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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.

Acceleration Clause: the part of a contract that says when a loan may be declared due and payable.

Adjustable-Rate: an interest rate that changes, based on changes in a published market-rate index.

Adjustable-Rate Loans: also known as variable-rate loans, they usually offer a low initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; when interest rates fall, your monthly payments may be lowered.

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.

Annuity: a monthly cash payment you get from an insurance company for the rest of your life.

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.

Appreciation: the increase of a home's value.

Adjustable Rate Mortgage (ARM): 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.

Condemnation: a court action saying a property is unfit for use; or, the government taking private property to use for the public by the right of eminent domain.

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 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.

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 Line: a credit account that lets a borrower decide when to take money out and how much to take out; also known as a 'Line of Credit', or 'Creditline'.

Credit Report: a record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.

Current Interest Rate: in the HECM program, the interest rate currently being charged on a loan; it equals the one-year rate for United States Treasury Securities, plus a margin.

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.

Deferred Payment Loan (DPL): reverse mortgages that give you a lump sum of cash to repair or improve a home; usually offered by state or local governments.

Depreciation: a decrease in the value of a home.

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.

Eminent Domain: the right of a government to take private property for public use; for example, taking privately owned land in order to build a highway.

Energy Efficient Mortgage (EEM): 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 loan(s) from the fair market value of the property.

Escrow: the holding of money or documents by a neutral third party prior to closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.

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.

Expected Interest Rate: in the HECM program, the interest rate used to determine a borrower's loan advance amounts; it equals the ten year rate for United States Treasury Securities, plus a margin.

Fair Housing Act: a law that prohibits discrimination in all facets of the home buying 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.

Federally Insured Reverse Mortgage: a reverse mortgage guaranteed by the federal government so the borrower will always get what the loan promises; also a Home Equity Conversion Mortgage (HECM).

Fixed Monthly Loan Advances: payments of the same amount that are made to a borrower each month

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.

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.

Home Equity: the value of a home, subtracting any money owed on it.

Home Equity Conversion: turning home equity into cash without having to leave your home or make regular loan repayments.

Home Equity Conversion Mortgage (HECM): the only reverse mortgage program insured by the Federal Housing Authority, a federal government agency.

Home Equity Loan: a mortgage on the borrower's principal residence, usually for the purpose of making home improvements or debt consolidation.

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; coverage 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) or 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 home buying.

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.

Initial Interest Rate: in the HECM program, the interest rate that is first charged on the loan beginning at closing; it equals the one year rate for United States Treasury Securities, plus a margin

Interest: a fee charged for the use of money.

Interest-Only Mortgage: a mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged.

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.

Jumbo Loan: a nonconforming loan that is larger than the limits set by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines.

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.

Leftover Equity: the sale price of the home minus the total amount owed on it and the cost of selling it; the amount the homeowner or heirs get when the house is sold.

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 Advances: payments made to a borrower, or to another party on behalf of a borrower.

Loan Balance: the amount owed, including principal and interest; capped in a reverse mortgage by the value of the home when the loan is repaid.

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.

Lump Sum: a single loan advance at closing.

Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.

Maturity: when a loan must be repaid; when it becomes 'due and payable'.

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.

Non-Recourse Mortgage: a home loan in which the borrower can never owe more than the home's value at the time the loan is repaid.

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.

Overages: the difference between the lowest available price and any higher price that the home buyer agrees to pay for the loan. Loan officers and brokers are often allowed to keep some or all of this difference as extra compensation.

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.

Points: fees paid to the lender for the loan. One point equals one percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs.

Private Mortgage Insurance (PMI): 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.

Private Mortgage Insurance (PMI): insurance designed to protect the lender against a loss if a borrower defaults on the loan. It is typically required for loans in which the down payment is less than twenty percent of the sales price or, in a refinancing, when the amount financed is greater than eighty percent of the appraised value.

Property Tax Deferral (PTD): reverse mortgages that pay annual property taxes; usually offered by state or local governments.

Proprietary Reverse Mortgage: a reverse mortgage product owned by a private company.

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.

Real Estate Settlement Procedures Act (RESPA): 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.

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.

Reverse Annuity Mortgage: a reverse mortgage in which a lump sum is used to purchase an annuity that gives the borrower a monthly income for life.

Reverse Mortgage: a home loan that gives cash advances to a homeowner, requires no repayment until a future time, and is capped by the value of the home when the loan is repaid.

Right of Rescission: a borrower's right to cancel a home loan within three business days of the closing.

Servicing: administering a loan after closing, such as maintaining loan records and sending statements.

Settlement: another name for closing.

Shared Equity: an itemized loan cost, based on a percent of a home's value at loan maturity.

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.

Supplemental Security Income (SSI): a federal monthly income program for low-income persons who are sixty-five years of age or older, blind, or disabled.

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.

T-Rate: the rate for United States Treasury Securities; used to determine the initial, expected, and current interest rates for the HECM program.

Tenure Advances: fixed monthly loan advances for as long as a borrower lives in a home.

Term Advances: fixed monthly loan advances for a specific period of time.

Thrift Institution: general term for savings banks and savings and loan associations.

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.

Total Annual Loan Cost (TALC) Rate: the projected annual average cost of a reverse mortgage including all itemized costs.

Transaction, Settlement, or Closing Costs: may include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys' fees; recording fees; and notary, appraisal, and credit report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost either as an amount or a range.

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.

Uninsured Reverse Mortgage: a reverse mortgage that becomes due and payable on a specific date.