| Glossary
of Mortgage Loan Terms.. |
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Amenity:
a feature of the home or property that serves as a benefit
to the buyer but that is not necessary to its use; may be
natural (like location, Woods, water) or man-made (like a
swimming pool or garden).
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Amortization:
repayment of a mortgage loan through monthly instalments
of principal and interest; the monthly payment amount is
based on a schedule that will allow you to own your home at
the end of a specific time period (for example, 15 or 30
years)
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Annual
Percentage Rate (APR): calculated by using a standard
formula, the APR shows the cost of a loan; expressed as a
yearly interest rate, it includes the interest, points,
mortgage insurance, and other fees associated with the loan.
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Application:
the first step in the official loan approval process;
this form is used to record important information about the
potential borrower necessary to the underwriting process.
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Appraisal:
a document that gives an estimate of a property's fair
market value; an appraisal is generally required by a lender
before loan approval to ensure that the mortgage loan amount
is not more than the value of the property.
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Appraiser:
a qualified individual who uses his or her experience
and knowledge to prepare the appraisal estimate.
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ARM:
Adjustable Rate Mortgage; a mortgage loan subject to changes
in interest rates; when rates change, ARM monthly payments
increase or decrease at intervals determined by the lender;
the Change in monthly -payment amount, however, is usually
subject to a Cap.
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Assessor:
a government official who is responsible for determining the
value of a property for the purpose of taxation.
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Assets:
Anything of value. Any interest in real or personal property
which can be appropriated for the payment of debt.
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Assumable
mortgage: a mortgage that can be transferred from a
seller to a buyer; once the loan is assumed by the buyer the
seller is no longer responsible for repaying it; there may
be a fee and/or a credit package involved in the transfer of
an assumable mortgage.
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Bad Debt:
A debt that is not collectible and is therefore
worthless to the creditor.
Balance Sheet: Financial statement presenting measures
of the assets, liabilities and owner's equity or net worth
of business firm or non profit organization as of a specific
moment in time
Balloon Mortgage: a mortgage that typically offers low
rates for an initial period of time (usually 5, 7, or 10)
years; after that time period elapses, the balance is due or
is refinanced by the borrower.
Bankruptcy: a federal law Whereby a person's assets
are turned over to a trustee and used to pay off outstanding
debts; this usually occurs when someone owes more than they
have the ability to repay.
Borrower: a person who has been approved to receive a
loan and is then obligated to repay it and any additional
fees according to the loan terms.
Bridge Loan: Short-term loan to provide temporary
financing until more permanent financing is available.
Building code: based on agreed upon safety standards
within a specific area, a building code is a regulation that
determines the design, construction, and materials used in
building.
Business Plan: A document that describes an
organization's current status and plans for several years
into the future. It generally projects future opportunities
for the organization and maps the financial, operations,
marketing and organizational strategies that will enable the
organization to achieve its goals.
Budget: a detailed record of all income earned and
spent during a specific period of time.
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Cap: a
limit, such as that placed on an adjustable rate mortgage,
on how much a monthly payment or interest rate can increase
or decrease.
Capital: Broadly, all the money and other property of
a corporation or other enterprise used in transacting its
business.
Capitalization: Long-term debt, preferred stock and
net worth. The loan capital of a community development loan
fund; includes that which has been borrowed from and is
repayable to third parties as well as that which is earned
or owned by the loan fund (i.e. "permanent capital").
Capital Markets: Those financial markets, including
institutions and individuals, that exchange securities,
especially long-term debt instruments.
Cash Flow Financing: Short-term loan providing
additional cash to cover cash shortfalls in anticipation of
revenue, such as the payment's) of receivables.
Cash reserves: a cash amount sometimes required to be
held in reserve in addition to the down payment and closing
costs; the amount is determined by the lender.
Certificate of title: a document provided by a
qualified source (such as a title company) that shows the
property legally belongs to the current owner; before the
title is transferred at closing, it should be clear and free
of all liens or other claims.
Closing: also known as settlement, this is the time
at which the property is formally sold and transferred from
the seller to the buyer; it is at this time that the
borrower takes on the loan obligation, pays all closing
costs, and receives title from the seller.
Closing costs: customary costs above and beyond the
sale price of the property that must be paid to cover the
transfer of ownership at closing; these costs generally vary
by geographic location and are typically detailed to the
borrower after submission of a loan application.
Collateral: Assets pledged to secure the repayment of
a loan.
Covenant: An agreement or promise to do or not to do
a particular thing; to enter into a formal agreement; a
promise incidental to a deed or contract. The following are
functional objectives guiding most covenants: full
disclosure of information, preservation of net worth,
maintenance of asset quality, maintenance of adequate cash
flow, control of growth, control of management, assurance of
legal existence and concept of going concern, provision for
lender profit or program goals.
Current Asset: Assets that will normally be turned
into cash within a year.
Current Liability: Liability that will normally be
repaid within a year.
Current Ratio: Current assets divided by current
liabilities -- a measure of liquidity. Generally, the higher
the ratio, the greater the "cushion" between current
obligations and a firm's ability to meet them.
Commission: an amount, usually a percentage of the
property sales price, that is collected by a real estate
professional as a fee for negotiating the transaction..
Condominium: a form of ownership in which individuals
purchase and own a unit of housing in a multi-unit complex;
the owner also shares financial responsibility for common
areas.
Conventional loan: a private sector loan, one that is
not guaranteed or insured by the U.S. government.
Cooperative (Co-op): residents purchase stock in a
cooperative corporation that owns a structure; each
stockholder is then entitled to live in a specific unit of
the structure and is responsible for paying a portion of the
loan.
Credit history: history of an individual's debt
payment; lenders use this information to gauge a potential
borrower's ability to repay a loan.
Credit report: a record that lists all past and
present debts and the timeliness of their repayment; it
documents an individual's credit history.
Credit bureau score: a number representing the
possibility a borrower may default; it is based upon credit
history and is used to determine ability to qualify for a
mortgage loan.
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Debt:
An amount owed for funds borrowed. The debt may be owed to
an organization's own reserves, individuals, banks, or other
institutions. Generally, the debt is secured by a note,
bond, mortgage, or other instrument that states repayment
and interest provisions. The note, in turn, may be secured
by a lien against property or other assets.
Debt Service: Amount of payment due regularly to meet a
debt agreement; usually a monthly, quarterly or annual
obligation.
Debt Service Reserve: Term used to refer to cash
reserves set aside by a borrower, either by internal policy
or lender covenant, to repay debt in the event that cash
generated by operations is insufficient.
Debt-to-income ratio: a comparison of gross income to
housing and non-housing expenses; With the FHA, the-monthly
mortgage payment should be no more than 29% of monthly gross
income (before taxes) and the mortgage payment combined with
non-housing debts should not exceed 41% of income.
Debt Service: Amount of payment due regularly to meet a debt
agreement; usually a monthly, quarterly or annual
obligation.
Deed: the document that transfers ownership of a
property.
Deed-in-lieu: to avoid foreclosure ("in lieu" of
foreclosure), a deed is given to the lender to fulfil the
obligation to repay the debt; this process doesn't allow the
borrower to remain in the house but helps avoid the costs,
time, and effort associated with foreclosure.
Default: the inability to pay monthly mortgage
payments in a timely manner or to otherwise meet the
mortgage terms.
Delinquency: failure of a borrower to make timely
mortgage payments under a loan agreement.
Discount point: normally paid at closing and
generally calculated to be equivalent to 1% of the total
loan amount, discount points are paid to reduce the interest
rate on a loan.
Down payment: the portion of a home's purchase price
that is paid in cash and is not part of the mortgage loan.
Due
Diligence: Refers to the task of carefully confirming
all critical assumptions and facts presented by a borrower.
This includes verifying sources of income, accuracy of
financial statements, value of assets that will serve as
collateral, the tax status of the borrower and any other
material facts presented by the borrower.
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Earnest
money: money put down by a potential buyer to show that
he or she is serious about purchasing the home; it becomes
part of the down payment if the offer is accepted, is
returned if the offer is rejected, or is forfeited if the
buyer pulls out of the deal.
EEM: Energy Efficient Mortgage; an FHA program that
helps homebuyers save money on utility bills by enabling
them to finance the cost of adding energy efficiency
features to a new or existing home as part of the home
purchase
Equity: an owner's financial interest in a property;
calculated by subtracting the amount still owed on the
mortgage loan(s) from the fair market value of the property.
Escrow account: a separate account into which the
lender puts a portion of each monthly mortgage payment; an
escrow account provides the funds needed for such expenses
as property taxes, homeowners insurance, mortgage insurance,
etc.
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Fair
Housing Act: a law that prohibits discrimination in all
facets of the home buying process on the basis of race,
colour, national origin, religion, sex, familial status, or
disability.
Fair market value: the hypothetical price that a
willing buyer and seller will agree upon when they are
acting freely, carefully, and with complete knowledge of the
situation.
Fannie Mae: Federal National Mortgage Association
(FNMA); a federally-chartered enterprise owned by private
stockholders that purchases residential mortgages and
converts them into securities for sale to investors; by
purchasing mortgages, Fannie Mae supplies funds that lenders
may loan to potential homebuyers.
FHA: Federal Housing Administration; established in
1934 to advance homeownership opportunities for all
Americans; assists homebuyers by providing mortgage
insurance to lenders to cover most losses that may occur
when a borrower defaults; this encourages lenders to make
loans to borrowers who might not qualify for conventional
mortgages.
Fixed-rate mortgage: a mortgage with payments that
remain the same throughout the life of the loan because the
interest rate and other terms are fixed and do not change.
Flood insurance: insurance that protects homeowners
against losses from a flood; if a home is located in a flood
plain, the lender will require flood insurance before
approving a loan.
Foreclosure: a legal process in which mortgaged
property is sold to pay the loan of the defaulting borrower.
Freddie Mac: Federal Home Loan Mortgage Corporation
(FHLM); a federally-chartered corporation that purchases
residential mortgages, securitizes them, and sells them to
investors; this provides lenders With funds for new
homebuyers.
Fund Balance: Net worth in a non profit organization;
total assets minus total liabilities.
Guaranteed Loan: A pledge to cover the payment of
debt or to perform some obligation if the person liable
fails to perform. When a third party guarantees a loan, it
promises to pay in the event of a default by the borrower.
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HELP:
Homebuyer Education Learning Program; an educational program
from the FHA that counsels people about the home buying
process; HELP covers topics like budgeting, finding a home,
getting a loan, and home maintenance; in most cases,
completion of the program may entitle the homebuyer to a
reduced initial FHA mortgage insurance premium-from 2.25% to
1.75% of the home purchase price.
Home inspection: an examination of the structure and
mechanical systems to determine a home's safety; makes the
potential homebuyer aware of any repairs that may be needed.
Home warranty: offers protection for mechanical
systems and attached appliances against unexpected repairs
not covered by homeowner's insurance; ,overage extends over
a specific time period and does not cover the home's
structure.
Homeowner's insurance: an insurance policy that
combines protection against damage to a dwelling and Is
contents with protection against claims of negligence )r
inappropriate action that result in someone's injury or
)property damage.
Housing counseling agency- provides counseling and
assistance to individuals on a variety of issues, including
loan default, fair housing, and home buying.
HUD: the U.S. Department of Housing and Urban
Development; established in 1965, HUD works to create a
decent home and suitable living environment for all
Americans; it does this by addressing housing needs,
improving and developing American communities, and enforcing
fair housing laws.
HUD1 Statement: also known as the "settlement sheet,"
it itemizes all closing costs; must be given to the borrower
at or before closing.
HVAC: Heating, Ventilation and Air Conditioning; a
home's heating and cooling system.
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Index:
a measurement used by lenders to determine changes to the
Interest rate charged on an adjustable rate mortgage.
Inflation: the number of dollars in circulation
exceeds the amount of goods and services available for
purchase; inflation results in a decrease in the dollar's
value.
Interim Financing: Short-term loan to provide
temporary financing until more permanent financing is
available.
Interest: a fee charged for the use of money .
Interest rate: the amount of interest charged on a
monthly loan payment; usually expressed as a percentage.
Insurance: protection against a specific loss over a
period of time that is secured by the payment of a regularly
scheduled premium.
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Judgment:
a legal decision; when requiring debt repayment, a judgment
may include a property lien that secures the creditor's
claim by providing a collateral source.
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Lease
purchase: assists low- to moderate-income homebuyers in
purchasing a home by allowing them to lease a home with an
option to buy; the rent payment is made up of the monthly
rental payment plus an additional amount that is credited to
an account for use as a down payment.
Leverage: Using long-term debt to secure funds for an
organization. In the social investment world, often refers
to financial participation by other private, public or
individual sources.
Liabilities, Total Liabilities: Total value of
financial claims on a firm's assets. Equals total assets
minus net worth.
Lien: a legal claim against property that must be
satisfied When the property is sold.
Limited
Liability: Limitation of shareholders' losses to the
amount invested.
Line of
Credit: Agreement by a bank that a company may borrow at
any time up to an established limit.
Linked Deposit: A deposit in an account with a
financial institution to induce that institution's support
for one or more projects. By accruing no interest or low
interest on its deposit, a foundation essentially subsidizes
the interest rate of the project borrowers.
Loan: money borrowed that is usually repaid with
interest.
Loan
Agreement: A written contract between a lender and a
borrower that sets out the rights and obligations of each
party regarding a specified loan.
Loan fraud: purposely giving incorrect information on
a loan application in order to better qualify for a loan;
may result in civil liability or criminal penalties.
Loan-to-value (LTV) ratio: a percentage calculated by
dividing the amount borrowed by the price or appraised value
of the home to be purchased; the higher the LTV, the less
cash a borrower is required to pay as down payment.
Lock-in: since interest rates can change frequently,
many lenders offer an interest rate lock-in that guarantees
a specific interest rate if the loan is closed within a
specific time.
Loss mitigation: a process to avoid foreclosure; the
lender tries to help a borrower who has been unable to make
loan payments and is in danger of defaulting on his or her
loan
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Margin:
an amount the lender adds to an index to determine the
interest rate on an adjustable rate mortgage.
Mortgage: a lien on the property that secures the
Promise to repay a loan.
Mortgage banker: a company that originates loans and
resells them to secondary mortgage lenders like :Fannie Mae
or Freddie Mac.
Mortgage broker: a firm that originates and processes
loans for a number of lenders.
Mortgage insurance: a policy that protects lenders
against some or most of the losses that can occur when a
borrower defaults on a mortgage loan; mortgage insurance is
required primarily for borrowers with a down payment of less
than 20% of the home's purchase price.
Mortgage insurance premium (MIP): a monthly payment
-usually part of the mortgage payment - paid by a borrower
for mortgage insurance.
Mortgage Modification: a loss mitigation option that
allows a borrower to refinance and/or extend the term of the
mortgage loan and thus reduce the monthly payments.
Negative Covenants: Statements of actions or events
of the borrower must prevent from occurring or existing, for
example, additional borrowing without the lender's consent.
Net Working Capital: Current assets minus current
liabilities.
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Offer:
indication by a potential buyer of a willingness to purchase
a home at a specific price; generally put forth in writing.
Origination: the process of preparing, submitting,
and evaluating a loan application; generally includes a
credit check, verification of employment, and a property
appraisal.
Origination fee: the charge for originating a loan;
is usually calculated in the form of points and paid at
closing.
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Partial
Claim: a loss mitigation option offered by the FHA that
allows a borrower, with help from a lender, to get an
interest-free loan from HUD to bring their mortgage payments
up to date.
PITI: Principal, Interest, Taxes, and Insurance - the
four elements of a monthly mortgage payment; payments of
principal and interest go directly towards repaying the loan
while the portion that covers taxes and insurance
(homeowner's and mortgage, if applicable) goes into an
escrow account to cover the fees when they are due.
PMI: Private Mortgage Insurance; privately-owned
companies that offer standard and special affordable
mortgage insurance programs for qualified borrowers with
down payments of less than 20% of a purchase price.
Pre-approve: lender commits to lend to a potential
borrower; commitment remains as long as the borrower still
meets the qualification requirements at the time of
purchase.
Pre-foreclosure sale: allows a defaulting borrower to
sell the mortgaged property to satisfy the loan and avoid
foreclosure.
Pre-qualify: a lender informally determines the
maximum amount an individual is eligible to borrow.
Premium: an amount paid on a regular schedule by a
policyholder that maintains insurance coverage.
Prepayment: payment of the mortgage loan before the
scheduled due date; may be Subject to a prepayment penalty.
Principal: the amount borrowed from a lender; doesn't
include interest or additional fees.
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Radon:
a radioactive gas found in some homes that, if occurring in
strong enough concentrations, can cause health problems.
Real estate agent: an individual who is licensed to
negotiate and arrange real estate sales; works for a real
estate broker.
REALTOR: a real estate agent or broker who is a
member of the NATIONAL ASSOCIATION OF REALTORS, and its
local and state associations.
Refinancing: paying off one loan by obtaining
another; refinancing is generally done to secure better loan
terms (like a lower interest rate).
Rehabilitation mortgage: a mortgage that covers the
costs of rehabilitating (repairing or Improving) a property;
some rehabilitation mortgages - like the FHA's 203(k) -
allow a borrower to roll the costs of rehabilitation and
home purchase into one mortgage loan.
RESPA: Real Estate Settlement Procedures Act; a law
protecting consumers from abuses during the residential real
estate purchase and loan process by requiring lenders to
disclose all settlement costs, practices, and relationships
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Settlement:
another name for closing .
Special Forbearance: a loss mitigation option where
the lender arranges a revised repayment plan for the
borrower that may include a temporary reduction or
suspension of monthly loan payments.
Subordinate: to place in a rank of lesser importance
or to make one claim secondary to another.
Survey: a property diagram that indicates legal
boundaries, easements, encroachments, rights of way,
improvement locations, etc.
Sweat equity: using labor to build or improve a
property as part of the down payment
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Title 1:
an FHA-insured loan that allows a borrower to make
non-luxury improvements (like renovations or repairs) to
their home; Title I loans less than $7,500 don't require a
property lien.
Title insurance: insurance that protects the lender
against any claims that arise from arguments about ownership
of the property; also available for homebuyers.
Title search: a check of public records to be sure
that the seller is the recognized owner of the real estate
and that there are no unsettled liens or other claims
against the property.
Truth-in-Lending: a federal law obligating a lender
to give full written disclosure of all fees, terms, and
conditions associated with the loan initial period and then
adjusts to another rate that lasts for the term of the loan.
Underwriting: the process of analyzing a loan
application to determine the amount of risk involved in
making the loan; it includes a review of the potential
borrower's credit history and a judgment of the property
value.
VA: Department of Veterans Affairs: a federal agency
which guarantees loans made to veterans; similar to mortgage
insurance, a loan guarantee protects lenders against loss
that may result from a borrower default.
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