Dictionary Of Terms Used In Mortgage Loan Financing

Sometimes the world of Financing can involve terms that are confusing. I want you to understand and become familiar with these terms. Please take some time to read through this free glossary so you can become an informed consumer.

Mortgage Terms & Definitions

Acceleration Clause - A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

Adjustable Rate Mortgage (ARM) - A mortgage with and interest rate that fluctuates according to the movements of a predetermined index. There are several types of ARM's, some change quicker than others, but all have a ceiling cap.

Alternative Financing - Mortgage options available below market rate including ARM's, buy down's and graduated payment mortgages (GPM's).

Amortization - The gradual repayment of a mortgage by installments.

Amortization Schedule - A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance of the loan.

Annual Percentage Rate (APR) - The total cost of your mortgage loan expressed as an annual interest rate. This includes the base interest rate, mortgage insurance, origination fees, and some other related fees.

Appraisal - An opinion by a licensed real estate appraiser regarding the fair market value of a property.

Appreciation - Difference between the increased value of a property and the original cost of the property.

Assumable Loan - Usually for a small assumption fee, a new buyer can take over or assume the loan of the previous homeowner, saving closing cost and loan origination fees. Some are non-qualifying most are through qualification.

Balloon Payment - A loan with monthly payments insufficient to pay off the balance in the specified term; the balance must be paid in full when the loan comes due.

Broker (Mortgage) - An individual or company that for a fee acts as an intermediary between borrowers and lenders.

Broker (Real Estate) - A person who has a real estate broker's license, who may not only make real estate transactions for others in exchange for a fee, but also may operate a real estate business and employ salespersons and other brokers.

Cap - A provision of an ARM limiting how much the interest rate or mortgage payments may increase or decrease.

Cash Reserve - A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two monthly mortgage payments.

Clear Marketable Title - A title that is free of liens or legal questions as to ownership of property.

Closing - The meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing cost. Also known as "settlement."

Closing Costs - Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called "settlement costs."

Community Home Buyer's Program - An alternative financing option that allows households of modest means to qualify for mortgages using nontraditional credit histories, 33 percent housing-to-income and 38 percent debt-to-income ratios, and the waiver of the usual two payments cash reserves at closing.

Condominium - A form of property ownership in which the homeowner holds title to an individual dwelling unity plus an interest in common areas of a multi-unit project, and sometimes the exclusive use of certain limited common areas.

Contingency - A condition that must be met before a contract is legally binding.

Conventional Mortgage - Any mortgage that is not insured or guaranteed by the federal government.

Convertible ARM - An adjustable-rate-mortgage that can be converted to a fixed-rate mortgage under specified conditions.

Cooperative - A type of multiple ownership in which the residents of a multi-unit housing complex own shares in the corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.

Covenant - A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.

Credit Report - A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's credit worthiness.

Debt-to-Income Ratio - Formula used to qualify borrowers. The ratio expresses, as a percent, the amount of monthly debt payments in relation to the amount of monthly income of a borrower(s).

Deed - The legal document conveying title to a property.

Deed of Trust - The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.

Default - The failure to make a mortgage payment on a timely basis or to otherwise comply with other requirements of a mortgage.

Delinquency - A loan in which a payment is overdue but not yet in default.

Depreciation - A decline in the value of a property; the opposite of "appreciation."

Disclosure - Document which describes all conditions of mortgage loan including terms and interest rates.

Discount Points - A one time charge by the lender to increase the yield of the loan. A point is one percent of the amount of the mortgage.

Down Payment - The part of the purchase price which the buyer pays in cash and does not finance with a mortgage.

Due-on-Sale Clause - A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

Earnest Money - A deposit made by the potential home buyer to show that he or she is serious about buying the house.

Equal Credit Opportunity Act (ECOA) - A federal law that prohibits lenders from denying mortgages on the basis of the borrower's race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity - A homeowner's financial interest in a property. Equity is the difference between the fair market value of a property and the amount still owed on the mortgage.

Equity Loan - A loan based on the borrower's equity in his or her home.

Escrow - The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.

Exclusive Agency Listing - A listing contract in which the agent has the sole right to sell the home, though the sellers are not bound to pay the commission if they produce the buyer.

Exclusive Right-to-Sell Contract - A listing contract in which the seller gives the real estate broker the sole right to sell; the person receives a commission, regardless of who produces the buyer.

Fair Credit Reporting Act - A consumer protection law that regulates the disclosure of consumer/credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record.

FHA Mortgage - A mortgage that is insured by the Federal Housing Administration. Also referred to as a "government" mortgage.

First Mortgage - A mortgage that has first claim in the event of default.

Fixed Rate Mortgage - A mortgage in which the interest rate does not change during the entire term of the loan.

Flood Insurance - Insurance that compensates for physical property damages resulting from flooding. It is required for properties located in federally designated flood areas.

Forbearance - The lender's postponement of foreclosure to give the borrower time to catch up on overdue payments.

Foreclosure - The legal process by which a mortgaged property may be sold when a mortgage is in default.

Graduated Payment Mortgage (GPM) - A mortgage that starts with low monthly payments that increase at a predetermined rate. The initial monthly payments are set at an amount lower than that required for full amortization of the debt.

Hazard Insurance - Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.

Homeowner's Insurance - An insurance policy that combines personal liability coverage and hazard insurance coverage for a dwelling and its contents.

Homeowner's Warranty (HOW) - A type of insurance that covers repairs to specified parts of a house for a specific period of time. It is provided by the builder or property seller as a condition of the sale.

Impound - The portion of a borrower's monthly payments held by the lender to pay taxes, hazard insurance and mortgage insurance.

Index - The interest rate to which changes in an adjustable-rate-mortgage are pegged.

Interest Rate - The fee charged for borrowing money.

Late Charge - The penalty a borrower must pay when a payment is made after the due date.

Lien - A legal claim against a property that must be paid off when the property is sold.

Lifetime Cap - A provision of an ARM that limits the highest rate that can occur over the life of the loan.

Listing Contract - A contract with a broker or firm the sellers hire to represent them in the sale of their home, according to the terms of sale that they specify. In exchange for producing a ready-willing-and-able buyer, the agent is paid a commission.

Loan Application Fee - A lender's fee, usually ranging from $75 to $300, which the buyer must pay when applying for a mortgage.

Loan Commitment - A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer.

Loan Origination Fee - A fee charged by the lender for processing a mortgage.

Loan Servicing - The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.

Loan-to-Value Ratio (LTV) - The relationship between the unpaid principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property.

Lock-In - A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.

Margin - The set percentage the lender adds to the index rate to determine the current interest rate of an ARM.

Market Rate - The average rate charged by lenders for conventional, fixed-rate loans.

Mortgage Banker - A company that originates mortgages exclusively for resale in the secondary market.

Mortgage Broker - An individual or company that for a fee acts as an intermediary between borrowers and lenders.

Mortgage Insurance - (Also known as Private Mortgage Insurance (PMI)) Insurance provided by nongovernmental insurers that protects lenders against loss if a borrower defaults. Fannie Mae generally requires private mortgage insurance for loans with loan-to-value (LTV) ratios greater than 80 percent.

Mortgage Insurance Premium (MIP) - The fee paid by a borrower to FHA or a private insurer for mortgage insurance.

Mortgage Note - A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the mortgage note is secured by a mortgage.

Mortgagee - The lender in a mortgage agreement.

Mortgagor - The borrower in a mortgage agreement.

Multiple Listing Service (MLS) - A networking system, frequently on computer, in which a number of real estate firms share information about their client's homes that are for sale.

Negative Amortization - A gradual increase in the mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the unpaid principal balance to create "negative" amortization.

Notice of Default - A formal written notice to a borrower that a default has occurred and that legal action may be taken.

Offer to Purchase and Acceptance - An offer of purchase that has been signed by both buyer and seller. A firm contract that outlines all details of the property transaction. Also known as a contract of sale or sales contract.

Offer to Purchase or Purchase Offer - A document that list the price, conditions, and terms under which the buyer is willing to purchase a property. Also known as an earnest money agreement, contract of purchase or deposit
receipt.

Open Listing - A listing contract in which sellers hire more than one firm or person to sell their home, and only the one who produces the buyer is entitled to the commission,

Origination Fee - A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount.

Payment Cap - A provision of some ARM's limiting the amount by which a borrower's payments may increase regardless of any interest rate increase; may result in negative amortization.

PITI - Acronym for principal, interest, taxes, and insurance - the components of a monthly mortgage payment.

Points - A one time charge by the lender to increase the yield of the loan; a point is 1 percent of the amount of the mortgage.

Pre-approval - The process of determining that a borrower is credit approved up to a predetermined amount. The borrower is credit approved pending the locating of a home that meets the predetermined loan criteria.

Prepayment Penalty - A fee that may be charged to a borrower who pays off a loan before it is due.

Prequalification - The process of determining how much money a prospective home buyer will be eligible to borrow before a loan is applied for.

Principal - The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

Private Mortgage Insurance (PMI) - Insurance provided by nongovernmental insurers that protects lenders against loss if a borrower defaults. Fannie Mae generally requires private mortgage insurance for loans with loan-to-value (LTV) percentages greater than 80 percent.

Purchase and Sale Agreement - A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Qualifying Ratios - Guidelines applied by the lenders to determine how large a loan to grant a home buyer.

Radon - A radioactive gas found in some homes that in sufficient concentrations can cause health problems.

Rate Lock - A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing. Also known as Lock-in.

Real Estate Agent - A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA) - A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Realtor - A collective membership mark that may be used only by real estate professionals who are members of the National Association of Realtors and subscribe to its strict code of ethics.

Refinancing - The process of paying off one loan with the proceeds from a new loan using the same property as security.

Reverse Mortgage - Also called "equity conversion mortgage," these loans permit senior citizens to convert the equity in their homes to income. The lender makes monthly cash payments to the homeowner, and repayment is deferred for a set period or until the homeowner dies and the house is sold.

Second Mortgage - A mortgage that has a lien position subordinate to the first mortgage.

Secondary Market - The buying and selling of existing mortgages.

Seller Take-Back - An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

Settlement - The meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing cost. Also known as "Closing."

Settlement Sheet -The computation of costs payable at closing that determines the seller's net proceeds and the buyer's net payment.

Survey - A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.

Tenancy by Entirety - A type of joint ownership of property that provides right of survivorship and is available only to a husband and wife.

Tenancy in Common - A type of joint ownership in a property without right of survivorship.

Title - A legal document evidencing a person's right to or ownership of a property.

Title Company - A company that specializes in examining an insuring titles to real estate.

Title Insurance - Insurance to protect the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of property.

Title Search - A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Treasury Securities - Treasury securities and T-Bills are common indexes for adjustable rate mortgages (ARMS).

Truth-in-Lending (TIL) - A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage including the "annual percentage rate (APR)" and other charges.

Underwriting - The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower's credit worthiness and the quality of the property itself.

VA Loan - A loan that is guaranteed by the Department of Veterans Affairs. Also referred to as a "government" mortgage.