Loan Glossary of Terms

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

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 that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.

Amoritization. The gradual repayment of a mortgage by installments.

Annual percentage rate (APR). The total yearly cost of a mortgage stated as a percentage of the loan amount; includes such items as the base interest rate, primary mortgage insurance, and loan origination fee (points).

Appraisal. A report that gives an assessment of the market value of a property.

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

Asbestos. According to the EPA, many homes constructed during the past 20 years probably do not contain asbestos products. You may hire a qualified professional who is trained and experienced in working with asbestos to inspect the home. A professional knows where to look for asbestos, how to take samples properly, and what corrective actions will be most effective.

Assessed value. The valuation placed upon 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.

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

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

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

Clear title. A title that is free of liens or legal questions as to ownership of property.

Closing. A meeting of all parties involved in a real estate transaction where title to a property is formally transferred.

Closing costs. Fees (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property, such as an origination fee, discount points, title insurance fees, survey fees and attorney's fees. Also called "settlement costs".

Collateral. Property owned by a borrower that is pledged to a lender in order to secure a loan.

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

Conditions. Additional documentation required by an underwriter that must be provided before or during loan closing in order for the loan to meet investor requirements.

Condominium. A form of property ownership in which the homeowner holds title to an individual dwelling unit, an undivided interest in common areas of a multi-unit project, and sometimes the exclusive use of certain limited common areas.

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 adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.

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.

Debt. Money that is borrowed, which the borrower promises to repay.

Debt-to-income ratio. Ratio used to qualify you for a mortgage. Compares your total monthly housing expense (the amount you pay out) with your total monthly gross income (the amount you earn).

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 borrowers.

Default. The failure to make a mortgage payment on a timely basis or to otherwise comply with other requirements of a mortgage.

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

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

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 made by the potential home buyer to show that he or she is serious about buying the house.

Easement. A right of way giving persons other then the owner access to or over a property.

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. A homeowner's financial interest in a property. Equity is the difference between the fair market value of a property and the amount still owed on the mortgage.

Escrow (or impound account). A trust that is set up and maintained by your mortgage company. The purpose is to save a portion of your monthly payment for the eventual payment of real estate taxes, hazard insurance, mortgage insurance or mortgage premiums.

Fair market value. A price freely agreed upon by a willing buyer and a willing seller of a property, with neither party being under any compulsion to buy or sell.

FHA mortgage. A mortgage that is insured by the Federal Housing Administration. Also referred to as a "government" mortgage.

First mortgage. A mortgage that has first claim in the event of default.

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

Flood insurance. Insurance that compensates for physical property damages resulting from flooding. It is required for properties located 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 legal process by which a mortgaged property may be sold when a mortgage is in default.

Funding fee. A fee charged by the VA to guarantee a mortgage loan.

Gift letter. A signed statement by a gift donor which explains that a cash gift used by the borrower to qualify for a loan does not need to be repaid.

Good faith estimate. A form required by law to completed and given to the borrower by the lender. The form estimates the closing costs that will be due upon disbursement of the loan proceeds.

Gross income. Total income before any deductions.

Guarantee fee. A fee charged by Rural Development to guarantee a mortgage loan.

Hazard insurance. Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or under hazards.

Home inspections. The home inspection is not the same as an appraisal. The inspection is meant to evaluate the structural and mechanical condition (not the market value) of the property. The inspector's findings will be based on observable, unconcealed structural conditions. The inspector will not normally guarantee or warrant the condition of the home, or determine whether a house is in compliance with local building codes.

Homeowner's insurance. An insurance policy that combines personal liability coverage and hazard insurance coverage for a dwelling and its contents.

Housing ratio. (Also called the housing-to-income ratio) This ratio reflects the percent of the borrower's income to be used for the monthly housing payment.

Interest rate cap. A provision of an ARM limiting how much interest rates may increase or decrease per adjustment period or over the life of a mortgage. 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.

Lead paint. Beginning in October 1995, buyers must be notified of any known lead-based paint hazards by sellers of any home built before 1978. Buyers must also receive a Lead Hazard Information Pamphlet developed by the federal government. If the house was built before 1920, you can be almost certain that lead-based paint was used. For houses built after 1950 but before 1978, there is a fair chance that lead-based paint is present.

Liabilities. A general term encompassing all types of debts and obligations.

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

Lifetime cap. A provision of an ARM that limits the highest rate that can occur over the life of the loan.

Loan commitment. See commitment letter.

Loan officer. The liaison between the home buyer and the various professionals that are involved in the loan process.

Loan servicing. The collection of mortgage payments from borrowers and related responsibilities of a loan services.

Loan-to-value percentage (LTV). A percentage which compares the outstanding principal balance of your mortgage loan with the value or selling price of the mortgaged property.

Lock-in. A written agreement guaranteeing the home buyer a specified interest rate and discount points on a mortgage loan.

Montana Board of Housing (MBOH). A State Authority that issues bonds to raise funds for first time home buyers.

Monthly housing payment. The monthly amount of the total cost factors involved in paying back a mortgage, including principal, interest, taxes, hazard insurance, private mortgage insurance and assessments.

Mortgage. The legal instrument by which real estate is pledged as security for the repayment of a loan.

Mortgage Bankers. Originate and fund loans using monies borrowed against a line of credit. They sell collateralized loan notes to investors. Mortgage Bankers are a large source for residential mortgage loans in the United States. Montana Mortgage Company is a Mortgage Banker.

Mortgage insurance. An insurance policy that insures a lender against loss if a borrower defaults on his or her mortgage payments.

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 mortgage note is secured by a mortgage.

Mortgagee. The borrower in a mortgage agreement.

Mortgagor. The borrower in a mortgage agreement.

Negative amortization. A gradual increase in the mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the unpaid principal balance to create "negative" amortization.

Net worth. The value of all of your assets minus your total liabilities.

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.

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

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

Points (discount points). A one-time charge assessed by the lender to lower the interest rate while still giving the investor the same yield on the loan; a point is 1 percent of the amount of the mortgage.

Prepayment penalty. A fee that may be charged to a borrower who pays off a loan before it is due.

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

Principal. Amount of debt, not including interest. The face value of a mortgage note.

Processing. The verification of accuracy of information on a loan application and gathering of supporting documents. Information is packaged and sent for consideration by an underwriter.

Processor. One who prepares the loan for underwriting.

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 the lenders to determine how large a loan to grant a home buyer.

Radon. A radioactive gas found in some homes that in sufficient concentrations can cause health problems.

RD (Rural Development). Formerly Farmers Home Administration. A Branch of the Federal Government which offer single family housing programs in rural areas. Specifically, subsidized housing and the guaranteed loan program.

Real estate sales professional. A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA). A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Refinancing. The process of paying off one loan with the proceeds from a new loan using the same property as security.

Second mortgage. A mortgage that has a lien position subordinate to the first mortgage.

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 that determines the seller's net proceeds and the buyer's net payment.

Servicing. The procedures related to the collection of mortgage payments and the management of mortgage escrow accounts.

Survey. A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.

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

Term. The period of time during which principal and interest payments must be made.

Title. A legal document evidencing a person's right to ownership of a property.

Title company. A company that specializes in examining and insuring titles to real estate.

Title insurance. Insurance to protect the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of 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 fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

Underwriter. One who analyzes mortgage loans to determine the risk involved in granting the loan.

Underwriting. The process of evaluating a loan application to determine the risk involved for the lender. It involves the analysis of property used as collateral for the loan; the borrower's ability to repay the loan' the borrower's past credit history and willingness to repay the loan, assets available for down payment, closing costs and reserves.

VA loan. A loan that is guaranteed by the Department of Veterans Affairs. Also referred to as a "government" mortgage.