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Home Loan Terms: A-L

THE MORTGAGE INDUSTRY IS FULL OF TERMS THAT ARE FOREIGN TO MANY PEOPLE. THE FOLLOWING GLOSSARY OF TERMS  THAT SHOULD  HELP YOU MAKE SENSE OF THE MORTGAGE PROCESS.

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Acceleration Clause – A common provision of a mortgage which allows the holder to demand the entire outstanding mortgage balance due and payable in the event of a breach of mortgage contract.

Accrued Interest – Interest earned for the period of time elapsed since interest was last paid.

Adjustable Rate Mortgage – A mortgage loan or deed of trust which allows the lender to adjust the interest rate in accordance with a specified index periodically and as agreed to at the inception of the loan.

Ad Valorem Taxes – Real estate taxes on the assessed value of property.

Amortization – Repayment of a mortgage debt with equal periodic payments of both principal and interest, calculated to retire the obligation at the end of a fixed period of time.

Amortization Schedule – A table showing the amounts of principal and interest due at regular intervals and the unpaid mortgage balance after each payment is made.

Annual Mortgage Statement – A report prepared by the lender or servicing agent for the mortgagor, stating the amount of taxes, insurance, and interest that was paid during the year, and the outstanding principal balance.

Annual Percentage Rate (APR) – The actual rate of interest paid, the APR represents the interest percentage of the total finance charge to the amount of the loan. The APR is disclosed to conform to federal truth-in-lending statutes.

Arrears – The situation in which mortgage interest and real estate taxes are paid at or after the end of the period for which they are levied. Late payment is also described as being in arrears.

Assessed Valuation – The value that a taxing authority places upon real property that becomes the base for computing local property taxes.

Assessment – The value factor assigned to real property and used to determine real property taxes. The process of reaching the assessed valuation. Also, an add-on tax to raise money for a special purpose.

Assumption Agreement – A written agreement by one party to pay an obligation originally incurred by another.

Assumption Fee – The amount paid to a lender for the paperwork and processing of records necessary to approve and document a new debtor.

Assumption of Mortgage – A buyer’s acceptance of primary liability for payment of an existing note secured by a mortgage or deed of trust. The seller remains secondarily liable, unless specifically released by the lender.

Balloon Mortgage – A mortgage with periodic installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at a specified date, usually at the end of the term.

Bankrupt – A person, firm, or corporation who, through a court proceeding, is relieved from the payment of all debts after the surrender of all assets to a court appointed trustee, for the protection of creditors. Bankruptcy may be declared under one of several chapters of the federal bankruptcy code. Chapter 7 covers liquidation of bankrupt business; Chapter 11, covers reorganization of bankrupt businesses; Chapter 12, covers certain farm bankruptcies; Chapter 13 covers workouts of debt by individuals.

Binder – Temporary hazard or title insurance granted prior to the issuance of a permanent policy. In real estate, a preliminary agreement between a buyer and seller which includes the price and terms of the contract.

Bi-Weekly Mortgage – A mortgage with payments due every two weeks, totaling 26 payments a year, allowing the debt to be retired in 18 or 19 years.

Blanket – The coverage of more than one piece of property under one instrument, such as blanket insurance policy or blanket mortgage.

Borrower – One who receives funds in the form of a loan with the obligation of repaying the loan-in-full with interest.

Buydown Mortgage – A mortgage with a below-market interest rate made by a lender in return for an interest rate subsidy in the form of additional discount points paid by the builder, seller or buyer.

Caps (interest) – Consumer safeguards on an adjustable-rate mortgage which limit the amount the interest rate may change per year and/or over the life of the loan.

Caps (payment) – Consumer safeguards on an adjustable-rate mortgage which limit the amount monthly payments may change.

Certificate of Title – A confirmation written by a title attorney or company stating that the title to a parcel of real property is legally vested in the present owner.

Closing – In real estate, the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to consummate a sale or loan transaction.

Collection – The servicing procedure followed to bring a delinquent mortgage current and to file the required notices to begin foreclosure when necessary.

Community Property – In some states, a form of ownership under which property acquired during a marriage is presumed to be owned jointly unless acquired as separate property of either spouse.

Co-Mortgagor – A second borrower who signs a mortgage loan with a mortgagor. The co-mortgagor’s income, assets and debts are combined with the mortgagor’s for underwriting and ratio analysis purposes. The co-mortgagor’s name must appear on the FHA certificate of Commitment and the mortgage or deed of trust. For full guarantee under the VA’s program, the co-mortgagor must be either a spouse or another eligible veteran.

Condemnation – The taking of private property for public use under the right of eminent domain with just compensation paid the owner.

Conventional Financing – In real estate, mortgage financing which is not insured or guaranteed by a government agency such as HUD/FHA, VA, or the Farmers Home Administration.

Convertible Mortgage – A type of adjustable-rate mortgage that may be converted to a fixed-rate mortgage at specified intervals during a predetermined time period. In income property lending, a mortgage in which lender-provided funds convert to equity ownership after a predetermined period of time.

Co-Signer – One who agrees to assume a debt obligation if the principal borrower defaults on mortgage payments. A co-signer assumes only personal liability and has no ownership interest in the property; his or her income and obligations are used in the underwriting process to reinforce the credit of the principal borrower.

Credit Rating – A rating given to a person or company that establishes creditworthiness based upon present financial condition, experience, and past credit history.

Deed-In-Lieu – A deed given by a mortgagor to a mortgagee to satisfy a debt and avoid foreclosure.

Deed of Trust – A type of security instrument in which the borrower conveys a trust to hold property to a third party (trustee) as security for the lender, with the condition that the trustee shall reconvey the title upon the payment of the debt, and, conversely, will sell the land and pay the debt in the event of a default by the borrower.

Default – A breach or non-performance of the terms of a note or the covenants of a mortgage.

Delinquency – Failure of a borrower to make timely payments under a loan agreement.

Demand Note/Mortgage – A note or mortgage that the lender can call due at any time and without prior notice.

Disbursement – Actual payment of monies. Sometimes used to describe construction loan draws.

Due-On-Sale – A clause in a mortgage stating that if the mortgagor sells, transfers, or in any way encumbers the property, then the mortgagee has the right to implement an acceleration clause making the balance of the obligation due.

Easement – A right to the limited use or enjoyment of land held by another. Also, an interest in land to enable sewer or other utility lines to be laid, or to allow access to a property.

Encumbrance – Anything that affects or limits the fee simple title to property, such as mortgages, leases, easements or restrictions.

Endorsement – A signature on a negotiable instrument by which title to property mentioned therein is assigned and transferred. Also, a notation added to an instrument after execution to change or clarify its contents. In insurance, coverage may be restricted or enlarged by endorsing a policy. In FHA loans, a notation placed on the note by the FHA indicating that the loan is insured under the National Housing Act.

Equity – Net ownership, the difference between fair market value and current indebtedness, sometimes called owner’s interest.

Escrow – A situation in which a third party, acting as the agent for the buyer and the seller, carries out instructions of both and assumes the responsibility of handling all paperwork and disbursement of funds. Also, impounds or reserves for the payment of taxes, insurance, or other bills when due.

Escrow Account – The segregated trust account in which escrow funds are held.

Escrow Agent – The person or organization having a fiduciary responsibility to both the buyer and seller (or lender and borrower) to see that the terms of the purchase/sale (or loan) are carried out.

Escrow Analysis – The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.

Escrow Company – An organization established to act as an escrow agent.

Escrow Contract – A three-party agreement between the buyer, seller, and the escrow agent, specifying the rights and duties of each.

Escrow Overage or Shortage – The difference, determined by escrow analysis, between escrow funds on deposit and escrow funds required to make a payment when it becomes due.

Escrow Payment – That portion of a mortgagor’s monthly payment held by a lender or servicer to pay taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

Federal Home Loan Mortgage Corporation (FHLMC) – A quasi-governmental secondary market organization that offers various mortgage purchase and securitization programs. Its major program is the Freddie Mac Participation Certification (PC).

Federal Housing Administration (FHA) – A federal agency within the Department of Housing and Urban Development (HUD).

Federal National Mortgage Association (FNMA) – The nation’s largest mortgage investor. A quasi-governmental secondary market organization that offers various mortgage purchase and securitization programs.

FHA Loan – A loan made through an approved lender and insured by the Federal Housing Administration. While there are limits to the size of FHA loans, they are intended to finance moderately priced homes.

First Mortgage – A real estate loan that creates a primary lien against real property.

Fixed-Rate Mortgage – A mortgage in which the interest rate and payments remain the same for the life of the loan.

Foreclosure – A legal procedure in which a mortgaged property is sold to pay the outstanding debt in case of default.

Governmental National Mortgage Association (GNMA) – A federal agency within the Department of Housing and Urban Development (HUD) that guarantees the timely payment of principal and interest for mortgage-backed securities backed by FHA-insured, and VA-guaranteed mortgages.

Grace Period – A period of time after an obligation is due during which a borrower can perform without incurring a penalty and without being considered in default.

Graduated Payment Mortgage (GPM) – A type of flexible payment mortgage where the payments increase for a specified period of time and then level off. Usually results in negative amortization.

Hazard Insurance – Insurance coverage that provides compensation to the insured in case of property loss or damage.

Homeowner’s Policy – A multiple peril insurance policy available to owners of private dwellings that covers the dwelling and its contents, as well as personal liability.

HUD – The Department of Housing and Urban Development. A governmental entity responsible for the implementation and administration of housing and urban development programs. HUD was established by the Housing and Urban Development Act of 1965 to supersede the Housing and Home Finance Agency.

Impound – That portion of a mortgagor’s monthly payment held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

Index – A published interest rate, such as prime rate, LIBOR, T-Bill, or the 11th District COFI. Lenders use indexes to establish interest rates charged on mortgages or to compare investment returns. On ARMs, a predetermined margin is added to the index to compute the interest rate adjustment.

Insured Loan – A loan insured by FHA, VA, or a private mortgage insurance company.

Interest – Consideration in the form of money paid for the use of money, usually expressed as an annual percentage. Also, a right, share or title in property.

Investor – Any person or institution that invests in mortgages or mortgage-backed securities.

Late Charge – Additional charge that a borrower is required to pay as a penalty for failure to pay a regular installment when due.

Legal Description – A property description, recognized by law, which is sufficient to locate and identify the property without oral testimony.

Lien – A legal hold or claim of a creditor on the property of another as security for a debt. Liens are always against property, usually real property.

Loan Administration – A mortgage banking function, which includes the receipt of payments, customer service, escrow administration, investor accounting, collections and foreclosures. Also called servicing.

 

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