Common Mortgage Terms

Acceleration clause: A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

Adjustable-rate mortgage (ARM): A mortgage whose interest rate changes over time based on an index and a margin. Rate changes are made at prescribed times and within prescribed limits (caps) as defined in the mortgage contract.

Amortization: The gradual repayment of a mortgage by installments.

Amortization schedule: A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance on the loan.

Annual percentage rate (APR): The total yearly cost of a mortgage stated as a percentage of the loan amount. This includes the base interest rate, mortgage insurance, origination fees, and some other related fees. See your lender for a more complete explanation of what fees are used to calculate your APR.

Appraisal: A professional opinion of the market value of a property.

Appreciation: An increase in the value of a house due to changes in market conditions or other causes.

Assessed value: The valuation placed upon a property by a public tax assessor for purposes of taxation.

Assumable mortgage: A mortgage that can be taken over ("assumed") by the buyer when a home is sold.

Assumption: The transfer of the seller's existing mortgage to the buyer.

Binder: A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.

Cap: A provision of an ARM limiting how much the interest rate or mortgage payments may increase.

Cash reserve: A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two mortgage payments.

Clear title: A title that is free of liens and legal questions as to ownership of the property.

Closing: The occasion where a sale is finalized; the buyer signs the mortgage, and closing costs are paid. Also called "settlement".

Closing costs: Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called "settlement costs".

Commitment letter: A formal offer by a lender stating the terms under which it agrees to loan money to a home buyer.

Community Home Buyer's Program: An alternative financing option that allows households of modest means to qualify for mortgages using nontraditional credit histories, 33 percent housing-to-income and 38 percent debt-to-income ratios, and the waiver of the usual two payments cash reserves at closing.

Community Home Improvement Mortgage Loan: An alternative financing option that allows low- and moderate-income home buyers to obtain 95 percent financing for the purchase and improvement of a home in need of modest repairs.

Community Land Trust Mortgage Loan: An alternative financing option that enables low- and moderate-income home buyers to purchase housing that has been improved by a non-profit Community Land Trust, and to lease the land on which the property stands.

Condominium: A form of property ownership in which the homeowner holds title to an individual dwelling unity plus an interest in common areas of a multi-unit project.

Contingency: A condition that must be met before a contract is legally binding.

Conventional mortgage: Any mortgage that is not insured or guaranteed by the federal government.

Convertible ARM: An adustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.

Cooperative: A form of common property ownership in which the residents of an apartment building do not own their own units, but rather own shares in the corporation that owns the property.

Covenant: A clause in a mortgage that obligates or restricts the borrower and which, if violated, can result in foreclosure.

Credit report: A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.

Deed: The legal document conveying title to a property.

Deed of trust: The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.

Default: Failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage.

Delinquency: A loan in which a payment is overdue but not yet in default.

Deposit: Cash paid to the seller when a formal sales contract is signed.

Depreciation: A decline in the value of a property; the opposite of "appreciation".

Discount points: See "Points".

Down payment: The part of the purchase price which the buyer pays in cash and does not finance with a mortgage.

Due-on-sale clause: A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

Earnest money: A deposit given to the seller to show that a prospective buyer is serious about buying the house.

Easement: A right of way giving persons other than the owner access to or over a property. A common example is a utility easement, which gives the power company the right to put power lines and poles over properties to deliver electricity.

Equal Credit Opportunity Act (ECOA): A federal law that prohibits lenders from denying mortgages on the basis of the borrower's race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity: The difference between the market value of a property and the homeowner's outstanding mortgage balance. If your home is worth $100,000 and you owe $65,000, you are said to have 35% equity in your home.

Equity loan: A loan based on the borrower's equity in his or her home.

Escrow: The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a homeowner pays money for taxes and insurance.

Fair Credit Reporting Act: A consumer protection law that sets up a procedure for correcting mistakes on one's credit record.

FHA loan: A mortgage insured by the Federal Housing Administration. See the
FHA Loan for more details.

First mortgage: The mortgage that has first claim (or "lien") in the event of a default.

Fixed-rate mortgage: A mortgage in which the interest rate does not change during the entire term of the loan.

Flood insurance: Insurance required for properties in federally designated flood areas.

Forbearance: The lender's postponement of foreclosure to give the borrower time to catch up on overdue payments.

Foreclosure: The process by which a mortgaged property may be sold when a mortgage is in default.

Graduated payment mortgage (GPM): A mortgage that starts with low monthly payments that increase at a predetermined rate. Be aware that most GPM's include a negative amortization clause.

Hazard insurance: Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism and other hazards.

Homeowner's insurance: An insurance policy that combines liability coverage and hazard insurance.

Homeowner's warranty: A type of insurance that covers repairs to specified parts of a house for a specific period of time.

Interest: The fee, or rent, charged by the lender for borrowing money.

Interest rate cap: A provision of an ARM limiting how much interest rates my increase in a given adjustment period. See also "Lifetime cap". Joint tenancy: A form of co-ownership giving each tenant equal interest and equal rights in the property, including the right of survivorship.

Late charge: The penalty a borrower must pay when a payment is made after the due date.

Lease-Purchase Mortgage Loan: An alternative financing option that allows low- and moderate-income home buyers to lease a home from a nonprofit organization with an option to buy, and with each month's rent payments consisting of "PITI" payments on the first mortgage, plus an extra amount that is earmarked for a savings account in which money for a down payment accumulates.

Lien: A legal claim against a property that must be paid when the property is sold.

Lifetime cap: A provision of an ARM that limits the total increase in interest rates over the life of the loan.

Loan commitment: See "Commitment letter".

Loan Servicing: The collection of mortgage payments from borrowers and the related responsibilities of a loan servicer, such as foreclosure, tax and insurance escrow, etc.

Loan-to-value ration (LTV): The total loan amount divided by the value of the house.

Lock-in: A written agreement guaranteeing the home buyer a specified interest rate provided the loan closes with that buyer within a set period of time. The lock-in also usually specifies the number of points to be paid at closing as well.

Margin: The set percentage the lender adds to the index rate to determine the current interest rate of an ARM.

Mortgage: A legal document that pledges a property to the lender as security for payment of a debt, usually a loan on the house itself.

Mortgage banker: A company that originates mortgages exclusively for resale in the secondary market (such as to GNMA, FNMA and FHMLC).

Mortgage broker: A company that for a fee matches borrowers with lenders.

Mortgage insurance: See "Private Mortgage Insurance".

Mortgage insurance premium (MIP): the fee paid by a borrower to FHA or a private insurer for mortgage insurance.

Mortgage note: A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the agreement is secured by a mortgage.

Mortgagee: The lender in a mortgage agreement.

Mortgagor: The borrower in a mortgage agreement.

Negative amortization: Payment terms under which the borrower's monthly payments do not cover the interest due; as a result, the balance due is added to the loan balance making it rise - thus "negative amortization".

Notice of default: A formal written notice to a borrower that a default has occurred and that legal action may be taken.

Origination fee: A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount (1% is generally known as one point).

Owner financing: A purchase in which the seller provides all or part of the financing.

Payment cap: A provision of some ARMs limiting how much a borrower's payments may increase regardless of how much the interest rate increases; be aware that on some ARMs this may lead to "negative amortization".

PITI: Stands for principal, interest, taxes and insurance -- the components of a monthly mortgage payment.

Points: A one-time charge by the lender to increase or decrease the stated interest rate on a loan. To decrease the interest rate, the borrower "pays" points, to increase the interest rate, the borrower "receives" points. All interest rate/point combinations are virtual financial equivalents.

Prepayment penalty: A fee charged to a borower who pays off a loan before it is due. Some loan programs contain a prepayment penalty, others do not - check with your loan officer for details.

Prequalification: The process of determining how much money a prospective home buyer will be eligible to borrow before a loan is applied for.

Principal: The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

Private mortgage insurance (PMI): Insurance provided by a nongovernmental insurer that protects lenders against a loss if a borrower defaults. Usually required on all loans with an "LTV" of more than 80%.

Purchase and sale agreement: A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Qualifying ratios: Guidelines applied by lenders to determing how large a loan to grant the homebuyer. The debt-to-income ratio is your current monthly debt on loans and credit cards divided by your gross income. The housing-to-income ratio is your new housing payments divided by your gross income.

Radon: A radioactive gas found in some homes that in sufficient concentrations can cause health problems. Your lender may require a radon check on your home.

Rate lock: See "Lock-in".

Real estate agent: A person licensed to negotiate and transact the sale of real estate on behalf of either the borrower or seller, or in some cases both partied.

Real Estate Settlement Procedures Act: A consumer protection law that requires lenders to give borrowers advance notice of closing costs, including an "APR".

Refinancing: The process of paying off one loan with the proceeds from a new loan secured by the same property. This is most often done to get the better interest rates offered by the new loan.

Rent with option to buy: See "Lease-Purchase Mortgage Loans".

Second Mortgage: A mortgage that has rights that are subordinate to the rights of the first mortgage. As such, these loans are often less secure and may demand a slightly higher interest rate.

Secondary mortgage market: The buying and selling of existing mortgages.

Seller take-back: An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

Settlement: See "Closing".

Settlement Sheet: The computation of costs payable at closing which determines the seller's net proceeds and the buyer's net payment.

Subsidized second mortgage: An alternative financing option for low- and moderate- income households that also includes a down payment and a first mortgage, with funds for the second mortgage provided by city, county, or state housing agencies, foundations, or nonprofit corporations. Payment on the second mortgage is often deferred, carries no or low interest rates, and part of the debt may be forgiven for each year the family remains in the home.

Survey: A drawing showing the legal boundaries of a property, it's fixtures, and any easements or encroachments.

Tenancy by entirety: A type of joint ownership of a property available only to a husband and wife.

Tenancy in common: A type of joint ownership in a property without right of survivorship.

(3/2) Options: An alternative financing plan that enables households whose earnings are no more than 115 percent of the medium income in their regional area to make a 3 percent down payment with their own funds, coupled with a 2 percent gift from a relative or a 2 percent grant or unsecured loan from a nonprofit or state or local government program.

Title: A legal document establishing the right of ownership.

Title company: A company that specializes in title searches and insuring title to property.

Title insurance: Insurance to protect the lender (lender's policy) or the buyer (buyer's policy) against loss arising from disputes over ownership of a property.

Title search: A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Transfer tax: State or local tax payable when title passes from one owner to another.

Truth-In-Lending: A federal law that requires lenders to full disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

Underwriting: The process of evaluating a loan application to determine the risk involved for the lender.

VA loan: A loan that is guaranteed by the Veterans Administration.  Be sure to view VA loan for more information.


Western Pacific Loans, Inc - Rob Penrose
1229 College Ave. Santa Rosa, Ca., 95404

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