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Mortgage Glossary-- A --Agreement for sale - A contract signed by buyer and seller stating the terms and conditions under which a property will be sold. Amortization - The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment. If the payment is less than the interest due, the balance rises and thus negative amortization occurs. Amortization schedule - A table showing the mortgage payment, broken down by interest and amortization, the loan balance, tax and insurance payments if made by the lender, and the balance of the tax/insurance escrow account. Application - A request for a loan that includes the information about the potential borrower, the property and the requested loan amount that the lender needs to make a decision. Appraisal - A written estimate of a property's current market value prepared by an independent appraiser. Appraiser - A professional with knowledge of real estate markets and skilled in the practice of appraising. When a property is appraised in connection with a loan, the appraiser is selected from a list maintained by the lender, but the appraisal fee is paid by the borrower. Appraisal fee - A fee charged by an appraiser for the appraisal of a particular property. Approval - Acceptance of the borrower's loan application. Approval means that the borrower meets the lender's qualification requirements. In some cases, especially where approval is provided quickly as with automated underwriting systems, the approval may be contingent on further verification of information provided by the borrower. Automated underwriting - A computer-driven process for informing the loan applicant very quickly, sometimes within a few minutes, whether the applicant will be qualified, and forwarded to a lender. The quick decision is based on information provided by the applicant, subject to later verification, and other information retrieved electronically including information about the borrower's credit history and the subject property. Automated underwriting system - A particular computerized system for doing automated loan qualifications. Mortgage brokers and some large lenders have developed such systems. -- B --Balance - The amount of the original loan remaining to be paid. It is equal to the loan amount less the sum of all prior payments of principal. Biweekly mortgage - A mortgage on which the borrower pays half the monthly payment every two weeks. Because this results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term. -- C --Cash-Out refinance - Refinancing for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes "cash-out" of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan. Closing costs - All costs [bank, legal, stamp duty, broker] that are due once a loan is approved. This can typically be calculated as between 5% - 7% of the loan amount [depending on the loan and borrower type]. Co-Borrowers - One or more persons who have signed the note, and are equally responsible for repaying the loan. Construction financing - The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house. Co-signing a note - Assuming responsibility for someone else's loan in the event that that party defaults. A risk not to be taken lightly. Credit report - A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history. Credit score - A single numerical score, based on an individual's credit history that measures that individual's credit worthiness. Credit scores are as good as the algorithm used to derive them. The most widely used credit score is called FICO for Fair Isaac Co. which developed it. -- D --Debt consolidation - Rolling short-term debt into a home mortgage loan. Default - Failure of the borrower to honor the terms of the loan agreement. Lenders (and the law) usually view borrowers delinquent 30 days or more after payment is due and non performing 90 days or more after payment is due. At 90 days overdue, the borrower is said to be in default. Delinquency - A mortgage payment that is more than 30 days late. Demand clause - A clause in the mortgage indenture that allows the lender to demand full repayment at any time for any reason. Documentation requirements - The set of lender requirements that specify how information about a loan applicant's income and assets must be provided, and how it will be used by the lender. Down payment - The difference between the cost of the property and the loan amount, expressed in dollars, or as a percentage of the price. For example, if the house sells for $100,000 and the loan is for $95,000, the down payment is $5,000 or 5%. -- E --Equity - In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home. Escrow - An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions for the sale proceeds to be held in escrow by an attorney until the seller remits all of the necessary documents. -- F --Fees - The sum of all upfront cash payments required by the lender as part of the charge for the loan. FICO Score - See Credit Score. First mortgage - A mortgage that has a first claim against the property in the event the borrower defaults on the loan. Fixed rate mortgage (FRM) - A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage. Foreclosure - The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults. Forbearance agreement - An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrower’s delinquency. -- G --Deed of Gift - A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as down payment. Grace period - The period after the payment due date during which the borrower can pay without being hit for late fees. Grace periods apply to most mortgages on which interest is calculated daily but accrued monthly. -- H --Hazard insurance - Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as "homeowner insurance". Homeowners insurance - Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Home equity line of credit - A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. You can draw on the line by writing a check, using a special credit card, or in other ways. Housing bubble - A marked increase in house prices fueled partly by expectations that prices will continue to rise. Housing expense - The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees. -- I --Interest cost - A time-adjusted measure of cost to a mortgage borrower. Interest cost is measured over the individual borrower's time horizon, and it may be measured after taxes at the individual borrower's tax rate. Interest due - The amount of interest, expressed in dollars, computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by the interest accrual period. 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 rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A rate of 6%, for example, means a rate of 1/2% per month. A mortgage interest rate is a rate on a loan secured by a specific property. Investor - In real estate, a borrower who owns or purchases a property as an investment rather than as a residence. -- J ---- K ---- L --Late fees - Fees that lender’s are entitled to collect from borrowers who don't pay within the grace period. Most mortgage notes offer borrowers a 3 or 5-day grace period, with a late charge of about $20.00 on payments received 3-5 days after the due date. Lien - The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc. Loan amount - The amount the borrower promises to repay, as set forth in the mortgage contract. It differs from the amount of cash disbursed by the lender by the amount of interest and other upfront costs included in the loan. Loan officer - Employees of lenders or mortgage brokers who find borrowers, sell and counsel them, and take applications. Loan-to-value ratio - The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts. -- M --Margin - The amount added to the prime rate, ranging generally from 2 to 3 percentage points, to obtain the mortgage interest rate. Maturity - The period until the last payment is due. This is usually but not always the term, which is the period used to calculate the mortgage payment. Minimum down payment - The minimum allowable ratio of down payment to sale price on any program. If the minimum is 5%, for example, it means that you must make a down payment of at least $5,000 on a $100,000 house, or $10,000 on a $200,000 house. Monthly debt service - Monthly payments required on credit cards, installment loans, home equity loans, and other debts but not including payments on the loan applied for. Mortgage - A written document evidencing the lien on a property taken by a lender as collateral for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. Mortgage broker - An independent contractor who offers the loan products of multiple lenders. A mortgage broker counsels on the loans available from different lenders, takes the application and usually processes the loan. When the file is complete, the lender processes and [perhaps] approves the loan. Mortgage Indemnity Insurance - Insurance against loss provided to a mortgage lender in the event of borrower default. The borrower pays the premiums. Mortgage Indemnity Insurance premium - The up-front charge that the borrower pays for mortgage indemnity insurance. Mortgage payment - The monthly payment of interest and principal made by the borrower. Mortgage referrals - Advice on where to go to get a mortgage. Mortgage shopping - Trying to find the best deal on a mortgage. -- N --Net branch- A facility offered by some lenders to mortgage brokers where de jure the brokers become employees of the lender but de facto they retain their independence as brokers. One of the advantages of this arrangement to brokers is that they need not disclose yield spread premiums received from lenders. Non-Permanent resident alien - A non-citizen without residency or work status, who is employed outside of the jurisdiction in which they wish to borrow. As distinction from a permanent resident alien, who has residency or work status and who lenders do not distinguish from other local citizens in certain regard. Non-permanent resident aliens are subject to somewhat more restrictive qualification requirements than local citizens. Note - A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents. -- O --Option ARM - An adjustable rate mortgage with flexible payment options, monthly interest rate adjustments, and very low minimum payments in the early years. They carry a risk of very large payments in later years. Origination fee - An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate. -- P --Partial Pre-payment - Making a payment larger than the scheduled payment as a way of paying off the loan earlier. Payment period - The period over which the borrower is obliged to make payments. On most mortgages, the payment period is a month, but on some it is biweekly. Payoff month - The month in which the loans balance is paid down to zero. Per Diem interest - Interest from the day of closing to the first day of the following month. Points - An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., "3 points" means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations Prepayment - A payment made by the borrower over and above the regular payment. If the additional payment pays off the entire balance it is a "prepayment in full"; otherwise, it is a "partial prepayment." Prepayment penalty - A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest. Primary residence - The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented. Principal - The part of the monthly payment that is used to reduce the loan balance. Processing - Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. Property flipping - Successive home or property sales at progressively higher prices. -- Q --Qualification - The process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay a loan. Qualification is sometimes referred to as "pre-qualification" because it is subject to verification of the information provided by the applicant. Qualification ratios - Requirements stipulated by the lender that the ratio of housing expense to borrower income, and housing expense plus other debt service to borrower income cannot exceed specified maximums. These may reflect the maximums specified by the Central Bank or Clearing Banks Association Member Banks. Qualification requirements - Standards imposed by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum loan-to-value ratios, and so on. -- R --Referral fees - Payments made by service providers to other parties as quid pro quo for referring customers. Refinance - Paying off an old loan while simultaneously taking a new one. This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan. It may be done to raise cash, as an alternative to a home equity loan. Or it may be done to reduce the monthly payment. Reverse mortgage - A loan to an elderly home owner on which the balance rises over time, and which is not repaid until the owner dies, sells the house, or moves out permanently. -- S --Scheduled mortgage payment - The amount the borrower is obliged to pay each month, including interest, principal, and mortgage insurance, under the terms of the mortgage contract. Paying less than the scheduled amount results in delinquency. On most mortgages, the scheduled payment is the fully amortizing payment throughout the life of the loan. Second mortgage - A loan with a second-priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid. Self-employed borrower - A borrower who must document income using tax returns or accountants reports rather than information provided by an employer. This complicates the process somewhat. Stated assets - A documentation requirement where the borrower discloses her assets but they are not verified by the lender. Stated income - A documentation requirement where the lender verifies the source of the income but not the amount. Sub-prime lender - A lender who specializes in lending to sub-prime borrowers. -- T --Teaser rate - The initial interest rate on an Adjustable Rate Mortgage, when it is below the regular market rate. Term - The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity date. On a 5-year balloon loan, for example, the maturity is 5 years but the term in most cases is 25 years. Title insurance - Insurance against loss arising from problems connected to the title to property. . Total expense ratio - The ratio of housing expense plus current debt service payments to borrower income, which is used in qualifying borrowers. -- U ---- V ---- W ---- X ---- Y ---- Z -- |
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