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After purchasing three single family homes I had no understanding
of what terms such as: Title, escrow, prepaids, mortgage insurance
and underwriting really meant, it's somewhat ironic that I now pride
myself as a mortgage professional. Please use the Glossary to clarify
as many of these terms as are available.
Mortgage
glossary
Acre: A measure, usually
of land equal to 160 square rods, (43560 sq. ft.) in a shape.
Adjustable Rate Mortgage (ARM): A mortgage in which
the lender adjusts the interest rate periodically according to a spcified
index.
Affidavit: A sworn
statement in writing.
Amortization: Gradual
reduction of the mortgage debt through periodic scheduled payments
over the mortgage term (life of the loan).
Annual
Percentage Rate (APR): A term used in a truth-in-lending
act to represent the percentage relationship of the total finance
charge to the amount of the loan. The APR reflects the cost of your
mortgage loan as a yearly rate. It may be higher than the interest
rate stated on the note because it includes, in addition to the interest
rate, points and fees paid by the borrower.
Application: A printed form used by a mortgage lender to record necessary
information concerning a prospective mortgage.
Application
Fee: A sum of money collected which is applied toward the
estimated initial mortgage processing expenses. (Appraisal and Credit
Report).
Appraisal: A report made by a qualified
person setting forth an opinion or estimate of value.
Appreciation:
An increase of value in property due to the economic or related causes
which may prove to be temporary or permanent.
Arbitration:
The act of negotiating a debt to a lesser rate of interest or balance
to achieve a settlement and closure of an account.
Assets:
Everything owned by a person or corporation, which can be used for
repayment of debts.
Bankruptcy: Proceedings
under federal bankruptcy by a court having proper jurisdiction. The
bankrupt's property is distributed by the court to the creditors as
full satisfaction of the debts, in accordance with certain priorities
and exemptions. Voluntary bankruptcy is petitioned by the debtor;
involuntary bankruptcy is initiated by the creditors.
Buy-Down:
Money advanced at settlement to reduce the borrowers monthly payments
on a mortgage during the term of the loan or for the first few years.
Basis Point: One one-hundredth of one percent.
Used primarily to describe changes in yield or price on debt instruments,
including mortgages and mortgage backed securities. (Yield Spread)
Balloon Payment: A mortgage that has level monthly
payments that will fully amortize it over a specified period, but
which provides for a balloon payment to be due at an earlier specified
term.
Blanket Mortgage: A mortgage that
covers more than one parcel of real estate owned by the mortgagor.
Bridge Loan: (or Swing-Loan) A form of a second
mortgage that is secured by the borrower's present home (which is
usually for sale) in a manner which allows the proceeds to be used
for closing on the new home before the present home is sold.
Broker: An individual employed on a fee or commission
basis as agent to bring buyers and sellers together.
Caps
(Interest): Consumer safeguard on an ARM (Adjustable Rate
Mortgage) that limits the amount the interest rate may change per
year.
Cap (Payment): Consumer safeguard
on a ARM (Adjustable Rate Mortgage) which limits the amount monthly
payment may change.
Cash-Out Refinance:
A refinancing arrangement in which the amount of money received from
the new loan exceeds the total of the money needed to repay the old
debt, closing costs.
Closing: The consummation
of a real estate transaction. The closing includes the delivery of
a deed, financial adjustments, the signing of notes, and the disbursement
of funds necessary to complete the sale and loan transaction.
Closing Costs: Generally involves an origination
fee, appraisal, credit report, title insurance, attorney fees, survey,
processing fee and recording fees.
Closing Statement:
(Settlement Statement or HUD-1) a form used at closing that gives
an account of the funds received and paid at the closing, including
the escrow deposits for taxes, hazard insurance and mortgage insurance.
This is generally the HUD-1.
Collateral:
Property pledged as security for a debt, such as real estate pledged
as security for a mortgage.
Comparables:
Properties used for comparative purposes in the appraisal process
that have similar characteristics to the subject property, (AKA: COMPS)
Coupon Rate: The stated anual interest rate
on debt instrument. The term is used to describe the contract interest
rate on the face of the mortgage note.
Deed: A
written document by which the ownership of land is transferred from
one person to another.
Default: The failure
to perform an obligation as agreed in a contract.
Delinquency:
A loan payment tht is overdue but within the period allowed before
actual default is declared.
Depreciation: A
loss of value in real property brought about by age, physical deterioration,
functional or economic obsolescence.
Discounted Loan:
When the note rate on a loan is less than the market rate of interest.
The lender requires additional points to raise the yield on the loan
to the market rate.
Due-On-Sale Provision: A
covenant in a conventional mortgage that allows the lender to call
the mortgage due and payable if ownership was transferred without
the lender's permission.
Debt-To-Income Ratio (DTI):
The relationship of a borrower's total monthly payment obligations
on long-term debts divisded by gross monthly income, expressed in
percentages (AKA: Back End Ratio).
Earnest Money: Deposit money given to the seller by the potential buyer
to show that he or she is serious about buying a property. If the
transaction is completed, the earnest money is applied to the down
payment. If the the transaction fails to complete, it may be forfeited.
Easement: an interest in land owned by another
tht entitles its holder to a specifice limited use, such as laying
a sewer, putting up power lines or crossing the property.
Encroachment: a fixture, such as a howse, wall or
fence, which intrudes upon another persons property.
Equal
Credit Opportunity Act (ECOA): A federal law requiring lenders
and other creditors to make credit equally available without discrimination
based on race, color, religion, national origin, sex, marital status,
receipt of income from public assistance programs or past exercising
or rights uncer the Consumer Protection Act.
Equity: The ownership interest - that portion of a property's value
over and above the liens against it.
Equity Loan:
A loan based upon the equity in a property. The credit of the borrower
is not a major factor.
Escrow: A procedure
whereby a disinterested third party handles legal documents and funds
on behalf of a seller and buyer.
Fair
Credit Reporting Act (FCRA): A
law, which requires a lender who is rejecting a loan request because
of adverse credit information to inform the borrower of the source
of such information.
Farmer's Home Administration
(FmHA): a government agency within the Department of Agriculture
that operates under the Consolidated Farm and Rural Development Act
of 1921 and Title V of the Housing Act of 1949. This agency provides
financing to farmenrs and other qualified borrowers who are unable
to obtain loans elsewhere.
Federal
Emergency Management Agency (FEMA): Federal
agency which, among other things directs the activities of the Federal
Insurance Administration andestablishes flood insurance rates and
terms of coverage, issues policies, processes claims and indicates
and maps flood-prone areas.
Federal
Home Loan Mortgage Corporation (FREDDIE
MAC): a corporation authorized by Congress in 1970. It purchases
residential mortgages insured by the General Housing Administration
or guaranteed by the Veterans Administration (VA) as well as conventional
home mortgages. It sells participation certificates whose principal
and interest is guaranteed by FHLMC.
Federal
Housing Administration (FHA):
A federal agency within the Department of Housing and Urban Development
(HUD) that provides mortgage insurance for residential mortgages and
sets standards for construction and underwriting. The FHA does not
lend money, nor does it plan or construct housing.
Federal
National Mortgage Association (FANNIE
MAE): A tax paying corporation created by Congress to support
the secondary mortgage market. It purchases and sells residental mortgages
insured by the Federal Housing Administration (FHA) or guaranteed
by the Veterans Administration (VA) as well as conventional home mortgages.
Fee Simple: The greatest possible ownership
interest a person can have in real estate. A term used to describe
ownership in real estate meaning that the person owning fee simple
has all possible rights to the use of the property, including the
right to dispose of the property or pass it on to heirs.
First Mortgage: A real estate loan that has priority
over any subsequently recorded mortgage.
Fixed Interest
Rate: An interest rate, which does not change during the
loan term.
Forbearance: The act of refraining
from taking legal action despite the fact the mortgage is in arrears.
It is usually granted only when a mortggor makes a satisfactory arrangement
to pay the amount owed at a future date.
Foreclosure: A legal procedure in which a mortgaged property is sold to
pay the outstanding debt in case of default.
Funding
Date: Date when the purchaser of the mortgage disburses payment
to the seller or warehouse lender.
Funding Fee:
The consideration paid by a mortgagee (borrower) for mortgage insurance
on a VA loan.
Government
National Mortgage Association (GINNIE
MAE): Created in 1968 by an amendment to the Title III of
the National Housing Act, this federal government corporation is a
constituent part of the Department of Housing and Urban Development
(HUD). Among other governmental functions, it guarantees securities
backed by mortgages that are insured or guaranteed by other government
agencies. (AKA: Ginnie Mae)
High Ratio Loan:
Mortgage loans in excess of 80% of the lower of the sales price or
appraised value.
Homeowners
Associations (HOA): A non profit corporation
or association tht manages the common areas and services of a PUD
or condominium project. In a condominium project it has no ownership
interest in the common areas; in a PUD , it holds title to common
areas.
Homeowner's Policy: A multiple peril
insurance policy available to owners of private dwellings, which covers
the dwelling and its contents, as well as personal liability.
Homestead State: In some states, a statutory
exemption which prohibits the attachment or sale of owner-occupied
properties to pay the claims of creditors.
Housing
and Urban Development (HUD): Established by the Housing
and Urban Development Act of 1965 to supersede the Housing and Home
Finance Agency.
Land Contract: An agreement
to ttransfer title to a property once conditions of the contract have
been fulfilled.
Improvements: Those additions
to raw lands tending to increase value such as buildings, streets,
sewers, etc.
Index: When talking about adjusting
rate mortgages, the index is usually expressed as a composite of interest
rates. Often, these rates are the rates of the U.S. Treasury Securities.
Changes in the index determine how the interest rates will change
on an adjustable rate mortgage (ARM).
Level Payment
Mortgage: A mortgage that provides for a fixed sum to be
paid periodically during the term of the loan. Part of the fixed payments
is credited to interest and the balance is used to reduce the principal
of the loan.
Lien: A hold, claim or charge
allowed a creditor upon the lands of a debtor, such as a mortgage.
LIBOR Index: The Libor (London Interbank Offered
Rate) Index is the daily average of interbank offered rates for six-month
U.S. dollar-denominated deposits as published in the Wall St. Journal.
Margin: With respect to Adjustable Rate Mortgages
(ARM), the margin is the amount the lender adds to the index value
to calculate the new interest rate at each adjustment. The margin
reflects the lender's cost of doing business and allowance for profit.
Mortgage: An instrument used to encumber land
as a security for a debt.
Net Worth: The
value of all assets less total liabilities. It is often used as an
underwriting guideline to indicate credit worthiness and financial
strength.
Owners Policy: A policy of title
insurance, which insures a named owner against loss by reason of defects,
liens and encumbrances or lack of marketability of the title. The
company also agrees to defend covered claims made against the title.
Open-End Mortgage: A mortgage with a provision
that the outstanding loan amount may be increased upon mutual agreement
of the lender and the borrower.
Originator: A
person who solicits builders, brokers, and others to obtain applications
for mortgaage loans, (AKA: Loan Officer).
Over-Improvement:
Renovation or remodeling inappropriate to a site due to its excess
isze or cost, or inadequate return.
PITI (Principal,
Interest, Taxes and Insurance): The most common components
of a monthly mortgage payment.
Point: An
amount equal to 1% of the loan amount. Points are one-time charges
assessed at closing by the lender. They represent additional yield
to the investor besides the interest rate.
Prepaids:
This generally includes homeowners insurance, escrow accrual for insurance
and taxes, interest to the end of the month and PMI (Private Mortgage
Insurance) if necessary.
Prepayment Priveilege: The
right given a borrower to pay all or part of a debt prior to its maturity.
Prepayment Penalties: A fee charged to a borrower
who pays off a mortgage loan balance befor it is due. Not normall
charged for more than five years.
Processing: The
paration of a mortgage loan application and supporting documentation
for consideration by a lender or insurer.
Property
Type: A description of property, which classifies it according
to the number of living units and type of structure (example: townhouse,
condominium, single family dwelling, multi-family dwelling, etc).
Quitclaim Deed: A deed relinquishing all interest,
title or claim an owner has in a property. A quitclaim deed implies
no warranty.
Refinancing: The repayment
of a debt from the proceeds of a new loan using the same property
as security.
Real
Estate Settlement Procedure Act (RESPA):
A federal law requiring lenders to provide home mortgage borrowers
with information on known or estimated settlement costs. It also establishes
guidelines for escrow account balances and the disclosures of settlement
costs.
Real Property: Land and that which
is affixed to it. (example: Land and Home).
Regulation
Z: Federal Reserve regulation issued under the Truth in Lending
(TIL) Law, which requires that a credit purchaser be advised in writing
of all costs connected with the credit portion of the purchase or
refinance.
Sales Contract: A written agreement
between buyer and seller stating terms and conditions of a sale or
exchange of a property.
Secondary Financing: A
funding method using a loan secured by a second mortgage on a property.
Sometimes used to refer to any financing techniques other than equity
and first mortgage debt.
Second Home (Vacation Home,
Weekend Home): A residence other than the borrower's primarty
residence which the borrower intends to occupy for a portion of each
year. Must be suitable for year round occupancy. No rental income
from the property will be allowed to qualify the applicant for a loan
against the purchase of a second home.
Second Mortgage
Market: A market where existing mortgages are bought and
sold. It contrasts with the primary mortgage market where mortgages
are originated.
Security: In lending, the
collateral given, deposited or pledged to secure the payment of debt.
Seller Contributions: Payment by the seller
or any other interested party of some or all of the purchaser's usual
closing costs.
Tax Lien: A claim against
property of unpaid taxes.
Tenants in the Entirety: Ownership of real property by husband and wife with equal
rights of possession. No disposition of any interest can take place
without the consent of both. The property passes to the survivor in
the event of the death of one or the other.
Title: Written evidence of the right to or ownership in a property.
In the case of real estate, the documentary evidence of ownerships
the title deed that specifies whom the legal estate is vested and
the history of ownership and transfers. Title may be aquired through
purchase, inheritance, devise, and gift or through foreclosures of
a mortgage.
Title Insurance Property: A
contract in which an insurer, usually a title insurance company, agrees
to pay the insured party a specific amount for any loss caused by
defects of title on real estate in which the insured has an interest
as purchaser, mortgage or otherwise.
Title Search:
An examination of public records to disclose the past and the current
facts regarding the ownership of a given piece of real estate.
Treasury Index: The Treasury Index is the weekly
average yield on U.S. Treasury securities adjusted to a constant maturity
of one, three or five years, as made available by the Federal
Reserve Board.
Truth
in Lending Act (TIL): A federal law requiring
a disclosure of credit terms using a standard format. This is intended
to facilitate comparison between the lending terms of financial institutions.
Two Step Mortgage: Mortgage where the interest
rate stays the same for a stated period, then changes typically after
5 or 7 years.
Underwriting: Analysis of
risk and setting of an appropriate rate and term for a mortgage on
a given property for given borrowers.
Uniform Residential
Appraisal Report (URAR): Standard form used by appraisers
to detail facts supporting the value of single-family properties (AKA:
FNMA Form 1004/FHLMC 65).
Uniform Residential Loan
Application (URLA): Standard form where mortgage applicants
provide the lender with information essential to loan approval (AKA:
FNMA Form 1003).
Unimproved Land: Raw Land
Vacancy Factor: The percentage of gross rental
income that represents vacant units.
Warehouse Loans:
Loans that are funded and awaiting sale or delivery to an investor.
Wholesale Origination: A loan origination strategy
by which loans are purchased from mortgage brokers, mortgage bankers
or other loan originators (banks, thrifts, etx). The loans may be
purchased prior to closing, at closing or after the loans are closed
depending on the arrangement between the originator and the wholesale
lender. Wholesale origination enables a lender to acquire mortgage-servicing
rights without incurring the fixed costs assiciated with a retail
origination strategy.
Without Recourse: A
mortgage in which the lender will not pursue personal liability against
the borrower. The lender's security is the real estate being financed.
Yield: The ratio of investment income to the
total amount invested over a given period of time.
Zero
Coupon Mortgage: Long term commercial financing that defers
all principal and interest payments until maturity.
Zoning: The creation of districts by local governments
in which specific types of property uses are authorized (i.e. residential,
commercial, mixed use).
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