Always wondered what those crazy abbreviations on your loan documents meant or need some help figuring out the mortgage language? Well check out this handy mortgage dictionary that www.mortgage-net.com put together:
Also known as a variable rate mortgage. The interest rate on these mortgages changes periodically.
Annual Percentage Rate – APR
The effective rate of interest for a loan per year. This rate is typically higher than the note rate because it takes into account closing costs. This is one way to compare loan programs offered by different lenders. Caution : the APR is sometimes computed differently by different lenders and can be misleading.
A gradual paying off of a debt by periodic installments which pay principal and interest.
Obtaining a lower interest rate (buying down the rate) by paying additional points to the lender. The lower rate may apply for the full duration of the loan or for just the first few years. A buydown may be used to qualify a borrower who would otherwise not qualify . This is because a buydown results in lower payments which are easier to qualify for.
Example : A very popular buydown is the 2-1 buydown. If the interest rate on the note is 9%, the buydown results in the rate being 7% (9%-2%) for the first year, 8% (9%-1%) for the second year, and 9% thereafter.
CC&Rs – Covenants, Conditions, and Restrictions
The basic rules establishing the rights and obligations of owners of real property within a condominium, townhouse, PUD, subdivision or other tract of land. An association is organized for the purpose of operating and maintaining property commonly owned by the individual owners. The association is normally made up of property owners.
Certificate of Reasonable Value (CRV)
An appraisal performed by an VA approved appraiser which establishes the property’s current market value. This value establishes the ceiling on the maximum VA mortgage loan principal.
Expenses incurred by the buyer and seller in a real estate or mortgage transaction. There are two types of costs : recurring and non recurring.
Non-recurring costs are one time transactional costs which include
- Discount and origination points
- Lender fees – underwriting, processing, document preparations, flood certificate, tax service, wire transfer, courier, etc.
- Title insurance fees
- Escrow, attorney or closing agent fees
- Recording fees
- Inspection and appraisal fees
- Real estate brokerage commissions
Recurring fees are costs associated with owning the property and they recur month after month. These costs may include hazard insurance, interest, property taxes, mortgage insurance (PMI), and association fees. A pro-rated amount of these fees may have to be paid at closing including
- Pre-paid interest – interest charges from the date of closing to the end of the month
- Property taxes if due
- Hazard insurance, fire insurance or homeowner’s insurance has to be paid for one year
- Mortgage insurance (PMI) – may be required if the loan amount is more than 80% of the value of the property. In the past a whole year of PMI had to be paid up front, however in recent years many PMI companies only require 1-2 months up front. Mortgage insurance premiums are normally paid every month with the loan payment
- Impound account may need money to be set up for future payments
A short term loan to pay for the construction of buildings or homes. These loans typically provide periodic disbursements to the builder as each stage of the building is completed. When construction is completed a take-out or permanent loan is used to pay off the construction loan.
Anything of value given to induce another to enter into a contract. Earnest money deposit on a sales contract is consideration.
Any mortgage loan other than a VA or an FHA loan. A convention loan may be conforming or non-conforming.
Some variable loans come with options to convert them to a fixed loan based on a pre-determined formula, during a given time period. For example the 1-year tbill adjustable may be converted to a fixed during the first five years on the adjustment date. The means that you could convert during the 13th, 25th, 37th, 49th and 61th months of the loan.
Failure to meet legal obligations in a contract – such as the failure to make the monthly mortgage payment.
The amount paid for the purchase of a property in addition to the mortgage, but not including any closing costs.
Example : John buys a house for $100,000 and obtains a loan for $80,000. His downpayment is $20,000.
A deposit made by a buyer of real estate towards the down payment to evidence good faith. This money is typically held by the real estate brokers or the escrow company.
Equity=Property Value – Loans/Liens Against the property.
Equity is typically expressed as a percentage of the property value.
Purchase loans from members of the Federal Reserve and the Federal Home Loan Bank Systems, securitizes them and sells FHLMC mortgage backed securities on wall street.
An agency within the U.S. Department of Housing and Urban Development (HUD) that administers loan programs, issues loan guarantees to make more housing available.
A mortgage that has priority as a lien over all other mortgages. In the case of a foreclosure the first mortgage will be satisfied before other mortgages. See also second mortgage.
An insurance policy that covers property damage due to natural flooding. Flood insurance may be required on properties in a flood zone.
A legal process by which the lender forces a sale of a property because the borrower has not met the terms of the mortgage.
Government National Mortgage Association (GNMA, Ginnie Mae)
A government agency part of HUD that buys VA and FHA loans from lenders, securitizes them and sells Ginnie Mae securities to investors.
Hazard Insurance (Fire Insurance, Homeowner’s insurance)
Insurance on a property against fire and other risks. A homeowner’s policy may have additional coverage for theft, liability, etc. that a fire insurance policy may not cover.
An association of homeowners in a particular subdivision, planned unit development (PUD), or condominium organized to manage the common area of the development and to enforce the association rules and regulations.
A closing document required by HUD that outlines the settlement cost of a loan. The closing agent prepares this document and sends it to the buyer upon closing.
A claim against the property for the payment of a debt, judgement, mortgage or taxes.
Example : Unpaid contractors may file a mechanic’s lien.
Latin for “lawsuit pending.” Recorded notice that litigation is pending on a property. Most lenders will require the clearance of the Lis Pendens prior to closing.
Loan Origination Fee or Points
Charge by a lender or broker connected with originating a loan. This is different from discount points which are used to buy down the rate of interest.
Loan to Value Ratio (LTV)
The loan amount divided by the value of the property.
A fixed number added to the index to compute the rate on an adjustable rate mortgage.
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.
A written instrument that creates a lien upon real estate as security for the payment of a specified debt.
Arranges financing for a borrower by placing loans with lenders. Mortgage brokers are paid a fee by the borrower or the lender when a loan closes.
See private mortgage insurance (PMI)
A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of an indebtedness, and states the manner in which it shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment.
An increase in principal balance which occurs when the monthly payments do not cover all of the interest cost. The interest cost which is not covered by the payment is added to the unpaid principal balance.
A written instrument that acknowledges a debt and promises to pay.
Abbreviation for principal, interest, taxes and insurance, which may be combined in a single monthly mortgage payment.
Power of Attorney
A written document authorizing a person to act on the behalf of another person. That person does not have to be an attorney. See Attorney-in-fact.
Prepaid interest is the interest charged to borrowers at closing to pay for the cost of borrowing for a balance of the month. For example, if a loan closes on the 19th of the month and the first payment is due on the 1st of the following month, the lender will charge 12 days of prepaid interest.
Full or partial payment of the principal before the due date. This might occur if the borrower makes extra payments, sells the property, or refinances the existing loan.
Fees paid by the borrower if they pay the loan before its due date.
The lowest commercial interest rate charge by a bank on short term loans to their most credit worthy customers. View current prime rate.
The outstanding balance on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment – as low as 2 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance payments are normally made annual or monthly. An impound account may be required.
A government levy based on the market value (as assessed by the county assessor’s office) of the property.
Real Estate Settlement Procedure Act (RESPA)
A law that states how mortgage lenders must treat those who apply for real estate loans on property with 1-4 units.
Example : A lender is required to provide a good faith estimate of closing costs within 3 days of an application being filed.
When a mortgage is paid off in full, the lender conveys the property back to the owner.
Regulation Z (Reg Z)
A federal regulation requiring creditors to provide full disclosure of the terms of a loan including the terms of the loan and the annual percentage rate (APR).
Real Estate Investment Trusts (REIT)
A trust that uses investors money to purchase and manage real estate. Investors realize some of the tax advantages in owning real estate.
Secondary Mortgage Market
Also known as a vacation home. This home is different from an investment property as it is not rented, but used occasionally by the owners.
A subordinated lien, created by a mortgage loan, over the amount of a first mortgage. Second mortgages generally carry a higher rate than a first mortgage since they represent a higher risk for an investor.
Section 8 Housing
Privately owned rental units participating in the low-income rental assistance program. Landlords receive subsidies on behalf of qualified low-income tenants, allowing the tenants to pay a limited proportion of their incomes toward the rent.
A special tax imposed on property, individual lots or all property in the neighborhood to pay for improvements – street lights, sidewalks, etc.
A loan in a lower priority, for example a second mortgage is subordinate to a first.
Evidence that the owner of the property is in lawful possession. Evidence of ownership.
An insurance policy which protects the insured against loss arising from defects in title. Title insurance policies are typically obtained for the buyer and the lender.
Tax paid to the city, county, state or other government entity upon sale of a property.
See Deed of Trust.
A party who is given legal responsibility to hold property in the best interest of or “for the benefit of” another. The trustee is one placed in a position of responsibility for another, a responsibility enforceable in a court of law.
Truth in Lending
See Regulation Z.
Home loan guaranteed by the U.S. Veterans Administration, enabling a veteran to buy a home with no money down.
A loan arrangement whereby the existing loan is retained an a new loan is added to the property.
Example : The seller sells his/her property for $200,000. The buyer puts $80,000 down. The seller has an existing loan balance of $100,000 for a remaining period of 25 years at an interest rate of 6%. The seller then makes a wraparound mortgage to the buyer, (where the seller acts as a lender) for $120,000 at 8%. The seller has to continue making payments on his old loan. They buyer has to pay the seller on the new loan. The buyer may at a later date refinance the property and close both loans.