Mortgage Terms [I- V]

 

I

Index
The rate you pay directly related to a particular interest-rate index.

Interest Adjustment
Required on all sellers’ payoffs due to interest being paid one month in arrears. It is always best to figure on 30 days of interest. To figure out one month’s interest, multiply the unpaid principal balance and interest rate, and then divide by 12. The new lender will also charge the buyer a “per diem” (per day) interest adjustment from the date of loan disbursement to 30 days before the first payment comes due.

Income-to-Debt Ratios
A qualifying ratio used in underwriting a residential mortgage loan, which computes the percentage of monthly income, required to meet the monthly housing expense.

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J

judgment
A decision made by a court of law. In judgments that require the repayment of a debt, the court may place a lien against the debtor's real property as collateral for the judgment's creditor.

judicial foreclosure
A type of foreclosure proceeding used in some states that is handled as a civil lawsuit and conducted entirely under the auspices of a court. Other states use non-judicial foreclosure.

jumbo loan
A loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits, currently at $227,150. Also called a nonconforming loan. Freddie Mac and Fannie Mae loans are referred to as conforming loans.

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L

Late Charge
The penalty a borrower must pay when a payment is made a stated number of days. On a first trust deed or mortgage, this is usually fifteen days.

Leasehold Estate
A way of holding title to a property wherein the mortgagor does not actually own the property but rather has a recorded long-term lease on it.

Lease Option
An alternative financing option that allows home buyers to lease a home with an option to buy. Each month's rent payment may consist of not only the rent, but an additional amount which can be applied toward the down payment on an already specified price.

Lender
A term which can refer to the institution making the loan or to the individual representing the firm. For example, loan officers are often referred to as "lenders."

Liabilities
A person's financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others.

Liability Insurance
Insurance coverage that offers protection against claims alleging that a property owner's negligence or inappropriate action resulted in bodily injury or property damage to another party. It is usually part of a homeowner’s insurance policy.

Lien
A legal claim against a property that must be paid off when the property is sold. A mortgage or first trust deed is considered a lien.

Line of Credit
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time to a specified borrower.

Liquid Asset
A cash asset or an asset that is easily converted into cash.

Loan Origination
How a lender refers to the process of obtaining new loans.

loan servicing
After you obtain a loan, the company you make the payments to is "servicing" your loan. They process payments, send statements, manage the escrow/impound account, provide collection efforts on delinquent loans, ensure that insurance and property taxes are made on the property, handle pay-offs and assumptions, and provide a variety of other services.

Loan-to-Value Ratio (LTV)
The ratio of mortgage amount to appraised value or sales price of real property. Used by lenders to determine maximum loan amounts set by secondary market investors and/or government insuring agencies.

Lock-in
An agreement in which the lender guarantees a specified interest rate for a certain amount of time at a certain cost.

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M

Margin
The difference between the interest rate and the index on an adjustable rate mortgage. The margin remains stable over the life of the loan. It is the index which moves up and down.

Maturity
The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable.

Merged credit report
A credit report which reports the raw data pulled from two or more of the major credit repositories. Contrast with a Residential Mortgage Credit Report (RMCR) or a standard factual credit report.

modification
Occasionally, a lender will agree to modify the terms of your mortgage without requiring you t refinance. If any changes are made, it is called a modification.

Mortgage
A legal document that pledges a property to the lender as security for payment of a debt. Instead of mortgages, some states use First Trust Deeds.

Mortgage Banker
For a more complete discussion of mortgage banker, see "Types of Lenders." A mortgage banker is generally assumed to originate and fund their own loans, which are then sold on the secondary market, usually to Fannie Mae, Freddie Mac, or Ginnie Mae. However, firms rather loosely apply this term to themselves, whether they are true mortgage bankers or simply mortgage brokers or correspondents.

Mortgage Broker
A mortgage company that originates loans, then places those loans with a variety of other lending institutions with whom they usually have pre-established relationships.

Mortgagee
The lender in a mortgage agreement.

Mortgage Insurance (MI)
Insurance that covers the lender against some of the losses incurred as a result of a default on a home loan. Often mistakenly referred to as PMI, which is actually the name of one of the larger mortgage insurers. Mortgage insurance is usually required in one form or another on all loans that have a loan-to-value higher than eighty percent. Mortgages above 80% LTV that call themselves "No MI" are usually a made at a higher interest rate. Instead of the borrower paying the mortgage insurance premiums directly, they pay a higher interest rate to the lender, which then pays the mortgage insurance themselves. Also, FHA loans and certain first-time homebuyer programs require mortgage insurance regardless of the loan-to-value.

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N

Negative Amortization
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment, which is why this is called "deferred interest." The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.

No-Cost Loan
Many lenders offer loans that you can obtain at "no cost." You should inquire whether this means there are no "lender" costs associated with the loan, or if it also covers the other costs you would normally have in a purchase or refinance transactions, such as title insurance, escrow fees, settlement fees, appraisal, recording fees, notary fees, and others. These are fees and costs which may be associated with buying a home or obtaining a loan, but not charged directly by the lender. Keep in mind that, like a "no-point" loan, the interest rate will be higher than if you obtain a loan that has costs associated with it.

Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Note Rate
The interest rate stated on a mortgage note.

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O

Original principal balance
The total amount of principal owed on a mortgage before any payments are made.

Origination Fee
On a government loan the loan origination fee is one percent of the loan amount, but additional points may be charged which are called "discount points." One point equals one percent of the loan amount. On a conventional loan, the loan origination fee refers to the total number of points a borrower pays.

Origination Points
The amount lenders charge to borrowers to prepare documents and to process and close the loan. One point equals one percent of the loan amount.

Owner Financing
A property purchase transaction in which the property seller provides all or part of the financing.

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P

Point
A point is 1 percent of the amount of the mortgage. 

Pre-approval
A loosely used term which is generally taken to mean that a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved. A pre-approval is usually done at a certain loan amount and making assumptions about what the interest rate will actually be at the time the loan is actually made, as well as estimates for the amount that will be paid for property taxes, insurance and others. A pre-approval applies only to the borrower. Once a property is chosen, it must also meet the underwriting guidelines of the lender. Contrast with pre-qualification

Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.  

Pre-qualification
This usually refers to the loan officer’s written opinion of the ability of a borrower to qualify for a home loan, after the loan officer has made inquiries about debt, income, and savings. The information provided to the loan officer may have been presented verbally or in the form of documentation, and the loan officer may or may not have reviewed a credit report on the borrower.

Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate are widely publicized in the news media and are used as the indexes in some adjustable rate mortgages, especially home equity lines of credit. Changes in the prime rate do not directly affect other types of mortgages, but the same factors that influence the prime rate also affect the interest rates of mortgage loans. 

Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage. 

PITI
The four components of a monthly mortgage payment on impounded loans. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance. 

Private Mortgage Insurance (PMI)
Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent. 

Planned Unit Development (PUD)
A project or subdivision that includes common property that is owned and maintained by a homeowners' association for the benefit and use of the individual PUD unit owners. 

Purchase Money Transaction
The acquisition of property through the payment of money or its equivalent.

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Q

qualifying ratios
Calculations that are used in determining whether a borrower can qualify for a mortgage. There are two ratios. The "top" or "front" ratio is a calculation of the borrower’s monthly housing costs (principle, taxes, insurance, mortgage insurance, homeowner’s association fees) as a percentage of monthly income. The "back" or "bottom" ratio includes housing costs as will as all other monthly debt.

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R

Rate Adjustment Period
With most ARMs, any periodic adjustment in the interest rate changes the payment. Adjustment periods tend to reflect the period of the index of the most popular ARMs; currently, annual adjustments are the most common.

Rate Cap
Consumer safeguards that protect the interest rate during the application and processing period.

Rate Guarantee
The interest rate lock feature that lenders offer to borrowers.

Rate Lock
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time at a specific cost.

Real Estate Brokerage Fee
The amount paid to the real estate firm by the buyer or seller for services rendered.

Reconveyance
An instrument used to transfer title.

Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Real Property
Land and appurtenances, including anything of a permanent nature such as structures, trees, minerals, and the interest, benefits, and inherent rights thereof. 

Recording
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.

Refinance
The repayment of a debt from the proceeds of a new loan using the same property as security.

refinance transaction
The process of paying off one loan with the proceeds from a new loan using the same property as security.

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S

Second Mortgage
A mortgage that has a lien position subordinate to the first mortgage.

Second Trust Deed
A loan on a property that was made after the first deed.

Secondary Mortgage Market
The market where lenders and investors buy and sell existing mortgages or mortgage-backed securities, thereby providing funds for additional mortgage lending.

Secured Loan
A loan that is backed by collateral. 

Servicer
An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market. 

Servicing
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.

Settlement Statement
See HUD1 Settlement Statement

Subordination Agreement
An agreement by which an encumbrance is made subject to a junior encumbrance; a lender with a loan in second position agrees to stay in second position on the property, even when the loan in first position has been rewritten or refinanced.

Subordinate Financing
Any mortgage or other lien that has a priority that is lower than that of the first mortgage. 

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T

Title
A legal document evidencing a person's right to or ownership of a property. 

Title insurance
Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property. 

Title search
A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding. 

Transfer of ownership
Any means by which the ownership of a property changes hands. Lenders consider all of the following situations to be a transfer of ownership: the purchase of a property "subject to" the mortgage, the assumption of the mortgage debt by the property purchaser, and any exchange of possession of the property under a land sales contract or any other land trust device. 

Transfer Tax
State or local tax payable when title passes from one owner to another. 

Treasury Index
An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or is derived from the U.S. Treasury's daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.  

Two-step Mortgage
An adjustable-rate mortgage (ARM) that has one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term. 

Two to Four Family Property
A property that consists of a structure that provides living space (dwelling units) for two to four families, although ownership of the structure is evidenced by a single deed. 

Trustee
A fiduciary who holds or controls property for the benefit of another.

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U

Underwriting
The analysis of the risk involved in making a mortgage loan that determines whether the risk is acceptable to the lender. Underwriting involves the evaluation of the property as outlined in the appraisal report, the borrower's ability to repay the loan and the application of criteria specified by an investor.

 

V

VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA).