Glossary of Mortgage Terms
Little did you know when you started looking for a home, that learning a new language was required. Some terms come up in every transaction, and some are specific to a particular loan program.
Additionally, some terms that have been used for a long time have been re-defined by the sweeping changes that the government made to the mortgage industry in 2010.
Even if you were once fluent in “mortgagese,” you may need a quick refresher. For example, origination fee used to refer to a lender fee of 1% of the mortgage amount to add to the lender’s profit. It has been re-defined as the cost of the appraisal, credit report and flood certification. That is a big change!
Take a moment to review any unfamiliar terms and be sure to contact you’re A+ Mortgage Loan professional for information specific to your transaction.
Acceleration
The right of the lender to demand immediate repayment of the mortgage loan upon default (non-payment) of the borrower. See also: “Due on Sale” clause.
Adjustable Rate Mortgage (ARM)
A mortgage product in which the rate can vary periodically based on an identifiable index. See also: margin.
Amortization Term
The length of time, expressed in months, required to pay off a mortgage. It can also express how the payments in an ARM are structured. For example, a 5 year ARM loan can be amortized over 30 years.
Annual Percentage Rate
Expresses the cost of a loan by combining the interest over the life of the loan and certain closing costs. All lenders must use the same formula for this calculation.
Appraisal
An estimate of value based on current market conditions completed by a qualified professional appraiser. The size, condition, amenities, and other factors are used to produce the appraisal report, which is used by lenders as collateral for a mortgage loan.
Assessment
As a general term, it is the property tax levy made against a parcel of real estate. A “special” assessment would be charges in addition to taxes for a specific purpose, such as sewer or street repair.
Borrower
In legal terms, a mortgagor. A person who receives a loan secured by real estate, who agrees to repay the loan in full.
Caps
The interest rate on an ARM is capped at a certain rate to safe guard the consumer and determine the affordability of the loan.
Cash Flow
The income generated by a rental property or business. It is evaluated to determine it’s sufficiency to repay expenses of the loan and/or personal, business, and property expenses.
Certificate of Eligibility
The document issued to a veteran that shows their eligibility to a Veteran’s Administration insured loan. The certificate does not guaranty a VA loan can be obtained. A veteran still must qualify based on income, debt, and credit.
Closing
The culmination of a real estate transaction at which the property passes from the seller to the buyer. The lender funding the loan has the buyer (borrower) execute a note, indicating that the buyer will repay the loan, and a mortgage, indicating that property is collateral for the loan. In the case of a refinance, the loan proceeds pay off the previous loan and /or may be given to the borrower.
Closing Costs
Expenses incurred by the purchaser of a property in conjunction with obtaining a loan; for example, the appraisal and the title insurance.
Commitment
This is the lender’s promise to fund a loan under the stated loan program guidelines and borrower’s qualifications.
Credit Report
A summary of a person’s credit history with mortgage, installment, and revolving credit rated numerically. Public record filings, current and paid, are also listed.
Credit Scores
A numerical value assigned by various credit reporting agencies to a borrower’s credit history. Mortgage lenders use the middle score of the three credit scores. Factors that affect the scores include: timely payment history (or lack thereof), percentage of revolving credit line used (less than 50% is best), bankruptcy, and/or foreclosure.
Debt to Income Ratio
The relationship of a borrower’s monthly obligations divided by gross monthly income. Different loan types have different guidelines for an acceptable debt to income ratio.
Default
In terms of a mortgage obligation, it means failure to make the monthly payments, keep the property insured, and any property taxes or liens paid.
Earnest Money
Money given to the seller’s realtor to bind the real estate contract. It must be held in trust until the closing, at which time it is applied to the borrower’s down payment.
Equal Credit Opportunity Act
It is required by Federal Law that credit cannot be denied on the bases of age, sex, race, color, religion, national origin, or marital status. Also, income from public assistance cannot be the sole reason a loan is denied.
Equity
The market value of a property, as determined by appraisal, minus any mortgage balances secured by the property.
Escrow
The account held by the lender from which property taxes and home owner’s insurance are disbursed when due. The amount of beginning escrow account is set by Federal Law.
Federal Housing Administration (FHA)
This agency does not make loans, it insures loans that conform to its guidelines for borrower qualification. It also has a number of specific guidelines on property condition that are designed to protect consumers.
FHA Mortgage Insurance
Insurance required by the FHA loan program for borrowers who use it. It entails an upfront financed portion and a monthly portion. It is required regardless of the down payment amount.
Fixed Rate Mortgage
A mortgage for which the principle and interest payment remains constant over the life of the loan.
Foreclosure
The legal process by which a lender forces the sale of a property to recover some of the loan it made using the property as collateral. This process is triggered by non-payment by the borrower.
Freddie Mac (Federal Home Loan Mortgage Corp)
A government sponsored entity that makes a market (purchases) conventional loans originated by mortgage bankers.
Hazard Insurance
This is a minimal form of property insurance for certain named perils, such as fire and severe storm damage. It does not have replacement cost or liability coverage.
HUD-1
The document presented at closing that breaks down the financial settlement of a real estate transaction. It summarizes charges and credits to the buyer and seller and itemizes loan charges. It gives the final amounts due from the buyer and payable to the seller.
Index
An identifiable published rate, like the 1 year Treasury bill, which is used to determine if an ARM has a higher or lower interest rate when it adjusts.
Late Charge
The penalty paid by a borrower if their payment is not received on time. The penalty is 5% for a conventional loan and 4% for an FHA loan.
Loan to Value
The percentage of a property’s value that is mortgaged. For example, 80% loan to value would indicate equity of 20% and a loan on the remaining 80%.
Lock or Lock In
Secure a rate for a mortgage loan from the lender that will be valid for a certain number of days from the lock date to, presumably, the closing date.
Mortgage
The document executed at closing that pledges the property being purchased as collateral for the loan.
Mortgage Banker
A mortgage lender who originates, approves, and funds their own loans. They also sell loans directly into the secondary market.
Mortgage Broker
A company that originates loans for a fee, which are approved by a lender who sells or services them.
Origination Fee
This used to mean a 1 % fee charged to a borrower by a lender to do their loan. In 2010, the government changed the meaning to indicate certain precise fees necessary to process a loan, including the appraisal, credit report, and flood certification.
PITI
Describes the components of a monthly mortgage payment: principle, interest, taxes, and insurance.
Points
Now called Discount Points. Each Point is 1 % of the loan amount. It is defined as prepaid interest paid to the lender at closing.
Power of Attorney
A legal document that allows one party to transact business for another party. For a real estate transaction, the power of attorney must be drafted for the specific property being purchased.
Pre-approval
Your A+ Mortgage Loan Officer will collect some basic information like income, assets and obtain a credit report in order to give you a reliable document that you can present to your realtor and a prospective seller to show you can purchase the home on which you are amking an offer.
Prepaid Expenses
The initial deposit into an escrow account for taxes, insurance, PMI, and the interest from the date of the closing until the end of the month in which the closing took place.
Private Mortgage Insurance (PMI)
Insurance which indemnifies lenders from the borrower default on a mortgage loan. It makes it possible to get a conventional mortgage without 20% down.
Qualifying Ratios
This calculation is used to determine how much you can afford for a mortgage. It is your monthly debt, including a new house payment divided by your gross monthly income. It can be different for different loan programs, but generally can be no higher than 45%.
Real Estate Settlement and Procedures Act (RESPA)
Governs the way mortgage loans are handled and disclosed to borrowers.
Rescission
The three day government required waiting period from the time a refinance closes until the disbursement of funds to pay off the previous loan.
Reverse Mortgage
A mortgage that pays a borrower to live in their home based on their equity. This is only available to borrowers ages 62 and older.
Second Mortgage
A second lien on a property that can be taken out as a lump sum or a line of credit (Home Equity loan) to be used when needed.
Simple Interest
The interest on a mortgage is always simple interest based on the outstanding balance, not compounded.
Title Insurance
Title insurance as the name suggests protects your ownership interest in a property and is required by all mortgage lenders. It recites any liens that are outstanding that must be satisfied prior to closing and specifies the new owner and lien holder(the lender).
Truth-in-Lending
This Federal law was enacted to protect consumers by requiring disclosure of the cost of financing before extending credit. In the case of mortgages, a mathematical calculation incorporating certain closing costs and interest cost over the entire term of a loan called the Annual Percentage Rate (APR), must be given to home buyers in order that they can make an informed financing decision.
Underwriting
The process of reviewing the verified information provided by borrowers and obtained from other sources, like a credit report in order to approve a borrower for a mortgage loan.
Verification of Deposit (VOD)
Direct verification of a borrower’s funds at their financial institution required in the context of verifying funds for down payment and closing costs.
Verification of Employment (VOE)
Direct verification of a borrower’s employment required to properly evaluate a borrower’s income.
Ready to get started?
Interested in learning more about how A+ Mortgage can help you get into the home of your dreams, or refinance your current home? Get in touch with one of our expert loan officers today!
