Mortgage Glossary

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Acceleration Clause

A provision of a mortgage or note which provides that the entire outstanding balance will become due and payable in the event of default.

 

 

Adjustable Rate Mortgage (ARM)

A mortgage in which the interest rate is adjusted periodically, either up or down, based on the movement of a pre-selected financial index. ARM loans usually have provisions which limit how much the rate and payment can change annually and over the term. Also known as Variable Rate Mortgage.

Amortization

Repayment of loan by installment payments. As the payments are made, an increasing amount of each payment is applied to principal and a lesser amount is applied to interest, so that at the end of the fixed period or term, the principal balance will be paid in full.

Annual Percentage Rate (APR)

The annual percentage rate refers to the total cost of the loan, including interest, points and other loan fees, expressed as a yearly rate. The APR is usually higher than the Interest Rate because it includes the interest plus the financing charges. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans and is valuable in comparing different types of mortgages.

 

Appraisal

A report made by a CA Licensed Appraiser as to the market value of a property as of a given date.

 

Appreciation

An increase in value, the opposite of depreciation.

 

Assessed Value

The value placed on a piece of real estate by the County Tax Assessor for the purpose of computing Property Taxes. Also called an assessment.

Asset

An item that has monetary value, i.e.; cash, stocks and real estate. Information about your assets is required when applying for a mortgage loan.

Assumability

An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and the lender may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.

Assumption of Mortgage

The purchaser takes over mortgage payments for the balance of the loan, assuming primary liability. Unless specifically released by the lender, the seller remains secondarily liable.

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Balloon Mortgage

A short term mortgage loan of equal monthly payments in which a large final payment (balloon) is due on a specified date. Usually this refers to a thirty-year amortization and a five year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.

Bridge Loan

A second trust that is collateralized by the borrower's present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as "swing loan."

 

Buydown

Money advanced by an individual (e.g. builder, seller, buyer, lender, developer) to buy down the interest rate and lower monthly mortgage payments for a few years or the whole term.

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Caps (interest rate)

Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year (called Periodic Cap) and/or over the life of the loan (called Lifetime Cap).

Caps (payment)

Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change per year (called Periodic Cap) and/or over the life of the loan (called Lifetime Cap). May result in negative amortization. See Negative Amortization .

Certificate Of Eligibility

The document given to qualified veterans which entitles them to VA guaranteed loans. Certificates of eligibility may be obtained by sending form DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility).

CRV -Certificate of Reasonable Value

An appraisal issued by the Veterans Administration showing the property's current market value.

Closing

The concluding day of the real estate transaction, when title and deed pass from seller to buyer. Also called settlement.

Closing Costs

Expenses incurred (over and above the price of the property) by buyers and sellers for services necessary to complete the loan transaction and transfer ownership of property. Also called Settlement Costs.

Closing Statement

A financial disclosure prepared by the escrow company giving a full account of all funds received and disbursed at closing. Also called a HUD-1 and/or Settlement Statement.

COFI

The 11 th District Cost of Funds Index (COFI) is one of the many indexes used to adjust the interest rate on adjustable-rate mortgages (ARMs). COFI reflects the actual interest expenses recognized during a given month by all savings-institution members of the Federal Home Loan Bank of San Francisco.

 

Commitment

An agreement, in writing, between a lender and a borrower to loan money at a future date, subject to certain conditions.

Comparables (comps)

Refers to similar properties used for comparison purposes in the appraisal process. These properties will be reasonably the same size and location, with similar amenities and characteristics, so that the approximate fair market value of the subject property can be determined.

Condominium

Ownership of a single unit in a multi-unit building or complex of buildings - along with a share of ownership in the common areas.

Contingency

A condition that must be met for a sales contract or a commitment to remain binding.

Conventional Mortgage

Any mortgage loan that is not insured by FHA, guaranteed by VA, or funded by a government authorized bond sale or grant.

Conversion Option

A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.

Convey

To transfer real estate from one person to another.

Credit Report

A report obtained from a Credit Reporting Agency reflecting the credit history and current status of a borrower's credit standing.

Credit Risk Score

A credit risk score is a mathematical summary of the information contained in a credit report that assigns numerical values to various pieces of information in the report. The most well known type of credit risk score is the Fair Isaac or FICO score. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.

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D

Debt-Income Ratio

Debt -Income Ratio equals total monthly debt payments divided by gross monthly income. For example, total debts of $2,000 divided by monthly income of $4,000 equals a debt-income ratio of 50%. Lenders use the ratio in qualifying borrowers.

Deed

A legal document by which title to property is transferred. Also called a Grant Deed.

Deed Of Trust

In many states, including California, this document is used in place of a mortgage to secure the payment of a note.

Default

Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

Discount Points

see Points

Down Payment

A down payment is the cash you deposit towards the purchase of a home. The larger the down payment, the less you need to borrow.

Due-On-Sale

A clause in the Deed of Trust which gives the lender the right to require immediate repayment of a mortgage balance if the property changes hands.

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Earnest Money

The deposit money given to the seller or his agent by the potential buyer at the time of the purchase offer. If the offer is accepted, the money will be applied to the down payment and/or closing costs.

Easement

A right to the limited use of land owned by another. An electric company, for example, could have an easement to put up electric power lines over someone's property.

Encumbrance

Anything that affects or limits the title to a property, such as outstanding mortgages, easement rights or unpaid taxes.

Equity

Equity is the difference between the fair market value of a home and the amount you still owe on it. When the mortgage and all other debts against the property are paid in full, the owner has 100% equity.

Escrow

Funds and/or deed left in trust to a third party.

Escrow Account

Generally, a portion of the monthly mortgage payment is held in an account by the lender to pay for taxes, hazard insurance and yearly mortgage insurance premiums. Also called Impound Account. Every time a payment is made, a portion goes into the escrow account. When the taxes and insurance bills are due on your home, the lender pays the bills with funds from this account.

Escrow Company

A third party chosen to collect necessary items from both buyer and seller to complete the transfer of property. For example, property conditions, loan documents and funds, seller payoff statement, etc. At settlement, the escrow company disburses funds to the appropriate parties. Also called Settlement Agent.

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First Mortgage

A mortgage that has the primary lien against a property.

Fixed-Rate Loan

A mortgage with an interest rate and monthly payments that remain constant over the life of the loan.

FHA Loan

A mortgage loan that is insured by the Dept. of Housing & Urban Development (HUD). FHA loans typically require a lower down payment than Conventional loans and can be more lenient on ratios and credit history.

FICO

See Credit Risk Score

Flood Certification

An independent agency report required by the lender to determine whether a property is located in a flood hazard zone, which would then require a federally mandated flood insurance policy.

Foreclosure

A legal procedure in which property mortgaged as security for a loan is transferred to pay the defaulting borrower's debt.

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Good Faith Estimate

A written estimate of all fees expected to be incurred for services necessary to complete the loan transaction and transfer of ownership.

Graduated Payment Mortgage

A fixed rate loan with monthly payments that start low, increasing by a fixed amount for a specific number of years. After that period, the payments typically remain constant for the duration of the loan.

Gross Income

Normal monthly income, including overtime, before taxes or payroll deductions. This income may come from more than one source.

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Housing-Income Ratio

Housing-Income Ratio equals total mortgage expense ( PITI ) divided by gross monthly income. For example, a mortgage payment of $1,000 divided by monthly income of $4,000 equals a housing-income ratio of 25%. This is used as one of the factors in determining whether you qualify for the mortgage.

Homeowner's Insurance

Also called property insurance, it provides protection against damage to a property from fire, windstorms, and other common hazards. While the Lender requires insurance coverage to protect the collateral that secures their loan, you determine which insurance company to use. To estimate the cost, multiply the sales price x .35%. For example, $100,000 sales price x .35% = $350 per year.

HUD-1 Form

See Real Estate Settlement Statement.

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Impounds

That portion of a borrower's monthly payment held by the lender or servicer to pay for taxes, homeowner's insurance and mortgage insurance as they become due. Also known as escrow account/reserves.

Index

A widely used rate that lenders will use to determine the prevailing rate on an Adjustable Rate Mortgage. The selected Index is added to the appropriate Margin to arrive at the Interest Rate. Market movement in the Index rate determines future Mortgage rates. Most mortgages are Indexed to either COFI, LIBOR, Prime Rate or Treasury Bills.

Investment Property

Real estate that is owned for investment purposes and not used as the owner's residence.

Interest

A charge paid for the use of money.

Interest-Only

Mortgage payments that include only interest. No reduction is made to the principal balance.

Interest-Rate Cap

A limit on the amount the interest rate can increase on an Adjustable Rate Mortgage. A periodic cap limits the increase at each adjustment date. A lifetime cap limits the total increase during the term of the loan.

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Land Contract

When the buyer agrees to make payments directly to the seller at pre-negotiated terms. The seller agrees to deed the property to the buyer upon completion of the agreement. The buyer becomes the owner of equity in this type of sale. (Also see Owner Financing)

Liability

An outstanding debt, such as a car loan or credit card balance. Information about your liabilities is required when applying for a mortgage loan.

LIBOR

London Inter-Bank Offering Rate (LIBOR). Often used as an Index on Adjustable Rate Mortgages.

Lien

A legal claim on a property used as security for a debt.

Lifetime Cap

The Lifetime Cap establishes the maximum loan payment and/or interest rate that can be charged over the life of the loan on an Adjustable Rate Mortgage.

LTV Loan-To-Value Ratio

Loan-to-Value ratio is a key factor in determining how much of a loan you can qualify for. Each loan program has set guidelines that establish the maximum LTV limit. To calculate, divide the loan amount by the fair market value of your home. For example, a mortgage loan of $150,000 on a home appraised at $200,000 has an LTV of 75%.

Lock

When the Lender and Borrower agree and commit to an interest rate and price, valid for a specified time period.

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Margin

The amount a lender adds to the base Index rate of an Adjustable Rate Mortgage to calculate the loan rate. For example, if your ARM loan has a Margin of 3% and the selected Index rate is 4%, your loan rate will be 7%.

MI

See PMI (Private Mortgage Insurance)

 

Mortgage

A contract in which a borrower's property is pledged as security (collateral) for a loan. The document used in California is called a Deed of Trust.

Mortgage Broker

A real estate financing professional who brings homebuyers and lenders together to arrange financing and mortgage contracts.

Mortgage Note

A written promise to pay a debt at a stated interest rate within a specified term. The agreement is secured by a mortgage lien.

Mortgagee

The lender in a mortgage contract.

Mortgagor

The borrower in a mortgage contract.

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Negative Amortization

A loan in which the outstanding principal balance goes up instead of down because the monthly payments are not large enough to cover the full amount of interest due. In the case of an adjustable-rate mortgage with payment caps, rising interest rates may cause the loan payment to be insufficient to cover even the interest portion of the scheduled payment, in which case, the unpaid interest is added to the loan balance. Also called deferred interest.

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Offer to Purchase

A written proposal to buy a piece of real estate that becomes binding when accepted by the seller. Also called a sales contract or purchase contract.

Origination

The first step in the mortgage loan process. During the origination phase, a loan application is filled out with details of your financial position. You will be asked to provide supporting documentation such as paystubs, W-2’s and bank statements.

Origination Fee

A fee charged for the work involved in the evaluation, preparation and submission of a proposed mortgage loan.

Owner Financing

A purchase in which the seller provides all or part of the financing.

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Payment Cap

The maximum amount the loan payment can change on an Adjustable Rate Mortgage. A periodic cap limits the increase at each adjustment date. The lifetime cap limits the amount your payment can increase during the entire term of the loan.

Periodic Rate Cap

The maximum amount the loan rate can change on each adjustment date on an Adjustable Rate Mortgage. ARM rates are usually adjusted each year after an initial fixed period.

P.I.T.I.

An acronym for payments to lender that cover P rincipal, I nterest, T axes and I nsurance on a property.

Plat Map

A map of a piece of land showing boundary lines, streets, actual measurements and easements.

Points

A fee paid to the lender at closing to obtain a lower interest rate on the mortgage. This would buy an interest rate at a 'discount' to the market and, therefore, is also called discount point. Each point is one percent of the loan amount. Points are considered as interest and, as such, are tax-deductible.

Prelim

Abbreviation for a Preliminary Title Report prepared by the Title Company which reflects all matters affecting title.

Prepayment

A prepayment is any amount you pay on your mortgage that is in excess of your normal monthly payment. Prepayments pay off a loan sooner and reduce total interest expense.

Prepayment Penalty

A fee that a lender may charge if you make unscheduled, extra or early payments on your loan. Most loan programs do not have prepayment penalties, however, it is important to verify this feature with your lender.

Pre-Approval

A commitment by a lender to extend credit provided that specific conditions are met.

Pre-Qualification

A preliminary assessment of a buyer's ability to secure a loan, based on a specific set of lending guidelines and buyer representations made. This is not a guarantee or commitment by a lender to extend credit.

Prime Rate

The interest rate charged by banks to their preferred corporate customers. The Prime Rate tends to be an estimator for general trends in short term interest rates and is used as an Index on some Adjustable Rate Mortgages.

Principal

The amount borrowed or remaining unpaid; also, that part of the monthly payment that is applied to the outstanding balance of a mortgage.

PMI (Private Mortgage Insurance)

Insurance written by a private company to protect the lender against loss caused by mortgage default. Generally required on Conventional loans if your downpayment is less than 20%.

Property Tax

Also called Real Estate Taxes, they are paid to the local County Tax Assessor. The amount paid can generally be deducted from federal income taxes. Property taxes are levied as a percentage of the home's assessed value. For example, if you pay 1.25% in property taxes on a home assessed at $100,000, the yearly property tax bill is $1,250.

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Qualifying Ratios

Guidelines applied by lenders to determine how large a loan to grant a home buyer. See Debt Ratio & Housing Ratio .

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Ratios

See Debt-Income Ratio , Housing-Income Ratio , or Loan-to-Value Ratio

Real Estate Settlement Statement

Final settlement statement often referred to as the HUD-1 form, used to itemize buyer, seller, broker, and lender charges and credits at closing.

Real Estate Taxes

See Property Taxes

Realtor

A real estate broker or sales associate affiliated with the National Association of Realtors.

Recording Fee

The charges imposed by the County Recorder's Office to record legal documents.

Refinancing

Repaying a debt with the proceeds of a new loan, using the same property as collateral or security. Reasons for refinancing include: reducing interest rate/term, change from an adjustable rate to fixed, or to eliminate a balloon payment. A cash-out refinance is one that involves paying off the current loan and borrowing an additional amount.

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Second Mortgage

A loan on property which already has an existing mortgage (the first mortgage). The second mortgage is subordinate to the first.

Secondary Mortgage Market

The buying and selling of existing mortgages through agencies (i.e. Fannie Mae, Freddie Mac).

Settlement Statement

See Real Estate Setlement Statement

SubPrime

Loans which do not meet conforming loan guidelines due to credit history, ratios, property type, etc.

Survey

A map prepared by an engineer or surveyor charting a particular piece of real estate. Typically not required in CA.

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Tax Deductible

A tax-deductible expense reduces your taxable income. Mortgage Interest, Points and Property Taxes are exampled of tax-deductible expenses. To calculate the worth of a tax deduction, multiply the deduction by your income tax rate. For example, if you are in the 27% tax bracket and have $10,000 in mortgage interest, the deduction of your mortgage interest would be worth $2,700.

Term

The number of years (or months) it will take to pay off the loan. Mortgage loans are typically available with terms of 15, 20, 30 (and sometimes 40) years.

Title

Ownership of a property. A clear title is one without any outstanding liens or encumbrances. A cloud on title refers to any outstanding liens or encumbrances which could impair the title.

Title Insurance Policy

Protection against financial loss arising from defects in the title occurring before purchase. An ALTA Policy protects the homeowner, while a CLTA Policy protects the mortgagee/lender.

Title Search

A search of public record to disclose the past and current facts regarding ownership of a particular piece of property.

Transfer Tax

City, county or state taxes imposed when property ownership passes from one person to another.

Truth-In-Lending

A federal law that requires lenders to fully disclose, in writing, the terms of a mortgage including the cost of credit expressed as a yearly rate, known as APR.

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Underwriting

The process of evaluating a borrower's loan package to see if they have the financial capacity to repay the loan.

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V

VA Loan

A mortgage available to eligible Veterans that is guaranteed by the Dept. of Veterans Affairs. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans.

Vesting

Vesting refers to the manner in which you take title. Title to real property may be held by individuals, either in Sole Ownership or in Co-Ownership. Co-Ownership of real property occurs when title is held by two or more persons. There are several variations as to how title may be held in each type of ownership. For advice regarding tax and other consequences of vesting, contact your attorney or tax provider.

V.O.D.

Acronym for Verification of Deposit. The form used to verify the borrower's assets (savings, checking, etc.)

V.O.E.

Acronym for Verification of Employment. The form used to verify the borrower's employment, income, etc.

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