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.
Maturity – The date on which an agreement expires; termination of a mortgage note.
Mechanic’s Lien – A claim created by law to secure priority of payment for work performed and materials provided by a vendor. Land may be attached as well as buildings, equipment, or other property.
Mortgage – A formal document executed by an owner of property, pledging that property as security for payment of a debt or performance of some other obligation. Also, the security instrument itself.
Mortgage-Backed Security (MBS) – An investment instrument backed by mortgage loans as security. Ownership is evidenced by an undivided interest in pool of mortgages or trust deeds. Income from the underlying mortgages is used to pay off the securities, and provides a return on investment.
Mortgage Banker – A firm that conducts mortgage lending activities from its own funds. Newly formed mortgages are sold to investors in the secondary market, providing funds for subsequent lending. The mortgage banker generally continues to service the loans.
Mortgage Insurance (MI) – Insurance that protects mortgage lenders against loss in the event of default by the borrower. This allows lenders to make loans with lower down payments. The federal government offers MI through HUD/FHA; private entities offer MI for conventional loans.
Mortgage Life Insurance – Term life insurance paid by the borrower in which the amount of coverage decreases as the mortgage balance declines. In the event the borrower dies while the policy is in force, the debt is automatically satisfied by insurance proceeds.
Mortgage Insurance Certificate (MIC) – Certificate issued by HUD/FHA as evidence that a mortgage has been insured, and that a contract of mortgage insurance exists between HUD/FHA and the lender incorporating the HUD/FHA regulations identified in the certificate.
Mortgage Insurance Premium (MIP) – The amount paid by a mortgagor for mortgage insurance either to FHA or a private mortgage insurance company.
Mortgage Note – A written promise to pay a sum of money at a stated interest rate during a specified term. A mortgage note is secured by a mortgage.
Mortgage Portfolio – The aggregate of mortgage loans held by an investor or serviced by a mortgage banker.
Mortgagee – The lender in a mortgage transaction.
Mortgagee Clause – A clause that may be attached to an insurance policy stipulating that the lender will receive a portion of insurance proceeds sufficient to satisfy the unpaid amount of a loan in the event of a loss.
Mortgagor – The borrower in a mortgage transaction who pledges property as a security for a debt.
Negative Amortization – The unpaid interest which is added to the mortgage principal in a loan where the principal balance increases rather than decreases because the mortgage payments do not cover the full amount of interest due.
Nonassumption Clause – A mortgage clause that prohibits the assumption of a mortgage by a third party without the prior approval of the lender.
Note – A general term for any kind of paper or document signed by a borrower that is an acknowledgement of the debt, and is, by inference, a promise to pay. When the note is secured by a mortgage, it is called a mortgage note and the mortgagee is named as the payee.
Notice of Default – Notice recorded after default under a deed of trust or mortgage. Also, the notice sent to defaulting borrowers, required by insurers or guarantors such as FHA, VA, or MIC.
Origination – The process of creating both commercial and residential mortgages.
Partial Payment – In loan collections, receipt of less than the full payment due.
PITI – An acronym for the items included in a monthly payment: principal, interest, taxes, and insurance.
Points – A point is the term used for pre-paid interest on a loan and often results in a discount on the interest rate over the life of the loan. 1 point = 1% of the total loan amount. Keep in mind discount points paid for on a purchase transaction for a primary residence are tax deductible in the year that they are paid.
Portfolio – The collection of loans held for servicing or investment.
Premium – In insurance terms, a payment for coverage.
Prepayment – The payment of all or part of a mortgage debt before it is due.
Prepayment Penalty – A charge the mortgagor pays the mortgagee for the privilege to prepay the loan.
Principal – The original balance of money lent, excluding interest. Also, the remaining balance of the loan, excluding interest.
Private Mortgage Insurance (PMI) – Insurance written by a private company protecting the mortgage lender against financial loss occasioned by a borrower defaulting on the mortgage.
Quitclaim Deed – A deed relinquishing all interest, title, or claim an owner has in a property. A quitclaim deed implies no warranty.
Real Estate Owned (REO) – Property a lender acquires as the result of foreclosure.
Real Property – Land and objects permanently attached to it, such as buildings and fences.
Redemption Period – The time allowed by law in some states during which mortgagors may buy back their foreclosed properties by paying the balance owed on their delinquent mortgages, interest and fees.
Reinstatement – The curing of all loan defaults by a borrower to return it to its current status.
Reverse Mortgage – A loan for senior homeowners that uses a portion of the home’s equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner moves out of the property permanently or passes away.
Satisfaction of Mortgage – The recorded instrument the lender provides to evidence payment in full of the mortgage debt.
Second Mortgage – A mortgage that has rights subordinate to a first mortgage.
Secondary Mortgage Marketing – A process whereby lenders and investors buy and sell existing mortgages or mortgage-backed securities, thereby providing greater availability of funds for additional mortgage lending by banks, mortgage bankers and savings institutions.
Seller-Servicer – A term used by Fannie Mae and Freddie Mac for a mortgage banker or other entity that has met the requirements necessary to sell and service mortgages for Fannie Mae or Freddie Mac.
Servicing Agreement – A written agreement between an investor and mortgage servicer stipulating the rights and obligations of each party.
Servicing Income – Fees the investor pays the mortgage servicer for performing loan administration duties.
Subordination – The act of a party acknowledging by written record that a debt is inferior to the interest of another in the same property. Subordination may apply not only to mortgages, but also to leases, real estate rights and any other type of debt instrument.
Tax Lien – A claim against property for unpaid taxes.
Tax Sale – The sale of property by a taxing authority or an officer of the court acting on a judgment to satisfy the payment of delinquent taxes.
Term – The period of time between the commencement date and the termination date of a note, mortgage, legal document or other contract.
Title – Written evidence of the right to or ownership of property. In the case of real estate, the documentary evidence of ownership is the title deed that specifies in whom the legal estate is vested and the history of ownership and transfers. Title may be acquired through purchase, inheritance, devise, gift or through foreclosure of a mortgage.
Title Search – An examination of public records, laws and court decisions to ensure that no one except the seller has a valid claim to the property and to disclose past and current facts regarding ownership of the subject property.
Trust Deed – The instrument given by a borrower (trustor) to a trustee vesting title to a property in the trustee’s name to ensure the borrower’s fulfillment of an obligation. A mortgage.
Underwriting – In mortgage banking, the analysis of the risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender. Underwriting involves the evaluation of the property as outlined in the appraisal report, and of the borrower’s ability and willingness to repay the loan.
Veterans Administration (VA) – The Department of Veteran’s Affairs, a cabinet-level agency of the federal government. The Servicemen’s Readjustment Act of 1944 authorized the agency to administer a variety of benefit programs designed to facilitate the adjustment of returning veterans to civilian life. Among the benefit programs is the VA Home Loan Guaranty program which encourages mortgage lenders to offer long-term, low down payment financing to eligible veterans by guaranteeing the lender against loss.
Voluntary Conveyance – An elective transfer of property title from a defaulting borrower to the lender as an alternative to foreclosure. This arrangement saves the lender the expense of foreclosure and the borrower receives credit for payment in full.
Wraparound Mortgage – A refinancing technique involving the creation of a second mortgage which includes the balance due on any existing mortgages plus the amount of the new secondary or junior lien.