Definitions of Mortgage Terminology

Balloon Note: Type of mortgage requiring a series of periodic payments that do not fully pay the loan and a large principal (balloon) payment at the end of the term.

Buydown: Funds paid at closing to reduce the interest rate for the first two or three years. The qualifying rate will be the rate in the first year.

Cap: A provision of an ARM limiting how much the interest rate or mortgage payments may increase or decrease.

Closing: The conclusion or consummation of a transaction. In real estate, closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to the sale or loan transaction.

Closing Costs: Money paid by any party to the transaction to effect the closing of a mortgage loan. Does not include prepaid expenses, apportionments, and the like but does normally include an origination fee, title insurance, survey, attorney's fees, etc.

Collateral: Property pledged as security for a debt, such as the real estate securing a mortgage.

Conforming Loan: Conventional home mortgages eligible for sale and delivery to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). These agencies generally buy first mortgages up to loan amounts approved by Congressional directive.

Contract: An agreement between one or more parties to do a particular lawful thing.

Conventional Loan: Non-Government loan provided to all borrowers. A mortgage loan neither insured by FHA nor guaranteed by VA.

Conversion: Option given on certain Adjustable Rate Mortgages (ARMs) which allow the borrower to convert to a fixed rate.

Equal Credit Opportunity Act (ECOA): ECOA is a federal law that requires lenders and other creditors to make credit equally available without discrimination.

Escrow Payment: That portion of a mortgagor's monthly payment held by the lender to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Known as impounds or reserves in some states.

Fair Market Value: The price at which property is transferred between a willing buyer and a willing seller, each of whom has a reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell.

Federal Home Loan Mortgage Corporation (FHLMC): "Freddie Mac" – Private, Government-chartered corporation which buys qualified mortgage loans from the financial institutions that originate them, securitizes the loans, and distributes the securities through the dealer community. The securities are not backed by the U.S. Government. The market value of these securities prior to maturity is not guaranteed and will fluctuate.

Federal Housing Administration (FHA): A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. It sets standards for construction and underwriting.

Federal National Mortgage Association (FNMA): "Fannie Mae" – A tax-paying corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA or guaranteed by VA as well as conventional home mortgages.

Fixed Rate Mortgage (FRM): A mortgage in which the interest rate does not change during the entire term of the loan.

Flood Insurance: Insurance which indemnifies against loss by flood damage. Required by lenders in areas designated (federally) as potential flood areas. The insurance is private but federally subsidized.

Good Faith Estimate: An itemized estimate of the costs to settle (or close) the loan.

Government National Mortgage Association (GNMA): "Ginnie Mae" – A government-owned agency which buys mortgages from lending institutions, securitizes them, and then sells them to investors. Because the payments to investors are guaranteed by the full faith and credit of the U.S. Government, they return slightly less interest than other mortgage-backed securities.

Hazard Insurance: Insurance that covers property damage caused by fire, wind, storms, and other similar risks. Sometimes earthquakes and floods are also covered, while other times they are not..

Homeowner's Association: An organization of homeowners residing within a particular development whose major purpose is to maintain community facilities and services for the common enjoyment of the residents.

Homeowner's Insurance: Insurance that covers property damage caused by fire, wind, storms, and other similar risks. Sometimes earthquakes and floods are also covered, while other times they are not.

Homestead (Exemption): The dwelling of the head of a family. Some states grant statutory exemptions, protecting homestead property against the rights of creditors. Property tax exemptions are also available in some states. Statutory requirements to establish a homestead may include a formal declaration to be recorded.

Interest: Consideration in the form of money paid for the use of money, usually expressed as an annual percentage. Also, a right, share or title in the property.

Interest-Only Mortgage: A loan in which only the interest is payable at regular intervals until the loan's maturity, at which time the full loan balance is due.

Joint Tenancy: An equal, undivided ownership of property by two or more persons, the survivors to take the interest upon the death of any one of them.

Lien: A legal hold or claim of one person on the property of another as security for a debt or charge. The right given by law to satisfy debt.

Life Of Loan: Contract term in years of a mortgage.

Loan-To-Value (LTV): The amount of the mortgage divided by the lesser of the sales price or the appraised value of the property.

Loan Types:

FHA: Government loan provided to low-to-moderate-income borrowers.

VA: Government loan provided to Veterans of the Armed Services.

Conforming: Conventional home mortgages eligible for sale and delivery to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). These agencies generally buy first mortgages up to loan amounts approved by Congressional directive.

Non-Conforming: Also called a jumbo loan. Conventional home mortgages not eligible for sale and delivery to either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan amount, loan characteristics or underwriting guidelines. Non-conforming loans usually incur a rate and origination fee premium.

Lock-In: Lock-In: Lender's guarantee of rate, discount and program for a specified term. Lock-in period typically runs 45 to 60 days from the date of the borrower's application.

Mortgage: A conveyance of an interest in real property given as security for the payment of a debt. In its simplest form, a mortgage permits foreclosure if the debt is not paid, but the foreclosure is usually a judicial proceeding, in court. After foreclosure, the property is then sold, usually by an officer of the court, to satisfy the debt.

Mortgage Banker: A firm or individual active in the field of mortgage banking. Mortgage bankers, as local representatives of regional or national institutional leaders, act as correspondents between lenders and borrowers. More and more frequently, though, mortgage bankers are, themselves, becoming institutional lenders, holding mortgages in their own portfolios as the basis for mortgage-backed securities that they issue.

Mortgage Broker: An individual or company that for a fee acts as intermediary between borrowers and lenders.

Mortgage Insurance: Insurance for which the lender pays a premium that protects the lender against loss if the borrower should default on the mortgage payments and foreclosure of the mortgage should become necessary.

Mortgage Insurance Premium (MIP): Insurance fee charged by FHA to insure the loan against default to the lender.

Non-Conforming Loan: Also called a jumbo loan. Conventional home mortgages not eligible for sale and delivery to either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan amount, loan characteristics or underwriting guidelines. Non-conforming loans usually incur a rate and origination fee premium.

Preliminary Title Report: A title search by a title company before issuance of a title binder or commitment to insure.

Prepaid Items: Charges on a mortgage loan that must be paid by the purchaser. Per diem interest is interest from the date of closing to the end of the month. Homeowner's Insurance must be prepaid for 12 months (escrowed). Property tax prepayment varies from 2 months to 12 months, depending on when the property is purchased and when the taxes are collected in the specific county (escrowed). Mortgage Insurance must be pre-paid for 2 months (escrowed).

Loan Types:

Private Mortgage Insurance (PMI): Insurance provided by a private company helping to protect the mortgage lender against mortgage default. Generally, this insurance is required by the lender when the down payment is less than 20% of the property value. The lender requires the borrower to pay the insurance premiums.

Processing: The preparation of a mortgage loan application and supporting documents for consideration by a lender or insurer.

Qualifying Rate: An interest rate used to calculate the borrower's ability to qualify, which may be greater than the actual interest rate charged to the borrower.

Real Estate Settlement Procedures Act (RESPA): RESPA is a federal law that requires lenders to provide home mortgage borrowers with information of known or estimated settlement costs. RESPA also limits the amount lenders may require to be held in an escrow account for real estate taxes and the insurance, requires the disclosure of known settlement costs to both buyers and sellers by the person conducting the settlement, and outlaws certain referral fees.

Sales Contract: A deliberate written agreement between competent parties stating terms and conditions of a sale.

ettlement Statement (HUD-1): S A statement showing the full details of the loan closing, including costs paid by both the buyer and the seller and detailed breakdown of the manner in which the loan proceeds were distributed.

Tenancy: A holding of real estate under any kind of right of title. Used alone, tenancy implies a holding under a lease.

Tenancy By Entirety: The joint ownership of property by a husband and wife, where both are viewed as one person under common law that provides for the right of survivorship.

Tenancy In Common: In law, the type of tenancy or estate created when real or personal property is granted, devised or bequeathed to two or more persons, in the absence of express words creating a joint tenancy. There is no right of survivorship.

Title: The evidence of the right to or ownership in 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, or through foreclosure of a mortgage.

Title Insurance: A contract by which the insurer, usually a title insurance company, agrees to pay the insured a specific amount for any loss caused by defects of title to real estate, wherein the insured has an interest as purchaser, mortgagee, or otherwise..

Truth-In-Lending: A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

Underwriting: The analysis of risk and the matching of it to an appropriate rate and term. Underwriting involves an analysis of the property, as revealed in the appraisal report as acceptable and adequate security for the loan and of the loan. Risk may also be affected by other factors, such as loan-to-value ratios, the presence or absence of mortgage insurance, etc.