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ADJUSTABLE RATE MORTGAGE (ARM):
A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.
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AMORTIZATION:
The gradual reduction of a debt by means of periodic payments sufficient to pay principal and interest and thereby liquidate the debt.
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APR (ANNUAL PERCENTAGE RATE):
A term used in the Truth in Lending Act to represent the percentage relationship of the total finance charge to the amount of the loan. Important in preparing the Federal Truth in Lending Disclosure Statement.
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APPRAISAL:
A report made by a qualified person setting forth an opinion or estimate of value. The term also refers to the process by which this estimate is obtained. In conventional mortgages and in HUD-FHA Direct Endorsement program, the lender receives a copy of the complete report showing the basis for the appraiser's estimate. In VA cases and in HUD applications processed by HUD, the lender receives any detailed supporting data.
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BALLOON NOTE:
Type of mortgage requiring a repayment of the outstanding principal balance prior to the expiration of the amortization period.
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BUYDOWN:
Funds paid at closing to reduce the interest rate for the first 2 or 3 years. The qualifying rate will be the rate in the first year.
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CAP:
A provision of an ARM limiting how much the interest rate or mortgage payments may increase or decrease.
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CLOSING:
The conclusion or consummation of a transaction. In real estate, closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to the sale or loan transaction.
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CLOSING COSTS:
Money paid by any party to the transaction to effect the closing of a mortgage loan. Does not include prepaid expenses, apportionments, and the like, but does normally include an origination fee, title insurance, survey, attorney's fees, etc.
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COLLATERAL:
Property pledged as security for a debt, such as the real estate securing a mortgage.
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CONTRACT:
An agreement between one or more parties to do a particular lawful thing.
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CONVENTIONAL LOAN:
A mortgage loan neither insured by FHA nor guaranteed by VA.
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CONVERSION:
Option given on certain Adjustable Rate Mortgages (ARMs), which allow the borrower to convert to a fixed rate. Option is typically offered during a predetermined and limited period of time and is converted at a predetermined rate.
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CO-SIGNER:
One who agrees to assume the debt obligation if the principal borrower should default on mortgage payments. A co-signer assumes only personal liability and has no ownership interest in the property. His or her income and obligations are used in the underwriting process to reinforce the credit of the principal borrower, but they are not given equal weight with those of the principal borrower. They serve as compensating factors only.
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CREDIT REPORT:
A report to a prospective lender on the credit standing of a prospective borrower, used to help determine creditworthiness.
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DISCOUNT POINT:
An amount equal to 1 percent of the principal amount of an investment or note. Loan discount points are a one-time charge assessed at closing by the lender to increase the yield on the mortgage loan to a competitive position with other types of investments.
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ECOA (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 program.
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ESCROW PAYMENT:
That portion of a mortgagor's monthly payment held by the lender to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Known as impounds or reserves in some states.
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FAIR MARKET VALUE:
The price at which property is transferred between a willing buyer and a willing seller, each of whom has a reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell.
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FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC):
"Freddie Mac" - Private corporation authorized by Congress. It sells participation sales certificates secured by pools of conventional mortgage loans, their principal and interest guaranteed by the Federal Government through the FHLMC. It also sells Government National Mortgage Association bonds to raise funds to finance the purchase of mortgages.
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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. It sets standards for construction and underwriting. FHA does not lend money, nor plan, nor construct housing.
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FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA):
"Fannie Mae" - A tax paying corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA or guaranteed by VA, as well as conventional home mortgages.
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FLOOD INSURANCE:
Insurance indemnify against loss by flood damage. Required by lenders in areas designated (federally) as potential flood areas. The insurance is private but federally subsidized.
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GOOD FAITH ESTIMATE:
An itemized estimate of the costs to settle (or close) the loan.
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GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA):
"Ginnie Mae" - On September 1, 1968. Congress enacted legislation to portion FNMA into two continuing corporate entities. GNMA has assumed responsibility for the special assistance loan program and the management and liquidation function in the older FNMA. Also, GNMA administers the mortgage backed securities program which channels new sources of funds into residential financing though the sales of privately issued securities carrying a GNMA guaranty.
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HAZARD INSURANCE:
A contract whereby an insurer, for a premium, undertakes to compensate the insured for loss on a specific property due to certain hazards.
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HOMEOWNER'S ASSOCIATION:
An organization of homeowners residing within a particular development whose major purpose is to maintain community facilities and services for the common enjoyment of the residents.
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HOMEOWNER'S INSURANCE:
See Hazard Insurance.
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HOMESTEAD (EXEMPTION):
The dwelling of the head of a family. Some states grant statutory exemptions, protecting homestead property against the rights of creditors. Property tax exemptions are also available in some states. Statutory requirements to establish a homestead may include a formal declaration to be recorded.
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HUD-1:
See Settlement Statement.
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INTEREST:
Consideration in the form of money paid for the use of money, usually expressed as an annual percentage. Also, a right, share, or title in the property.
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JOINT TENANCY:
An equal undivided ownership of property by two or more persons, the survivors to take the interest upon the death of any one of them.
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LIEN:
A legal hold or claim of one person on the property of another as security for a debt or charge. The right given by law to satisfy debt.
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LIFE OF LOAN:
Contract term in years of a mortgage.
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LOAN ANALYST (LOAN PROCESSOR):
The person who coordinates and communicates the process of the loan which leads to the loan closing.
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LOAN-TO-VALUE:
Also known as LTV. The amount of the mortgage divided by the lesser of the sales price or the appraised value of the property.
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LOAN TYPES:
FHA: Government loan provided to low to moderate income borrowers.
VA: Government loan provided to Veterans of the Armed Services.
Conventional Conforming: Non-Government loan provided to all borrowers.
Conventional Non-Conforming: Non-Government loan provided to all borrowers.
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LOCK-IN:
Lender's guarantee of rate, discount and program for a specified term. Lock-in period typically runs 45 to 60 days from the date of borrower's application.
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MARGIN:
The set percentage the lender adds to the index value to determine the interest rate of an ARM.
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MORTGAGE:
A conveyance of an interest in real property given as security for the payment of a debt. In its simplest form, a mortgage permits foreclosure if the debt is not paid but the foreclosure is usually a judicial proceeding, in court. After foreclosure, the property is then sold, usually by an officer of the court, to satisfy the debt.
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MORTGAGE BANKER:
A firm or individual active in the field of mortgage banking. Mortgage bankers, as local representatives of regional or national institutional leaders, act as correspondents between lenders and borrowers. More and more frequently, though, mortgage bankers are, themselves, becoming institutional lenders, holding mortgages in their own portfolios as the basis for mortgage-backed securities that they issue.
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MORTGAGE BROKER:
An individual or company that for a fee acts as intermediary between borrowers and lenders.
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MORTGAGE INSURANCE:
Insurance for which the lender pays a premium, that protects the lender against loss if the borrower should default on the mortgage payments and foreclosure of the mortgage should become necessary. Mortgage Insurance issued by Private Mortgage Insurance (PMI) companies typically covers a specific dollar amount or percentage of the debt adequate to protect the lender even though the value of the property may not be enough to make the lender whole. The lender generally, but not always, retains title to the property after the mortgage insurance claim is paid. Mortgage insurance issued by HUD-FHA provides coverage of the entire unpaid principal or debt, plus certain costs of foreclosure, and requires that the marketable title to the property be conveyed to HUD-FHA.
MIP (Mortgage Insurance Premium): Insurance fee charged by FHA to insure the loan against default to the lender. Current charge is 2.25% of the loan amount up-front, with an annual premium equal to .5% of the loan amount. The up-front portion may be financed into the loan amount. First time home buyers receive a discount of 1.75% on the up front MIP.
PMI (Private Mortgage Insurance): Insurance fee charged to protect conventional lenders against default on the mortgage. Typically required on loans with a Loan-To-Value greater than 80% and is paid on a monthly basis.
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MORTGAGE NOTE:
A written promise to pay a sum of money at a stated interest rate during a specified term. It is secured by a mortgage.
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PITI (PRINCIPAL, INTEREST, TAXES AND INSURANCE):
The principal and interest payment on most loans is fixed for the term of the loan; the tax and insurance portions may be adjusted to reflect changes in taxes or insurance costs.
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PRELIMINARY TITLE REPORT:
A title search by a title company before issuance of a title binder or commitment to insure.
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PREPAID ITEMS:
Charges on a mortgage loan that must be paid at closing by the purchaser.
Per diem interest is interest from the date of closing to the end of the month.
Homeowner's Insurance must be prepaid for 14 months. (Escrowed)
Property Taxes pre-payment varies from 2 months to 12 months, depending on when the property is purchased and when the taxes are collected in the specific county. (Escrowed)
Mortgage Insurance must be pre-paid for 2 months. (Escrowed)
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PROCESSING:
The preparation of a mortgage loan application and supporting documents for consideration by a lender or insurer.
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QUALIFYING RATE:
An interest rate used to calculate the borrower's ability to qualify, which may be greater than the actual interest rate charged to the borrower.
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RESPA (REAL ESTATE SETTLEMENT PROCEDURES ACT):
RESPA is a federal law that requires lenders to provide home mortgage borrowers with information of known or estimated settlement costs. RESPA also limits the amount lenders may require to be held in an escrow account for real estate taxes and the insurance, requires the disclosure of known settlement costs to both buyers and sellers by the person conducting the settlement, and outlaws certain referral fees.
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SALES CONTRACT:
A deliberate written agreement between competent parties stating terms and conditions of a sale.
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SERVICING:
The duties of the mortgage banker as a loan correspondent as specified in the servicing agreement for which a fee is received. The collection for an investor of payments, interest, principal, and trust items such as hazard insurance and taxes, on a note by the borrower in accordance with the terms of the note. Servicing also consists of operational procedures, covering accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow up, and loan analysis.
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SETTLEMENT STATEMENT (HUD-1):
A statement showing the full details of the loan closing, including costs paid by both the buyer and the seller and detailed breakdown of the manner in which the loan proceeds were distributed. The Real Estate Settlement Procedures Act (RESPA) requires that this standardized form be used in all loan closings involving purchase money first mortgages in which the Federal Government is involved in any way, even though the loan itself may be insured or guaranteed by a government agency. For practical purposes, the form must be used with all purchase money first mortgage loan closings and may be used in other transactions, such a second mortgages, refinancing transactions, etc.
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TENANCY:
A holding of real estate under any kind of right of title. Used alone, tenancy implies a holding under a lease.
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TENANCY BY ENTIRETY:
The joint ownership of property by a husband and wife where both are viewed as one person under common law that provides for the right of survivorship.
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TENANCY IN COMMON:
In law, the type of tenancy or estate created when real or personal property is granted, devised or bequeathed to two or more persons, in the absence of express words creating a joint tenancy. There is no right of survivorship. (See Joint Tenancy)
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TITLE:
The evidence of the right to or ownership in property. In the case of real estate, the documentary evidence of ownership is the title deed that specifies in whom the legal estate is vested and the history of ownership and transfers. Title may be acquired through purchase, inheritance, devise, or through foreclosure of a mortgage.
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TITLE INSURANCE:
A contract by which the insurer, usually a title insurance company, agrees to pay the insured a specific amount for any loss caused by defects of title to real estate, wherein the insured has an interest as purchaser, mortgagee, or otherwise.
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TITLE SEARCH:
An examination of public records, laws, and court decisions to disclose the past and current facts regarding ownership of real estate.
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TRUTH-IN-LENDING:
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage including the APR and other charges.
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