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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Freddie Mac
see Federal Home Loan Mortgage Corporation
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Ginnie Mae
see Government National Mortgage Association.
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Government National Mortgage Association (GNMA)
Also known as "Ginnie Mae," provides sources of funds for residential
mortgages, insured or guaranteed by FHA or VA.
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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.
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Growing-Equity Mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment increases over an
established period of time. The increased amount of the monthly payment is
applied directly toward reducing the remaining balance of the mortgage.
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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.
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Guarantee Mortgage
A mortgage that is guaranteed by a third party.
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Hazard Insurance
A form of insurance in which the insurance company protects the insured from
specified losses, such as fire, windstorm and the like.
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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.
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HUD-1 statement
A document that provides an itemized listing of the funds that are payable at
closing. Items that appear on the statement include real estate commissions,
loan fees, points, and initial escrow amounts. Each item on the statement is
represented by a separate number within a standardized numbering system. The
totals at the bottom of the HUD-1 statement define the seller's net proceeds
and the buyer's net payment at closing.
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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.
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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.
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Indexed rate
The sum of the published index plus the margin. For example if the index were
9% and the margin 2.75%, the indexed rate would be 11.75%. Often, lenders
charge less than the indexed rate the first year of an adjustable-rate
mortgage.
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Initial Interest Rate
This refers to the original interest rate of the mortgage at the time of
closing. This rate changes for an adjustable-rate mortgage (ARM). It's also
known as "start rate" or "teaser."
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Installment
The regular periodic payment that a borrower agrees to make to a lender.
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Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or by
private mortgage insurance (MI).
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Interest
The fee charged for borrowing money.
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Interest Accrual Rate
The percentage rate at which interest accrues on the mortgage. In most cases,
it is also the rate used to calculate the monthly payments.
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Interest Rate Buydown Plan
An arrangement that allows the property seller to deposit money to an account.
That money is then released each month to reduce the mortgagor's monthly
payments during the early years of a mortgage.
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Interest Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified
in the mortgage note.
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Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified
in the mortgage note.
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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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Investor
A money source for a lender.
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Jumbo Loan
A loan which is larger (more than $333,700 as of 1/1/03) 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.
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Late Charge
The penalty a borrower must pay when a payment is made a stated number of days
(usually 15) after the due date.
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Lease-Purchase Mortgage Loan
An alternative financing option that allows low- and moderate-income home
buyers to lease a home with an option to buy. Each month's rent payment
consists of principal, interest, taxes and insurance (PITI) payments on the
first mortgage plus an extra amount that accumulates in a savings account for a
down payment.
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Liabilities
A person's financial obligations. Liabilities include long-term and short-term
debt.
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Lien
A claim upon a piece of property for the payment or satisfaction of a debt or
obligation.
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Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments can
increase or decrease over the life of the mortgage.
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Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest
rate can increase or decrease over the life of the loan. See cap.
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Loan
A sum of borrowed money (principal) that is generally repaid with interest.
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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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Lock
Lender's guarantee that the mortgage rate quoted will be good for a specific
number of days from day of application.
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Margin
The amount a lender adds to the index on an adjustable rate mortgage to
establish the adjusted interest rate.
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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.
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Maturity
The date on which the principal balance of a loan becomes due and payable.
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MIP (Mortgage Insurance Premium)
It is insurance from FHA to the lender against incurring a loss on account of
the borrower's default.
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Monthly Fixed Installment
That portion of the total monthly payment that is applied toward principal and
interest. When a mortgage negatively amortizes, the monthly fixed installment
does not include any amount for principal reduction and doesn't cover all of
the interest. The loan balance therefore increases instead of decreasing.
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Mortgage
A legal document that pledges a property to the lender as security for payment
of a debt.
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Mortgage Banker
A company that originates mortgages exclusively for resale in the secondary
mortgage market.
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Mortgage Broker
An individual or company that charges a service fee to bring borrowers and
lenders together for the purpose of loan origination.
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Mortgagee
The lender.
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Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20
percent. See private mortgage insurance, FHA mortgage insurance.
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Mortgage Life Insurance
A type of term life insurance In the event that the borrower dies while the
policy is in force, the debt is automatically paid by insurance proceeds.
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Mortgagor
The borrower or homeowner.
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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.
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Net Effective Income
The borrower's gross income minus federal income tax.
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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.
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Note
A legal document that obligates a borrower to repay a mortgage loan at a stated
interest rate during a specified period of time.
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Office of Thrift Supervision (OTS)
The regulatory and supervisory agency for federally chartered savings
institutions. Formally known as Federal Home Loan Bank Board
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One-year adjustable
Mortgage whose annual rate changes yearly. The rate is usually based on
movements of a published index plus a specified margin, chosen by the lender.
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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.
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Owner Financing
A property purchase transaction in which the party selling the property
provides all or part of the financing.
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Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable-rate
mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment
change date occurs in the month immediately after the adjustment date.
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Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any one
adjustment period.
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Periodic Rate Cap
A limit on the amount that the interest rate can increase or decrease during
any one adjustment period, regardless of how high or low the index might be.
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Permanent Loan
A long term mortgage, usually ten years or more. Also called an "end
loan."
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PITI
Principal, Interest, Taxes and Insurance. Also called monthly housing expense.
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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.
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Points (loan discount 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).
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Power of Attorney
A legal document authorizing one person to act on behalf of another.
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Pre-Approval
The process of determining how much money you will be eligible to borrow before
you apply for a loan.
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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.
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Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance
of their due date.
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Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed
in some form (but not necessarily imposed) in many states.
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Primary Mortgage Market
Lenders, such as savings and loan associations, commercial banks, and mortgage
companies, who make mortgage loans directly to borrowers. These lenders
sometimes sell their mortgages to the secondary mortgage markets such as to FNMA
or GNMA, etc.
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Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that
reduces the remaining balance of a mortgage.
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Principal Balance
The outstanding balance of principal on a mortgage not including interest or
any other charges.
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Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part
of the monthly payment that reduces the remaining balance of the mortgage.
Interest is the fee charged for borrowing money. Taxes and insurance refer to
the monthly cost of property taxes and homeowners insurance, whether these
amounts that are paid into an escrow account each month or not.
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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 3 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 your
loan's structure.
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Qualifying Ratios
Calculations used to determine if a borrower can qualify for a mortgage. They
consist of two separate calculations: a housing expense as a percent of income
ratio and total debt obligations as a percent of income ratio.
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Rate Lock
A commitment issued by a lender to a borrower or other mortgage originator
guaranteeing a specified interest rate and lender costs for a specified period
of time.
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Realtor®
A real estate broker or an associate holding active membership in a local real
estate board affiliated with the National Association of Realtors.
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Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf
of the property owner.
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Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance
notice of closing costs.
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Recission
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.
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Recording Fees
Money paid to the lender for recording a home sale with the local authorities,
thereby making it part of the public records.
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Refinance
Obtaining a new mortgage loan on a property already owned. Often to replace
existing loans on the property.
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Renegotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically. See adjustable rate
mortgage.
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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.
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Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower
using the borrower's equity in the home as collateral for and repayment of the
loan.
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Revolving Liability
A credit arrangement, such as a credit card, that allows a customer to borrow
against a preapproved line of credit when purchasing goods and services.
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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.
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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.
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Security
The property that will be pledged as collateral for a loan.
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Seller Carry-back
An agreement in which the owner of a property provides financing, often in
combination with an assumable mortgage. See owner financing.
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Servicer
An organization that collects principal and interest payments from borrowers
and manages borrowers’ escrow accounts. The servicer often services
mortgages that have been purchased by an investor in the secondary mortgage
market.
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MORTGAGE TERMINOLOGY