Mortgage Terms DictionaryAt Equity One Lending, we want you to feel comfortable making the decisions that get you into the home of your dreams. A big part of that is speaking the language. Below is a brief overview of mortgage vocabulary, including major loan types and other terms you will run into. A basic understanding of these terms will make you feel right at home working with a Equity One Lending loan officer.
The gradual reduction of the mortgage debt through regularly scheduled payments over the term of the loan.
ANNUAL PERCENTAGE RATE (APR)
The measure of the cost of credit stated as a yearly rate; includes such items as the stated interest rate, plus certain charges.
A written estimate or opinion of a property’s value prepared by a qualified appraiser.
The act of becoming responsible for the repayment of a loan not originally in your name.
A mortgage in which the borrower’s monthly payments are amortized over a longer period than the actual term of the mortgage. As a result, at the end of the loan term, the borrower must pay off the remaining balance with a single lump sum payment or refinance the loan.
When a debtor yields his or her assets to the bankruptcy court and thereby is relieved of the duty to repay unsecured debts. After claiming this provision of federal law, the debtor is discharged of existing unsecured debt; the unsecured creditors may not continue collection actions. Although they may not take additional action to collect from the debtor, those creditors holding deeds of trust or judgment liens are secured by the property. Not all debts may be discharged.
A person who coordinates funding or negotiates contracts for a client but does not loan the money him- or herself.
A situation in which the lender subsidizes the mortgage by lowering the interest rate. During the first few years, the loan payments are low, but they will increase when the funding expires.
For an Adjustable-Rate Mortgage (ARM), a limitation on the amount the interest rate or mortgage payments may increase or decrease.
CERTIFICATE OF TITLE
The attorney’s written opinion establishing the status of title for a property as reflected on the public records. The certificate does not address issues not on record and offers no protection unless the writer of the certificate was negligent.
Also called settlement, a meeting between the buyer, seller and lender and/or their agents during which the property and funds legally transfer.
Expenses that fall above the price of the property that are incurred by buyers and sellers in the process of transferring ownership of a property. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing typically is about 3 percent to 6 percent of the mortgage amount. Closing costs will vary according to the area of the country; your PrimeLending loan officer is able to provide estimates of closing costs for you.
The closing disclosure combines and replaces the Final TIL, Itemization of Amount Financed, and HUD Settlement Statement. The closing disclosure is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction.
Property assured to secure a loan.
A pledge by a lender to provide a loan on specific terms or conditions to a borrower.
A report with documentation of the borrower’s credit history and current status of credit.
The relationship between a borrower’s total monthly debt payments (including proposed housing expenses) and his or her gross monthly income; this calculation is used in determining the mortgage amount that a borrower qualifies for.
The amount of interest that is added to the principal balance of a loan when the contractual terms of that loan allow for a scheduled payment to be made that is less than the interest due.
Failure to make payments in a timely fashion. Foreclosure is a possible result.
DEPARTMENT OF VETERANS AFFAIRS
An independent agency of the federal government that guarantees long-term, low- or no-down payment mortgages to eligible veterans.
A decline in property value.
DISCOUNT POINT (or POINT)
A fee paid by the borrower at closing to reduce the interest rate. A point equals 1 percent of the loan amount.
Money paid up front to make up the difference between the purchase price and the mortgage amount. Down payments usually are 5% to 20% of the sales price on conventional loans.
Money paid by a buyer to a seller to cement a transaction or ensure payment. Usually between 1 to 5% of the purchase price, the amount becomes a part of the down payment if the offer is accepted. The money is returned to the borrower if the offer is rejected. If the borrower cancels the transaction, the entire amount may be forfeited.
The right to use the land of another for a specific limited purpose.
The physical intrusion of a structure or improvement (such as a fence) on the land of another.
The owner’s interest in a property, calculated as the current fair market value of the property less the amount of existing liens.
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)
Also known as “Freddie Mac,” the Federal Home Loan Mortgage Corporation provides a secondary market for mortgage financing by purchasing conventional loans.
FEDERAL HOUSING ADMINISTRATION (FHA)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)
Also known as “Fannie Mae,” this secondary mortgage institution is the largest single holder of home mortgages in the United States. FNMA purchases VA, FHA, and conventional mortgages from primary lenders.
This statement contains the finalized information regarding the annual percentage rate, the finance charge, the amount financed, and the total payments required for the loan.
FIXED RATE MORTGAGE
Throughout the term of the loan, this mortgage interest rate will remain the same for the original borrower.
FLOAT DOWN OPTION
The float down option gives you the ability to reduce your interest rate if the market improves after you lock in your rate. The float down option is applied to the interest rate only and is based on the initial lock period; it may be utilized with all conforming loans – both government and conventional.
The pledge of one party to pay a debt or fulfill a responsibility contracted by another if the original party neglects to pay or perform according to terms of the contract.
When an insurance company covers the insured from loss or damage to the property resulting from issues, such as fire, windstorm and the like.
The U.S. Department of Housing and Urban Development. Established in 1965, HUD develops national policies and programs to address housing needs in the U.S. One of the main missions of HUD is to create a suitable living environment for all Americans by developing and improving the country’s communities and enforcing fair housing laws.
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.
A claim against property. Property is said to be encumbered by a lien and the lien must be removed to clear title.
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate or monthly payment can increase or decrease over the life of the loan.
The loan estimate combines and replaces the current Good Faith Estimate (GFE) and initial Truth in Lending (TIL) disclosures. The loan estimate is designed to provide disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the mortgage loan for which they are applying. It retains most of the information provided in the previous forms, however contains new additional information not previously provided such as a cash to close and a detailed escrow breakdown, among others.
LOAN ORIGINATION FEE
LOAN-TO-VALUE RATIO (or LTV RATIO)
The relationship between the loan amount and the value of the property (the lower of appraised value or sales price), expressed as a percentage of the property’s value. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.
The lender guarantees a specified interest rate if a mortgage goes to closing within a set period of time through this written agreement. This typically specifies the number of points to be paid at closing as well.
The time period during which the borrower is guaranteed an interest rate by the lender.
For an adjustable-rate mortgage (ARM), the amount that is added to the index to determine the interest rate on each adjustment date, as stated in the note.
The lowest price a seller would accept and the highest price that a buyer would pay on a property. The price a property could be sold for at a given time could differ from the market value.
A voluntary lien filed against a property to secure a debt, usually a loan.
An independent professional or company that brings together borrowers and lenders for loan origination purposes, both in residential and commercial circumstances. Mortgage brokers typically charge a fee or require a commission for their services.
MORTGAGE INSURANCE (MI)
Insurance that protects lenders against losses caused by a borrower’s default on a mortgage loan. MI typically is required if the borrower’s down payment is less than 20% of the purchase price.
MORTGAGE INSURANCE PREMIUM (MIP)
Insurance provided to the lender from the Federal Housing Administration (FHA) to cover an instance of the borrower defaulting on the mortgage. Borrowers pay one-half percent each month on FHA insured mortgage loans.
When a borrower’s monthly payments are not large enough to pay all the interest due on the loan. The unpaid interest then is added to the unpaid balance of the loan. Negative amortization can cause home buyers to owe more than the original amount of the loan.
NET EFFECTIVE INCOME
The borrower’s gross income minus federal income tax.
A portion of a mortgage contract prohibiting the assumption of the mortgage without the approval of the lender beforehand.
Lenders charge the borrowers this fee to cover the services needed to take a loan application, process it, and prepare it for closing; it is typically computed as a percentage of the face value of the loan.
An acronym for the four primary components of a monthly mortgage payment: principal, interest, taxes, and insurance (PITI).
Needed to create an escrow account or to adjust the seller’s existing escrow account; taxes, hazard insurance, private mortgage insurance and special assessments can be included in the prepaid expenses.
A preliminary assessment by a lender of the amount it will lend to a potential homebuyer. The process of determining how much money a prospective home buyer may be eligible to borrow before he or she applies for a loan.
PRIVATE MORTGAGE INSURANCE (PMI)
Insurance coverage required for expenses incurred if the borrower defaults on the loan. Borrowers typically are required to carry private mortgage insurance when they have a small percentage of a down payment to offer. An initial premium payment of 1% to 5% of your mortgage amount will be required. Private mortgage insurance also may necessitate an additional monthly fee depending on the borrower’s loan structure.
A lender is paid this money for recording a home sale with the local authorities; this makes it part of the public records.
The cancellation of a contract. In regard to mortgage refinancing, by law the homeowner has three days to cancel the new loan if the agreement uses equity in the home as security.
Real Estate Settlement Procedures Act. Through this, lenders are obligated to disclose information to potential customers throughout the mortgage process. By doing so, it protects borrowers from abuses by lending institutions. RESPA requires lenders to fully inform borrowers about all closing costs, lender servicing, escrow account practices, and business relationships between closing service providers and other parties to the transaction.
A mortgage that has a lien position subordinate to the first mortgage.
The party involved in completing a transaction between a buyer and seller. This is done through the transfer of securities to the buyer and the transfer of cash or other compensation to the seller.
Interest calculated only on the principal balance.
Conducted by a registered land surveyor, this measurement of land shows the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.
Indicates ownership of property. A property owner is said to be “in title.”
Coverage against loss or damage resulting from an error in title ownership to a particular piece of property. Title insurance protects against inaccuracies made during a title search as well as issues that could not be known or discovered through the public records such as missing heirs, mistakes, fraud and forgery.
A step in the loan process where it is decided if a loan will be provided to a potential homebuyer; this decision is based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
VA (or U.S. DEPARTMENT OF VETERANS AFFAIRS)
A federal government agency that provides benefits to veterans and their dependents, including health care, educational assistance, financial assistance, and guaranteed home loans.
VERIFICATION OF DEPOSITS (VOD)
The borrower’s financial institution signs this document to verify the status and balance of his/her financial accounts.
VERIFICATION OF EMPLOYMENT (VOE)
The borrower’s employer signs this document to verify his/her position and salary.