Glossary
adjustable rate mortgage (ARM) A loan that allows the interest
rate, and usually the payment, to adjust periodically during
the life of the loan. Most ARMs start at a lower-than-market interest
rate and then adjust based on a prevailing index plus
margin.
amortization The continuous regular payment of a set amount
on a loan, which will reduce and pay it off in a given period of
time.
annual percentage rate (APR) The interest rate on credit as expressed
by a combination of the loan interest rate and certain
loan costs. The Truth-in-Lending statement of Regulation Z of
the Federal Reserve requires the APR to be quoted.
balloon payment When a debt is paid off in less than the set
amortization period by paying the remaining principal balance,
a balloon payment of the loan has been made. A loan with
a 30 year amortization payment with the remaining principal to
be paid off in five years is a balloon loan.
basis points One basis point equals 0.01%, one hundred basis
points equal 1.0%.
bond A security for payment of an obligation. In mortgage lending,
bonds are backed by mortgage loans that are pooled together
and the resultant bond can be sold in the secondary
market.
broker In mortgage lending, a broker is someone who acts as an
intermediary between the borrower and the actual lender. A
broker is typically an independent agent representing several
lending sources.
buy-down A loan that is bought down below its original interest
rate and/or payment. A permanent buy-down will reduce the
interest rate and payment for the life of the loan, while a temporary
buy-down will reduce the payments on the loan only in
the beginning years.
certificate of reasonable value (C.R.V.) The name given to a
Veteran’s Administration (VA) appraisal.
C.H.A.R.M. booklet Consumer Handbook on Adjustable Rate
Mortgages, which must be given to any borrower who applies
for an ARM. This is a federally required disclosure.
chattel Personal property that is not a part of the real estate and
can be moved.
closing costs The sum of all costs in relation to the purchase
and/or loan closing, excluding the down payment.
cloud A defect on the title of the property that would prevent
the purchaser from obtaining a clear title.
collateral The security for a loan. Something of value against
which the loan is secured. A mortgage is secured by real estate.
commitment A promise to do something. In mortgage lending,
the lender will commit to make the loan, or commit to make the
loan at a specific rate and points. Some lenders will require a
commitment fee to guarantee the commitment.
common area Part of a property owned by all of the owners. In
a condominium or planned unit development there are common
areas owned by the property owners jointly.
compensating factor A positive factor that can help to influence
the loan approval. Long-term good credit, a large amount
of assets, or increasing income are some examples.
condominium A property where the unit is owned individually
and the land and all other improvements are owned jointly
with all the owners, or the condominium association.
conforming In mortgage lending, a loan that conforms to the
guidelines set forth by Fannie Mae or Freddie Mac is said to be
conforming.
construction loan A short-term, temporary loan, made by a
lender to pay the cost of constructing a building, which is paid
off upon completion by cash or a permanent mortgage. The
construction loan is secured by the real estate.
conventional loan A loan that is not insured, guaranteed, or
funded by the government.
covenants and restrictions The rules and regulations governing
the maintenance and use of an area. Condominiums and
Planned Unit Developments (PUDs) will have covenants and
restrictions.
creditor A lender, or someone who lends money to a borrower
(debtor).
credit scores Automated credit system which determines the
quality of a borrower’s credit.
D.E. underwriter A direct endorsement underwriter who is
approved by the FHA to underwrite (approve/reject) FHAinsured
loans. The underwriter will normally be employed by
the lender making the loan.
deed The document that shows ownership in real property.
deed of trust A mortgage that secures the note by the real property,
and appoints a third party trustee to act in the lender’s behalf,
without having to go to court to proceed with foreclosure
when the borrower defaults on the loan.
default A condition of the mortgage that occurs any time the
borrower is not in compliance with the terms of the loan. A late
payment is a default. A default that is not corrected will result
in the loan being called for payment in full.
depreciation When the value of property goes down. Some depreciation
is taken as a tax write-off and is considered to be a
paper loss because the actual value has not diminished.
Desktop Underwriting (DU) Fannie Mae’s automated computer
underwriting system.
discount points Points, expressed as a percent of the loan, that
are used to buy the interest rate down. Sometimes discount
points are used as fee income by the lender. If 10% is the rate
with no discount points, or the rate is at par, a rate of 9.75%
would have points added to buy it down from 10%. The borrower
gets a discounted rate by paying additional points, or interest,
up-front.
disintermediation The movement of funds from one place to
another to seek a higher yield. If money is moving out of bank
accounts and into higher-paying instruments, such as government
bonds, this movement can create a shortage of funds, or
higher interest rates.
due-on-sale clause A clause in a mortgage that requires the loan to
be paid off if the property is sold or conveyed to another person.
earnest money The deposit on a contract. It is part of the consideration
on a binding contract. It can be in the form of cash or
a note.
encroachment When some part of a property is on an adjoining
property. If a fence or roof overhang from one property is on the
other property, it is encroaching on the latter. A lender will not
make a loan on the property until either the encroachment is
corrected or title insurance insures against it.
equity The value of property beyond any lien against it. That
portion that is owned without liability.
escrow Money held by the lender to pay future claims. Taxes
and insurance are normally added into the monthly payment
and held in escrow until they are due to be paid.
fair-market value The value a purchaser will pay for a property;
on an appraisal it is value as determined by comparing the
property to similar properties that have sold in the community.
Federal Home Loan Mortgage Corporation (FHLMC or Freddie
Mac) A quasi-governmental agency that acts as a secondary
market investor to buy and sell mortgage loans. It sets many of
the underwriting guidelines on conventional loans, along with
Fannie Mae (FNMA).
Federal Housing Administration (FHA) A section of the U.S.
Department of Housing and Urban Development that insures
loans by the full faith and credit of the U.S. government. It sets
the guidelines for the approval and insurance of these FHA
loans.
Federal National Mortgage Association (FNMA) A secondary
market investor that was originally a government agency and is
now a private corporation whose stock is traded on the N.Y.
Stock Exchange. It buys and sells mortgages that meet its guidelines.
Also known as Fannie Mae.
fee simple The highest form of ownership that someone can
hold in a property. This is the most common form of ownership.
first mortgage A first lien on real estate, or a loan that has priority
over other mortgages on the same property.
fixed rate mortgage (FRM) A mortgage with an interest rate that
does not change or adjust.
fixture A part of the property that is attached and conveys with
it. The opposite of chattel.
foreclosure Legal action by the lender upon default to have the
property sold to pay the securing mortgage.
front end zero In mortgage insurance, the up-front or first year’s
premium is allowed to be financed into the loan so that it does
not have to be paid at closing.
funding fee The VA funding fee is a closing cost that may be
paid by anyone, or financed into the mortgage as long as the total
does not exceed the maximum 100% loan currently allowed
by Ginnie Mae (GNMA). The fee is 1.25% on LTVs over 95% to
100% loans, 0.75% on loans over 90% LTV up to 95%, 0.50%
on loans with at least 10% down, and 0.50% on assumptions.
Government National Mortgage Association (GNMA or Ginnie
Mae) A government agency that participates in the secondary
market and is involved in buying, selling, and guaranteeing
government loans such as FHA and VA.
grace period The time between the due date and the past-due
date of a loan during which there is no late charge.
graduated payment mortgage (GPM) A loan that starts out
with a substantially lower payment and then increases the
payments each year until a level payment is reached that will
pay off the loan over the remaining amortization period. There
is usually negative amortization.
gross income Total income before withholding is subtracted.
Gross monthly income (GMI) is used to qualify borrowers.
growing equity mortgage (GEM) A loan in which the normal
payment is increased each year so that the amortization is accelerated,
paying off the mortgage in a shorter period of time.
hazard insurance That portion of the homeowner’s insurance
that protects the property against fire and other forms of destruction.
HUD (Department of Housing and Urban Development) The
government agency that governs FHA and other housing programs.
index A figure, normally compiled from other indicators, that is
used to establish rates on ARMs.
judgment An unsecured lien filed against a borrower for nonpayment
of a debt.
jumbo loans Nonconforming loans that are higher than the loan
amounts acceptable to FNMA and FHLMC.
late charge The penalty imposed when a late payment is made
or received after the grace period of a loan.
lien A debt that is secured by something of value. A mortgage is
a lien on real estate.
Loan Prospector (LP) Freddie Mac’s automated computer underwriting
system.
loan-to-value (LTV) The amount of the total value of the property
that is secured by the mortgage. An $80,000 mortgage on a
$100,000 property has 80% LTV. Total loan-to-value (TLTV) is
the sum of all liens on a property.
lock-in The ability to have an interest rate and/or points locked
in, or guaranteed, for a specific period of time.
long-term debt (LTD) Any debt that exceeds the maximum payoff
period as set by the guidelines for individual loans.
margin The interest added onto the index of an ARM to determine
the adjustment of the interest rate.
mortgage A legal instrument that makes real estate security for
a loan.
mortgagee The holder of a mortgage loan.
mortgagor The borrower of a mortgage loan.
mortgage banker A lender who deals regularly with the secondary
market. A mortgage banker originates, closes, services,
and sells the loans.
mortgage broker A lender who deals with other lenders as an
intermediary, or broker, of the other lender’s loans.
mortgage insurance (MI) Insurance on a mortgage that protects
the lender against losses due to default and/or foreclosure. It is
required on all conventional loans with less than 20% down
payment. It is not life insurance. It is sometimes called Private
Mortgage Insurance, or PMI.
mortgage insurance premium (MIP) Mortgage insurance on
FHA loans that is backed by the full faith and credit of the U.S.
government.
negative amortization This situation occurs when the borrowers
are charged more interest than they are paying. The unpaid
interest is added back into the principal amount of the loan.
nonconforming Loans that do not conform to standard conventional
loan guidelines set by Fannie Mae or Freddie Mac.
Jumbo loans are nonconforming.
note The legal instrument that shows the borrower is obligated
to pay the loan.
origination fee The fee the lender gets for originating and closing
the loan, usually 1% of the loan amount.
PITI The basic house payment P = principal, I = interest, T =
taxes, I = hazard insurance. Additional parts of the payment
might be the following MI = mortgage insurance, HOA = homeowner’s
association fees or road maintenance fees.
planned unit development (PUD) A comprehensive development
that encompasses several different sections and amenities.
points Points are a percentage of the loan amount. Discount
points are charged to make up the difference between a lower
loan amount and the actual required rate, which is higher.
Some lenders will charge extra points as fee income. The origination
fee is often included as part of the total points.
principal The amount of the loan.
private mortgage insurance The same as mortgage insurance.
Realtor A registered name for any real estate agent who belongs
to the National Association of Realtors.
second mortgage Secondary financing behind or after the primary
or first mortgage.
secondary market Investors who buy and sell large numbers
of mortgage loans from the primary lenders. Fannie Mae, or
the Federal National Mortgage Association (FNMA); and Freddie
Mac, or the Federal Home Loan Mortgage Corporation
(FHLMC) are two of the largest.
servicing The job of collecting the monthly house payments
from a loan and making sure that they are properly credited.
The loan servicer must make sure that the loans stay current,
that the taxes and insurance are paid, and that the borrower is
notified of the loan status and any changes.
subordination A second mortgage is subordinate to a first mortgage.
survey Most lenders will require a physical survey of the property.
This is done by a registered surveyor who will measure the
lot lines and show the footprint of the house and all outbuildings,
roads, rights of way, easements, and water located
on the property.
title To hold title to property is to show ownership. A deed is evidence
of holding title to property.
title insurance Insurance that insures against any defects in the
title that would give less than clear title to the property. Normal
exceptions are mortgages, easements, and rights of way. The
borrower normally pays for this as a normal closing cost. However,
the seller or other third party can pay the insurance premium.
total loan-to-value (TLTV) The total of all mortgages on the
property expressed as a percentage of the value. Such as, a
$100,000 house with an $80,000 first mortgage and a $10,000
second mortgage = 90% TLTV.
underwriter A person who underwrites a mortgage loan is the
one who either approves or rejects it based on certain guidelines
pertaining to that loan. Some lenders approve loans by
loan committees.
Veteran’s Administration (VA) This federal agency oversees
the VA loan guarantee program.
value the worth of a property, being the lesser of the sales price
or appraised value.