Mortgage Terms 101

Understanding the Process:

Mortgage Terms 101


I would like to help you to understand the mortgage process…

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“…brush up on your Mortgage term vocabulary BEFORE you take that first step…”

Getting a mortgage loan is probably the largest financial commitment you will ever have to make. There are many industry terms used in the marketplace today and it is important that you are armed with the knowledge to get the mortgage that is right for you. Get to know the following terms and make an informed decision about your mortgage!


Glossary

80/20 Mortgage
A 100% financing program which uses a first mortgage to pay 80% of the purchase price and a second mortgage to pay the remaining 20%.  This program require a good credit score.  It can also eliminate the need for PMI  (for PMI see below).

Abstract of title
An overview and summary of public records concerning the title to a specific parcel of land. The abstract of title should reveal any legal defects that would prevent the sale of the property. Typically, your attorney (or title insurance company) reviews this document before you complete the purchase of the property.

Acceleration clause
A provision in a loan agreement that permits the lender to increase loan payments, or even demand the entire balance of the loan immediately, if the borrower defaults, or violates specified provisions of the loan contract.

Accrued interest
Interest is called ‘accrued’ when it has been earned, but not yet paid.

Adjustable rate mortgage (ARM)
A popular form of mortgage characterized by a variable interest rate. Typically, ARMs are adjusted annually in accord with a specified financial index, such as One-year Treasury bills. If the chosen index rises, the interest rate (and the monthly payment) rises as well. If the index declines, the interest rate also falls for that period. Most ARMs specify an upper limit (cap) on the varying rate.

Adjustment date
The interest rate for an adjustable-rate mortgage (ARM) changes officially on the adjustment date specified in the loan agreement.

Adjustment period
The period of time between adjustment dates (the day for changing the interest rate) of an adjustable-rate mortgage (ARM).

Agreement of sale
A signed contract between the buyer and seller specifying the precise conditions under which the seller sells a property.

Alternative documentation
A procedure, based on documents the borrower will provide, that allows provisional acceptance of a borrower’s stated financial information before formal verification by a third party.

Amortization
The discharging of a debt by regularly scheduled (often monthly) installments consisting of both principal and interest.

Annual cap
The maximum increase allowed in any single year for the interest rate of an adjustable-rate loan.

Annual percentage rate (APR)
The total annual cost of a loan, including both interest charges and most (or all) fees. Be sure to ask if any fees have been left out. Knowing the APR lets you compare different loan offers accurately, even when they’re structured differently.

Application
A statement of financial and personal information made when you first apply for a loan.

Application fee
A substantial ($200-$700) charge by a lender for processing a loan application. This initial fee may include costs for property appraisal, obtaining a credit report and other clerical services associated with making a loan.

Appraisal
Made by a licensed professional, this is an estimate of a property’s value. Appraisals may be based on a detailed study of the property, sales of similar properties in the neighborhood, on estimated replacement costs of existing structure or on a commercial property’s estimated average revenues – or a combination of one or more such methods.

Appraisal fee
The amount you pay to have an appraiser provide an opinion of the value of a property on a specific date.

Appreciation
The increase in the market price of a property due to market forces and inflation.

Assessment
A tax charge levied on a property, or a charge levied to fund specific local improvements, including new sidewalks, water mains or community services.

Asset
Any holding of value, including art works, stocks, real estate, cars and jewelry.

Assumable mortgage
An existing mortgage held by the seller that a buyer can assume – take over – in purchasing a property. Typically, a buyer saves money on fees and gets a lower interest rate by assuming an existing mortgage.

Assumption
An agreement between a buyer and a seller whereby the buyer takes over the seller’s mortgage payments and accepts the mortgage’s liability.

Assumption clause
Part of the deal when you assume an existing mortgage, this clause specifically grants the buyer the right to take over the seller’s existing mortgage.

Assumption fee
The buyer assuming a seller’s existing mortgage pays this fee to the lender as part of the process of transferring the debt to the new owner of the property.

Aztec
More formally, the ‘recognition agreement,’ this part of a loan contract to buy a co-op details the specific rights of lender. With a co-op, the buyer purchases shares in the co-op entity – not the dwelling space itself – so the lender’s security must be appropriately delineated.

Balloon mortgage
A mortgage with monthly payments that are too small to amortize (pay off) the loan over time, and one large final payment to make up for the remaining balance. Balloons typically permit low monthly payments, and allow refinancing to pay the balloon when the time comes.

Bank attorney
The attorney (representing the lender) with fiduciary responsibility to make sure that the terms of the loan contract are carried out. In many cases, this person also reviews the title and lien search to make sure the property is legally clear to be sold. Some states require a bank attorney at the closing, some don’t.

Basis points
A measure of interest or yield, representing 1/100th of 1%. Thus, an interest rate that declines from, say, 6.50% to 6% is said to have fallen by 50 basis points.

Binder
A provisional agreement to purchase made by paying an ‘earnest money’ deposit on a property.

Biweekly mortgage
Instead of making monthly mortgage payments, borrowers with a biweekly mortgage pay an agreed-upon amount of principal and interest every two weeks. Each payment is roughly half of what would otherwise be the monthly payment for their loan. But because there are 52 weeks in a year, with this plan the borrower pays the equivalent of 13 monthly payments each year, thereby reducing the debt more quickly.

Blanket mortgage
This type of mortgage is designed to cover more than one property.

Bona fide
From the Latin, “good faith,” this quasi-legal expression suggests that the point it describes is being addressed honorably and honestly. Its practical significance in a real contract is not entirely clear.

Borrower (mortgagor)
The person who borrows money – as for a mortgage – and incurs a legal obligation to repay the debt under the terms of the loan contract.

Breach
A break with, failure or violation of a legal obligation.

Bridge loan
A loan made, usually, to allow the purchase of a new house before the buyer’s current home sells. Most of the time, this type of loan takes the form of a second mortgage on the buyer’s current house. When the old place sells, the proceeds pay the bridge loan.

Broker
Someone who matches a buyer and a seller. In real estate, it is generally assumed that a broker will also assist in negotiating for the client or clients.

Building line or setback
The distance from a property boundary that must remain free of man-made structures. Most communities have laws, ordinances or codes stipulating exactly how close to a property line an owner may build a structure, such as a garage or an addition.

Buy-down
A loan arrangement that permits the borrower to pay more initially in exchange for a lower interest rate. Typically, the lender accepts more money at the start in exchange for a lower interest rate during the first years of the loan.

Buyer’s market
A buyer’s market, as real estate people are pleased to call it, occurs when sellers greatly outnumber prospective buyers. In theory at least, sellers are likely to lower their prices when buyers become scarce.

Call option
A loan provision empowering a lender to receive full repayment before the term of the loan expires. The lender can ‘call in’ the entire loan if, for example, the borrower breaches specified terms of the loan agreement, such as not repaying the loan.

Cap
An upper limit on the amount by which an interest rate may rise over the life of a loan, and also the maximum periodic increase in a mortgage’s monthly payment or annual interest rate. Essential in an adjustable-rate loan, a cap insures that the total cost of the loan will never exceed specified limits.

Cash out
Money left over when you take out a new loan, and use it to pay off a smaller loan or mortgage. Thus, if your current mortgage balance is $100,000, and you refinance with a new mortgage for $150,000, you pay off the old mortgage and ‘cash out’ the extra $50,000, minus a few thousand dollars for bank refinancing fees.

Cashier’s check (or bank check)
Often required for certain real estate fees, a cashier’s check is guaranteed by the issuing bank, not by you. You pay the bank the amount of the check ahead of time, and the payee relies on the bank to make it good.

Ceiling
In lender parlance, this refers to the maximum, lifetime interest rate of an adjustable rate mortgage.

Certificate of eligibility
For veterans only, this certificate from the Veterans Administration (VA) establishes eligibility for a VA-guaranteed loan. Veterans can get a certificate of eligibility through their local VA office.

Certificate of occupancy (CO)
Written authorization from a local municipality allowing people to move into a newly completed or substantially completed residence.

Certificate of reasonable value (CRV)
This document from a Veteran’s Administration appraiser states the maximum VA mortgage amount allowed for a property

Certificate of title
An opinion written by an attorney or a title company of the status of the title of a specific property. However, a certificate of title does not guarantee that the title is, in fact, without flaw. Protection against a flawed title is the promise of homeowner title insurance, which is different from lender title insurance, a form that protects the lender only.

Chain of title
The record, in chronological order, of the conveyance of a property from the original owner to all subsequent owners.

Closed-end mortgage
A mortgage that does not allow additional debt to be added to principal.

Closing (or settlement)
Also called the settlement, this meeting marks the conclusion of your home-purchasing (or home-refinancing) adventure. At this gathering, typically attended by all parties involved in the transaction (and their attorneys), buyer and sellers sign the papers and hand over the payments required to formally execute the transfer of legal title to the property.

Closing costs
Expenses paid by buyers and sellers in order to consummate the sale of the property. Typically, these costs amount to about 2% of the property’s selling price. They include fees for attorneys, clerical services, commissions, taxes, title insurance, registration of documents and other items – all of which should have been made clear to all parties before the closing.

Closing statement
On this document appear all the costs, itemized, associated with closing on the purchase of the home.

Cloud
A claim against a property that disputes the validity of its title. In most cases, the purchase cannot proceed until the claim has been removed, leaving clear title to the property.

Co-borrower
Also called the co-signer, this is a person who agrees to share or assume the legal obligation to repay a loan, though the co-borrower might have no ownership in the property being financed.

Collateral
An asset or several assets used to guarantee the repayment of a loan; these assets can be seized and sold to pay the loan if the borrower defaults. Homes, cars and even tax-free retirement accounts can all serve as collateral.

Collection
Efforts to bring a delinquent mortgage current, and, if necessary, to file notices and documents required to proceed with a foreclosure.

Commission
Typically between 3% and 7% of a property’s selling price, this is money paid by the seller to a real estate agent for services in brokering the sale, and helping to shepherd it to conclusion.

Commitment
A lender’s agreement with a prospective buyer to lend (usually a mortgage) money at a future date, subject to specified conditions. Lenders typically charge a commitment fee between $TK and $TK for this written promise.

Commitment letter
Sometimes called a loan commitment, this letter is a lender’s formal offer of a loan under agreed-upon terms and conditions.

Common areas
Especially applicable to condominiums, co-ops and private communities, common areas specified in the sales contract entitle the buyer to use spaces and facilities shared by all others in the property association. Common areas might include a swimming pool, a gymnasium, a parking lot, tennis courts and other facilities maintained by the community as a whole.

Comparable
A term used by appraisers, comparables are properties similar to the property being sold, having about the same size, age and amenities, as well as a comparable location.

Condominium
One of several dwellings in a discrete group that shares ownership of common areas or facilities. A condominium is ‘owned’ because the buyer receives legal title to it. (By contrast, when you buy a co-operative unit, a co-op, you buy only shares in the co-op – not the unit itself. The shares confer the right to live in a specified unit. )

Condominium conversion
Common for rental properties, this legal change of ownership permits purchase of apartments by individuals, usually under terms specifying how common areas will be shared.

Conforming loan
This is a loan that conforms to guidelines set down by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA). Both agencies permit conforming loans up to $227,150 on a single-unit property.

Construction loan
A short-term loan to finance construction of a home. Typically, the lender pays the builder directly. When the house is complete, the lender converts the debt to a mortgage for the new owner.

Consumer reporting agency
Also known as a consumer reporting bureau, this type of organization prepares a credit report for a lender after a supplicant applies for a loan.

Contingency
A condition or term one party must satisfy before a contract becomes legally binding.

Contract of sale
A written agreement between buyer and seller on the purchase price and terms of a sale.

Conventional loan
A mortgage not funded, guaranteed or insured by the Federal Housing Administration (FHA), Rural Economic Community Development (RECD) or the Veterans Administration (VA).

Conversion clause
A clause in the contract for some adjustable-rate mortgages (ARMs), permitting the borrower to change the mortgage to a fixed-rate loan, after the first adjustment period.

Conveyance
A document used to affect a legal transfer of ownership or debt, including transfer of a deed or mortgage.

Cooperative dwelling
Best known as just a ‘co-op,’ this is a residence owned by purchasing shares in the over-arching business entity (usually a corporation) that holds title to the physical property itself. Shares entitle their owner to live in a specified apartment or dwelling.

Co-signer
Also called the co-borrower, this is a person who agrees to share or assume the legal obligation to repay a loan, though the co-borrower might have no ownership in the property being financed.

Covenant
A binding agreement, such as a clause in a mortgage that can trigger foreclosure if the borrower violates the specified obligation.

Covenants
For property, these are the rules or restrictions governing legitimate use.

Credit bureau
An organization that compiles credit history data directly from lenders and creditors to build credit reports for individuals; the main bureaus are Equifax, TransUnion and TRW.

Credit ratio
This ratio, sometimes expressed as a percentage, compares a borrower’s income and debt burden. Lenders use two systems: For federally funded loans (FHA and VA ), net monthly income is contrasted with monthly long-term debt. Banks and other commercial lenders may use a debt-to-income (DTI) ratio based on gross monthly income.

Credit report
A report detailing a person’s credit history. Missed loan payments, late payments, large credit card debts and other fiscal transgressions can hurt your chances of getting a good rate on a mortgage — or getting a mortgage at all.

Current assets
Value of cash, accounts receivable, inventories, marketable securities and other assets that could be converted to cash in less than one year.

Debt-to-income ratio (DTI)
A key indicator of a prospective home buyer’s ability to repay a mortgage, the DTI shows a borrower’s monthly debt payments divided by gross monthly income. Thus, if monthly debt payments were $3500 and your gross monthly income were $7000, your DTI would be 1/2 or 50%. The lower the ratio, the more welcoming a lender is likely to be; most lenders want to see a DTI of at least 3/4.

Deed
A formal, written instrument that transfers legal title to real property from one owner to another. The deed should be signed by buyer and seller, contain an accurate description of the property being conveyed, and should bear the signatures of witnesses in accord with pertinent state laws. The purchaser receives the deed at the closing.

Deed-in-lieu
A deed given by the borrower to the mortgage lender to avoid foreclosure or otherwise satisfy a debt.

Deed of trust
A document similar to a conventional deed, the deed of trust is a security instrument involving three parties – borrower, lender and a trustee. The borrower transfers title to the property to the trustee, and the trustee holds it in trust as security for the lender. If the borrower pays the debt, the deed of trust becomes void, and the title reverts to the borrower free and clear. If the borrower defaults, the trustee may sell the property to satisfy the debt.

Default
Failure to fulfill a financial obligation. Defaulting on a loan often means losing whatever assets you used as collateral.

Delinquency
Failure to make payments on time, as agreed in the loan agreement.

Department of housing and urban development (HUD)
The federal agency charged with administering FHA, GNMA and several other housing programs.

Deposit
Money that a buyer gives to a seller to ensure that the seller will not offer the property to another buyer, for a specified period of time – typically 60 days. If the sale proceeds, the deposit is counted as part of the selling price. If the sale falls through, the erstwhile buyer usually loses the money paid as a deposit. In part, the deposit compensates the seller for sales forgone during the time period specified.

Depreciation
The decline in the value of an asset over time.

Discount points (or points)
Points are, essentially, interest paid when the mortgage is signed. One point equals 1% of the total loan; thus, one point on a $200,000 mortgage would be $2,000 payable at the closing. Typically, the more points paid at closing, the lower the overall interest rate of the mortgage.

Documentary stamps
A state tax paid for transferring a real estate title in a sale. This tax, however, takes the form, literally, of one or more stamps on the deed or the mortgage.

Down payment
An initial cash payment, typically between 5% and 20% of a property’s purchase price, that is the difference between the price and the amount of the mortgage. This payment should be refundable (with interest) if the seller will not or cannot complete the sale; a prospective buyer should make sure such conditions are clear in the sales contract. Conversely, a buyer who backs out of the deal may lose the down payment.

Due-on-sale clause
A standard mortgage provision stating that any remaining balance must be repaid immediately if the borrower sells the mortgaged property, or transfers legal title.

Duplex
A dwelling divided into two distinct and separate living units.

Earnest money
A token of the buyer’s earnest desire to purchase the property, this initial cash deposit discourages a seller for a specified period of time from selling the house to someone else. Typically, earnest money is expected to hold the property for 60 days. In theory, if the buyer backs out of the deal without good cause, he or she forfeits the earnest money. If the seller accepts the earnest money, but sells to someone else before the agreed-upon time period ends, a legal mess is likely.

Easement
The legal right of a person or government entity to use someone else’s property for a specified purpose, such as hosting power lines, for a public sidewalk or as an access road to another property. A wise buyer should personally verify (or read a statement disclaiming) any such easements before the closing. Customarily the buyer’s attorney performs this task, but it is the buyer — not the attorney — who faces the consequences of a careless easement search.

Economic obsolescence
The decline of a property’s value due to on changes in the surrounding area, such as, construction of a new highway or airport nearby. This effect is also known as economic depreciation.

Effective age
A somewhat arcane term, this refers to an appraiser’s estimate of a structure’s age based on its condition, rather than its actual age – even if the true age can be established.

Effective rate
An estimate of the cost of a mortgage in light of how long the prospective buyer really expects to live in the house (and make mortgage payments). Like an APR (annual percentage rate) calculation, the effective rate considers all fees and miscellaneous costs. But unlike the APR, which assumes the mortgage will continue for its entire term, the effective rate views these costs over a shorter period of time. The effective rate is thought a more realistic number to use when comparing home-buying costs.

Eminent domain
A government’s legal right to seize private property for public use, after paying the owner its fair market value.

Encroachment
A structure, such a fence, part of a building or even a pile of soil, that intrudes illegally onto someone else’s property.

Encumbrance
Liens, easements, zoning laws or other legal claims on a property that may reduce its market value. A buyer should understand all encumbrances on a property before closing and what, if anything, can be done to remove any encumbrance.

Environmental hazard
Special conditions, such as the presence of asbestos insulation or radon, that may pose a hazard to the health of the homeowner, and so reduce the value of a dwelling.

Equity
The current market value of a property minus all debts owed on the property.

Escrow
Meaning ‘in trust,’ escrow in real estate refers to a neutral third party (the escrow agent) designated to hold money and documents until a sale is complete. The word itself, meaning ‘parchment’ in Old French, probably came into English with the Norman Conquest 1000 or so years ago.

Escrow account
Sometimes called an ‘impound account,’ this is a special account held in trust by the lender into which the borrower pays regular installments to applied to the cost of taxes and insurance. These funds are put into an “Escrow Account” (or “Escrow”). The lender then pays these expenses for the borrower from this escrow account.

Escrow agent
A person with fiduciary responsibility to the buyer and seller, or the borrower and lender, to ensure that the terms of the purchase/sale or loan are carried out.

Escrow disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

Escrow payment
The portion of a mortgagor’s monthly payment that is held by the ‘servicer’ 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.

Estate
The ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death.

Eviction
The lawful expulsion of an occupant from real property.

Examination of title
The report on the title of a property from the public records or an abstract of the title.

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.

Fair market value
The price established in a free market between a buyer and seller in an arms-length transaction where neither one is compelled to buy or sell. In an appraisal, this is the final value derived after examining the Sales Comparison, Cost, and if applicable, Income approaches; sometimes referred to as “Market Value.”

FAIR plan
The Fair Access to Insurance Requirement Plan is a program established within a state to provide access to insurance for property owners in areas that are generally not insurable by most insurers; examples include specific beach and windstorm areas.

Fannie Mae
A common nickname for the Federal National Mortgage Association.

Fannie Mae’s community homeBuyer’s program
An income-based community lending model, under which mortgage insurers and Fannie Mae offer flexible underwriting guidelines to increase a low- or moderate- income family’s buying power and to decrease the total amount of cash needed to purchase a home. Borrowers who participate in this model are required to attend pre-purchase homebuyer education sessions.

Farmer’s home administration (FmHA)
The government agency that guarantees mortgages secured by residential properties located in rural areas, concentrating on borrowers with income less than HUD’s local median income for the area in which they reside. FmHA is now known as Rural Economic and Community Development.

Federal deposit insurance corporation (FDIC)
Independent deposit insurance agency created by Congress to maintain stability and public confidence in the nation’s banking system.

Federal home loan mortgage corporation (FHLMC, or Freddie Mac)
This agency buys loans that are underwritten to its specific guidelines. These guidelines are an industry standard for residential conventional lending.

Federal housing administration (FHA)
An agency within the Department of Housing and Urban Development that sets standards for underwriting and insures residential mortgage loans made by private lenders. One of FHA’s objectives is to ensure affordable mortgages to those with low or moderate income. FHA loans may be high loan-to-value, and they are limited by loan amount. FHA mortgage insurance requires a fee of up to 3.8 percent of the loan amount to be paid either at closing or added to each monthly payment, as well as an annual fee of 0.5 percent of the loan amount added to each monthly payment.

Federal national mortgage association (FNMA, or Fannie Mae)
A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds. Fannie Mae does not directly lend money to homebuyers, but works with lenders to make sure that there is no shortage of funds available for mortgage loans. This agency buys loans that are underwritten to its specific guidelines. These guidelines are an industry standard for residential conventional lending.

Fee simple
The maximum form of ownership, with the right to occupy a property and sell it to a buyer at any time. Upon the death of the owner, the property goes to the owner’s designated heirs. Also known as fee simple absolute.

FHA
See Federal Housing Administration.

FHA loans
Fixed- or adjustable-rate loans insured by the U.S. Department of Housing and Urban Development. FHA loans are designed to make housing more affordable, particularly for first-time homebuyers. FHA loans typically permit borrowers to buy a home with a lower down payment than conventional loans. With FHA insurance, eligible buyers can purchase a home with a down payment as little as 3% of the appraised value or the purchase price, whichever is lower. FHA borrowers typically are required to participate in a face-to-face meeting with their lender or a government approved mortgage counselor prior to closing on a new mortgage loan. The current FHA loan limit is $169,050; however, FHA loan amount limits may vary by county.

FICO Scoring
The term for your credit score.  Your credit score is a calculation derived from the timeliness of your payments, amount of available credit currently in use, number of credit inquiries, number of open accounts, history of bankruptcies, judgments and collections.

Fifteen-year mortgage
A loan with a term of 15 years. Although the monthly payment on a 15-year mortgage is higher than that of a 30-year mortgage, the amount of interest paid over the life of the loan is substantially less.

Fidelity bond
An insurance bond that is obtained to protect against financial loss from dishonest acts of persons entrusted with authority to manage funds.

First mortgage
A mortgage that is in first lien position, taking priority over all other liens. In the case of a foreclosure, the first mortgage will be repaid before any other mortgages.

Fixed rate
An interest rate that is fixed for the term of the loan.

Fixed rate loans
Fixed rate loans have interest rates that do not change over the life of the loan. As a result, monthly payments for principal and interest are also fixed for the life of the loan. Fixed rate loans typically have 15-year or 30-year terms. With a fixed rate loan, you will have predictable monthly mortgage payments for as long as you have the loan.

Flood insurance
Insurance that compensates for physical damage to a property by flood. Typically not covered under standard hazard insurance.

FmHA
See: Farmer’s Home Administration

FNMA
See: Federal National Mortgage Association

Forbearance
The act by the lender of refraining from taking legal action on a mortgage loan that is delinquent.

Foreclosure
The legal process by which a borrower in default under a mortgage or deed of trust, loses his/her interest in the mortgaged property; this process usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

Freddie Mac
A common nickname for the Federal Home Loan Mortgage Corporation.

General warranty deed
A deed which conveys not only all the grantor’s interests in and title to the property to the grantee, but also warrants that if the title is defective or has a “cloud” on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic’s liens against it) the grantee may hold the grantor liable.

Gift funds
Funds donated to the borrower from certain eligible sources to assist the borrower in meeting closing costs. Generally, eligible sources are a relative, church, municipality, or nonprofit organization.

Ginnie Mae
Nickname for Government National Mortgage Association (GNMA).

Government national mortgage association (GNMA or Ginnie Mae)
A government organization that participates in the secondary market, buying, selling and guaranteeing FHA and VA loans.

Good faith estimate
Written estimate of the settlement costs the borrower will likely have to pay at closing. Under the Real Estate Settlement Procedures Act (RESPA), the lender is required to provide this disclosure to the borrower within three days of receiving a loan application.

Grace period
Period of time during which a loan payment may be made after its due date without incurring a late penalty. The grace period is specified as part of the terms of the loan in the Note.

Graduated payment mortgage (GPM)
A mortgage that has initial monthly payments set at an amount lower than that required for full amortization of the debt. The payments are then increased by a specified percentage each year during the graduated payment period. At the end of the period, payments are in an amount that will fully amortize the mortgage.

Grantee
That party in the deed who is the buyer or recipient.

Grantor
That party in the deed who is the seller or giver.

Gross income
Total income before taxes or expenses are deducted.

Hazard insurance
Insurance to cover property damage from losses from fire and storms. Some forms include coverage for earthquakes, floods and tornadoes too. Most lenders require mortgagors to buy enough hazard insurance on the mortgaged property to pay off the mortgage.

Home equity
The difference between a property’s market value and any outstanding loans for which the property serves as collateral. Home equity is commonly used as collateral for loans.

Home equity line of credit
An open-ended line of credit based on the equity built up in a property. Typically, lenders will lend up to 85% of a property’s appraised value.

Home equity loan
A loan – a form of second mortgage, really — that allows an owner to borrow against the equity in a home.

Homeowner’s insurance
This insurance includes hazard coverage for any damages that may affect the value of a house, plus personal liability and theft coverage.

Housing and Urban Development (HUD)
The federal agency that administers FHA, GNMA and other housing programs.

Housing debt-to-income ratio
All monthly mortgage expenses — principal, insurance, interest and taxes (PITI), dues, private mortgage insurance., etc.-expressed as a percentage of gross qualifying income.

HUD-1 Uniform Settlement Statement
A standard closing statement that outlines all closing costs on a real estate transaction or a refinancing of real estate.

Impounds
That part of a monthly mortgage payment that is placed in an impound (or escrow) account used specifically to pay for hazard insurance, property taxes and private mortgage insurance.

Index
A widely published measure of the cost of money in a particular market. Lenders use different indexes as benchmarks for adjustable-rate mortgages (ARMs).

Initial Rate
The interest rate charged during the first interval of an adjustable-rate loan (ARM).

Interest
Fee paid for borrowing money. It is calculated based on a percentage of the total amount of the loan.

Interest rate
The amount charged by a lender for borrowing money, not including fees. Some interest rates are fixed at an agreed-upon level for the entire length of a loan. Other loans have variable interest rates; the amount the rate changes, and the time period between rate changes are stipulated in the loan contract.

Interest rate cap
A limit on the amount of interest that can be charged on monthly payments of an ARM during an adjustment interval.

Interest-only loan
The borrower pays only the interest on the loan each month. The principal amount is due in a lump sum upon maturity or in lump sums at specified intervals.

Joint liability
Liability shared by two or more people to fulfill the terms of a debt.

Joint tenancy
Equal ownership of a property by two or more people, including rights of survival.

Jumbo loan
A loan beyond the limits set by Fannie Mae and Freddie Mac. The current limit for a single-family unit in the United States is $252,700, except in Alaska, Hawaii, and the Virgin Islands where it’s $360,000.

Junior mortgage
A loan that is subordinate to a primary loan. A junior mortgage or lien will be paid after the primary loan in the event of a foreclosure.

Late charge
Fee paid by a borrower for not paying on time.

Lease purchase agreement
An agreement whereby the purchase contract sets the closing date and helps the seller if the buyer defaults on the loan.

Lender
The savings institution or bank offering the loan.

LIBOR (London Interbank Offered Rate)
An index used for determining interest rate changes for some adjustable rate mortgages.

Lien
A claim against one person or company on a property by another person as security for a debt. For example, a mortgage is a lien.

Lien search
An investigation of the seller and the co-op corporation to check for liens, loans or judgments that may cause problems for a new buyer.

Lifetime cap
Part of an adjustable-rate mortgage agreement that limits the maximum rate that can occur on a mortgage term.

Liquidity
An asset that can be sold for about its true worth and converted into cash in a short period of time.

Loan application
A borrower’s statement of personal and financial information required to apply for a loan.

Loan application fee
A fee charged by lenders to cover a loan application. The fee often includes the cost of obtaining a property appraisal, a credit report, and a lock-in L fee.

Loan origination fee
Fee charged by a lender to cover direct costs of arranging the loan.

Loan-to-Value Ratio (LTV)
The relationship expressed as a percentage, between the amount of the proposed loan and a property’s appraised value or purchase price. For example, a $75,000 loan on a property appraised at $100,000 is a 75% loan-to-value.

Lock or Lock-In
A lender’s guarantee of a specific interest rate for the period between the loan application approval and loan closing. A lock-in interest rate protects the buyer against rate increases during that time.

Margin
The percentage a lender adds to the index of an adjustable rate mortgage to create an interest rate. When the initial interest rate ends, the interest rate then moves toward the total of its index plus a margin.

Marketable title
A title without defects, which allows the owner to sell the property without objections from a buyer.

Market value
The estimated price range for a piece of property. Various circumstances may cause a property to be sold above or below its market value.

Mortgage
Money borrowed to purchase a home at a specified interest rate using the property as collateral.

Mortgage banker
An individual or company that provides mortgage loans.

Mortgage broker
A person or company that helps prospective borrowers find lenders.

Mortgage disability insurance
An insurance policy that will pay the monthly mortgage payment for a specific period of time if an insured borrower is inflicted with a covered disability.

Mortgage commitment
A written notice from a lending institution saying it will advance mortgage funds to allow a buyer to purchase a house.

Mortgage insurance
Required by lenders on some loans to protect lenders from a possible default. Most conventional loans with down payments or home equity percentages that are less than 20 percent of the home value require private mortgage insurance (PMI).

Mortgage Insurance
Insurance to protect the lender in case you default on your loan. With conventional loans, mortgage insurance is generally not required if you make a down payment of at least 20% of the home’s purchase price. (Note, however, that FHA and VA loans have different insurance guidelines.)

Mortgage loan
A loan for which real estate serves as collateral to provide for repayment in case of default.

Mortgage note
Document legally obligating a borrower to repay a loan at a specific interest rate during a certain period of time.

Mortgage (open-end)
A loan on a house that allows borrowing additional money in the future without refinancing the loan or paying additional financing charges. Open-end mortgages generally impose limits on the borrowing.

Mortgagee
A financial institution that lends money to a borrower.

Mortgagor
A person who borrows in order to buy a house.

Negative amortization
A situation in which a borrower’s monthly payment is too small to cover both the principal and interest of a loan. The unpaid interest is added to the loan’s principal, so the loan may get larger with each payment.

Net rental income
The remaining income generated by an investment property after deducting all mortgage related expenses, including HOA fees (if applicable) and operating expenses from the gross rental income.

Net worth
The worth of a person or company that is determined by the amount that assets exceed liabilities.

Non-assumption clause
A statement that does not allow a new buyer to make a mortgage payment without the approval of the lender.

Non-conforming loan
Any loan that doesn’t conform to Federal National Mortgage Association (FNMA) or Federal Qualification

Note Rate
The actual interest rate charged by the lender on the principle of your loan.

PMI
“Private Mortgage Insurance” is insurance to protect the lender from financial loss in the event the lender defaults on the loan.  You usually will pay this if you have less than 20% equity in the property.  Rates vary with the risk of the loan.  While you pay the premiums there is no benefit to the borrower.

Principle
The unpaid balance of your mortgage loan.

Qualifying ratio
A ratio that is calculated by a lender to decide how much a buyer can borrow.

Quitclaim deed
A document that releases someone from any interest in a piece of real estate. A quitclaim deed is often used to transfer the grantor’s interest to the buyer when the grantor’s interest is questionable.

Real estate settlement procedures act (RESPA)
A federal law that requires lenders to provide borrowers with information about settlement costs. The RESPA also outlaws kickbacks in the real estate business.

Real property
Land and anything permanently on it, such as buildings and trees.

Realtor
An agent or broker who belongs to the National Association of Realtors.

Rebate
Money paid towards the borrowers non-recurring closing costs, including appraisals, title, application fees, underwriting fees, and processing fees.

Recognition agreement
An agreement by the co-op that recognizes specific rights of lenders who finance the acquisition of interests in a co-op project.

Reconveyance
Conveying a property back to the owner when a mortgage loan has been completely paid off

Recording
Adding title property documents to public records.

Recording fee
Money paid to have the sale of a property added to the public records.

Refinance
Retirement of an existing debt from the proceeds of a new loan, using the same collateral as security.

Rental income
Money received for renting property to a tenant.

Restrictive covenants
Private restrictions limiting the use of real property. Restrictive covenants are created by deed and may “run with the land,” binding all subsequent purchasers of the land, or may be “personal” and binding only between the original seller and buyer. The language of the covenant, the intent of the parties, and the law in the State where the land is situated govern the determination whether a covenant runs with the land or is personal. Restrictive covenants that run with the land are encumbrances and may affect the value and marketability of title. Restrictive covenants may limit the density of buildings per acre, regulate size, style or price range of buildings to be erected, or prevent particular businesses from operating or minority groups from owning or occupying homes in a given area. (This latter discriminatory covenant is unconstitutional and has been declared unenforceable by the US Supreme Court.)

Reverse annuity mortgage (RAM)
A Mortgage in which the borrower receives periodic payments from the lender who uses the borrower’s equity in the home as security.

Reserves
Sometimes referred to as “cash reserves” or “post closing reserves”; this is the amount of liquid assets the borrower has remaining after completion of the mortgage loan transaction and payment of any other debt(s) that had to be satisfied in order for the borrower to qualify for the loan. See: Liquidity

Resident alien
A non-U.S. citizen who is granted most of the rights of a U.S. citizen, including permanent residency in the United States. Resident Alien status is usually evidenced by a “Green Card.”

Revolving debt
A debt that does not have a fixed payment, although repayment is usually a percentage of the outstanding balance and made at regular intervals; most common are credit cards issued by banks or department stores.

Right to rescission
A borrower’s right to cancel certain kinds of loans within three days of signing.

Sales agreement
Contract stating the terms and conditions for selling a property

Second mortgage
A loan that is taken after a first mortgage and often has a higher interest rate and a shorter term.

Second/Vacation home
Used exclusively by the borrower for some portion of the year, but is suitable for year round use. It cannot be subject to a mandatory rental pool and the borrower can’t use the property for income producing purposes

Secondary market
A market in which investors like GNMA, FHLMC, FNMA and private organizations buy large numbers of mortgages from the primary lenders and either hold them in a portfolio or package them for sale to others. By selling loans in the secondary market, lenders obtain the funds needed to make new loans.

Self-employed borrower
A borrower who has an ownership interest of 25% or more in the business at which he/she is employed

Servicing
Responsibility of collecting monthly mortgage payments and properly crediting them to the principal, interest, taxes and insurance, as well as keeping the borrower informed of any changes in the status of the loan.

Settlement (or closing)
Fees paid for honoring the agreement between buyer and seller and/or borrower and lender

Settlement costs
Also known as closing costs, these costs are for services that must be performed before your loan can be initiated. Examples include title fees, recording fees, appraisal fee, credit report fee, pest inspection, attorney’s fees, taxes, and surveying fees.

Shared appreciation mortgage (SAM)
A lender offers a low interest rate in exchange for a share in the borrower’s profits when the home is sold.

Special assessments
A special tax imposed upon homeowners for improvements such as, road construction, sidewalks, sewers, and streetlights.

Special lien
A lien that binds a specified piece of property, unlike a general lien, which is levied against all one’s assets. It creates a right to retain something of value belonging to another person as compensation for labor, material, or money expended in that person’s behalf. In some localities it is called “particular” lien or “specific” lien. See Lien

Special warranty deed
A deed that protects the title holder against title defects or claims against the title that arose during the period the grantor held the title to the property. In a special warranty deed the grantor guarantees that he has done nothing during the time he held the title that would be problematic for the new title holder.

Subdivision
An area of land that is divided into smaller individual lots.

Survey
A measurement of property done by a registered professional showing the dimensions and location of any buildings as well as easements, rights of way, roads, etc. within the boundries of a specific property.

Sweat equity
Value added to a property in the form of labor, such as do-it-yourself home improvements, or services of the owner in lieu of cash.

Tax
A state enforced charge imposed on people, property or income. It is used to help the general public.

Tax impound
Annual tax payment money paid to and held by a lender.

Tax lien
Claim against a property for unpaid taxes.

Tax sale
Public sale of property due to unpaid taxes on that property.

Temporary buy-downs
A loan on which the interest rate has been “bought down” for a temporary period of time at the beginning of the loan by escrowing funds at the time of closing, which will be applied to the total monthly mortgage payments.

Tenants-in-common
Undivided interest in property taken by two or more people. The interest need not be equal. Upon death of one or more persons, there is no right of survivorship.

Term
Period of time between the start of a loan and the date the entire balance of the loan is due.

Title
A legal document that proves ownership of a property

Title company
A company that insures title to property.

Title search
Review of all transactions in the public record to make sure that the seller is the legal owner of a property and that there are no claims against the property.

Townhouse
A house in a row of small lots that shares its exterior limits with other similar units; the individual holds the title to the unit and its lot, but has only a fractional interest in common areas, if any.

Transfer tax
Money paid when a title is transferred to a new holder

Trustee
Someone who is given legal responsibility to hold property for another person.

Truth-in-lending
Lenders must disclose the cost of loan terms to the buyer. In most cases the consumer is allowed to cancel a home-improvement loan, second mortgage, or other loan until midnight of the third business day after a contract is signed

UCC-1
Financing Statement required by the lender when financing a Co-op. It is filed in the county in which the co-op is located.

Underwriter
A professional who approves or denies a loan to a potential homebuyer based on the homebuyers credit history, employment history, assets, debts, property appraisal and other factors such as loan guidelines.

Underwriting
Evaluating the risks of a borrower and setting terms and conditions for the loan.

Usury
Excessive loan interest. Usury is illegal.

Uniform settlement statement
A standard document prescribed by the Real Estate Settlement Procedures Act disclosing all costs paid in connection with the settlement of a real estate transaction. Also called a HUD-1.

Variable rate
Interest rate that fluctuates in relation to an index.

Verification of deposit (VOD)
Document signed by a financial institution to confirm that the borrower’s account balance and history is correct.

Verification of employment (VOE)
Document signed by the borrower’s employer as proof the borrower’s position and salary.

Veterans administration (VA)
The federal agency in charge of the VA loan guarantee program. In general, qualified veterans can apply for home loans with no down payment and a mortgage insurance premium of 1 percent of the loan amount.

Waiver
A document to voluntarily relinquish certain rights or privileges.

Walk-through
Inspection of a property by the prospective buyer before closing the mortgage.

Warranty deed
Protects the homebuyer against outside claims to a property.

Wraparound mortgage
A loan given to a buyer for the remaining balance on a seller’s first mortgage and an additional amount requested by the seller. The existing loan is retained and combined with a new, larger loan and the interest rate is set somewhere between the old rate and the current market rate. A typical wraparound is an interest only loan with a 5-year balloon or less.

Yield
The ratio of investment income to the total amount invested over a given period of time; also known as “return on investment” or ROI.

Zoning
Local government control over development within an area of land.


Mortgage regulations have changed significantly over the last few years, making your options wider than ever.  Subtle changes in the way you approach mortgage shopping, and even small differences in the way you structure your mortgage, can cost or save you literally thousands of dollars and years of expense.

Get the Right Information – Whether you are about to buy your first home, or are planning to make a move to your next home, it is critical that you be informed about the factors involved.

Everyday people are inquiring about a mortgage loan, whether it is for their first home or a subsequent financing, but rarely are they properly prepared.  By taking these few minutes to acquaint yourself with the “Mortgage Terms 101” you can better prepare yourself for this process and possibly save yourself thousands on your mortgage.

Why do I offer this report free of charge?   I am offering this free of charge because I want to be your mortgage advisor.  I offer more than simply a loan:  We currently have over 40 creative programs to fit your needs. Please contact us at (949) 529-0784  to set up your FREE No-Obligation consultation where we will meet to tailor a program to fit your needs and comfort levels for monthly payment and investment. I want to earn your business.