Freddie Mac. These mortgages not insured by FHA or guaranteed by the VA.
Credit Report
A report documenting the credit history and current status
of a borrower's credit standing.
Debt-to-Income Ratio (DTI)
The DTI ratio is a qualifying ratio used by underwriting
systems (whether human or computerized) to prove that
borrowers have sufficient income to service their mortgage
payments. This ratio is expressed as a percentage, and
is calculated by dividing the borrower's monthly payment obligations
by his or her gross monthly income.
Deed of Trust
The document that is used in conjunction with the promissory
note to denote that a borrower has pledged certain real estate
as collateral to secure the repayment of a loan which was used
to purchase or refinance said real estate. The deed of
trust is the document that identifies the real estate as
collateral. The deed of trust is filed with the County
Clerk and Recorder in the county in which the real estate is
located.
Default
Default is the failure to meet legal obligations in a
contract or promissory note. Default provisions are
generally found in the language of the promissory note.
Some common default provisions in a real estate promissory
note are:1) Material misrepresentation of the facts surrounding the application.
2) Failure to make scheduled principal or interest payments on time.
3) Using the property for illegal purposes.
4) Selling the property or making a transfer of beneficial interest in the property.
5) Failure to maintain insurance or to pay property taxes.
This is not a complete list of default provisions, there are other default provisions depending on the type of loan and the lenders requirements.
Deferred Interest
When a mortgage is written with a monthly payment that is
less than required to satisfy the note rate, the unpaid interest
is deferred by adding it to the loan balance. Please see
Negative Amortization.
Delinquency
Failure to make payments on time. Generally, with
conventional and FHA loans, becoming 90 days past due on loan
payments triggers the beginning of the foreclosure process.
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 Point
See Points.
Down Payment
Money paid to make up the difference between the purchase
price and the mortgage loan amount. Down payment funds
creates equity in the property being purchased.
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 or transfers a
beneficial interest in the home. If the due-on-sale
provision is violated and the loan is not paid within the time
period prescribed by the lender, then the lender has the legal
right to commence foreclosure proceeding.
Earnest Money
Money given by a buyer to a seller as part of the purchase
price to bind a transaction or assure payment.
Entitlement
The VA home loan benefit is called entitlement. Entitlement
for a VA guaranteed home loan is also known as eligibility.
Equal Credit Opportunity Act (ECOA)
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
This is the difference between the fair market value (established by an appraisal) and current indebtedness.Escrow
An account held by the lender into which the home buyer pays money for tax or insurance payments. Another meaning of Escrow is earnest money deposits held by the listing Realtor or a title company prior to closing of the real estate transaction.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 Bank Board (FHLBB)
The former name for the regulatory and supervisory agency for federally chartered savings institutions. Agency is now called the Office of Thrift Supervision.
Federal Home Loan
Mortgage Corp.
(FHLMC)
aka "Freddie
Mac" Is a quasi-governmental agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration
(FHA)
FHA is 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 sets standards for
underwriting mortgages.
Federal National Mortgage Association
(FNMA)
aka "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 available and affordable.
FHA Loan
A loan insured by the Federal Housing Administration open to
all qualified home purchasers. FHA maintains "mortgage
limits" based upon local community housing costs. These
limits are published on the FHA web site. The mortgage limits
are generous enough to handle moderately priced homes almost
anywhere in the country and FHA provides increased limits in high
cost housing areas.
FHA Mortgage Insurance (MIP)
Requires a fee (up to 1.5 percent of the loan amount) paid
at closing to insure the loan with FHA. In addition, FHA mortgage
insurance requires an annual fee of up to 0.5 percent of the
current loan amount, paid in monthly installments. The lower
the down payment, the more years the fee must be paid. Fixed Rate Mortgage
Fixed rate mortgage is a loan where the interest rate will remain the same throughout the term of the mortgage.Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.
Freddie Mac
See Federal Home Loan Mortgage Corporation.
Graduated Payment Mortgage (GPM)
A type of flexible-payment mortgage where the payments may increase for a specified period of time and then level off. This type of mortgage can create negative amortization.Guaranty
A promise by one party (guarantor) to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract. Guaranties generally cannot be enforced until the first party defaults on the obligation. Also, guaranties generally are not report on the guarantor's credit report.Hard Money Loans
These are loans that are made based solely on the value of the real property. Usually borrowers in foreclosure will attempted to refinance with hard money loans. A more detailed explanation can be found in theLoan Application Guide in this site accessed via the middle right side button on the home page. Or link to h. Hard Money Loans.
Hazard Insurance
A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like. Hazard Insurance is frequently confused with Homeowners Insurance. Homeowners Insurance is Hazard Insurance with the added protection of personal liability insurance.
Impound
That portion of a borrower's monthly payments held by the
lender to pay for taxes, hazard insurance, mortgage
insurance, and other items as they become
due. Impounds are also known as reserves.
Index
A published interest rate against which lenders use to
establish the current interest rate on an adjustable rate
mortgage. The most common indexes are the one-year U.S.
Treasury Note, the one-year LIBOR (London inter-bank overnight
rate), and the monthly average costs-of-funds index (COFI)
computed from savings and loans deposits.
Interest Only Loans
This loan is also referred to as an Interest First
loan. A published
article accessed on the home page of this web site has a
section devoted to e. Interest Only Loans.