Mortgage Glossary
Abstract, or Abstract
of Title
A historical summary of all the recorded instruments and proceedings that
affect the title of a property.
Acknowledgment
Declaration by a party executing an instrument that it is his act and
deed. It is usually made before a Notary Public or Attorney.
Adjustable Rate
An interest rate, which changes periodically in relation to an index,
as opposed to a fixed rate that, does not change (see fixed rate below).
Payments may increase or decrease accordingly. (AKA: Variable Rate)
Affiliated Business
Arrangement Disclosure
This disclosure is provided to a borrower because they may have inquired
about a lender-affiliated mortgage or escrow company. The lender also
provides this disclosure to a borrower because they are required to disclose
any affiliations they have with other companies. (i.e.: Title Companies,
Finance Companies, and Escrow Companies) The lender is stating that any
referrals that they may have given were only suggestions and that the
borrower was free to choose any company that he / she desired. If the
borrower did not choose one way or another, a lender usually chooses for
him/her in order to process the loan.
Amortization
A repayment method in which the amount a borrower borrows is repaid gradually
through regular monthly payments of principal and interest. During the
first few years, most of each payment is applied toward the interest owed.
During the final years of the loan, payment amounts are applied almost
exclusively to the remaining principal.
Amount Financed
The Amount Financed is the loan amount applied for less the prepaid finance
charges. Prepaid finance charges can be found on the Good Faith Estimate
/ Settlement Statement (HUD-I or IA). For example if the borrower's note
is for $100,000 and the Prepaid Finance Charges total $5,000, the Amount
Financed would be $95,000. The Amount Financed is the figure on which
the Annual Percentage Rate is based. The Amount Financed is simply the
loan Principal less the total of Prepaid Finance Charges.
Annual Membership
Amounts that may be charged annually for having a line of credit available.
Often charged regardless of whether or not you use the line. Also referred
to as a "participation fee."
Annual Percentage
Rate
1. The cost of credit on a yearly basis, expressed as a percentage. Required
to be disclosed by the lender under the federal Truth In Lending Act,
Regulation Z. APR includes up-front costs paid to obtain the loan, and
therefore, is usually a higher amount than the interest rate stipulated
in the mortgage note. APR does not include title insurance, appraisal,
and credit report. 2. It also is not the note rate for which the borrower
applied. The APR is the cost of the loan in percentage terms taking into
account various loan charges of which interest is only one such charge.
Other charges which are used in calculation of the APR are Private Mortgage
Insurance or FHA Mortgage Insurance Premium (when applicable) and Prepaid
Finance Charges (loan discount, origination fees, prepaid interest and
other credit costs). The APR is calculated by spreading these charges
over the life of the loan that results in a rate higher than the interest
rate shown on the Mortgage/Deed of Trust Note. If interest were the only
Finance Charge, then the interest rate and the APR would be the same.
3. Interest + Prepaid Finance Charge = Finance Charge. = APR and / or
Amount of Loan; Prepaid Finance Charge = Amount Financed = APR. 4. The
APR is the relative cost of credit expressed in percentage terms. Remember
the monthly payment is NOT bases on the APR. It is based on the interest
rate stated on the NOTE and quoted at the time the borrower was contacted
with the approval. The APR can be any of the following plus interest rate,
amortized over the first year: loan fees, points, title fees, recording
fees, signing fees, document fees, and any other fees imposed by the lender
and paid by the borrower.
Application
This is an initial statement of personal and financial information, which
is required to approve the loan.
Application Fee
A fee that is paid upon application for loan. An application fee may frequently
include charges for property appraisal ($200 - $400) and a credit report
($30 - $100).
Appraisal
A fee charged by an appraiser to render an opinion of marker value as
of a specific date. Required by most lenders to obtain a loan.
Assumption of Mortgage
The agreement of a purchaser to become primarily liable for the payments
on a mortgage loan. Unless otherwise specified by the lender, the seller
may remain secondarily liable for payments.
Balloon Payment
A lump sum payment for the unpaid balance of a loan. Usually comes at
the end of a loan.
Cap
The maximum allowable increase for either payment or interest rate for
a specified amount of time on an adjustable rate mortgage.
Cash Out
Receiving money back when refinancing your present mortgage.
Ceiling
The maximum allowable interest rate over the life of the loan of an adjustable
rate mortgage.
Close Application
(Payoff Letter)
A document that authorizes lenders to payoff old loans with the funds
from a new loan (refinance).
Closing
A meeting at which all documents are signed and all expenses are paid
to transfer ownership of property. Also called a "settlement."
Closing Costs
Any fees paid by the borrowers or sellers during the closing of the mortgage
loan. This normally includes an origination fee, discount points, attorney
fees, title insurance, survey, and any items which must be prepaid, such
as taxes and insurance escrow payments. a. closing costs, nonrecurring:
one-time costs charged in conjunction with a loan. (i.e.: loan origination
fee, title policy, escrow fee, credit report, appraisal, tax service,
notary fees, recording fees, pest control inspection) b. closing costs,
recurring: costs charged in conjunction with a loan (i.e.: tax reserve,
tax prioritization, hazard insurance reserve, hazard insurance premium,
prepaid interest)
Closing Instructions
A document that outlines the entire loan package. This includes the terms
of the loan, fees (that are also shown in the HUD-1), and tells what documents
will be included in the loan package.
Community Property
Property acquired by husband and wife, or either, during marriage, when
not acquired as the separate property of either.
Conforming Loan
Generally this is a mortgage loan under $207,000. Qualifying ratios and
underwriting methods are standardized to a large degree.
Contract of Sale
The agreement between the buyer and the seller on the purchase price,
terms, and conditions necessary to both parties to convey the title to
the buyer.
Credit Limit
The maximum amount that a person can borrow under a home equity plan.
Debt Service
The total amount of credit card, auto, mortgage or other debt upon which
you must pay.
Deed
The legal document conveying title to a property.
Deed of Trust
Used in many western states. The agreement used to pledge your home or
other real estate as security for a loan. Similar to a mortgage and a
three-party instrument between a borrower called the trustor; a lender
called the beneficiary and a neutral third party called a trustee. The
deed of trust is the instrument, which is recorded to give added assurance
that the promissory note will be paid when due.
Deed, Grant
A form of old deed common in California which contains implied warranties
to the effect that the grantor has not previously conveyed or encumbered
the property.
Deed, Quit Claim
A deed, which conveys whatever present right, title, or interest, the
grantor may have. Unlike a grant deed, it does not contain any warranties.
Discount Point
(or Points)
The amount paid either to maintain or lower the interest rate charged.
Each point is equal to one percent (1%) of the loan amount (i.e.: one
point on a $100,000 mortgage would equal $1000).
Down Payment
The difference between the purchasing price and that portion of the purchase
price being financed. Most lenders require the down payment to be paid
from the buyer's own funds. Gifts from related parties are sometimes acceptable,
and must be disclosed to the lender.
Due on Sale
A clause in a mortgage agreement providing that, if the mortgagor (the
borrower) sells, transfers, or, in some instances, encumbers the property,
the mortgagee (the lender) has the right to demand the outstanding balance
in full.
Effective Interest Rate
The cost of credit on a yearly basis expressed as a percentage. Includes
up-front costs paid to obtain the loan, and is therefore, usually a higher
amount than the interest rate stipulates in the mortgage note. Useful
in comparing loan programs with different rates and points.
Encumbrance
A claim against a property by another party which usually affects the
ability to transfer ownership of the property.
Equity
The difference between the fair market value (appraised value) of your
home and your outstanding mortgage balance.
Escrow
An item of value, money, or documents deposited with a third party to
be delivered upon the fulfillment of a condition. For example, the deposit
by a borrower with the lender of funds to pay taxes and insurance premiums
when they become due, or the deposit of funds or documents with an attorney
or escrow agent to be disbursed upon the closing of a sale of real estate.
Escrow Transfer
Request and Disclosure
A document requesting that the funds in an escrow for a borrowers old
loan to be transferred to the escrow account of the new loan at the time
the old loan is paid off.
Escrow Waiver Agreement
A document that allows the lender to waive its right to require the borrower
to establish an escrow impound account to pay for such things as real
estate taxes or hazard insurance premiums.
Fannie Mae
The Federal National Mortgage Association, a New York Stock Exchange company
and the largest non-bank financial services company in the world. It operates
pursuant to a federal charter and is the nation's largest source of financing
for home mortgages. It adds liquidity to the mortgage market by investing
in home loans throughout the country.
First Mortgage
A mortgage which is in first lien position, taking priority over all other
liens (which are financial encumbrances).
Fixed Rate
An interest rate which is fixed for the term of a loan. Payments as well
are fixed at one amount.
FHA Loan
More appropriately termed FHA Insured Loan. A loan for which the Federal
Housing Administration insures the lender against losses the lender may
incur due to a borrower's default.
Finance Charge
The amount of interest prepaid finance charge and certain insurance premiums
(if any) which the borrower will be expected to pay over the life of a
loan. Or the finance charge is the total of payments less the amount financed.
Finance charge,
prepaid
Prepaid finance charges are certain charges made in connection with the
loan and which must be paid upon the close of the loan. The Federal Reserve
Board in Regulation Z defines these charges and the borrower must pay
the charges. Non-inclusive examples of such charges are, loan organization
fee, points or discount, private mortgage insurance, or FHA mortgage insurance,
or tax service fee. Some loan charges are specifically excluded from the
prepaid finance charge such as appraisal fees and credit fees.
Form W-9
The purpose of this form is to allow the person who is required to file
an information return with the IRS to get a borrowers correct taxpayer
identification number (TIN) to report such items as income paid to the
borrower (cash back), real estate transactions, mortgage interest paid
to the borrower, acquisition or abandonment of secured property, or cancellation
of debt.
Form 4506
The purpose of this form is for the lender to get a tax return, verify
that the borrower did or did not file a Federal tax return, W-2 information,
or a copy of a tax form.
Freddie Mac
The Federal Home Loan Mortgage Corporation. A federal agency within the
Department of Housing and Urban Development (HUD), which insures residential
mortgage loans made by private lenders and sets standards for underwriting
mortgage loans.
Good Faith Estimate
A written estimate of closing costs which a lender must provide the borrower
within three (3) days of submitting an application.
Grace Period
A period of time during which a loan payment may be paid after its due
date and not incur a late penalty. Such late payments may be reported
on your credit report.
Hazard Insurance
A contract between purchaser and an insurer, to compensate the insured
for loss of property due to hazards (fire, hail damage, etc), for a premium.
Home Equity Line of Credit
A loan providing a borrower with the ability to borrow funds at the time
and in the amount the borrower chooses, up to a maximum credit limit for
which a borrower has qualified. Repayment is secured by the equity in
the borrower's home. Simple interest (interest-only) payments on the outstanding
balance) is usually tax-deductible. Often used for home improvements,
major purchases or expenses, and debt consolidation.
Home Equity Loan
A fixed or adjustable rate loan obtained for a variety of purposes, secured
by the equity in your home. Interest paid is usually tax-deductible. Often
used for home improvement or the freeing of equity for investment in other
real estate or other investments. Recommended by many to replace or substitute
for consumer loans whose interest is not tax-deductible, such as auto
or boat loans, credit card debt, medical debt, and educational loans.
HUD
The Department of Housing and Urban Development was established by Congress
in 1965 and is responsible for the implementation and administration of
government housing and urban development programs. These programs include
community planning and development, housing production and mortgage insurance
(FHA), secondary mortgage market activities (GNMA) and equal opportunity
in housing.
HUD-1 Settlement
Statement
This document is generated at the close of escrow and details all costs
and expenses that were received or paid during the loan. Contained in
this are the settlement charges to the borrower, the amount of the loan
to be paid off, the gross amount due from the borrower, the principal
amount of the new loan, and any other deposits or fees. Can be a form
utilized at loan closing to itemize the costs associated with purchasing
the home. Used universally by mandate of HUD, the Department of Housing
and Urban Development.
HUD-1, Addendum
This is an additional page that may be attached, and verifies that the
borrowers have read and understand the HUD-1.
Impound Account
An account maintained by institutional lenders in which the borrower pays
his real property taxes and hazard insurance premiums to the lender in
monthly payments along with the principal and interest.
Interest Rate
The periodic charge expressed as a percentage, for use of credit. Or the
percentage of a sum of money charged for its use.
Index
A number, usually a percentage, upon which future interest rates for adjustable
rate mortgages are based. Common indexes include Cost of Funds for the
Eleventh Federal District of banks or the average rate of one-year Government
Treasury Security.
Joint Tenancy
Title held by two or more individuals in equal shares with right of survivorship.
Jumbo Loan
Mortgage loans over $203,150. Terms and underwriting requirements may
vary from confirming loans.
Line of Credit
An agreement whereby a financial institution promises to lend up to a
certain amount without the need to file another application.
Loan to Value Ratio
(LTV)
A ratio determined by dividing the sales price or appraised value into
the loan amount, expressed as a percentage. For example, with a sales
price of $100,000 and a mortgage loan of $80,000, a borrowers loan to
value ratio would be 80%. Loans with an LTV over 80% may require Private
Mortgage Insurance (see Private Mortgage Insurance).
Lock (or Lock In)
A commitment a borrower obtains from a lender assuring the borrower that
a particular interest rate or feature is locked in for a definite time
period. Provides protection should interest rates rise between the time
the borrower applies for a loan, acquire loan approval, and, subsequently,
close the loan and receive the funds the borrower has borrowed.
Margin
An amount, usually a percentage, which is added to the index to determine
the interest rate for adjustable rate mortgages.
Minimum Payment
The minimum amount that a borrower must pay, usually monthly, on a home
equity loan or line of credit. In some plans, the minimum payment may
be "interest only," (simple interest). In other plans, the minimum
payment may include principal and interest (amortized).
Monthly Payment
The loan amount, called the Principal, the Number of Payments, and the
Annual Interest Rate (Note Rate) are used together to determine the monthly
payment. This is the amount shown on the Note. If the loan is fully amortized,
as most loans are, then by making the monthly payment every month on time,
the entire principal will be paid off by the time the last payment is
due.
Mortgage
A legal document that pledges a property to the lender as security for
payment of a debt.
Mortgage Banker
A person who originates mortgage loans, loaning a borrower the funds,
and closing the loan in their name.
Mortgage Broker
A person who, as a mortgage banker, takes loan applications and processes
the necessary paperwork. Unlike a mortgage banker, brokers do not fund
the loan with their own money, but work on behalf of several investors,
such as mortgage bankers, S & L, banks, or investment bankers.
Mortgage Insurance
Insurance purchased by a borrower to insure the lender or the government
against loss should a loan become default. MIP: (or Mortgage Insurance
Premium) is paid on government-insured loans (FHA or VA loans) regardless
of a borrowers LTV (loan-to-value). Should a borrower pay off a government-insured
loan in advance of maturity, the borrower may be entitled to a small refund
of MIP. PMI: (or Private Mortgage Insurance) is paid on those loans which
are not government-insured and whose LTV is greater than 80%. When a borrower
has accumulated 20% of their home value as equity, the lender may waive
PMI at the borrower request. Please note that such insurance does not
constitute a form of life insurance, which pays off the loan in case of
death.
Mortgage Loan
A loan, which utilizes real estate as security or collateral to provide
for repayment, should a borrower default on the terms of the borrower
loan. The mortgage or Deed of Trust is the borrower agreement to pledge
their home or other real estate as security.
Mortgagee
The lender in a mortgage loan transaction.
Mortgagor
The borrower in a mortgage loan transaction.
Mortgagor's Affidavit
A document used by the Federal Housing Administration to insure a loan,
or by the Veterans Administration to guarantee a loan, or by a Private
Mortgage Insurance Company to insure a loan. This document also states
whether or not a borrower intends to occupy the property as a primary
residence. It also determines if a property is located in a Special Flood
Hazard Area.
Negative Amortization
Amortization in which a payment made is insufficient to fund complete
repayment of a loan at its termination. Usually occurs when an increase
in the monthly payment is limited by a ceiling. That portion of the payment,
which should be paid, is added to the remaining balance owed. The balance
owed may increase, rather than decrease, over the life of the loan.
Note
A signed document acknowledging a debt and a promise to repay per the
terms outlined. The Note could contain: address of the property in question,
loan amount, lender, interest rate, date in which the first payment of
the new loan is due, date of last payment, where to mail the payments,
monthly payments, and percentage charged if paid late.
N.R.C.C.
Non-Recurring Closing Costs. On a HUD 1 or Estimated Closing Statement
for a loan.
Overnight Fee Statement
This allows the lender to use an overnight express mail to payoff the
previous mortgage.
Payment Schedule
The dollar figures in the payment schedule represent principal, interest
and mortgage insurance (if applicable) over the life of a loan. These
figures will not reflect taxes and insurance escrows or any temporary
buy down payments contributed by the seller.
Payoff Statement
This document tells borrowers how the amount of the payoff of an old loan
was reached. Generally the total payoff amount on this statement will
match the payoff amount listed one the HUD-1 statement. This statement
may include, prepayment interest, optional insurance, fees required for
payoff, funds to be credited, funds to be retained.
PITI
Principal, interest, taxes, and insurance, which comprise a borrowers
monthly mortgage payment.
P.O.C.
Paid outside of closing. Typically on a HUD 1 or Estimated Closing Statement
for a loan.
Prepaid Finance
Charges
Certain loan charges such as loan origination fees (points), loan discount
(discount points), buy-downs, and prepaid interest (odd day interest),
processing fees, etc. are defined as prepaid finance charges.
Prepayment Penalty
A fee paid to a lending institution for paying a loan prior to the scheduling
maturity date.
Qualifying Ratios
Comparisons of a borrower debts and gross monthly income.
Quitclaim Deed
A deed that transfers, without warranty of ownership, whatever interest
or title a grantor may have at the time the conveyance is made.
Real Estate Settlement
Procedures Act (RESPA)
A federal law that requires lenders to provide borrowers with information
on settlement (closing costs).
Refinance Transaction
The process of paying off one loan with the proceeds from a new loan,
typically using the same property as security for the new loan.
Right of Rescission
(A.k.a.: Notice of Right to Cancel - 3 Day Right of Rescission) The legal
right to void or cancel a mortgage contract in such a way as to treat
the contract as it never existed. Right of rescission is not applicable
to mortgages made to purchase a home, but may be applicable to other mortgages,
such as home equity loans.
Security Interest
An interest that a lender takes in a borrower's property to assure repayment
of a debt.
Second Mortgage
A subordinated lien created by a mortgage loan, over the amount of a first
mortgage. Second mortgages are used to reduce the amount of a cash down
payment or in refinancing to raise cash.
Servicing A Loan
The ongoing process of collecting a borrowers monthly mortgage payment,
including accounting for and payment of a borrowers yearly tax and/or
homeowners insurance bills.
Sole & Separate
Property
Property owned before marriage and that acquired afterward by gift, bequests,
devise, or descent.
Subordination Agreement
An agreement under which a prior trust deed is made inferior to an otherwise
junior lien. Or this document ensures that if a second mortgage or some
other entity has a claim on the title of the property, the new Deed of
Trust will be placed in first position on the title of the property. There
may be multiple subordination agreements.
Tenancy In Common
Ownership of property by any two or more persons in undivided interests
(not necessarily equal), without right of survivorship.
Title
The written evidence that proves the right of ownership of a specific
piece of property.
Title Company
A Company that specializes in examining and insuring titles to real estate.
Title Insurance
Protection for lenders or homeowners against financial loss resulting
from legal defects in the title.
Total of Payments
A figure that represents the total of all payments made towards principal,
interest, and mortgage insurance (if applicable) over the life of the
loan.
Transaction Fee
A fee, which may be charged each time, a borrower draws on a home equity
credit line.
Truth and Lending
Disclosure
A federal law designated to show a borrower the total cost of a loan.
This document discloses the following to borrower's annual percentage
rate, finance charge, amount financed, and total number of payments, and
amount of each payment associated with the loan. This document also stipulates
if there are any pre-payment penalties associated with the loan.
Underwriting
The process of verifying data and approving a loan.
VA Loan
(More appropriately termed VA Insured Loan). A loan for which the Veteran's
Administration insures the lender against losses the lender may incur
due to a borrower's default. Available only to veterans possessing a Certificate
of Eligibility.
Variable Rate
An interest rate that changes periodically in relation to an index. Payments
may increase or decrease accordingly.
Various Riders
At the end of the Deed of Trust, before the signatures, there is a list
of possible Riders to the document. If one or more of the boxes are checked,
then the appropriate Rider will be attached. Examples of a few common
Riders are Condominium Rider for condominiums, 1-4 Family Rider in multi-family
dwellings, and Balloon Rider where a balloon payment is part of the loan.
