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Mortgage Glossary
A
Amenity: a feature of the
home or property that serves as a benefit to the buyer but
that is not necessary to its use; may be natural (like
location, Woods, water) or man-made (like a swimming pool
or garden).
Amortization: repayment of
a mortgage loan through monthly installments of principal
and interest; the monthly payment amount is based on a
schedule that will allow you to own your home at the end
of a specific time period (for example, 15 or 30 years)
Annual Percentage Rate
(APR): calculated by using a standard formula, the APR
shows the cost of a loan; expressed as a yearly interest
rate, it includes the interest, points, mortgage
insurance, and other fees associated with the loan.
Application: the first step
in the official loan approval process; this form is used
to record important information about the potential
borrower necessary to the underwriting process.
Appraisal: a document that
gives an estimate of a property's fair market value; an
appraisal is generally required by a lender before loan
approval to ensure that the mortgage loan amount is not
more than the value of the property.
Appraiser: a qualified
individual who uses his or her experience and knowledge to
prepare the appraisal estimate.
ARM: Adjustable Rate
Mortgage; a mortgage loan subject to changes in interest
rates; when rates change, ARM monthly payments increase or
decrease at intervals determined by the lender; the Change
in monthly -payment amount, however, is usually subject to
a Cap.
Assessor: a government
official who is responsible for determining the value of a
property for the purpose of taxation.
Assumable mortgage: a
mortgage that can be transferred from a seller to a buyer;
once the loan is assumed by the buyer the seller is no
longer responsible for repaying it; there may be a fee
and/or a credit package involved in the transfer of an
assumable mortgage.
B
Balloon Mortgage: a
mortgage that typically offers low rates for an initial
period of time (usually 5, 7, or 10) years; after that
time period elapses, the balance is due or is refinanced
by the borrower.
Bankruptcy: a federal law
Whereby a person's assets are turned over to a trustee and
used to pay off outstanding debts; this usually occurs
when someone owes more than they have the ability to
repay.
Borrower: a person who has
been approved to receive a loan and is then obligated to
repay it and any additional fees according to the loan
terms.
Building code: based on
agreed upon safety standards within a specific area, a
building code is a regulation that determines the design,
construction, and materials used in building.
Budget: a detailed record
of all income earned and spent during a specific period of
time.
C
Cap: a limit, such as that
placed on an adjustable rate mortgage, on how much a
monthly payment or interest rate can increase or decrease.
Cash reserves: a cash
amount sometimes required to be held in reserve in
addition to the down payment and closing costs; the amount
is determined by the lender.
Certificate of title: a
document provided by a qualified source (such as a title
company) that shows the property legally belongs to the
current owner; before the title is transferred at closing,
it should be clear and free of all liens or other
claims.
Closing: also known as
settlement, this is the time at which the property is
formally sold and transferred from the seller to the
buyer; it is at this time that the borrower takes on the
loan obligation, pays all closing costs, and receives
title from the seller.
Closing costs: customary
costs above and beyond the sale price of the property that
must be paid to cover the transfer of ownership at
closing; these costs generally vary by geographic location
and are typically detailed to the borrower after
submission of a loan application.
Commission: an amount,
usually a percentage of the property sales price, that is
collected by a real estate professional as a fee for
negotiating the transaction..
Condominium: a form of
ownership in which individuals purchase and own a unit of
housing in a multi-unit complex; the owner also shares
financial responsibility for common areas.
Conventional loan: a
private sector loan, one that is not guaranteed or insured
by the U.S. government.
Cooperative (Co-op):
residents purchase stock in a cooperative corporation that
owns a structure; each stockholder is then entitled to
live in a specific unit of the structure and is
responsible for paying a portion of the loan.
Credit history: history of
an individual's debt payment; lenders use this information
to gauge a potential borrower's ability to repay a loan.
Credit report: a record
that lists all past and present debts and the timeliness
of their repayment; it documents an individual's credit
history.
Credit bureau score: a
number representing the possibility a borrower may
default; it is based upon credit history and is used to
determine ability to qualify for a mortgage loan.
D
Debt-to-income ratio: a
comparison of gross income to housing and non-housing
expenses; With the FHA, the-monthly mortgage payment
should be no more than 29% of monthly gross income (before
taxes) and the mortgage payment combined with non-housing
debts should not exceed 41% of income.
Deed: the document that
transfers ownership of a property.
Deed-in-lieu: to avoid
foreclosure ("in lieu" of foreclosure), a deed
is given to the lender to fulfill the obligation to repay
the debt; this process doesn't allow the borrower to
remain in the house but helps avoid the costs, time, and
effort associated with foreclosure.
Default: the inability to
pay monthly mortgage payments in a timely manner or to
otherwise meet the mortgage terms.
Delinquency: failure of a
borrower to make timely mortgage payments under a loan
agreement.
Discount point: normally
paid at closing and generally calculated to be equivalent
to 1% of the total loan amount, discount points are paid
to reduce the interest rate on a loan.
Down payment: the portion
of a home's purchase price that is paid in cash and is not
part of the mortgage loan.
E
Earnest money: money put
down by a potential buyer to show that he or she is
serious about purchasing the home; it becomes part of the
down payment if the offer is accepted, is returned if the
offer is rejected, or is forfeited if the buyer pulls out
of the deal.
EEM: Energy Efficient
Mortgage; an FHA program that helps homebuyers save money
on utility bills by enabling them to finance the cost of
adding energy efficiency features to a new or existing
home as part of the home purchase
Equity: an owner's financial interest in a property;
calculated by subtracting the amount still owed on the
mortgage loon(s)from the fair market value of the
property.
Escrow account: a separate
account into which the lender puts a portion of each
monthly mortgage payment; an escrow account provides the
funds needed for such expenses as property taxes,
homeowners insurance, mortgage insurance, etc.
F
Fair Housing Act: a law
that prohibits discrimination in all facets of the
homebuying process on the basis of race, color, national
origin, religion, sex, familial status, or disability.
Fair market value: the
hypothetical price that a willing buyer and seller will
agree upon when they are acting freely, carefully, and
with complete knowledge of the situation.
Fannie Mae: Federal
National Mortgage Association (FNMA); a
federally-chartered enterprise owned by private
stockholders that purchases residential mortgages and
converts them into securities for sale to investors; by
purchasing mortgages, Fannie Mae supplies funds that
lenders may loan to potential homebuyers.
FHA: Federal Housing
Administration; established in 1934 to advance
homeownership opportunities for all Americans; assists
homebuyers by providing mortgage insurance to lenders to
cover most losses that may occur when a borrower defaults;
this encourages lenders to make loans to borrowers who
might not qualify for conventional mortgages.
Fixed-rate mortgage: a
mortgage with payments that remain the same throughout the
life of the loan because the interest rate and other terms
are fixed and do not change.
Flood insurance: insurance
that protects homeowners against losses from a flood; if a
home is located in a flood plain, the lender will require
flood insurance before approving a loan.
Foreclosure: a legal
process in which mortgaged property is sold to pay the
loan of the defaulting borrower.
Freddie Mac: Federal Home
Loan Mortgage Corporation (FHLM); a federally-chartered
corporation that purchases residential mortgages,
securitizes them, and sells them to investors; this
provides lenders With funds for new homebuyers.
G
Ginnie Mae: Government
National Mortgage Association (GNMA); a government-owned
corporation overseen by the U.S. Department of Housing and
Urban Development, Ginnie Mae pools FHA-insured and
VA-guaranteed loans to back securities for private
investment; as With Fannie Mae and Freddie Mac, the
investment income provides funding that may then be lent
to eligible borrowers by lenders.
Good faith estimate: an
estimate of all closing fees including pre-paid and escrow
items as well as lender charges; must be given to the
borrower within three days after submission of a loan
application.
H
HELP: Homebuyer Education
Learning Program; an educational program from the FHA that
counsels people about the homebuying process; HELP covers
topics like budgeting, finding a home, getting a loan, and
home maintenance; in most cases, completion of the program
may entitle the homebuyer to a reduced initial FHA
mortgage insurance premium-from 2.25% to 1.75% of the home
purchase price.
Home inspection: an
examination of the structure and mechanical systems to
determine a home's safety; makes the potential homebuyer
aware of any repairs that may be needed.
Home warranty: offers
protection for mechanical systems and attached appliances
against unexpected repairs not covered by homeowner's
insurance; ,overage extends over a specific time period
and does not cover the home's structure.
Homeowner's insurance: an
insurance policy that combines protection against damage
to a dwelling and Is contents with protection against
claims of negligence )r inappropriate action that result
in someone's injury or )property damage.
Housing counseling agency-
provides counseling and assistance to individuals on a
variety of issues, including loan default, fair housing,
and homebuying.
HUD: the U.S. Department of
Housing and Urban Development; established in 1965, HUD
works to create a decent home and suitable living
environment for all Americans; it does this by addressing
housing needs, improving and developing American
communities, and enforcing fair housing laws.
HUD1 Statement: also known
as the "settlement sheet," it itemizes all
closing costs; must be given to the borrower at or before
closing.
HVAC: Heating, Ventilation
and Air Conditioning; a home's heating and cooling system.
I
Index. a measurement used
by lenders to determine changes to the Interest rate
charged on an adjustable rate mortgage.
Inflation: the number of
dollars in circulation exceeds the amount of goods and
services available for purchase; inflation results in a
decrease in the dollar's value.
Interest: a fee charged for
the use of money .
Interest rate: the amount
of interest charged on a monthly loan payment; usually
expressed as a percentage.
Insurance: protection
against a specific loss over a period of time that is
secured by the payment of a regularly scheduled premium.
J
Judgment: a legal decision;
when requiring debt repayment, a judgment may include a
property lien that secures the creditor's claim by
providing a collateral source.
L
Lease purchase: assists
low- to moderate-income homebuyers in purchasing a home by
allowing them to lease a home with an option to buy; the
rent payment is made up of the monthly rental payment plus
an additional amount that is credited to an account for
use as a down payment.
Lien: a legal claim against
property that must be satisfied When the property is sold
Loan: money borrowed that is usually repaid with interest.
Loan fraud: purposely
giving incorrect information on a loan application in
order to better qualify for a loan; may result in civil
liability or criminal penalties.
Loan-to-value (LTV) ratio.-
a percentage calculated by dividing the amount borrowed by
the price or appraised value of the home to be purchased;
the higher the LTV, the less cash a borrower is required
to pay as down payment.
Lock-in: since interest
rates can change frequently, many lenders offer an
interest rate lock-in that guarantees a specific interest
rate if the loan is closed within a specific time.
Loss mitigation: a process
to avoid foreclosure; the lender tries to help a borrower
who has been unable to make loan payments and is in danger
of defaulting on his or her loan
M
Margin: an amount the
lender adds to an index to determine the interest rate on
an adjustable rate mortgage.
Mortgage: a lien on the
property that secures the Promise to repay a loan.
Mortgage banker: a company
that originates loans and resells them to secondary
mortgage lenders like :Fannie Mae or Freddie Mac.
Mortgage broker: a firm
that originates and processes loans for a number of
lenders.
Mortgage insurance: a
policy that protects lenders against some or most of the
losses that can occur when a borrower defaults on a
mortgage loan; mortgage insurance is required primarily
for borrowers with a down payment of less than 20% of the
home's purchase price.
Mortgage insurance premium
(MIP): a monthly payment -usually part of the mortgage
payment - paid by a borrower for mortgage insurance.
Mortgage Modification: a
loss mitigation option that allows a borrower to refinance
and/or extend the term of the mortgage loan and thus
reduce the monthly payments.
O
Offer: indication by a
potential buyer of a willingness to purchase a home at a
specific price; generally put forth in writing.
Origination: the process of
preparing, submitting, and evaluating a loan application;
generally includes a credit check, verification of
employment, and a property appraisal.
Origination fee: the charge
for originating a loan; is usually calculated in the form
of points and paid at closing.
P
Partial Claim: a loss
mitigation option offered by the FHA that allows a
borrower, with help from a lender, to get an interest-free
loan from HUD to bring their mortgage payments up to date.
PITI: Principal, Interest,
Taxes, and Insurance - the four elements of a monthly
mortgage payment; payments of principal and interest go
directly towards repaying the loan while the portion that
covers taxes and insurance (homeowner's and mortgage, if
applicable) goes into an escrow account to cover the fees
when they are due.
PMI: Private Mortgage
Insurance; privately-owned companies that offer standard
and special affordable mortgage insurance programs for
qualified borrowers with down payments of less than 20% of
a purchase price.
Pre-approve: lender commits
to lend to a potential borrower; commitment remains as
long as the borrower still meets the qualification
requirements at the time of purchase.
Pre-foreclosure sale:
allows a defaulting borrower to sell the mortgaged
property to satisfy the loan and avoid foreclosure.
Pre-qualify: a lender
informally determines the maximum amount an individual is
eligible to borrow.
Premium: an amount paid on
a regular schedule by a policyholder that maintains
insurance coverage.
Prepayment: payment of the
mortgage loan before the scheduled due date; may be
Subject to a prepayment penalty.
Principal: the amount
borrowed from a lender; doesn't include interest or
additional fees.
R
Radon: a radioactive gas
found in some homes that, if occurring in strong enough
concentrations, can cause health problems.
Real estate agent: an
individual who is licensed to negotiate and arrange real
estate sales; works for a real estate broker.
REALTOR: a real estate
agent or broker who is a member of the NATIONAL
ASSOCIATION OF REALTORS, and its local and state
associations.
Refinancing: paying off one
loan by obtaining another; refinancing is generally done
to secure better loan terms (like a lower interest rate).
Rehabilitation mortgage: a
mortgage that covers the costs of rehabilitating
(repairing or Improving) a property; some rehabilitation
mortgages - like the FHA's 203(k) - allow a borrower to
roll the costs of rehabilitation and home purchase into
one mortgage loan.
RESPA: Real Estate
Settlement Procedures Act; a law protecting consumers from
abuses during the residential real estate purchase and
loan process by requiring lenders to disclose all
settlement costs, practices, and relationships
S
Settlement: another name
for closing .
Special Forbearance: a loss
mitigation option where the lender arranges a revised
repayment plan for the borrower that may include a
temporary reduction or suspension of monthly loan
payments.
Subordinate: to place in a
rank of lesser importance or to make one claim secondary
to another.
Survey: a property diagram
that indicates legal boundaries, easements, encroachments,
rights of way, improvement locations, etc.
Sweat equity: using labor
to build or improve a property as part of the down payment
T
Title 1: an FHA-insured
loan that allows a borrower to make non-luxury
improvements (like renovations or repairs) to their home;
Title I loans less than $7,500 don't require a property
lien.
Title insurance: insurance
that protects the lender against any claims that arise
from arguments about ownership of the property; also
available for homebuyers.
Title search: a check of
public records to be sure that the seller is the
recognized owner of the real estate and that there are no
unsettled liens or other claims against the property.
Truth-in-Lending: a federal
law obligating a lender to give full written disclosure of
all fees, terms, and conditions associated with the loan
initial period and then adjusts to another rate that lasts
for the term of the loan.
U
Underwriting: the process
of analyzing a loan application to determine the amount of
risk involved in making the loan; it includes a review of
the potential borrower's credit history and a judgment of
the property value.
V
VA: Department of Veterans
Affairs: a federal agency which guarantees loans made to
veterans; similar to mortgage insurance, a loan guarantee
protects lenders against loss that may result from a
borrower default.
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