New Home Purchase - Refinance - Debt Consolidation
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Mortgage Glossary
203(b): FHA program
which provides mortgage insurance to protect lenders from default; used to
finance the purchase of new or existing one- to four family housing;
characterized by low down payment, flexible qualifying guidelines, limited
fees, and a limit on maximum loan amount.
203(k): this FHA mortgage insurance program enables
homebuyers to finance both the purchase of a house and the cost of its
rehabilitation through a single mortgage loan.
Amenity: a feature of the home or property that serves as a
benefit to the buyer but that is not necessary to its use; may be natural
(like location, Woods, water) or man-made (like a swimming pool or garden).
Amortization: repayment of a mortgage loan through monthly
installments of principal and interest; the monthly payment amount is based
on a schedule that will allow you to own your home at the end of a specific
time period (for example, 15 or 30 years)
Annual Percentage Rate (APR): calculated by using a
standard formula, the APR shows the cost of a loan; expressed as a yearly
interest rate, it includes the interest, points, mortgage insurance, and
other fees associated with the loan.
Application: the first step in the official loan approval process; this form
is used to record important information about the potential borrower
necessary to the underwriting process.
Appraisal: a document that gives an estimate of a
property's fair market value; an appraisal is generally required by a lender
before loan approval to ensure that the mortgage loan amount is not more
than the value of the property.
Appraiser: a qualified individual who uses his or her
experience and knowledge to prepare the appraisal estimate.
ARM: Adjustable Rate Mortgage; a mortgage loan subject to
changes in interest rates; when rates change, ARM monthly payments increase
or decrease at intervals determined by the lender; the Change in monthly
-payment amount, however, is usually subject to a Cap.
Assessor: a government official who is responsible for
determining the value of a property for the purpose of taxation.
Assumable mortgage: a mortgage that can be transferred from
a seller to a buyer; once the loan is assumed by the buyer the seller is no
longer responsible for repaying it; there may be a fee and/or a credit
package involved in the transfer of an assumable mortgage.
Balloon Mortgage: a mortgage that typically offers low
rates for an initial period of time (usually 5, 7, or 10) years; after that
time period elapses, the balance is due or is refinanced by the borrower.
Bankruptcy: a federal law Whereby a person's assets are
turned over to a trustee and used to pay off outstanding debts; this usually
occurs when someone owes more than they have the ability to repay.
Borrower: a person who has been approved to receive a loan
and is then obligated to repay it and any additional fees according to the
loan terms.
Building code: based on agreed upon safety standards within
a specific area, a building code is a regulation that determines the design,
construction, and materials used in building.
Budget: a detailed record of all income earned and spent
during a specific period of time.
Cap: a limit, such as that placed on an adjustable rate
mortgage, on how much a monthly payment or interest rate can increase or
decrease.
Cash reserves: a cash amount sometimes required to be held
in reserve in addition to the down payment and closing costs; the amount is
determined by the lender.
Certificate of title: a document provided by a qualified
source (such as a title company) that shows the property legally belongs to
the current owner; before the title is transferred at closing, it should be
clear and free of all liens or other claims.
Closing: also known as settlement, this is the time at
which the property is formally sold and transferred from the seller to the
buyer; it is at this time that the borrower takes on the loan obligation,
pays all closing costs, and receives title from the seller.
Closing costs: customary costs above and beyond the sale
price of the property that must be paid to cover the transfer of ownership
at closing; these costs generally vary by geographic location and are
typically detailed to the borrower after submission of a loan application.
Commission: an amount, usually a percentage of the property
sales price, that is collected by a real estate professional as a fee for
negotiating the transaction.
Condominium: a form of ownership in which individuals
purchase and own a unit of housing in a multi-unit complex; the owner also
shares financial responsibility for common areas.
Conventional loan: a private sector loan, one that is not
guaranteed or insured by the U.S. government.
Cooperative (Co-op): residents purchase stock in a
cooperative corporation that owns a structure; each stockholder is then
entitled to live in a specific unit of the structure and is responsible for
paying a portion of the loan.
Credit history: history of an individual's debt payment;
lenders use this information to gauge a potential borrower's ability to
repay a loan.
Credit report: a record that lists all past and present
debts and the timeliness of their repayment; it documents an individual's
credit history.
Credit bureau score: a number representing the possibility
a borrower may default; it is based upon credit history and is used to
determine ability to qualify for a mortgage loan.
Debt-to-income ratio: a comparison of gross income to
housing and non-housing expenses; With the FHA, the-monthly mortgage payment
should be no more than 29% of monthly gross income (before taxes) and the
mortgage payment combined with non-housing debts should not exceed 41% of
income.
Deed: the document that transfers ownership of a property.
Deed-in-lieu: to avoid foreclosure ("in lieu" of
foreclosure), a deed is given to the lender to fulfill the obligation to
repay the debt; this process doesn't allow the borrower to remain in the
house but helps avoid the costs, time, and effort associated with
foreclosure.
Default: the inability to pay monthly mortgage payments in
a timely manner or to otherwise meet the mortgage terms.
Delinquency: failure of a borrower to make timely mortgage
payments under a loan agreement.
Discount point: normally paid at closing and generally
calculated to be equivalent to 1% of the total loan amount, discount points
are paid to reduce the interest rate on a loan.
Down payment: the portion of a home's purchase price that
is paid in cash and is not part of the mortgage loan.
Earnest money: money put down by a potential buyer to show
that he or she is serious about purchasing the home; it becomes part of the
down payment if the offer is accepted, is returned if the offer is rejected,
or is forfeited if the buyer pulls out of the deal.
EEM: Energy Efficient Mortgage; an FHA program that helps
homebuyers save money on utility bills by enabling them to finance the cost
of adding energy efficiency features to a new or existing home as part of
the home purchase
Equity: an owner's financial interest in a property;
calculated by subtracting the amount still owed on the mortgage loon(s)from
the fair market value of the property.
Escrow account: a separate account into which the lender
puts a portion of each monthly mortgage payment; an escrow account provides
the funds needed for such expenses as property taxes, homeowners insurance,
mortgage insurance, etc.
Fair Housing Act: a law that prohibits discrimination in
all facets of the homebuying process on the basis of race, color, national
origin, religion, sex, familial status, or disability.
Fair market value: the hypothetical price that a willing
buyer and seller will agree upon when they are acting freely, carefully, and
with complete knowledge of the situation.
Fannie Mae: Federal National Mortgage Association (FNMA); a
federally-chartered enterprise owned by private stockholders that purchases
residential mortgages and converts them into securities for sale to
investors; by purchasing mortgages, Fannie Mae supplies funds that lenders
may loan to potential homebuyers.
FHA: Federal Housing Administration; established in 1934 to
advance homeownership opportunities for all Americans; assists homebuyers by
providing mortgage insurance to lenders to cover most losses that may occur
when a borrower defaults; this encourages lenders to make loans to borrowers
who might not qualify for conventional mortgages.
Fixed-rate mortgage: a mortgage with payments that remain
the same throughout the life of the loan because the interest rate and other
terms are fixed and do not change.
Flood insurance: insurance that protects homeowners against
losses from a flood; if a home is located in a flood plain, the lender will
require flood insurance before approving a loan.
Foreclosure: a legal process in which mortgaged property is
sold to pay the loan of the defaulting borrower.
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM);
a federally-chartered corporation that purchases residential mortgages,
securitizes them, and sells them to investors; this provides lenders With
funds for new homebuyers.
Ginnie Mae: Government National Mortgage Association
(GNMA); a government-owned corporation overseen by the U.S. Department of
Housing and Urban Development, Ginnie Mae pools FHA-insured and
VA-guaranteed loans to back securities for private investment; as With
Fannie Mae and Freddie Mac, the investment income provides funding that may
then be lent to eligible borrowers by lenders.
Good faith estimate: an estimate of all closing fees
including pre-paid and escrow items as well as lender charges; must be given
to the borrower within three days after submission of a loan application.
HELP: Homebuyer Education Learning Program; an educational
program from the FHA that counsels people about the homebuying process; HELP
covers topics like budgeting, finding a home, getting a loan, and home
maintenance; in most cases, completion of the program may entitle the
homebuyer to a reduced initial FHA mortgage insurance premium-from 2.25% to
1.75% of the home purchase price.
Home inspection: an examination of the structure and
mechanical systems to determine a home's safety; makes the potential
homebuyer aware of any repairs that may be needed.
Home warranty: offers protection for mechanical systems and
attached appliances against unexpected repairs not covered by homeowner's
insurance; ,overage extends over a specific time period and does not cover
the home's structure.
Homeowner's insurance: an insurance policy that combines
protection against damage to a dwelling and Is contents with protection
against claims of negligence )r inappropriate action that result in
someone's injury or )property damage.
Housing counseling agency- provides counseling and assistance to individuals
on a variety of issues, including loan default, fair housing, and homebuying.
HUD: the U.S. Department of Housing and Urban Development;
established in 1965, HUD works to create a decent home and suitable living
environment for all Americans; it does this by addressing housing needs,
improving and developing American communities, and enforcing fair housing
laws.
HUD1 Statement: also known as the "settlement sheet," it
itemizes all closing costs; must be given to the borrower at or before
closing.
HVAC: Heating, Ventilation and Air Conditioning; a home's
heating and cooling system.
Index: a measurement used by lenders to determine changes
to the Interest rate charged on an adjustable rate mortgage.
Inflation: the number of dollars in circulation exceeds the
amount of goods and services available for purchase; inflation results in a
decrease in the dollar's value.
Interest: a fee charged for the use of money .
Interest rate: the amount of interest charged on a monthly
loan payment; usually expressed as a percentage.
Insurance: protection against a specific loss over a period
of time that is secured by the payment of a regularly scheduled premium.
Judgment: a legal decision; when requiring debt repayment,
a judgment may include a property lien that secures the creditor's claim by
providing a collateral source.
Lease purchase: assists low- to moderate-income homebuyers
in purchasing a home by allowing them to lease a home with an option to buy;
the rent payment is made up of the monthly rental payment plus an additional
amount that is credited to an account for use as a down payment.
Lien: a legal claim against property that must be satisfied
When the property is sold
Loan: money borrowed that is usually repaid with interest.
Loan fraud: purposely giving incorrect information on a
loan application in order to better qualify for a loan; may result in civil
liability or criminal penalties.
Loan-to-value (LTV) ratio: a percentage calculated by
dividing the amount borrowed by the price or appraised value of the home to
be purchased; the higher the LTV, the less cash a borrower is required to
pay as down payment.
Lock-in: since interest rates can change frequently, many
lenders offer an interest rate lock-in that guarantees a specific interest
rate if the loan is closed within a specific time.
Loss mitigation: a process to avoid foreclosure; the lender
tries to help a borrower who has been unable to make loan payments and is in
danger of defaulting on his or her loan
Margin: an amount the lender adds to an index to determine
the interest rate on an adjustable rate mortgage.
Mortgage: a lien on the property that secures the Promise
to repay a loan.
Mortgage banker: a company that originates loans and
resells them to secondary mortgage lenders like :Fannie Mae or Freddie Mac.
Mortgage broker: a firm that originates and processes loans
for a number of lenders.
Mortgage insurance: a policy that protects lenders against
some or most of the losses that can occur when a borrower defaults on a
mortgage loan; mortgage insurance is required primarily for borrowers with a
down payment of less than 20% of the home's purchase price.
Mortgage insurance premium (MIP): a monthly payment
-usually part of the mortgage payment - paid by a borrower for mortgage
insurance.
Mortgage Modification: a loss mitigation option that allows
a borrower to refinance and/or extend the term of the mortgage loan and thus
reduce the monthly payments.
Offer: indication by a potential buyer of a willingness to
purchase a home at a specific price; generally put forth in writing.
Origination: the process of preparing, submitting, and
evaluating a loan application; generally includes a credit check,
verification of employment, and a property appraisal.
Origination fee: the charge for originating a loan; is
usually calculated in the form of points and paid at closing.
Partial Claim: a loss mitigation option offered by the FHA
that allows a borrower, with help from a lender, to get an interest-free
loan from HUD to bring their mortgage payments up to date.
PITI: Principal, Interest, Taxes, and Insurance - the four
elements of a monthly mortgage payment; payments of principal and interest
go directly towards repaying the loan while the portion that covers taxes
and insurance (homeowner's and mortgage, if applicable) goes into an escrow
account to cover the fees when they are due.
PMI: Private Mortgage Insurance; privately-owned companies
that offer standard and special affordable mortgage insurance programs for
qualified borrowers with down payments of less than 20% of a purchase price.
Pre-approve: lender commits to lend to a potential
borrower; commitment remains as long as the borrower still meets the
qualification requirements at the time of purchase.
Pre-foreclosure sale: allows a defaulting borrower to sell
the mortgaged property to satisfy the loan and avoid foreclosure.
Pre-qualify: a lender informally determines the maximum
amount an individual is eligible to borrow.
Premium: an amount paid on a regular schedule by a
policyholder that maintains insurance coverage.
Prepayment: payment of the mortgage loan before the
scheduled due date; may be Subject to a prepayment penalty.
Principal: the amount borrowed from a lender; doesn't
include interest or additional fees.
Radon: a radioactive gas found in some homes that, if
occurring in strong enough concentrations, can cause health problems.
Real estate agent: an individual who is licensed to
negotiate and arrange real estate sales; works for a real estate broker.
REALTOR: a real estate agent or broker who is a member of
the NATIONAL ASSOCIATION OF REALTORS, and its local and state associations.
Refinancing: paying off one loan by obtaining another;
refinancing is generally done to secure better loan terms (like a lower
interest rate).
Rehabilitation mortgage: a mortgage that covers the costs
of rehabilitating (repairing or Improving) a property; some rehabilitation
mortgages - like the FHA's 203(k) - allow a borrower to roll the costs of
rehabilitation and home purchase into one mortgage loan.
RESPA: Real Estate Settlement Procedures Act; a law
protecting consumers from abuses during the residential real estate purchase
and loan process by requiring lenders to disclose all settlement costs,
practices, and relationships
Settlement: another name for closing .
Special Forbearance: a loss mitigation option where the
lender arranges a revised repayment plan for the borrower that may include a
temporary reduction or suspension of monthly loan payments.
Subordinate: to place in a rank of lesser importance or to
make one claim secondary to another.
Survey: a property diagram that indicates legal boundaries,
easements, encroachments, rights of way, improvement locations, etc.
Sweat equity: using labor to build or improve a property as
part of the down payment
Title 1: an FHA-insured loan that allows a borrower to make
non-luxury improvements (like renovations or repairs) to their home; Title I
loans less than $7,500 don't require a property lien.
Title insurance: insurance that protects the lender against
any claims that arise from arguments about ownership of the property; also
available for homebuyers.
Title search: a check of public records to be sure that the
seller is the recognized owner of the real estate and that there are no
unsettled liens or other claims against the property.
Truth-in-Lending: a federal law obligating a lender to give
full written disclosure of all fees, terms, and conditions associated with
the loan initial period and then adjusts to another rate that lasts for the
term of the loan.
Underwriting: the process of analyzing a loan application
to determine the amount of risk involved in making the loan; it includes a
review of the potential borrower's credit history and a judgment of the
property value.
VA: Department of Veterans Affairs: a federal agency which
guarantees loans made to veterans; similar to mortgage insurance, a loan
guarantee protects lenders against loss that may result from a borrower
default.
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