Below are definitions of the some of the common terms you will find in the mortgage industry. If you would like information on anything not listed here, please feel free to contact us.
The gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time
Annual Percentage Rate (APR)
The actual cost to the borrower of a mortgage, including interest, mortgage insurance, and loan origination fees (points) calculated over the life of the loan. This will be higher than the Note Rate. Certain fees to third parties (appraisal, title insurance, etc.) are not included in this calculation.
A written opinion of value of the property based on an appraiser’s analysis of the property.
A mortgage whose payments will not be sufficient to pay off the entire balance of the loan by the end of the term of the loan. The payment required at the end of the loan term is called a Balloon Payment.
Within the mortgage loan arena, this term is used to identify a payment made that is significantly larger in size than any of the previous payments. Typically, this is a lump sum payment used to pay off any remaining balance that exists.
The refinancing of an existing mortgage, in which the borrower receives cash in excess of what is used to pay off the existing mortgage, closing costs, points and other fees associated with the transaction.
Expenses, in addition to the purchase price of the property, incurred by buyers and sellers in transferring ownership of a property, including but not limited to: origination fee, title insurance, and recording fees.
The total of all liens on the property divided by the appraised value, expressed as a percentage.
A mortgage that is equal to or less than the dollar amount established by the conforming loan limit set by Fannie Mae and Freddie Mac’s Federal regulator, The Office of Federal Housing Enterprise Oversight (OFHEO) and meets the funding criteria of Freddie Mac and Fannie Mae.
Conventional Mortgage Loan
Conventional loans cover a vast array of loan programs offered by banks. They can have either fixed or variable rates or payments. These loans are not government insured or guaranteed so they do not include FHA loans or VA loans. They also do not include Private Money or Hard Money loans.
Debt-to-Income Ratio (aka “back-end ratio”)
The total mortgage payment plus other monthly expenses (credit card payments, car loan payments, etc.) divided by the gross monthly income, expressed as a percentage.
Debt-to-Income Ratio for Housing (aka “front-end ratio”)
A variation of the debt-to-income ratio (DTI) that calculates how much of a person’s gross income is going towards housing costs. If a homeowner has a mortgage, the front-end DTI ratio is usually calculated as housing expenses (such as mortgage payments, mortgage insurance, etc.) divided by gross income, expressed as a percentage.
The written document conveying real property.
Deed of Trust
A Deed of Trust is used to convey the “dormant title” to land to another person or company as a “trustee”, in order to secure debts or other obligations. The trustee is given the power of sale of the land encumbered in the event of a default by the borrower.
When the borrower does not meet his or her obligations as defined by the loan agreement. This usually involves non-payment of money due but can also involve other factors, such as failure to maintain adequate insurance or failure to properly maintain the property.
An increased interest rate charged to a borrower when payments on a loan are overdue. This higher rate is applied to outstanding balances in arrears in addition to the regular interest charges for the debt. It is illegal to charge this rate on certain mortgage loans.
Department of Veterans Affairs (VA)
An independent agency of the federal government, which guarantees long-term, low or no down payment mortgages to eligible veterans.
Under a deed of trust, a trustee is given title without ownership of the property. The trustee has “dormant title” because it can sell the property if the borrower defaults on the loan but the trustee cannot use the property and does not own it.
Cash paid up front to the seller.
Provision in a security instrument calling for automatic maturity in the event of sale or transfer of title by borrower.
Earnest Money Deposit
Cash paid up front to the seller to show the potential buyer has a definite interest in the property. This is normally paid to an impartial third party (escrow company) to hold until the transaction is completed or the deposit is forfeited.
Equal Credit Opportunity Act
Federal law that prohibits discrimination in a credit transaction on the basis of sex, marital status, race, color, religion, national origin, age, receipt of public assistance benefits and/or the borrower’s good faith exercise of the rights under the Consumer Credit Protection Act.
An impartial third party who holds the financial instrument (check, cashier’s check, banks wire, etc.) on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled.
The value of the property over and above the financial obligations against it. For example, if a property is worth $100,000 and loans against it total $65,000, there is $35,000 of equity.
Fair Housing Act
Prohibits discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions, based on race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents of legal custodians, pregnant women, and people securing custody of children under the age of 18), and handicap (disability).
Fannie Mae - Federal National Mortgage Association - FNMA
A government-sponsored enterprise (GSE) that was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market. Fannie Mae is a publicly traded company which operates under a congressional charter that directs Fannie Mae to channel its efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans.
The cost of credit, which is either collected at or before the loan closing.
Fixed-rate Mortgage (FRM)
A mortgage in which the interest rate does not change throughout the term of the loan.
Insurance coverage that is required in designated areas to protect the borrower and lender against loss due to flooding.
The process used by a lender to terminate the borrowers interest in a property due to a default in the loan, often ending in the lender selling the property and using the proceeds to satisfy the mortgage.
Freddie Mac - Federal Home Loan Mortgage Corp - FHLMC
A stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. The FHLMC purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries.
Good Faith Estimate
An estimate of settlement costs that the applicant may incur at loan closing.
The most commonly used deed in California. It conveys all the title that the grantor has and any title the grantor may acquire in the future.
Gross Monthly Income
The borrower’s total earnings per month before expenses and income taxes are deducted but after business expenses are deducted.
Insurance coverage that insures against damage to a property from fire, wind, or other hazards. This is separate from flood insurance.
Home Equity Line of Credit
A mortgage loan, generally in a subordinate position, which allows the borrower to draw funds in different increments from the loan as needed.
Housing Expense Ratio (aka front-end ratio)
The percentage of gross monthly income that goes toward paying housing expenses. (see also debt-to-income ratio)
Interest Only Loan
A mortgage that requires only the accrued interest (and no principal) to be paid for a specified term of the loan.
The relationship, expressed in a percentage, between the amount of the mortgage and the appraised value/purchase price of the property. For example, on a loan of $65,000 against a property value of $100,000, the LTV is 65%.
Security instrument in which real property is pledged by the borrower to the lender as security for the repayment of a loan.
Compensation paid to a lender to originate and close a loan. Sometimes expressed in the form of points, in which case 1 point is equal to 1%.
Note (see Promissory Note)
The interest rate shown on the promissory note. It includes only the interest and does not include any other fees of the loan as the APR (Annual Percentage Rate) would.
A fee that is sometimes charged to a borrower for paying off a debt early.
Principal, interest, taxes, and insurance, which generally make up the four components of the monthly mortgage payment.
Private Mortgage Insurance (PMI)
Protects lenders against borrower defaults. Generally required on mortgages where the loan to value ratio is more than 80%.
A written, dated and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at a specified future date, which could include multiple payments over time.
The cancellation of a transaction, stipulated by state and federal law that allows refinancing borrowers to cancel the loan. The general rescission period is three days (not including Sunday or federal holidays) from the signing date. This only applies to owner occupied refinances.
Real Estate Owned (REO)
Property acquired by a lender, through foreclosure, which is held as inventory.
Real Estate Settlement Procedures Act (RESPA)
RESPA requires lenders and brokers to provide borrowers with information on settlement costs and mortgage servicing transfers at the time of application.
Secondary Mortgage Market
The segment of the mortgage market where mortgages are resold, not where mortgages are originated. Mortgages in this market are often grouped together based on risk, size, and structure and are then sold.
Interest computed solely on the principal balance.
Arrangement between a mortgagor (borrower) and mortgagee (lender) through which the mortgagor retires the mortgage obligation with a payment of something less than the total outstanding principal balance. Any principal forgiven in the transaction is considered by the IRS to be taxable income to the borrower. (See www.irs.gov for current tax information)
The right to the ownership and possession of any item that may be legally recognized as belonging to someone or something. In its most basic sense, title is the recognition of ownership.
An examination of public records to determine and confirm a property’s legal ownership, and find out what claims are on the property. A title search is usually performed by a title company or an attorney, who researches the vested owner, the liens or other judgments on the property, the loans on the property and the property taxes due.
Title Insurance (Owner’s policy)
An insurance policy certifying an owner has the title to a house and the right to transfer it to another.
Title Insurance (Lender’s policy)
An insurance policy that insures a lender against errors in the title that were not discovered in the title search.
Federal law requiring disclosure of the Annual Percentage Rate to home buyers within a short period of applying for a loan. It’s purpose is to help borrowers understand the actual cost of borrowing money, which allows them to compare costs among lenders.
The process by which the guidelines established are applied to a loan application to ensure that safe and secure loans are issued. Some of the things that are considered are the property value, the borrower’s ability to make the payments, the borrower’s credit and the loan-to-value ratio.