Mortgage Dictionary

ADJUSTABLE RATE MORTGAGE (ARM)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as the re-negotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.

AMORTIZATION
The periodic principal pay down of a loan.

ANNUAL PERCENTAGE RATE (APR)
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 points and other credit costs. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan.

ASSUMPTION
Taking over a loan and becoming personally liable for the repayment.

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.

BANKRUPTCY
A provision of Federal Law whereby a debtor surrenders his assets to the Bankruptcy Court and is relieved of the future obligation to repay his unsecured debts. After bankruptcy, the debtor is discharged and his unsecured creditors may not pursue further collection efforts against him. Secured creditors, those holding deeds of trust or judgment liens, continue to be secured by the property, but they may not take other action to collect from the debtor.

BENEFICIARY
A person named to receive a benefit from a trust. A contingent beneficiary has conditions attached to his rights, usually someone else must die first.

BROKER
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money herself.

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. Brokers usually charge a fee or receive a commission for their services.

CAPS (interest)
Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or over the life of the loan.

CAPS (payment)
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.

CAVEAT EMPTOR
Buyer beware. The buyer must inspect the property and satisfy himself it is adequate for his needs. The seller is under no obligation to disclose defects but may not actively conceal a known defect or lie if asked.

CERTIFICATE OF ELIGIBILITY
The document given to qualified veterans which entitles them to VA guaranteed loans for homes, businesses, 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 TITLE
A written opinion by an attorney setting forth the status of title to the property as shown on the public records. The certificate does not certify as to matters not of record and affords no protection unless the author was negligent.

CLOSINGS
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 is about 3 percent to 6 percent of the mortgage amount.

COLLATERAL
Property pledged to secure a loan.

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.

CONDOMINIUM
A system of individual fee simple ownership of portions (units) in a multi-unit structure, combined with joint ownership of common areas. Each individual may sell or encumber his own unit.

CONSTUCTION LOAN
A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

COVENANT
A written agreement or restriction on the use of land or promising certain acts. Homeowner Associations often enforce restrictive covenants governing architectural controls and maintenance responsibilities. However, land could be subject to restrictive covenants even if there is no homeowner’s association.

CONVENTIONAL LOAN
A mortgage 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
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 net effective income (FHA/VA loans) or gross monthly income (conventional loans).

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DEED
The written document conveying real property. Once recorded at the Courthouse, the original piece of paper is not needed to convey title in the future.

DEED OF TRUST
A voluntary lien to secure a debt deeding the property to Trustees who foreclose and sell the property at public auction, in the event of default on the Note the Deed of Trust secures. In many states, this document is used in place of a mortgage to secure the payment of a note.

DEFAULT
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

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.

DELINQUENCY
Failure to make payments on time. This can lead to foreclosure.

DELIVERY
The final, unconditional and absolute transfer of a deed to the Grantee so that the Grantor may not revoke it. A Deed, signed but held by the Grantor, does not pass title.

DEPARTMENT OF VETERANS AFFAIRS
An independent agency of the federal government which guarantees long-term, low-or no-down payment mortgages to eligible veterans.

DOWN PAYMENT
Money paid to make up the difference between the purchase price and the mortgage amount. Down payments usually are 5 percent to 20 percent of the sales price on conventional loans.

DUE-ON-INTEREST
A clause inserted in a mortgage that allows the lender to call the loan due and payable at its option upon the transfer of the property also known as paragraph “17” in FNMA / FHLMC Mortgage

DUE-ON-SALES 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
Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

EASEMENT
The right to use the land of another for a specific limited purpose.

EMINENT DOMAIN
The power of the state to take private property for public use upon payment of just compensation.

ENCROACHMENT
The physical intrusion of a structure or improvement on the land of another. Examples include a fence or driveway over the property line.

ENTITLEMENT
The VA home loan benefit is called entitlement. This entitlement is for a VA guaranteed home loan. This is also known as eligibility.

EQUAL CREDIT OPPORTUNITY ACT (ECOA)
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 an owner has in real estate over and above the obligation against the property.

EQUITY SHARING
A form of joint ownership between an owner/occupant and an owner/investor. The investor takes depreciation deductions for his share of the ownership. The occupant receives a portion of the tax write-offs for interest and taxes and a part of his monthly payment is treated as rent. The co-owners divide the profit upon sale of the property.

ESCROW
Funds that are set aside and held in trust, usually for payment of taxes and insurance on real property. Also earnest deposits held pending loan closing.

FARMERS HOME ADIMINSTRATION (FmHA)
Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

FEDERAL HOME LOAN BANK BOARD (FHLBB)
A regulatory and supervisory agency for federally chartered savings institutions.

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)
The Federal Home Loan Mortgage Corporation provides a secondary market for mortgage financing by purchasing conventional loans. Also known as “Freddie Mac.”

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.

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)
A secondary mortgage institution which is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as “Fannie Mae.”

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, they are generous enough to handle moderately-priced homes almost anywhere in the country.

FHA MORTGAGE INSURANCE
Requires a small fee (up to 3.8 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent, $75,000, 30-year fixed-rate FHA loan, this fee would amount to either $2,850 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 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.

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GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)
Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA. Also known as Ginnie Mae.

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
A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.

HELOC
Stands for home equity line of credit, or simply “home equity line.” It is a loan set up as a line of credit for some maximum draw, rather than for a fixed dollar amount.

HOUSING EXPENSES-TO-INCOME RATIO
The ratio, expressed as a percentage, which results when a borrower’s housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (conventional loans).

IMPOUND
That portion of a borrower’s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

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.

INVESTOR
A money source for a lender.

INTERIM FINANCING
A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion

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JOINT OWNERSHIP AGREEMENT
An agreement between owners defining their rights, ownership, monetary obligations and responsibilities. This could be between an investor and an occupant or the occupants. If an investor is involved, the investor does not take depreciation deductions and none of the occupant’s payment is deemed rent for tax purposes.

JOINT TENANCY
Two or more persons own a property. Joint tenants with the common law right of survivorship means the survivor inherits the property without reference to the decedent’s will. Creditors may sue to have the property divided to settle claims against one of the owners.

JUMBO LOAN
A loan which is larger than the limits set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

LIEN
A claim or charge against property. Property is said to be encumbered by a lien and the lien must be removed to clear title

LOAN-TO-VALUE RATIO
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

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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.

MORTGAGE
A voluntary lien filed against property to secure a debt, usually a loan. To foreclose, the lender must often institute a court action and the borrower may have the right to reclaim the property after foreclosure.

MORTGAGE INSURANCE
Money paid to insure the mortgage when the down payment is less than 20 percent.

MORTGAGE INSURANCE PREMIUM (MIP)
One-half percent that borrowers pay each month on FHA insured mortgage loans. It is insurance from FHA to the lender against incurring a loss on account of the borrower’s default. On September 1, 1983, the MIP was changed to a one-time charge to the borrowers.

MORTGAGEE
The lender.

MORTGAGOR
The borrower or homeowner.

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.

NEGOTIABLE RATE MORTGAGE (RBM)
A loan in which the interest rate is adjusted periodically.

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
A written promise to pay a certain sum of money at a certain time. A negotiable note starts “Pay to the order of” and is transferable by endorsement similar to a check.

ORIGINATION FEE
The fee charged by a lender to prepare loan documents, perform credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.

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PERMANENT LOAN
A long term mortgage, usually ten years or more. Also called an “end loan.”

PITI
Principal, Interest, Taxes and Insurance. Also called monthly housing expense.

PLEDGED ACCOUNT MORTGAGE (PAM)
Money is placed in a pledged savings account and this fund plus earned interest is gradually used to reduce mortgage payments.

POINTS
Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

POWER OF ATTORNEY
A written document authorizing another to act on his or her behalf as an Attorney in Fact. One does not need to be a licensed attorney to act as an attorney in fact but, power of attorney forms are powerful legal documents that should be used only under advice of a licensed attorney at law.

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.

PRE-PAYMENT
A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

PRE-PAYMENT PENALTY
An additional charge imposed by the lender for paying off a loan before the due date.

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.

PRINCIPAL
The amount of debt, not counting interest, left on a loan.

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 require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on you loan’s structure. On a $75,000 house with a 10 percent down payment, this would mean either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.

QUITCLAIM DEED
A deed releasing whatever interest you may hold in a property but making no warranty whatsoever.

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)
RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.

REALTOR®
A real estate broker or an associate holding active membership in a local real estate board affiliated withthe 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.

REFINANCE
Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.

REVERSE ANNUITY MORTGAGE
Form of mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as Satisfaction of Mortgage: The document issued by the mortgagee when the mortgage loan is paid in full. Also called a “release of mortgage.”

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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.

SERVICING
All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

SHARED APPRECIATION MORTGAGE
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 a mortgage where the borrowers share 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.

SURVEY
A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known 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.

TENANTS BY THE ENTIRETY
A husband and wife own the property with the common law right of survivorship so, if one dies, the other automatically inherits.

TENANT IN COMMON
Two or more persons own the property with no right of survivorship. If one dies, his interest passes to his heirs, not necessarily the co-owner. Either party, or a creditor of one, may sue to partition the property.

TITLE
Document that gives evidence of an individual’s ownership of property

TITLE INSURANCE
Insurance that provides an indemnity against loss or damage as a result of defect in title ownership to a particular piece of property. Title insurance covers mistakes made during a Title Search as well as matters which could not be found or discovered in the public records such as missing heirs, mistakes, fraud and forgery.

TITLE SEARCH
An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

TRUTH-IN-LENDING ACT (TILA)
Federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan.

TWO-STEP MORTGAGE
Mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often 7 or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of 7 or 10 years. Also called “Super Seven” or “Premier” mortgage.

UNDERWRITING
The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

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

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VA LOANS
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.

VA MORTGAGE FUNDING FEE
Premium of up to 1-7/8 percent (depending on the size of the down payment) paid on a VA-backed loan. On a $75,000 fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed.

VERIFICATION OF DEPOSITS (VOD)
Document signed by the borrower’s financial institution verifying the status and balance of his/her financial accounts.

VERIFICATION OF EMPLOYMENT (VOE)
Document signed by the borrower’s employer verifying his/her position and salary.

WAREHOUSE FEE
Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee.

WRAPAROUND
The debt secured includes an existing debt already on the property. The payments made to the holder of the wraparound include payments due on the existing loan and the holder must forward the appropriate portion of each payment to the existing noteholder.

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