Mortgage Glossary

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We compiled a list of common mortgage related terms that you may encounter when going through the loan application and home buying experience.

Of course if you have any questions please feel free to contact us today.

Adjustable rate mortgage (ARM)

A mortgage in which the interest rate is adjusted based on type of ARM selected. Also titled: the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.

5/25 and 7/23 Mortgages

Mortgages with one rate adjustment after the first five years or the first seven years.

3/1, 5/1, 7/1 and 10/1 ARMs

Mortgages that have a fixed rate for three-year, five-year, seven-year or 10-year periods. The rate may adjust yearly after the initial fixed period.

Adjustment interval

The time interval between changes in interest rate and/or monthly payment for adjustable rate mortgages.

Amortization

A schedule of equal periodic payments calculated to pay off the debt at the end of a fixed period. This includes interest on the outstanding balance.

Annual percentage rate (A. P. R.)

APR measures the full cost of a loan. This includes interest and loan fees stated as a yearly percentage rate.

Appraisal

An estimate of the value of any property sold or purchased conducted by a qualified professional – an appraiser. Generally ordered by the mortgage broker or company before closing.

Balloon Mortgage

A mortgage with a shorter term than amortization schedule. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment. This usually refers to a thirty-year amortization schedule and a five-year term.

Borrower (Mortgagor)

A person, or persons, who applies for and receives a mortgage, with the intention of repaying the loan in full.

Broker

An individual who assists in obtaining funding from outside sources for qualified borrowers. Brokers are compensated for their services, by charging a fee and/or receiving commissions.

Buy-down

A lowered interest rate for the first few years caused by the lender and/or home-builder subsidizing the mortgage.

Caps (interest)

Limits the amount the interest rate on an adjustable rate mortgage may change per year, and/or for the life of the loan.

Caps (payment)

Limits the amount monthly payments for an adjustable rate mortgage may change.

Certificate of Eligibility

The document given to qualified veterans. This form entitles veterans guaranteed VA loans for homes, business and mobile homes. Certificates of eligibility may be obtained by sending your DD214 (Separation Paper) and Form 1880 (request for Certificate) to the local VA office.

Certificate of Reasonable Value (CRV)

Appraisal issued by the Veterans Administration showing the property’s current market value.

Closing

The meeting, usually at the Title Company, attended by the buyer, seller, lender or their agents, where the property and funds legally change hands. Closing costs must be paid during this meeting. These costs include but are not limited to: origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement.

Construction loan

A short term loan paying for the construction of a home or building. Usually moved to a permanent mortgage after construction is complete.

Contract sale or deed:

A contract negotiated between a buyer and a seller that intends to transfer real estate after meeting certain conditions.

Conventional loan

A mortgage not guaranteed by the VA or insured by FHA.

Credit Report

Reporting documentation showing a borrower’s credit history, credit standing, and payment history.

Debt-to-Income Ratio

The percentage of a borrower’s gross monthly income, that is obligated to be paid to outstanding debts. This percentage, or ratio, is found by dividing debts by gross monthly income.

Deed of trust

A written instrument legally conveying property to a trustee often used to secure an obligation such as a mortgage or promissory note.

Department of Veterans Affairs (VA)

An independent agency of the federal government, which, among other duties, guarantees long-term, low-or no-down payment mortgages to eligible veterans.

Down Payment

The percentage of the sales price paid in cash by the borrower which when added to the loan amount will equal the sales price.

Due-on-Sale-Clause

A clause in a deed of trust or mortgage, that grants to lender the right to demand immediate payment from the mortgage holder of the balance owed on the mortgage provided the property is sold.

Earnest Money

Money given to the seller by the buyer to bind the transaction which can later be used as part of the purchase price.

Equal Credit Opportunity Act (ECOA)

A federal law that requires creditors and lenders to make credit equally available to borrowers without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity

The difference between fair market value and current mortgage(s) amount owed. Equity is found by subtracting current mortgage(s) amount from current fair market value.

Escrow

An account held by the lender or mortgage company for the purpose of collecting and later paying taxes and insurance for the borrower. The borrower "deposits" this money with every mortgage payment made.

Federal Home Loan Mortgage Corporation (FHLMC)

A quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers. This agency is commonly referred to as "Freddie Mac".

Federal Housing Administration (FHA)

FAH is a division of the Department of Housing and Urban Development (HUD). The main activity of FHA is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

Federal National Mortgage Association (FNMA)

A tax-paying corporation created by Congress, with a primary purpose of purchasing and selling conventional residential mortgages as well as those insured by FHA or guaranteed by VA. FNMA, also known as "Fannie Mae", provides funds for one in seven mortgages, and makes money for mortgages more available and affordable.

FHA loan

A loan, open to all qualified borrowers, insured by the Federal Housing Administration (FHA). There are limits to the size of FHA loans. However, these limits are generous enough to allow the purchase of moderately priced homes almost anywhere in the country.

FHA mortgage insurance

A required a fee, up to 2.25 percent of the loan amount, payable at closing to insure the loan with FHA. FHA mortgage insurance also requires an annual fee of up to 0.5 percent of the current loan amount payable in monthly installments. The lower the down payment, the more years this annual fee must be paid.

Federal Home Loan Mortgage Corporation (FHLMC)

FHLMC, or Freddie Mac, provides a secondary market for savings and loans by purchasing their conventional loans.

Fixed Rate Mortgage

A constant, set, or "fixed" interest rate that does not change during the term of the mortgage.

Hazard Insurance

A required form of insurance for every mortgage, in which the insurance company protects the insured from specified losses.

Housing Expenses-to-Income Ratio

The percentage of the borrower’s gross monthly income that will be used for housing expenses. This percentage, or ratio, is found by dividing house payment by gross monthly income.

Impound

Monies from the borrower’s monthly payments set aside and held by the lender for future use. The lender will use these funds to pay the borrower’s taxes, hazard insurance, mortgage insurance, and other items as they are due. Impounds are also known as reserves.

Interim Financing

A short-term loan usually made during the construction of a home, building, or project. This loan is usually replaced by a mortgage upon completion.

Investor

A person who commits money or capital in order to gain a financial return. This person is a financial source for a lender.

Jumbo Loan

A loan which is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Jumbo loans usually carry higher interest rates because they are outside the limits set by FNMA and FHLMC.

Loan-to-Value Ratio

The ratio of the loan amount to the appraised value of the property. This ratio is generally represented as a percentage value.

Lock

Setting a specific interest rate with a lender for a specific number of days guarantying that the interest rate quoted will remain constant for the given period.

Margin

The difference between the market value of collateral and the face value amount of a loan.

Market Value

The amount the seller may expect to obtain for their property given the current condition of the property and the surrounding area.

MIP (Mortgage Insurance Premium)

Insurance provided to the lender from FHA assuring the lender they will not incur a loss on account of the borrower’s default.

Mortgage Insurance

Money required to be paid to insure the mortgage when the down payment is less than 20 percent.

Mortgagor (Borrower)

A person, or persons, who applies for and receives a mortgage, with the intention of repaying the loan in full.

One-year adjustable

A mortgage whose annual rate changes yearly. The rate is generally based on movements of a published index, plus a specified margin, and chosen by the lender.

Origination Fee

A fee charged by a lender, or broker to prepare loan documents and to serve as part of the broker’s compensation.

PITI

Acronym for Principal, Interest, Taxes and Insurance. These items combined create a mortgage payment.

Points (loan discount points)

Points are equal to a percentage of the loan amount – 1 point = 1%. Loan discount points are a prepaid interest assessed at closing by the lender.

Prepaid Expenses

Expenses that are necessary to create an escrow account or to adjust the seller’s existing escrow account. These can include taxes, hazard insurance, private mortgage insurance and special assessments. Prepaid expenses are payable at closing.

Prepayment

A privilege in a mortgage allowing the borrower to make payments in advance of their due date in order to pay down principal.

Prepayment Penalty

Penalty charged to a borrower for early repayment of debt. Prepayment penalties are not part of every loan.

Principal

The total amount, not counting interest, left on a loan.

Private Mortgage Insurance (PMI)

Insurance required to be carried if the down payment is less than 20% of the sales price. One year is generally required as a prepayment expense, and a monthly payment is required.

Rescission

The cancellation of a refinancing contract within three days if the transaction uses equity in the home as security.

Recording Fees

Payment to the lender for recording the sale of a home with the local authorities, thereby making it part of the public records.

Refinance

Obtaining a new mortgage loan on a property already owned, usually to replace existing loans on the property.

Real Estate Settlement Procedures Act (RESPA)

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.

Second Mortgage

A mortgage made after the first mortgage.

Servicing

Steps and operations a lender performs to keep a loan in good standing. Servicing includes, but is not limited to, collection of payments, payment of taxes, payment of insurance.

Simple Interest

Interest computed only on the principle balance.

Survey

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

Title

A document providing evidence of ownership of property.

Title Insurance

A policy insuring a home buyer against errors in the title search. Title policies are issued by a title company. The policy is included in the closing costs. Policies are also available to protect the lender’s interests.

Title Search

An examination, usually performed by a title company, of municipal records to determine the legal ownership of property.

Truth-In-Lending

A federal law requiring the disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan.

Underwriting

The final step before the loan goes to closing. The underwriter reviews the loan and all documentation to determine the risk of the loan.

VA Loan

A long-term, low- or no-down payment loan guaranteed by the Department of Veterans Affairs which is restricted to individuals who are qualified by military service or other entitlements.

VA Mortgage Funding Fee

A premium placed upon a VA loan that varies by the size of the down payment. The premium may either be paid at closing or financed into the loan.

Verification of Deposit (VOD)

A document verifying the borrower’s status and balance, signed by the borrower’s financial institution.

Verification of Employment (VOE)

A document verifying the borrower’s position and salary signed by the borrower’s employer.

Warehouse Fee

A fee charged when the prime rate of interest is higher on short term loans over mortgage loans, that allows mortgage brokers to originate loans that will be sold at a later date.
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Texas Savings and Mortgage Lending

CONSUMERS WISHING TO FILE A COMPLAINT AGAINST A COMPANY OR A RESIDENTIAL MORTGAGE LOAN ORIGINATOR SHOULD COMPLETE AND SEND A COMPLAINT FORM TO THE TEXAS DEPARTMENT OF SAVINGS AND MORTGAGE LENDING, 2601 NORTH LAMAR, SUITE 201, AUSTIN, TEXAS 78705. COMPLAINT FORMS AND INSTRUCTIONS MAY BE OBTAINED FROM THE DEPARTMENTS WEBSITE AT WWW.SML.TEXAS.GOV. A TOLL-FREE CONSUMER HOTLINE IS AVAILABLE AT 1-877-276-5550.


THE DEPARTMENT MAINTAINS A RECOVERY FUND TO MAKE PAYMENTS OF CERTAIN ACTUAL OUT OF POCKET DAMAGES SUSTAINED BY BORROWERS CAUSED BY ACTS OF LICENSED RESIDENTIAL MORTGAGE LOAN ORIGINATORS. A WRITTEN APPLICATION FOR REIMBURSEMENT FROM THE RECOVERY FUND MUST BE FILED WITH AND INVESTIGATED BY THE DEPARTMENT PRIOR TO THE PAYMENT OF A CLAIM. FOR MORE INFORMATION ABOUT THE RECOVERY FUND, PLEASE CONSULT THE DEPARTMENTS WEBSITE AT WWW.SML.TEXAS.GOV.