The Glossary of Mortgage Terms at Daily Interest.com

Glossary
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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Acceleration Clause - Condition in a mortgage that may require the balance of the loan to become due immediately, if regular mortgage payments are not made or for breach of other conditions of the mortgage.

Adjustment Interval - In an ARM, the time interval between adjustments, typically 6 months or annually. For a hybrid ARM, this is also noted as the time interval before the first adjustment, typically 1, 3, 5, 7, or 10 years.

Agreement of Sale - Also known as the Purchase Agreement, Sales Agreement, Deposit Receipt, Offer to Purchase, or Contract of Purchase according to local custom. When executed by both parties, it is the contract in which the selling price, specific terms, and conditions under which the seller agrees to sell and a buyer agrees to buy a property.

Amortization - a mortgage payment plan whereby a portion of each payment is applied to the interest and the balance to reducing the principal, the result of which is that the loan if fully re-paid within the specified term.

Annual Percentage Rate - Congress' inept attempt to give consumers the ability to differentiate between loan programs offered by various lenders by making lenders disclose the "true" cost of borrowing. The APR takes into account points and closing costs in helping borrowers compare loans. Unfortunately, it is an imperfect solution to the problem due to the lack of standards in determining APR's. Unscrupulous lenders can mauever their charges as to not be included in this computation.

Application Fee - Some lenders charge an up-front Application Fee to cover some of the costs of processing the loan application. Sometimes, the lender only collects the actual costs of an appraisal and credit report.

Appraisal - An opinion of value as of a given date of a property prepared by an expert. The experts are usually licensed in the state. For residential loans, the report is invariably prepared on FNMA form. Note - Realtors frequently provide homeowners who are potential clients an Estimate of Value or Market Analysis, showing recent comparable sales and other market data. The conclusion they reach may be accurate or not depending upon the ability of the Realtor but their report is not an appraisal and in some states they are precluded from using the word appraisal to describe it.

Adjustable rate mortgage - (ARM) Is a mortgage in which the interest rate is adjusted periodically based on a preselected index. Also sometimes known as the re-negotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.

Assessed Value - The value of a property for tax purposes according to the Tax Assessor of the jurisdiction in which the property is located. This number bears very little relation to the current market value of the property.

Assessment - A local tax levied against a property for a specific purpose, such as a sewer or street lights.

Assumption - The process whereby a purchaser of a property is substituted for the original borrower upon approval of the lender. The original mortgagor is to be released from further liability in the assumption. Assumption should not be confused with purchasing a property "subject to" the current mortgage where the new buyer makes the payments but the original mortgagor remains personally liable if the purchaser fails to make the monthly payments. The Garn - St.Germain bill in the mid 1980's generally gave lenders the right to require payoff of the loan upon sale of the property. In my view, it is a dangerous practice to purchase a property without telling the lender, "hoping that they will not notice." FHA and VA loans are virtually the only fixed rate loans which are assumable. ARM's, on the other hand, are always presumed to be "at market rate" and are almost universally assumable at the discretion of the lender.

Balloon (payment) mortgage - Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

Basis Point - 1/100th of 1%. A term used mostly by bond people who figure in the mortgage business because so many loans are securitized. If you look in your paper and see that the yield on the 30 year bond fell from 7.87% to 7.82%, it fell 5 basis points. Mortgage rates dropped a little bit too but not enough for most people to notice to notice. A 1/4% drop would be equal to 25 basis points.
Blanket Mortgage A mortgage covering at least two 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 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.

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). 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 - The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, 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.

Closing Costs - The expenses in addition to down payment which buyers normally incur in the settlement process. The agreement of sale negotiated previously between the buyer and the seller may state in writing who will pay each of the above costs. These costs are usually divided into the following three categories.

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.

Condominium - A type of Planned Unit Development where the form of ownership is where the buyer purchases individual ownership of a dwelling unit and a share of the common areas and facilities which serve the multi-unit project. For example, you may own unit 14 and a 1/60th interest in the pool and clubhouse facilities of your project. It is very important to know that lenders frequently have a number of restrictions in lending to owners of condominiums. As a basis for this, it is helpful to understand that as the owner of a condominium unit, the value of your unit as collateral for the loan is not it's full sales price. The other part is your share of the value of the Association owned assets, such as a pool, clubhouse, and the common area. The value of these assets is beyond your individual control. Their ongoing value is a function of the willingness of all your fellow owners to continue to pay dues to the Association so it can maintain values of common owned property.

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 of Purchase - See agreement of sale

Contract sale or 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 Mortgage - A mortgage loan not insured by HUD or guaranteed by the Veterans' Administration.

Cooperative Housing - Also known as a Co-op and Stock Co-op. This is a form of ownership, frequently of an apartment building, which is owned by a corporation, the stockholders of which are the residents of the dwellings. In a cooperative, the corporation owns title to the real estate. The resident purchases stock in the corporation which entitles him to occupy a unit in the building. The resident does not own his unit, he has the right to occupy it.

Credit Report - A report documenting the credit history and current status of a borrower's credit standing.

Debt-to-Income Ratio - The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income. See housing expenses-to-income ratio.

Deed of Trust - In many states, the word mortgage is used but the security instrument whereby the property is given as security for the loan is actually a Deed of Trust. There are three parties to the instrument: the Trustor, the borrower, the Trustee, and the Beneficiary, the lender. The borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the debt to the lender or beneficiary. In the event of default, the beneficiary notifies the Trustee of the default whereupon the trustee proceeds to sell the property at a public sale. Usually a lender seeks a non-judicial foreclosure where the proceeds of the sale less the costs are the lender's revenue to apply against the loan. If the proceeds from the sale are not sufficient to pay off the loan, the lender may not pursue other legal action against to collect the deficiency. In some states, a lender must seek a judicial foreclosure to recover the full amount owed.

Default - Each note will contain provisions outlining the conditions under which the note is in default, at which time the lender has the right to start foreclosure. The most common of these, of course, is the failure to make payments on time. Generally, thirty days after the due date if payment is not received, the mortgage is in default. Other events of defaults are the failure to pay property taxes, failure to keep adequate insurance in force, or to allow the property to deteriorate, like knocking the house down before building a new, larger, structure.

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. See negative amortization.

Delinquency - Failure to make payments on time. This can lead to foreclosure.

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 Points - Money paid up-front to obtain a lower interest rate.

Down payment - The cash portion of the purchase price, the difference between the sales price and the initial mortgage amount.

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.

Earnest Money - The deposit money given by the buyer to his agent or settlement agent upon the signing of the Offer to Purchase, actually called the Deposit Receipt some places. This shows that he is serious about buying the house. If the sale goes through, the earnest money is applied against the down payment. If the sale is not consummated, disposition of the earnest money is either forfeited or returned to the buyer depending upon what is agreed to in the Offer.

Encumbrance - A legal right or interest in land that affects a good or clear title. Usually the Agreement of Sale will provide that the seller deliver a preliminary title policy or the results of a title search within 10 or 15 days. The purpose of obtaining a title search is to reveal the existence of such encumbrances and to give the buyer the opportunity to determine whether he wants to purchase with the encumbrance, or what can be done to remove it. Some encumbrances, such as easement rights, Special Assessments, or restrictive covenants (CC&R's) of a Community Associations "run with the land" and may actually not be negative. Others such as mortgages, judgment liens, a pending legal action, unpaid taxes, are invariably extinguished through settlement process.

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 value of an owner's interest in his property. Equity is the difference between the property's fair market value the total of the unpaid mortgage balance and any outstanding liens or other debts against the property.

Escrow - Escrow accounts, also known as impound accounts in some areas, are lender established accounts into which the borrower makes regular payments and periodically the lender pays some or all of the following on behalf of the borrower: mortgage insurance premiums, property tax payments, and/or casualty insurance premiums. These are usually required by mortgage insurance companies where the LTV of the original loan was greater than 80%. The reason for this is that on such loans, the borrowers' equity in the property is not high and if the lender were to have to foreclose, he does not want ALSO to have to make up back taxes payment.

Fannie Mae or FNMA - The Federal National Mortgage Association. A quasi-governmental organization which purchases mortgage loans from banks, S&L', and mortgage bankers, groups them in pools, and sells security interest in the pools to institutional investors. Such sales make up a portion of the Secondary Market.

Fannie Mae is 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 more available and more affordable.

Federal Housing Administration (FHA) - 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 also sets standards for underwriting mortgages.

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 ($155,250 as of 1/1/96), they are generous enough to handle moderately-priced homes almost anywhere in the country.

FHA mortgage insurance - Requires a fee (up to 2.25 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.

Firm Commitment - A promise by FHA to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan.

Fixed Rate Mortgage - The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.

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 or FHLMC - The Federal Home Loan Mortgage Corporation. Similar to FNMA, Freddie Mac is also a purchaser or loans. Loans which conform to FNMA/FHLMC standards are referred to as Conforming Loans.

Foreclosure - The legal process of a lender of enforcing payment of the debt secured by a mortgage, or deed of trust, by taking and selling the mortgaged property, and depriving the mortgagor of possession.

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.

Guaranty - A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.

Hazard Insurance - (also Homeowners Insurance, Fire Insurance, or Casualty Insurance) - A policy which protects the homeowner against damages to the property caused to property by fire and other common hazards. Note that it is invariably a requirement of the lender that you provide for insurance coverage and that they be named as an Additional Insured party so that their interests are also protected.

Housing Expenses-to-Income Ratio - The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. See debt-to-income ratio.

HUD - U.S. Department of Housing and Urban Development. Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders and sets minimum standards for such homes. HUD is also charged with enforcing RESPA and other housing related laws.

Impound - see Escrow Interest - The price paid for borrowing money.

Index - A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Interest rate cap - The maximum interest rate which can be charged on an ARM, also called ceiling rate. This is frequently 6% over the initial interest rate. The cap can also be an "interim cap," the amount that the interest rate can be increased at any regular change interval, frequently 2% per year.

Jumbo Loan - A loan which is larger (more than $300,700 as of 1/1/02) 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.

Lien - A claim by one person or entity on the property of another. Commonly, this is security for money owed, as is created when you buy a property. Such claims also may include obligations not met or satisfied, judgments, unpaid taxes, materials, or labor.

Loan-to-Value Ratio - The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

Margin - The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

Market Value - The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

MIP (Mortgage Insurance Premium) - It is insurance from FHA to the lender against incurring a loss on account of the borrower's default. Mortgage Insurance Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.

Mortgage - A lien or claim against real property given by the buyer to the lender as security for money borrowed.

Mortgage Commitment - A written notice from the a lender saying it will fund the mortgage loan to enable a buyer to purchase a house.

Mortgage Insurance Premium - The payment made by a borrower for a policy which protects the lender in the vent of default. In the case of Conventional mortgages, premiums are paid to the Private Mortgage Insurance (PMI) carrier which insured the loan. In the case of Government loans, the premiums are paid to HUD in the case of FHA loans and to the Veterans Administration in the case of VA loans.

Mortgage Note - A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of an indebtedness, and states the manner in which it shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment.

Mortgagee - The lender in a mortgage agreement.

Mortgagor - The borrower in a mortgage agreement.

Negative Amortization - Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.

Net Effective Income - The borrower's gross income minus federal income tax.

Non Assumption Clause - A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

Note - The signed obligation to pay a debt, as a mortgage note.

Office of Thrift Supervision (OTS) - The regulatory and supervisory agency for federally chartered savings institutions. Formally known as Federal Home Loan Bank Board.

Open-end Mortgage - A mortgage with a provision that permits borrowing additional money in the future on the same note. In the case of case of conventional loans, these are now quite uncommon. The exception is the equityline loan which is an Open-end loan.

Origination Fee - The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan. Paid by borrower in addition to, or instead of P.O.C. through agreement between the borrower and the mortgage broker

Permanent Loan - A long term mortgage, usually ten years or more. Also called an "end loan."

PITI - Principal, Interest, Taxes, Insurance which are the borrowers' Housing Expense when making calculation for qualifying

P.O.C. - Paid Outside of Closing is the terminology which is used to describe funds associated with a loan transaction which do not actually pass through the settlement agent's (escrow's) accounts. This would include, for example, funds paid directly to the lender for the appraisal and credit report. It also includes any other funds, such as rebates, paid to a broker in addition to the Loan Origination Fee. Sometimes such rebates are OK, meaning that the borrower and broker agreed to them. Important Warning - Sometimes the P.O.C. fees are rebates the broker got by getting the borrower to pay for an "above market rate" loan.

Points - Prepaid Interest assessed at closing by the lender. A point is one percent of the amount of the loan. On a $50,000, one point is $500 while on a $200,000 loan, one point is $2,000. When a borrower pays points, this first includes the Loan Origination Fee. Additional points are called "discount points" and are an off-set against interest rate. Lenders will, these days, almost always offer a number of "rate versus fee" combinations allowing the borrower to choose one which is most suitable for his circumstance.

Power of Attorney - A legal document authorizing one person to act on behalf of another.

Prepaid Expenses - 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 - Payment of the whole or part of principal amount of a mortgage loan before the due date. Mortgage agreements can restrict the borrowers right of prepayment either by limiting the amount that can be prepaid in any one year or charging a penalty for prepayment.

Prepayment Penalty - Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states. In Michigan the penalty allowed by law is either 1% of the loan amount or 6 months of interest. Be very careful of the latter.

Primary Mortgage Market - Lenders making mortgage loans directly to borrower's such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets such as to FNMA or GNMA, etc.

Principal - the balance of the loan outstanding. Initially, the full amount of the loan, also the amount upon which the interest payment is computed.

Private Mortgage Insurance (PMI) - In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment - as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on you loan's structure.

Purchase Agreement - See agreement of sale.

Qualifying - The process whereby the lender assesses the borrowers' ability to re-pay the loan.

Realtor - A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

Recision - The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

Recording Fees - Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

Refinancing - The process whereby a borrowers pays off one loan with the proceeds from a new loan. When the new loan is just enough to pay off the old loan (and perhaps some of the closing costs) it is referred to as a Rate & Term Re-fi or a No-Cash-Out Re-fi. When the new loan is sufficiently large so that the borrower ends up with some cash at closing, it is know as a Cash-Out Re-fi.

RESPA - Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.

Sales Agreement - See agreement of sale.

Satisfaction of Mortgage - The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."

Second Mortgage - A mortgage made subsequent to another mortgage and subordinate to the first one.

Secondary Mortgage Market - The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.

Securitization - The process whereby loans are pooled

Shared Appreciation Mortgage (SAM) - A mortgage in which a borrower receives a below-market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgage where the borrowers shares the monthly principal and interest payments with another party in exchange for part of the appreciation.

Simple Interest - Interest which is computed only on the principle balance.

Special Assessments - A special tax imposed on a property and usually all other property in the immediate area, for school or road construction, sewers, street lights, or to put utilities underground, and so forth.

Survey - A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to know points, its dimensions, and the location and dimensions of any buildings.

Sweat Equity - Equity created by a purchaser performing work on a property being purchased.

Taxes - As applied to real estate, Property Taxes paid to the government, usually the County or State, to support education, police, fire protection, etc.

Title Insurance - First, an "owner's" policy of Title Insurance protects homeowners against loss of their interest in property due to legal defects in title. This is typically paid for by the seller to assure that he has passed marketable title to the property being purchased. Second and different, lenders also require that the buyer/borrower purchase a "mortgagee's title policy" which will protect the lender's interest, assuring, for example, that the lender is in first lien position.

Title Search - An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Trustee - As it applies to real estate, the party or entity given the right to hold property for another. In a Trust Deed state, the Trustee has the "right of sale" of the property when notified by the Beneficiary (the lender), that the Trustor (the borrower) is in default on the note secured by the Deed of Trust.

Truth-In-Lending - 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.

Two-Step Mortgage - A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time.

Underwriting - the process whereby a lender determines whether a borrower is qualified as to income and creditworthiness for the loan for which they have applied and the property is evaluated as to whether it is sufficient collateral for the loan.

USURY - Interest charged in excess of the legal rate established by law.

VA Loan - A long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

Verification of Deposit (VOD) - A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.

Verification of Employment (VOE) - A document signed by the borrower's employer verifying his/her position and salary.

Harry Smith email Harry@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-514-9000	Drew Smith email drew@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-703-7770
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