Glossary Of Terms
We have put together this handy list of terms often used in the mortgage
and loan business for you to refer to.
Accrued Interest
Interest earned but not yet paid.
Adjustable Rate Mortgage Loans (ARM)
Loans with interest rates that are adjusted periodically based on changes
in a pre-selected index. As a result, the interest rate on your loan
and the monthly payment will rise and fall with increases and decreases
in overall interest rates. These mortgage loans must specify how their
interest rate changes, usually in terms of a relation to a national index
such as (but not always) Treasury bill rates. If interest rates rise,
your monthly payments will rise. An interest rate cap limits the amount
by which the interest rate can change; look for this feature when you
consider an ARM loan.
Adjustment Interval On an ARM loan, the time between changes in the interest
rate or monthly payment.
Agreement of Sale
Contract signed by buyer and seller stating the terms and conditions
under which a property will be sold.
Alternative Documentation
A method of documenting a loan file that relies on information the borrower
is likely to be able to provide instead of waiting on verification sent
to third parties for confirmation of statements made in the application.
Amortization
Repayment of a loan with periodic payments of both principal and interest
calculated to payoff the loan at the end of a fixed period of time.
Annual Percentage Rate (APR)
The cost of a mortgage expressed as a yearly rate. The annual percentage
rate is often not the same as the interest rate. It is a percentage that
results from an equation considering the amount financed, the finance
charges, and the term of the loan.
Application
An initial statement of personal and financial information required to
apply for a loan.
Application Fee
Fee charged by a lender to cover the initial costs of processing a loan
application. The fee may include the cost of obtaining a property appraisal,
a credit report, and a lock-in fee or other closing costs incurred during
the process or the fee may be in addition to these charges.
Appraisal
A written estimate of a property's current market value completed by
an impartial party with knowledge of real estate markets.
Appraisal Fee
A fee charged by a licensed, certified appraiser to render an opinion
of market value as of a specific date.
APR
See Annual Percentage Rate.
ARM
See Adjustable Rate Mortgage Loans.
Assignment
The transfer of ownership, rights, or interests in property by one person,
the assignor, to another, the assignee.
Assumption
A method of selling real estate where the buyer of the property agrees
to become responsible for the repayment of an existing loan on the property.
Balloon Mortgage
Balloon mortgage loans are short-term fixed-rate loans with fixed monthly
payments for a set number of years followed by one large final balloon
payment ("the balloon") for all of the remainder of the principal.
Typically, the balloon payment may be due at the end of 5, 7, or 10 years.
Borrowers with balloon loans may have the right to refinance the loan
when the balloon payment is due, but the right to refinance is not guaranteed.
Bankruptcy
A proceeding in a federal court to relieve certain debts of a person
or a business unable to pay its debts.
Bearer
The legal owner of a piece of property.
Borrower (Mortgagor)
An individual who applies for and receives funds in the form of a loan
and is obligated to repay the loan in full under the terms of the loan.
Broker
An individual who brings buyers and sellers together and assists in negotiating
contracts for a client.
Call Option
A provision of a note which allows the lender to require repayment of
the loan in full before the end of the loan term. The option may be exercised
due to breach of the terms of the loan or at the discretion of the lender.
Caps (interest)
Consumer safeguards which limit the amount the interest rate on an adjustable
rate mortgage can change in an adjustment interval and/or over the life
of the loan. For example, if your per-period cap is 1% and your current
rate is 7%, then your newly adjusted rate must fall between 6% and 8%
regardless of actual changes in the index.
Caps (payment)
Consumer safeguards which limit the amount monthly payments on an adjustable-rate
mortgage may change. Since they do not limit the amount of interest the
lender is earning, these consumer safeguards may cause negative amortization.
Cash Out
Any cash received when you get a new loan that is larger than the remaining
balance of your current mortgage, based upon the equity you have already
built up in the house.
Cashier's Check
property may be sold to pay off a mortgage loan that is in default.
Freddie Mac
A common nickname for the Federal Home Loan Mortgage Corporation.
Good Faith Estimate
Written estimate of the settlement costs the borrower will likely have
to pay at closing. Under the Real Estate Settlement Procedures Act (RESPA),
the lender is required to provide this disclosure to the borrower within
three days of receiving a loan application.
Grace Period
Period of time during which a loan payment may be made after its due
date without incurring a late penalty. The grace period is specified
as part of the terms of the loan in the Note.
Gross Income
Total income before taxes or expenses are deducted.
Hazard Insurance
Protects the insured against loss due to fire or other natural disaster
in exchange for a premium paid to the insurer.
Housing and Urban Development
See HUD.
HUD
Housing and Urban Development. A U.S. government agency established to
implement federal housing and community development programs; oversees
the Federal Housing Administration.
HUD-1 Uniform Settlement Statement A standard form which itemizes the
closing costs associated with purchasing a home or refinancing a loan.
Index
A published rate used by lenders that serves as the basis for determining
interest rate changes on ARM loans.
Initial Rate
The rate charged during the first interval of an ARM loan.
Interest
Charge paid for borrowing money, calculated as a percentage of the remaining
balance of the amount borrowed.
Interest Rate
The annual rate of interest on the loan, expressed as a percentage of
100.
Interest Rate Cap
Consumer safeguards which limit the amount the interest rate on an ARM
loan can change in an adjustment interval and/or over the life of the
loan. For example, if your per-period cap is 1% and your current rate
is 7%, then your newly adjusted rate must fall between 6% and 8% regardless
of actual changes in the index.
Joint Liability
Liability shared among two or more people, each of whom is liable for
the full debt.
Joint Tenancy
A form of ownership of property giving each person equal interest in
the property, including rights of survivorship.
Jumbo Loan
A mortgage larger than the $240,000 limit set by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation.
Junior Mortgage
A mortgage subordinate to the claim of a prior lien or mortgage. In the
case of a foreclosure, a senior mortgage or lien will be paid first.
Late Charge
Penalty paid by a borrower when a payment is made after the due date.
Lender
The bank, mortgage company, or mortgage broker offering the loan.
LIBOR (London Interbank Offered Rate) The interest rate charged among
banks in the foreign market for short-term loans to one another. A common
index for ARM loans.
Lien
A legal claim by one person on the property of another for security for
payment of a debt.
Loan Application
An initial statement of personal and financial information required to
apply for a loan.
Loan Application Fee
Fee charged by a lender to cover the initial costs of processing a loan
application. The fee may include the cost of obtaining a property appraisal,
a credit report, and a lock-in fee or other closing costs incurred during
the process or the fee may be in addition to these charges.
Loan Origination Fee
Fee charged by a lender to cover administrative costs of processing a
loan.
Loan-to-Value Ratio (LTV)
The percentage of the loan amount to the appraised value (or the sales
price, whichever is less) of the property.
Lock or Lock-In
A lender's guarantee of an interest rate for a set period of time. The
time period is usually that between loan application approval and loan
closing. The lock-in protects you against rate increases during that
time.
Margin
A specified percentage that is added to your chosen financial index to
determine your new interest rate at the time of adjustment for ARM loans.
Mortgage
A legal document by which real property is pledged as security for the
repayment of a loan.
Mortgage Banker
An individual or company that originates and/or services mortgage loans.
Mortgage Broker
An individual or company that arranges financing for borrowers.
Mortgage Insurance
Insurance to protect the lender in case you default on your loan. With
conventional loans, mortgage insurance is generally not required if you
make a down payment of at least 20% of the home's purchase price. (Note,
however, that FHA and VA loans have different insurance guidelines.)
Mortgage Loan
A loan for which real estate serves as collateral to provide for repayment
in case of default.
Mortgage Note
Legal document obligating a borrower to repay a loan at a stated interest
rate during a specified period of time. The agreement is secured by a
mortgage or deed of trust or other security instrument.
Mortgagee
The lender in a mortgage loan transaction.
Mortgagor
The borrower in a mortgage loan transaction.
Negative Amortization
A loan payment schedule in which the outstanding principal balance of
a loan goes up rather than down because the payments do not cover the
full amount of interest due. The monthly shortfall in payment is added
to the unpaid principal balance of the loan.
Non-Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage
by another borrower without the prior approval of the lender.
Note
Legal document obligating a borrower to repay a loan at a stated interest
rate during a specified period of time. The agreement is secured by a
mortgage or deed of trust or other security instrument.
Notice of Default
Written notice to a borrower that a default has occurred and that legal
action may be taken. Origination Fee
Fee charged by a lender to cover administrative costs of processing a
loan.
Payment Cap
Consumer safeguards which limit the amount monthly payments on an adjustable-rate
mortgage may change. Since they do not limit the amount of interest the
lender is earning, they may cause negative amortization.
Per Diem Interest
Interest calculated per day. (Depending on the day of the month on which
closing takes place, you will have to pay interest from the date of closing
to the end of the month. Your first mortgage payment will probably be
due the first day of the following month.)
PITI
Abbreviation for Principal, Interest, Taxes and Insurance, the components
of a monthly mortgage payment.
Points
Points are an up-front fee paid to the lender at the time that you get
your loan. Each point equals one percent of your total loan amount. Points
and interest rates are inherently connected: in general, the more points
you pay, the lower the interest rate you get. However, the more points
you pay, the more cash you need up front since points are paid in cash
at closing.
Prepaid Expenses
Taxes, insurance and assessments paid in advance of their due dates.
These expenses are included at closing.
Prepaid Interest
Interest that is paid in advance of when it is due. Typically charged
to a borrower at closing to cover interest on the
loan between the closing date and the first payment date.
Prepayment
Full or partial repayment of the principal before the contractual due
date.
Prepayment Penalty
Fee charged by a lender for a loan paid off in advance of the contractual
due date.
Pre-qualification
The process of determining how much money a prospective home buyer will
be eligible to borrow prior to application for a loan. Information submitted
during pre-qualification is subject to verification at application.
Principal
The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI)
Insurance to protect the lender in case you default on your loan. With
conventional loans, mortgage insurance is generally not required if you
make a down payment of at least 20% of the home's purchase price. (Note,
however, that FHA and VA loans have different insurance guidelines.)
Purchase Agreement
Contract signed by buyer and seller stating the terms and conditions
under which a property will be sold.
Real Estate Settlement Procedures Act (RESPA)
A federal law that requires lenders to provide mortgage loan borrowers
with information of known or estimated settlement costs.
Real Property
Land and any improvements permanently affixed to it, such as buildings.
Reconveyance
The transfer of property back to the owner when a mortgage loan is fully
repaid.
Recording
The act of entering documents concerning title to a property into the
public records.
Recording Fee
Money paid to an agent for entering the sale of a property into the public
records.
Refinancing
The process of paying off one loan with the proceeds from a new loan
secured by the same property.
RESPA
See Real Estate Settlement Procedures Act.
Right to Rescission
Under the provisions of the Truth-in-Lending Act, the borrower's right,
on certain kinds of loans, to cancel the loan within three days of signing
a mortgage.
Sales Agreement
Contract signed by buyer and seller stating the terms and conditions
under which a property will be sold.
Second Mortgage
An additional mortgage placed on a property that has rights that are
subordinate to the first mortgage.
Settlement (or Closing)
The settlement or closing is the conclusion of your real estate transaction.
It includes the delivery of your security instrument, signing of your
legal documents and the disbursement of the funds necessary to the sale
of your home or loan transaction (refinance).
Settlement Costs
Also known as closing costs, these costs are for services that must be
performed before your loan can be initiated. Examples include title fees,
recording fees, appraisal fee, credit report fee, pest inspection, attorney's
fees, taxes, and surveying fees.
Survey
A measurement of land, prepared by a licensed surveyor, showing a property's
boundaries, elevations, improvements, and relationship to surrounding
tracts.
Sweat Equity
Value added to a property in the form of labor or services of the owner
rather than cash.
Tax Lien
Claim against a property for unpaid taxes.
Tax Sale
Public sale of property by a government authority as a result of non-payment
of taxes.
Term
The period of time between the beginning loan date on the legal documents
and the date the entire balance of the loan is due.
Title
Document which gives evidence of ownership of a property. Also indicates
the rights of ownership and possession of the property.
Title Company
A company that insures title to property.
Title Insurance
Insurance which protects the lender (lender's policy) or the buyer (owner's
policy) against loss due to disputes over ownership of a property.
Title Search
Examination of municipal records to ensure that the seller is the legal
owner of a property and that there are no liens or other claims against
the property.
Transfer Tax
Tax paid when title passes from one owner to another.
Truth-in-Lending Act
Federal law requiring written disclosure of the terms of a mortgage (including
the APR and other charges) by a lender to a borrower after application.
Also requires the right to rescission period.
Underwriting
In mortgage lending, the process of determining the risks involved in
a particular loan and establishing suitable terms and conditions for
the loan.
VA Loans
Fixed-rate loans guaranteed by the U.S. Department of Veterans Affairs.
They are designed to make housing affordable for eligible U.S. veterans.
VA loans are available to veterans, reservists, active-duty personnel,
and surviving spouses of veterans with 100% entitlement. Eligible veterans
may be able to purchase a home with no down payment, no cash reserve,
no application fee, and lower closing costs than other financing options.
The maximum VA loan amount is currently $203,000.
Variable Rate Mortgage
See Adjustable Rate Mortgage.
Variable Rate
Interest rate that changes periodically in relation to an index.
Verification of Deposit (VOD)
Document signed by the borrower's bank or other financial institution
verifying the borrower's account balance and history.
Verification of Employment (VOE)
Document signed by the borrower's employer verifying the borrower's position
and salary.
Waiver
Voluntary relinquishment or surrender of some right or privilege.
Walk-through
A final inspection of a home to check for problems that may need to be
corrected before closing. Zoning Ordinances (or
Zoning Regulations)
Local law establishing building codes and usage regulations for properties
in a specified area.