Landmark Mortgage and Loans - Glossary of Terms

ADJUSTABLE RATE MORTGAGE (ARM) - A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also known as a negotiable rate mortgage or variable rate mortgage.

AMORTIZATION - The periodic principal pay down of a loan.

ANNUAL PERCENTAGE RATE (APR) - An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is usually higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan.

ASSUMPTION - Taking over a loan and becoming personally liable for the repayment.

BALLOON PAYMENT MORTGAGE - Usually a short term fixed rate loan which involves small payments for a certain period of time and one large payment for the principal balance at a time specified in the contract.

BANKRUPTCY - A provision of Federal Law whereby a debtor surrenders his assets to the Bankruptcy Court and is relieved of the future obligation to repay his unsecured debts. After bankruptcy, the debtor is discharged and his unsecured creditors may not pursue further collection efforts against him. Secured creditors, those holding deeds of trust or judgment liens, continue to be secured by the property but they may not take other action to collect from the debtor.

BENEFICIARY - A person named to receive a benefit from a trust. A contingent beneficiary has conditions attached to his rights, usually someone else must die first.

BROKER - An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself.

CAPS (interest) - Consumer safeguards which limit the amount that the interest rate may change on an adjustable rate mortgage.

CAPS (payment) - Consumer safeguards which limit the amount that monthly payments may change on an adjustable rate mortgage.

CAVEAT EMPTOR - Buyer beware. The buyer must inspect the property and satisfy himself that it is adequate for his needs. The seller is under no obligation to disclose defects but may not actively conceal a known defect or lie if asked.

CERTIFICATE OF ELIGIBILITY - The document given to qualified veterans which entitles them to VA guaranteed loans for homes, businesses, and mobile homes.

CERTIFICATE OF REASONABLE VALUE (CRV) - An appraisal issued by the Veterans Administration showing the property's current market value.

CERTIFICATE OF TITLE - A written opinion by an attorney setting forth the status of title to the property as shown on the public records.

CLOSING - The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charges and other costs assessed. The cost of closing is usually about 3% to 6% of the mortgage amount.

COLLATERAL - Property pledged to secure a loan.

COMMITMENT - An agreement, usually in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

CONDOMINIUM - A system of individual fee simple ownership of portions (units) in a multi-unit structure, combined with joint ownership of common areas. Each individual may sell or encumber his own unit.

CONSTRUCTION LOAN - A short-term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

CONVENTIONAL LOAN - A mortgage loan which is not insured or guaranteed by any agency of state or federal government.

CREDIT REPORT - A report documenting the credit history and current status of a borrower's credit standing.

DEBT-TO-INCOME RATIO - The ratio, expressed as a percentage, which results when a borrower's monthly payment obligations on long-term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (conventional loans).

DEED - The written document conveying real property. Once recorded at the Courthouse, the original piece of paper is not needed to convey title in the future.

DEED OF TRUST - A voluntary lien to secure a debt deeding the property to Trustees who foreclose and sell the property at public auction, in the event of default on the Note the Deed of Trust secures. In many states, this document is used in place of a mortgage to secure the payment of a note.

DEFAULT - Failure to meet legal obligations in a contract, such as the failure to make the monthly payments on a mortgage.

DELINQUENCY - Failure to make payments on time potentially leading to foreclosure.

DELIVERY - The final, unconditional and absolute transfer of a deed to the Grantee so that the Grantor may not revoke it.

DEPARTMENT OF VETERANS AFFAIRS - An independent agency of the federal government which guarantees long-term, low or no down payment mortgages to eligible veterans.

DOWN PAYMENT - Money paid to make up the difference between the purchase price and the mortgage amount. Down payments are usually 10% to 20% of the sales price on conventional loans.

DUE-ON-INTEREST - A clause in a mortgage agreement that allows the lender to call the loan due and payable at its option upon the transfer of the property.

DUE-ON-SALE CLAUSE - A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

EARNEST MONEY - Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

EASEMENT - The right to use the land of another for a specific limited purpose.

EMINENT DOMAIN - The power of the state to take private property for public use upon payment of just compensation.

ENCROACHMENT - The physical intrusion of a structure or improvement on the land of another, such as a fence or driveway over the property line.

ENTITLEMENT - The VA guarantee of a home loan for a veteran. Also known as eligibility.

EQUAL CREDIT OPPORTUNITY ACT (ECOA) - A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

EQUITY - The value an owner has in real estate over and above the obligation against the property.

EQUITY SHARING - A form of joint ownership between an owner/occupant and an owner/investor. The investor takes depreciation deductions for his share of the ownership. The occupant receives a portion of the tax write-offs for interest and taxes and a part of his monthly payment is treated as rent. The co-owners divide the profit upon sale of the property.

ESCROW - Funds that are set aside and held in trust, usually for payment of taxes and insurance on real property. Also earnest deposits held pending loan closing.

FEDERAL HOUSING ADMINISTRATION (FHA) - A division of the Department of Housing and Urban Development whose main activity is the insuring of residential mortgage loans made by private lenders. The FHA also sets standards for underwriting mortgages.

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - A secondary mortgage institution which is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as "Fannie Mae."

FHA LOAN - A loan insured by the Federal Housing Administration open to all qualified home purchasers.

FHA MORTGAGE INSURANCE - A small fee (up to 3.8 percent of the loan amount) paid at closing or a portion of this fee may be added to each monthly payment of an FHA loan to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.

FIRM COMMITMENT - A promise by FHA to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan.

FIXED RATE MORTGAGE - A mortgage with an interest rate that will remain the same throughout the term of the mortgage for the original borrower.

FORECLOSURE - A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA. Also known as "Ginnie Mae."

GRADUATED PAYMENT MORTGAGE (GPM) - A type of flexible payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has built-in negative amortization.

GUARANTY - A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.

HAZARD INSURANCE - A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm, etc.

HOUSING EXPENSE-TO-INCOME RATIO - The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (conventional loans).

IMPOUND - A portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, etc. as they become due. Also known as reserves.

INVESTOR - A money source for a lender.

INTERIM FINANCING - A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.

JOINT OWNERSHIP AGREEMENT - An agreement between owners defining their rights, ownership, monetary obligations and responsibilities. This could be between and investor and an occupant or the occupants. If an investor is involved, the investor does not take depreciation deductions and none of the occupant's payment is deemed rent for tax purposes.

JUMBO LOAN - A loan which is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

LIEN - A claim or charge against property. Property is said to be encumbered by a lien and the lien must be removed to clear title.

LOAN-TO-VALUE RATIO - The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

MARKET VALUE - The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

MORTGAGE - A voluntary lien filed against property to secure a debt, usually a loan. To foreclose, the lender must often institute a court action and the borrower may have the right to reclaim the property after foreclosure.

MORTGAGE INSURANCE - Money paid to insure a mortgage when the down payment is less than 20 percent.

MORTGAGEE - The lender.

MORTGAGOR - The borrower.

NEGATIVE AMORTIZATION - Occurs when monthly payments are not large enough to pay all the interest due on the loan. The unpaid interest is added to the unpaid balance of the loan. Negative amortization results in the home buyer owing more than the original amount of the loan.

NET EFFECTIVE INCOME - The borrower's gross income minus federal income tax.

NON-ASSUMPTION CLAUSE - A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

NOTE - A written promise to pay a certain sum of money at a certain time. A negotiable note starts "Pay to the order of" and is transferable by endorsement similar to a check.

ORIGINATION FEE - The fee charged by a lender to prepare loan documents, perform credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.

PERMANENT LOAN - A long-term mortgage, usually ten years or more. Also called an "end loan."

PITI - Principal, Interest, Taxes and Insurance.

POINTS - Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount.

POWER OF ATTORNEY - A written document authorizing another to act on his behalf as an Attorney in Fact. One does not need to be a licensed attorney to act as an attorney but, power of attorney forms are powerful legal documents that should be used only under advice of a licensed attorney at law.

PREPAID EXPENSES - Necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

PREPAYMENT - A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

PREPAYMENT PENALTY - An additional charge imposed by the lender for paying off a loan before the due date.

PRIMARY MORTGAGE MARKET - Lenders making mortgage loans directly to borrower's such as savings and loan association, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets.

PRINCIPAL - The amount of debt, not counting interest, left on a loan.

PRIVATE MORTGAGE INSURANCE (PMI) - In the event that the borrower does not have a 20% percent down payment, lenders will allow a smaller down payment. With the smaller down payment loans, borrowers are usually required to purchase private mortgage insurance requiring an initial premium payment and possibly an additional monthly fee depending on the loan's structure.

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) - RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.

REALTOR - A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

RECISION - The cancellation of a contract. The law that gives a homeowner three days to cancel a contract after it is signed if the transaction uses equity in the home as security.

RECORDING FEES - Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

REFINANCE - Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.

SECOND MORTGAGE - A mortgage made subsequent to another mortgage and subordinate to the first one.

SECONDARY MORTGAGE MARKET - The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.

SERVICING - The steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections, etc.

SIMPLE INTEREST - Interest which is computed only on the principal balance.

SURVEY - A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.

SWEAT EQUITY - Equity created by a purchaser performing work on a property being purchased.

TITLE - Document that gives evidence of an individual's ownership of property.

TITLE INSURANCE - Insurance that provides an indemnity against loss or damage as a result of defect in title ownership to a particular piece of property. Title insurance covers mistakes made during a title search as well as matters which could not be found or discovered in the public records such as missing heirs, mistakes, fraud and forgery.

TITLE SEARCH - An examination of municipal records to determine the legal ownership of property. Usually performed by a title company.

TRUTH-IN-LENDING - Federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan.

TWO-STEP MORTGAGE - Mortgage in which the borrower receives a below market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time.

UNDERWRITING - The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

USURY - Interest charged in excess of the legal rate established by law.

VA LOANS - Long-term, low or no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

VA MORTGAGE FUNDING FEE - Premium of up to 1 7/8% (depending on the size of the down payment) on a VA-backed loan, paid either at closing or added to the amount financed.

VERIFICATION OF DEPOSITS (VOD) - Document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.

VERIFICATION OF EMPLOYMENT (VOE) - Document signed by the borrower's employer verifying his/her position and salary.

WRAP-AROUND - The debt secured includes an existing debt already on the property. The payments made to the holder of the wrap-around include payments due on the existing loan and the holder must forward the appropriate portion of each payment to the existing note holder.