MORTGAGE TERM GLOSSARY
Presented by:
RITA REALTOR Brokerage 904-555-5555 Rita@realtor.com www.Authorify.com
LARRY LOAN OFFICER Office 904-555-1010 Larry@loans.com www.Authorify.com
Getting a mortgage can be complicated, and there are many terms that may be unfamiliar to you. Rita the REALTOR® and I (Larry Loan Officer) put together this helpful glossary of terms to familiarize yourself with. Use this helpful guide as a quick reference of common terms that are often referred to when talking about loans.
Adjustable-Rate Mortgage (ARM)
Appraisal A professional estimate of the value of an asset. Mortgage lenders use official appraisals, prepared by professional real estate appraisers, to decide the maximum loan they are willing to finance for that property. Assets Something of current, perceived, or future economic benefit to its owner. Real estate is an asset; so is a bond, a business, a share of stock, a precious metal like gold, or a commodity like oil. A “promise to pay” is also an asset. A loan is an asset on the books of the lender, while accounts receivable are assets on the books of a business. Balloon Loan A loan that is not fully amortized. Since a balance will be left owing at the end of the term, the borrower will be expected to make a lump-sum payment at the end of the loan term, also known as a “balloon payment.” The borrower could do this with cash out-of-pocket, or by refinancing the loan. Bi-Weekly Mortgage A mortgage that is paid every two weeks, rather than monthly. The extra payments can significantly reduce the interest paid over the life of the loan. Chapter 13 Bankruptcy Known as the “wage-earner’s plan,” Chapter 13 Bankruptcy is used by debtors with stable income to propose a plan to pay their debts off, either partially or in full, with installment payments over 3-5 years.
A mortgage with an interest rate that adjusts periodically, based on market interest rates. They usually have an introductory fixed interest rate for 5, 7, or 10 years, after which the interest rate adjusts set intervals — for example, once a year. An ARM with a five-year fixed-rate term and then adjustments once a year would be referred to as a “5/1” ARM. The introductory interest rate tends to be low, but after that, the adjustments could dramatically raise (or lower) your interest expense and overall mortgage payment. Amortization The process of paying down a loan until the loan balance is paid in full. The root word “mort” (for “death”) refers to the gradual “death” of the loan balance. A loan that is “fully-amortized” will have a balance due of $0 at the end of the total loan term. A loan that is not fully-amortized will have a balance still due at the end of the term, usually requiring a “balloon payment.” Annual Percentage Rate (APR) The annualized interest rate of the loan. If you made interest-only payments with no principal, this is the percentage of your loan balance you would owe every year as interest. With a fixed-rate, fully- amortized mortgage, interest is assessed every month against the remaining loan balance as smaller fractions of the APR. As such, the interest you pay each month gets gradually lower and lower, while the principal paydown gets higher and higher.
RITA REALTOR | BROKERAGE 904-555-5555 | Rita@realtor.com | www.Authorify.com
LARRY LOAN OFFICER | OFFICE 904-555-1010 | Larry@loans.com | www.Authorify.com
Chapter 7 Bankruptcy Chapter 7 Bankruptcy puts an automatic and temporary stay on your debts. It halts debt collection efforts, eviction, and foreclosure proceedings. Used to buy time to liquidate property and pay off debts. Closing Costs Any fees required to close escrow and buy property other than the purchase price. Examples include loan application fees, transfer taxes, inspection fees, attorney fees, and prepaid interest. Closing Disclosure A document that provides the final details of the mortgage loan the borrower is taking on, including the starting balance, interest rate, amortization schedule, loan term, and mortgage-related closing costs. Co-Borrower When multiple people or entities take out a mortgage loan together, they are “co-borrowers,” equally responsible and liable for repayment of the loan. Collections A process where a creditor attempts to collect a debt from a borrower, usually after the borrower has defaulted on payments or other terms of the loan. Convertible ARM A “hybrid” loan structure that begins with an adjustable interest rate, but contains the option to convert to a fixed-rate loan at a later date during the loan term.
Construction Mortgage A mortgage for the construction or renovation of a home. It may include loan proceeds not only for the purchase of the property, but for the construction expenses as well. Construction funds may be disbursed by the lender according to a schedule based on the progress of the project, with more funds available at different milestones in construction. Conventional Mortgage Sometimes referred to as a “conforming” loan, a conventional mortgage fits the guidelines set forth by Federal mortgage banks Fannie Mae and Freddie Mac. Under these conditions, the federal banks will insure the loan, protecting the borrower and therefore decreasing risk to the lender. Debt-To-Income (DTI) Ratio The percentage of the borrower’s gross income that goes toward paying down his/her current consumer debt. Most lenders will not issue a mortgage to borrowers with 43% DTI or over. Lenders prefer a DTI of 36%, with no more than 28% going towards a rent or mortgage payment. Deed The legal instrument indicates, officially and on paper, who owns a particular piece of real estate. Deeds are usually filed with a governmental entity, like the County Clerk, and are used to establish ownership and guard against competing claims of ownership. In the mortgage industry, “Deed” may be short for “Deed of Trust,” one of the two critical documents that form a mortgage loan. The deed of trust establishes the ownership of the property by the borrower with a lien held by the lender (see definition of lien). The other instrument that forms the mortgage is the promissory note.
RITA REALTOR | BROKERAGE 904-555-5555 | Rita@realtor.com | www.Authorify.com
LARRY LOAN OFFICER | OFFICE 904-555-1010 | Larry@loans.com | www.Authorify.com
Deed-in-Lieu of Foreclosure Instead of the costly, damaging process of foreclosure, a lender may allow a borrower in default to simply hand over the deed to the lender as satisfaction for the loan. Deferred Payment A payment that the lender agrees to accept later, usually tacked on to the loan balance and due as a balloon payment at loan maturity. Basically, the borrower gets to skip that payment, but they will eventually owe that payment, and interest is still assessed against it. Deficiency If a borrower in default sells the property, but the proceeds from the sale cannot cover the outstanding loan balance, the lender may seek a deficiency judgment against the borrower in court. This enables the lender to continue to go after the borrower for collection of the debt — seize other assets, garnish wages, etc. Delinquency Failing to make payments on a loan as agreed. Delinquent borrowers may face delinquency fees, foreclosure, and deficiency judgments. Discount Points A fee the lender may accept up front to reduce the interest rate on a loan. For example, for each “point” you pay up front (1% of the loan balance), the lender may reduce the interest rate by 1%. If you seek a $500,000 loan at 5% interest, paying one “point” as a fee ($5,000) may reduce your interest rate to 4%. Down Payment The portion of the purchase price paid by the borrower, not the lender. If a borrower is buying a $250,000 home with a $225,000 mortgage loan, the buyer must make a $25,000 down payment to make up the difference.
Earnest Money Deposit A refundable deposit paid at the time of execution of the purchase contract, used to express the buyer’s “good faith” intent to close the contract. If the buyer exits the contract in accordance with a contingency in the contract, the buyer gets the deposit back. If the buyer exits the contract without any contingencies to exercise, the seller gets to keep the deposit as collateral for the deal falling through. At closing, the deposit gets applied to the down payment. Escrow A “neutral third party” process that ensures the terms of a real estate purchase contract are satisfied, holding all funds in trust until the terms of the contract are met. Without escrow, a buyer might make a big down payment and take on a big loan for a house that doesn’t exist; or the seller might transfer title, only for a check to bounce. Escrow makes sure both parties are satisfied before anything irrevocable takes place. In the mortgage industry, escrow also refers to a separate account to hold funds for mandatory housing payment expenses, like insurance and property taxes. The lender may require the borrower to make extra payments into an escrow fund for the payment of these expenses. This is to make sure they actually get paid; if the borrower doesn’t make these payments, the collateral for the loan is at risk. Equity The ownership interest in an asset. If a person owns a $300,000 house with a $200,000 loan, they are said to have $100,000 equity in that house. FHA Mortgage A mortgage insured by the US Federal Housing Administration, used to help lower-income and lower- credit borrowers buy homes. Fixed-Rate Mortgage A mortgage where the interest rate stays the same for the entire life of the loan. The interest rate is usually fixed based on market interest rates at the time of loan origination, in a process known as “rate lock.” The loan is usually fully-amortized, and the monthly payments never change.
RITA REALTOR | BROKERAGE 904-555-5555 | Rita@realtor.com | www.Authorify.com
LARRY LOAN OFFICER | OFFICE 904-555-1010 | Larry@loans.com | www.Authorify.com
Home Inspection A professional evaluation of the structure and major systems home during the purchase contract inspection contingency period. If the buyer is not satisfied with the result of the inspection, (s)he can exit the contract with no penalty, as long as they do so before the inspection contingency expires. An inspection will usually entail a visual inspection of the roof, foundation, electrical system, plumbing, interior, exterior, and other major systems. Homeowners Insurance Insurance against loss or damage to the structure and contents of a home due to hazards, fire, smoke, theft, or vandalism. It usually does not cover flood or earthquake damage. Real estate purchased for the purpose of investment (rental, fix-and-flip, etc.), not for the purpose of occupancy by the owner. Investment Property Jumbo A loan with a balance too large to conform with Fannie Mae or Freddie Mac insurance requirements. Usually used to buy high-end, expensive homes. Usually requires strict underwriting and large down payments. A legal encumbrance on the title of a property, usually recorded on paper and filed with the applicable government entity, like the County Clerk. The owner of a lien on the property is entitled to seize the property through judicial foreclosure if the property owner defaults on certain obligations. A mortgage creates a lien, which the lender can use to foreclose the property if the borrower defaults on the loan. Other entities that can place liens on property include Homeowners’ Associations, contractors, and property tax assessors. Lien
Forbearance An agreement with the lender for the borrower to temporarily stop making payments and defer those payments to the end of the loan term. Foreclosure The judicial process whereby a lender seizes the title to the real estate asset as collateral for a mortgage loan that a borrower has defaulted on. If borrowers are still in the property when the foreclosure is executed, they and their possessions may be forcibly removed from the premises by law enforcement.
Government-Sponsored Enterprises (GSEs)
A quasi-governmental organization established to enhance the flow of credit (like mortgage loans) to specific economic sectors.
Hazard Insurance Insurance against damage to the structure of the home from natural hazards. It usually doesn’t cover floods or earthquakes, and it doesn’t cover personal property contained within the home.
Home Equity Line of Credit (HELOC)
A type of home loan where the lender extends a revolving line of credit, like a credit card, secured by the owner’s equity in the home. The homeowner can borrow against the line of credit, up to the credit limit, at will. The borrower doesn’t have to carry a balance on the HELOC, but will owe interest according to the APR of the loan if they do carry a balance. Contrast this with a mortgage loan, which begins as a lump-sum loan and gets repaid in regular installments.
RITA REALTOR | BROKERAGE 904-555-5555 | Rita@realtor.com | www.Authorify.com
LARRY LOAN OFFICER | OFFICE 904-555-1010 | Larry@loans.com | www.Authorify.com
Loan-to-Value (LTV) Ratio The percentage created by dividing a mortgage loan against a property by the total property value. If a property is worth $400,000 and has a $300,000 loan against it, it has an LTV ratio of 75%. Lenders usually have a maximum LTV ratio they will extend. How high that ratio is depends on the loan program the borrower selects. Maturity A loan that has reached “maturity” has reached the end of its loan term. If it is fully amortized, the balance should be $0 at maturity. If it is a “balloon loan,” there may still be a balance due as a lump-sum payment at maturity. Monthly Gross Income A borrower’s monthly income, without consideration for taxes or expenses. In other words, an employee’s monthly gross income is the number at the top of the monthly pay stub, not the actual “take-home” income after tax withholdings. Mortgage A loan secured by real estate, with a specific property as collateral. A mortgage is formed by two critical documents — the deed of trust, which establishes ownership of the property with a lien for the lender; and the promissory note, or the contract for the loan. Mortgage Insurance Insurance that protects the lender against the borrower’s hypothetical future default. Mortgage Payment The monthly payment that must be made to service the mortgage loan and keep it current, without incurring default penalties.
Negative Equity A condition that exists when a borrower has a larger mortgage balance than the current value of the property. If a borrower has a $300,000 loan but the house is only worth $250,000, the owner’s equity is -$50,000, or $50,000 in negative equity. Note Short for promissory note, the note is one of two critical instruments that form a mortgage (the other one is the “deed of trust”). The note establishes the terms of the loan, including the interest rate, loan balance, loan term, and repayment terms. Origination Fee A fee that the lender may charge for their services in creating the loan. Often expressed in the form of “points,” each point being 1% of the loan balance. PITIA An acronym for principal, interest, taxes, insurance, and association fees. Refers to the four major mandatory housing payments. Figuring out the final “housing payment” must include all of them. The lender may require the borrower to make extra payments and hold the extra funds in escrow to cover property taxes, insurance, and HOA fees (if there are any). Points Each point is 1% of the loan balance. For a $200,000 loan, one point would be $2,000. The lender may charge points as an origination fee, or offer the opportunity to pay “discount points” as a fee to reduce the interest rate on the loan. Pre-Approval A process by which the lender officially approves a borrower to borrow a certain amount. The application process is more extensive, with more documentation required, and therefore carries more weight than “prequalification.”
LARRY LOAN OFFICER | OFFICE 904-555-1010 | Larry@loans.com | www.Authorify.com
RITA REALTOR | BROKERAGE 904-555-5555 | Rita@realtor.com | www.Authorify.com
Real Estate Agent A real estate professional who acts as broker in a real estate transaction, acting as an intermediary between the buyer and the seller. An agent is usually hired by and loyal to one party in the transaction, and both the buyer and the seller may be represented by a real estate agent. Recast/Re-Amortize A mortgage recast happens if the borrower makes a large lump-sum payment of principal. The lender will then re-amortize the mortgage — recalculate the new minimum payment, based on the new reduced balance, to bring the balance to $0 by the end of the loan. The lender may then reset the minimum mortgage payment to the lower number that will fully amortize the loan after the recast. Refinance Taking out a mortgage or HELOC on a property that the borrower already owns, rather than taking out a loan for the purchase of a new home. This may be a second mortgage, it may repay and replace the first mortgage, or it may be taken if the borrower has no mortgage at all and owns the property free-and-clear. Repayment Plan The contractual plan for the borrower to repay the loan. If the loan is fully amortized, the repayment plan will bring the loan balance to $0 at maturity. In a balloon loan, the repayment plan may leave a balance due at maturity, requiring a balloon payment at that time. Second Mortgage A borrower may take more than one mortgage out on a property. In a second mortgage, the lien is considered to be junior to the first mortgage — meaning the first lender has the right to foreclose in the event of default before the second lender. This makes second mortgages much more risky for the lender. As such, second mortgages usually carry higher interest rates and require strict screening of the borrower.
Prequalification An informal estimation of how much a borrower is eligible to borrow. Little documentation or verification is required for a lender to issue a prequalification, so it is not binding and carries little weight. Principal The balance still due on the loan. In a fixed-rate loan, each mortgage payment includes some paydown of principal. If the loan is fully amortized, the principal is paid down to $0 by the end of the loan term. If a principal balance is left due at the end of the loan term, a “balloon payment” of the remaining principal may be required at that time. Private-Label Mortgages A private-label mortgage is a mortgage that is not insured by one of the common government mortgage guarantors, like Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), US Department of Veterans Affairs (VA), US Department of Agriculture (USDA), or a GSE. This makes the loans more risky for the lender.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance. Since the Great Recession of 2008, borrowers who put less than 20% down are required to buy private mortgage insurance (PMI) at their expense. Property Taxes Taxes assessed by the county for the privilege of owning property, due every year. Property taxes are usually assessed as a percentage of the value of the property, based on an appraisal by a country appraiser. If an owner does not pay his property taxes, the county can put a lien on the property and eventually foreclose the property. This lien is “senior” to any mortgage, meaning the county has the right to foreclose first and leave the lender with no collateral. This is why many lenders require the borrower to pay funds into an escrow account to cover property taxes.
RITA REALTOR | BROKERAGE 904-555-5555 | Rita@realtor.com | www.Authorify.com
LARRY LOAN OFFICER | OFFICE 904-555-1010 | Larry@loans.com | www.Authorify.com
Seller Concessions Closing costs that the seller agrees to pay.
Trust A relationship where someone holds title to property, with the obligation to maintain that property for the benefit of someone else. Underwater The condition of owing more on a property than the property is actually worth. Underwriting The process of verifying a borrower’s eligibility to borrow — credit, income, assets, etc. — and verifying the conditions of the property to justify using it as collateral for the loan.
Settlement Costs Another word for closing costs — fees necessary to close a real estate transaction. Short Sale Selling a property for less than the balance due. A lender may accept less than the balance due as payoff of the loan if the seller is underwater and can’t sell the property for the full remaining balance. Term The length of the loan. At the end of the term, the loan meets maturity. In a 30-year mortgage, the term is 30 years. A fully-amortized loan will have a balance of $0 at the end of the term. Title Certification of ownership of property, as recorded on a deed. Title Insurance Indemnity insurance that protects the buyer and the lender from financial loss that may result from defects in the title. Defects in the title can prevent ownership of property from being transferred, even after money has changed hands.
Unpaid Principal Balance (UPB) The amount of principal left unpaid on a mortgage.
USDA Loan A loan insured by the US Department of Agriculture for the purchase of a suburban or rural home. May be eligible for no down payment (100% LVT). VA Loan A loan insured by the US Department of Veterans Affairs for current and former armed service members and their families. May be eligible for no down payment (100% LVT).
Contact me today! Larry Loan Officer Loan Office 904-555-1010
Need help deciding what mortgage is best for you?
Larry@Loans.com www.Authorify.com
RITA REALTOR | BROKERAGE 904-555-5555 | Rita@realtor.com | www.Authorify.com
LARRY LOAN OFFICER | OFFICE 904-555-1010 | Larry@loans.com | www.Authorify.com
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