Glossary

Below are definitions of commonly used mortgage banking terms.


Alphabetical Index

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 

A

Adjustable Rate Mortgage: A mortgage loan or deed of trust which allows the lender to adjust the interest rate in accordance with a specified index periodically and as agreed to at the inception of the loan.

Amortization: the term or the length of the mortgage. Amortizing a loan means to pay it off with regular timely payments. Or, repayments of a mortgage debt with equal periodic payments of both principal and interest, calculated to retire the obligation at the end of a fixed time period. Usually the fixed time period is the term of the loan.

Amortization Schedule: A table showing amounts of principal and interest due at regular intervals and the unpaid mortgage balance after each payment is made.

Annual Mortgage Statement: A report prepared by the lender or servicing agent for the mortgagor, stating the amount of taxes, insurance, and interest that was paid during the year and the outstanding principal balance.

Annual Percentage Rate: the cost of finance, expressed as an interest rate, on an annual basis. The APR is very significant, since it takes into consideration some of the costs in obtaining the loan

Appraisal: An opinion or estimate of value. Also refers to the process by which a value estimate is obtained.

Appraiser: One qualified by education, training, and experience to estimate the value of real and personal property.

Appraised Value: An opinion of the current market value of a property.

Appreciation: An increase in value for any reason, except inflation.

Arrears: The situation in which mortgage interest and real estate taxes are paid at or after the end of the period for which they are levied. Late payment is also described as being in arrears.

Assessed Valuation: The value that a taxing authority places upon real property that becomes the base for computing local property taxes.

Assessment: A value factor assigned to real property and used to determine real property taxes. The process of reaching the assessed valuation. Also, an add-on tax to raise money for a special purpose.

Assignment: The transfer of ownership, rights, or interests in property, as in a mortgage, lease, or deed of trust.

Assumption of mortgage: A buyer's acceptance of primary liability for payment of an existing note secured by a mortgage or deed of trust. The seller remains secondarily liable, unless specifically released by the lender.

Audit: The official examination and verification of bookkeeping accounts to prove the accuracy of figures and the adequacy of accounting controls. An audit may be done by public accountants hired for this purpose or by a company's own employees. The latter is called an internal audit.

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B

Balloon Mortgage: A mortgage with periodic installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at a specified date, usually at the end of the term.

Balloon Payment: A scheduled payment on a mortgage that is larger than other, periodic payments, usually the final unamortized payment.

Basis: The cost of a property, including improvements, refinancing costs, closing costs, and similar costs, less depreciation. Basis is used for tax purposes to calculate any profit or loss realized on the sale of a property.

Binder: Temporary hazard or title insurance granted prior to the issuance of a permanent policy. In real estate, a preliminary agreement between a buyer and seller which includes the price and the terms of the contract.

Borrower: One who receives funds in the form of a loan with obligation of repaying the loan in full with interest.

Buy-Down Mortgage: A mortgage with a below-market interest rate made by a lender in return for an interest rate subsidy in the form of additional discount points paid by the buyer.

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C

Caps (Interest): Consumer safeguards on an adjustable rate mortgage which limit the amount the interest rate may change per year and/or over the life of the loan.

Caps (Payment): Consumer safeguards on an adjustable rate mortgage which limit the amount monthly payments may change.

Cash-Out Refinancing: When the principal amount of a new mortgage involved in refinancing is greater than the principal amount outstanding of the existing mortgage being refinanced, and all or a portion of the equity is converted to cash.

Clear Title: Unencumbered title to real property, free of liens or defects. Also, "free and clear".

Closing: In real estate, the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to consummate a sale or loan transaction.

Collection: The servicing procedure followed to bring a delinquent mortgage current and to file the required notices to begin foreclosure when necessary.

Co-Mortgagor: A second borrower who signs a mortgage loan with a mortgagor. The co-mortgagor's income assets, and debts are combined with the mortgagor's for underwriting and ratio analysis purposes.

Conforming Loan: A loan that meets generally accepted underwriting guidelines and falls within certain maximum limits. Or, a mortgage loan which meets all requirements (size, type, and age) to be eligible for purchase or securitization by federal agencies.

Conventional Financing: In real estate, mortgage financing which is not insured or guaranteed by a government agency such as HUD/FHA, VA, or the Farmers Home Administration.

Convertible Mortgage: A type of adjustable rate mortgage that may be converted to a fixed-rate mortgage at specified intervals during a pre-determined time period.

Coupon: A paper document that is submitted with a mortgage payment to streamline the processing of that payment.

Credit Life Insurance: Declining term life insurance taken out by a borrower as an added source of funds for the repayment of the loan.

Credit Rating: A rating given to a person or a company by a credit reporting agency that establishes creditworthiness based upon present financial condition, experience, and past credit history.

Credit Report: A report by a credit reporting agency to a prospective lender on the credit standing of a prospective borrower, used to aid in the determination of creditworthiness.

Current Ratio: The ratio of current assets to current liabilities.

Custodian: Usually a commercial bank which holds for safekeeping mortgages and related documents backing a mortgage-backed security. Custodians may be required to examine and certify documents.

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D

Debt Coverage Ratio: A ratio of effective annual net income to annual principal and interest payments. Also called debt service coverage.

Debt Service: A borrower's periodic mortgage payments comprised of principal plus interest on the unpaid mortgage balance.

Deed of Trust: A type of security instrument in which the borrower conveys title to real property to a third party (trustee) to be held in trust as security for the lender, with the condition that the trustee shall re-convey the title upon the payment of the debt, and, conversely, will sell the land and pay the debt in the event of a default by the borrower. See Mortgage.

Default: A breach or nonperformance of the terms or a note or the covenants of a mortgage.

Delinquency: Failure of a borrower to make timely payments under a loan agreement.

Disbursements: Actual payment of monies. For example A hazard insurance disbursement transaction would reflect a check produced to pay the premium on a homeowner's policy.

Discount: In loan originations, a discount refers to an amount withheld from loan proceeds by a lender.

Due On Sale: A clause in a mortgage stating that if the mortgage sells, transfers, or in any way encumbers the property, then the mortgagee has the right to implement an acceleration clause making the balance of the obligation due.

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E

Encumbrance: Anything that affects or limits the fee simple title to property, such as mortgages, leases, easements, or restrictions.

Equity: Net ownership, the difference between fair market value and current indebtedness, sometimes called owners interest.

Escrow: An item of value, money, or documents, deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate. In some parts of the country, escrows of taxes and insurance premiums are called impounds or reserves.

Escrow Account: The segregated trust account in which escrow funds are held.

Escrow Analysis: The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.

Escrow Overage or Shortage: The difference, determined by escrow analysis, between escrow funds on deposit and escrow funds required to make a payment when it becomes due.

Escrow Payment: That portion of a mortgagor's monthly payments held by a lender or servicer to pay taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also called impounds or reserves in some states.

Evidence of Title: Proof of ownership of property.

Extended Coverage Endorsement: An endorsement that may be attached to insurance policies, which extends the breadth of coverage.

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F

Face Value: Par Value or the actual selling price of a security; the amount the issuer contracts to repay.

Fair Market Value: The price at which property is transferred between a willing buyer and a willing seller, each of whom has a reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell.

Federal Home Loan Mortgage Corporation FHLMC: Created by Congress in Title III of the Emergency Home Finance Act of 1970. This stockholder-owned corporation, a portion of whose board of directors is appointed by the President of the United States, supports the secondary market in mortgages on residential property with mortgage purchase and securitization programs. Also called Freddie Mac.

Federal Housing Administration FHA: A federal agency within the Department of Housing and Urban Development (HUD) that provides mortgage insurance and residential mortgages and set standards for construction and underwriting. The FHA does not lend money.

Federal National Mortgage Association FNMA: The nation's largest mortgage investor. Created in 1968 by an amendment to Title II of the National Housing Act, this stock holder owned corporation, a portion of whose board of directors is appointed by the President of the United States, supports the secondary market in mortgages on residential property with mortgage purchase and securitization programs. Also called Fannie Mae.

fee simple: The greatest possible interest a person can have in real estate, including the right to dispose of the property or pass it to one's heirs.

Final Closing: The date upon which the permanent mortgage lender funds the mortgage loan.

First Mortgage: A mortgage that gives the mortgagee a security right over all other mortgages of the mortgaged property.

Fixed Rate Mortgage: A mortgage in which the interest rate and payments remain the same for the life of the loan.

Foreclosure: A legal procedure in which a mortgaged property is sold to pay the outstanding debt in case of default.

Funding: Payment of money by lenders for a mortgage loan settlement, or the receipt of money by lenders from investors of purchase mortgages.

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G

Good Faith Estimate: A written estimate of closing costs provided by a mortgage company.

Government National Mortgage Association GNMA: Created in 1968 by an amendment to the Title III of the National Housing Act this federal government corporation is a constituent part of the Department of Housing and Urban Development. Among other governmental functions, it guarantees securities backed by mortgages that are insured or guaranteed by other governmental agencies. Also called Ginnie Mae.

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H

Hazard Insurance: Insurance coverage which provides compensation to the insured in case of property damage or loss.

Home Equity Loan: Mortgage financing that consists of a revolving line of credit secured by the appraised market value of the home. Useable for any purpose.

HUD: The Department of Housing and Urban Development. A governmental entity responsible for housing and urban development programs. HUD was established by the Housing and Urban Development Act of 1965 to supersede the Housing and Home Finance Agency.

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I

Impound: See Escrows.

Installment: The periodic payment that a borrower agrees to pay a mortgage lender.

Interest: Consideration in the form of money paid for the use of money, usually expressed as an annual percentage. Also, a right, share, or title in property.

Interest Rate: Percentage paid for the use of money, usually expressed as an annual percentage.

Investor: Any person or institution that invests in mortgage or mortgage-backed securities.

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J

Joint Tenancy: Form of co-ownership giving each tenant equal interest and equal rights in the property, including the right of survivorship.

Jumbo Loan: A loan amount higher than those allowed by usual underwriting guidelines. Rates are usually somewhat higher than for conforming loans.

Junior Mortgage: A mortgage that is subordinate to the claims of a prior lien or mortgage.

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K

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L

Land Contract: An agreement to transfer title to a property once conditions of the contract have been fulfilled.

Late Charge: An additional charge that a borrower is required to pay as a penalty for failure to pay a regular installment when due.

Legal Description: A property description, recognized by law is sufficient to locate and identify the property without oral testimony.

Lien: A legal hold or claim of a creditor on the property of another as security for a debt. Liens are always against property, usually real property.

Loan Administration: A mortgage banking function which includes the receipt of payments, customer service, escrow administration, investor accounting, collections, and foreclosures.

Loan to Value (LTV): The amount of mortgage debt against the market appraisal value of the property expressed as a percentage. An 80 percent LTV on a $100,000 property means a mortgage of up to $80,000 can be obtained.

Loss Draft: Insurance Payments in settlement of a claim for damage to mortgaged property. Drafts are generally made out to both the mortgagee and the mortgagor.

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M

Market Value: The highest price that a buyer and the lowest price that a seller would accept, neither one being compelled to buy or sell.

Mortgage: A pledge of property, especially real property, as security for a debt. By extension, the document evidencing the pledge. In many states the document is a Deed of Trust. The document may contain the terms of repayment of the debt. By further extension, "mortgage" is used to describe both the mortgage proper and the separate promissory note evidencing the debt and providing the terms of the debt's repayment.

Mortgage Banker: A firm or "mortgage company" that originates real estate loans and either holds them in its own portfolio or sells them to other investors.

Mortgage Insurance: Insurance which protects lenders against loss in the event of default by the borrower. This allows lenders to make loans with lower down payments. The federal government offers MI through HUD/FHA, while private entities offer MI for conventional loans.

Mortgage Life Insurance: Insurance with the primary function of paying off the mortgage in the event the primary payer dies or becomes disabled. This is different than private mortgage insurance.

Mortgage Note: A written promise to pay a sum of money at a stated interest rate during a specified term. A mortgage note is secured by the mortgage.

Mortgagee: The lender in a mortgage transaction.

Mortgagor: The borrower in a mortgage transaction who pledges property as a security for a debt.

Mortgage (fixed rate): A mortgage in which the interest rate and payments remain the same for the life of the loan.

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N

Negative Amortization: The unpaid interest which is added to the mortgage principal in a loan where the principal balance increases rather than decreases because the mortgage payments do not cover the full amount of interest due.

Note: A general term for any kind of paper or document signed by a borrower that is an acknowledgement of the debt, and by inference, a promise to pay. When the note is secured by a mortgage, it is called a mortgage note and the mortgagee is named as the payee.

Notice of Default: Notice recorded after a default under a deed of trust or mortgage. Also, the notice sent to defaulting borrowers, required by insurers or guarantors such as FHA, VA or a mortgage insurance company.

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O

Origination: The process of creating both commercial and residential mortgages.

Origination Fee: The lender's fee charged a borrower to prepare documents, make credit checks, inspect and sometimes appraise a property. Usually stated as a percentage of the face value of the loan.

Originator: A person who solicits builders, brokers, and others to obtain applications for mortgage loans. Often called a loan officer.

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P

Payment Frequency: The interval of time in between required loan payments.

PITI: Stands for principal, interest, taxes, and insurance when they are all included in one mortgage payment. The PITI is divided into the monthly gross income of the borrower to come up with a ratio that is used to determine the borrower's ability to repay the loan.

PMI: Stands for private mortgage insurance. Borrowers who make a down payment of less than 20 percent have to pay for this additional insurance. It protects the lender who takes on the added risk of lending more than 80 percent loan against the value.

Points: Prepaid Interest. Each point is equal to 1 percent of the loan amount. They are sometimes called the "loan origination fees".

Prepaid Interest: Mortgage interest that is paid in advance of when it is due.

Prepayment: The payment of all or part of a mortgage debt before it is due.

Principal: The original balance of money lent, excluding interest. Also the remaining balance of a loan excluding interest.

Private-Mortgage-Insurance: Insurance written by a private company protecting the mortgage lender against financial loss occasioned by a borrower defaulting on the mortgage.

Promissory Note: A written promise to pay a specific amount at a specified time.

Property Taxes: Local government taxes levied on the ownership of real estate.

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Q

Quitclaim Deed: A deed relinquishing all interest, title, or claim an owner has in a property. A quitclaim deed implies no warranty.

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R

Real Estate or Real Property: Land and objects permanently attached to it, such as buildings and fences.

Refinancing: The repayment of a debt from the proceeds of a new loan using the same property as security.

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S

Second Mortgage: A mortgage that has rights subordinate to a first mortgage.

Secondary Financing: A funding method using a loan secured by a second mortgage on a property. Sometimes used to refer to any financing technique other than equity and first mortgage debt.

Secondary Mortgage Market: The market where lenders and investors buy and sell existing mortgages or mortgage-backed securities, thereby providing greater availability of funds for additional mortgage lending.

Seller-Servicer: A term used by Fannie Mae and Freddie Mac for a mortgage banker or other entity that has met the requirements necessary to sell and service mortgages for Fannie Mae or Freddie Mac.

Servicing: See loan administration

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T

Tax Lien: A claim against property for unpaid taxes

Term: The period of time between the commencement date and the termination date of a note, mortgage, or legal document, or other contract.

Title: Written evidence of the right to or ownership in property. In the case of real estate, the documentary evidence of ownership is the title deed that specifies in whom legal estate is vested and the history of ownership and transfers. Title may be acquired through purchase, inheritance, devise, gift, or through foreclosure of a mortgage.

Title Defect: Any legal right held by others to claim property or to make demands upon an owner.

Title Insurance Policy: A contract by which the insurer agrees to pay the insured a specific amount for any loss caused by defects of title to real estate, wherein the insured has an interest as purchaser, mortgagee, or otherwise.

Title Search: An examination of public records, laws, and court decisions to ensure that no one except the seller has a valid claim to the property, and to disclose past and current facts regarding ownership of the subject property.

Trust: A fiduciary relationship whereby legal title to a property is transferred to a trustee with the intention that such property be administered by the trustee for the benefit of another, the beneficiary, who holds equitable title to such property.

Trust Deed: The instrument given a borrower (trustor) to a trustee vesting title to a property in the trustee to ensure the borrower's fulfillment of an obligation. A mortgage.

Trustee: One who holds legal title to property for the benefit of another, or to secure performance of an obligation.

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U

Underwriting: In mortgage banking, the analysis of the risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender. Underwriting involves the evaluation of the property as outlined in the appraisal report, and the borrower's ability and willingness to repay the loan.

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V

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X

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Y

Yield: The ratio of investment income to the total amount invested over a given period of time.

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Z

Zoning: The creation of districts by local governments in which specific types of property uses are permitted.

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