I have a glossary of some of the most common mortgage terms. Portions in italics are personal comments to explain the terms and impact to a borrower.
ARM or adjustable-rate mortgage:
A mortgage loan with an interest rate that adjusts periodically over the life of the mortgage based on changes in a specified index.
The ARM is a foot in the door for the real estate market and mortgage industry. Qualifications for mortgage payments are based on a percentage of the borrowers monthly calculated gross income. ARM mortgages are available for lower initial rates than traditional fixed rate mortgages. The mortgage company loses little on the difference in mortgage payment the first years, but stand to make up difference as ARM rates are adjusted to current interest rates as the mortgage matures. Realtors and Brokers make more, because real estate buyers qualify for higher priced property and make the more expensive purchase. Both groups are paid commissions and fees on the price of the house or amount of the loan. If the rate increases, you the borrower may not qualify for the payments on the existing loan. Only you know what the impact would be if the rate adjusted upwards and you were faced with a higher payment.
The portion of principal and interest due on a loan that is written off when deemed to be uncollectible.
Charge off may sound reassuring if the property is foreclosed, however the mortgage company writes it off as revenue producing, but the debt is still not gone. This will result in additional state and federal income taxes based on the amount that is Charged-off. The borrower will receive a 1099-C reporting the difference between sales price and amount owed as INCOME, and will owe additional taxes on this amount.
A mortgage loan that is not guaranteed or insured by the U.S. government or its agencies, such as the VA, FHA or RHS.
Conventional mortgages are generally less expensive for the borrower. There is less paperwork and the property does not receive the scrutiny and has fewer requirements than Government insured loans.
A process that uses recorded information about individuals and their loan requests to assess – in a quantifiable, objective, and consistent manner – their future performance regarding debt repayment.
Your credit report will be available to the mortgage broker and mortgage company. The information is used to verify debt reported on your mortgage application, your financial ability to pay your debts, and your �willingness� to pay your debts in a timely manner. The information includes the lenders, payment history, and whether your payments have been late (if so how many have been late, and how late were the payments).
The failure of a borrower to comply with the terms of a note or the provisions of a mortgage.
Late mortgage payments are not the only criteria for being in �Default�. Failure to pay property taxes, insurance premiums, and make necessary repairs can cause mortgage default.
A mortgage loan on which a payment has not been made by the due date.
Self explained. Pay it late and you are delinquent.
A mortgage loan with an interest rate that does not change during the entire term of the loan.
Generally the initial rate on a Fixed Rate Loan is slightly higher. However the Principal and interest portion of the mortgage payment will not change over the life of the loan, regardless of what the mortgage interest rate market does. If the rates drop (unlikely at this time) you lost. If the rates on new mortgages rise, then you make out like a fat cat.
This does not mean your total payment will remain unchanged. If you have an escrow for insurance and taxes your payments will change. Insurance premiums and property taxes rise, your escrow payment will also increase to meet the additional expenses.
The lender’s postponement of legal action when a borrower is delinquent. It is usually granted when a borrower makes satisfactory arrangements to bring the overdue mortgage payments up to date.
The borrower should contact the lender to explain and make arrangements. Request the results and terms in writing. Failing to honor the agreement may result in Foreclosure. Waiting to request Forbearance until the foreclosure process complicates the process and may make the borrower ineligible for Forbearance. You wait, you lose.
The legal process by which property that is mortgaged as security for a loan may be sold to pay a defaulting borrower’s loan.
You lost. Fees are added to the principal balance due on the mortgage. Fees may include and are not limited to late fees, local court filing fees, and attorney�s fees. On what was originally a $100,000 mortgage, the total amount to satisfy the mortgage may now be $130,000. If it sells as a foreclosed property for less, you are responsible for the difference between the mortgage due and sales price. If the difference is a �Charge-Off�, it will be reported to the I.R.S. as Income and you will be responsible for paying taxes on the difference.
A mortgage loan with a contractual maturity at the time of purchase equal to or less than 15 years.
The tasks a lender performs to protect a mortgage investment, including collecting monthly payments from borrowers and dealing with delinquencies.
Mortgages are grouped into value groups. Such groups are traded and sold daily. You may not have the same Mortgage Provider or service provider through the life of the mortgage. They are required to give advance notification when a change is made. Examine your documentation carefully to ensure the original terms are continued to the new Mortgage and Service Provider.
Loan-to-value (LTV) ratio:
The ratio, at any point in time, of the unpaid principal amount of a borrower’s mortgage loan to the value of the property that serves as collateral for the loan (expressed as a percentage).
To calculate the LTV: Principal Balance divided by the original purchase price. The calculation is your present LTV.
Any change to the original terms of a mortgage.
A legal document that pledges property to a lender as security for the repayment of the loan. The term also is used to refer to the loan itself.
Any loan secured by real property is a mortgage regardless of the purpose or use of the funds.
Multifamily mortgage loan:
A mortgage loan secured by a property containing five or more residential dwelling units.
Duplexes, Triplexes and Fourplexes may be purchased under owner occupied or investment mortgages, but do not meet the quantity of dwelling units of multifamily mortgage loans.
A procedure in which the borrower is allowed to sell his or her property for an amount less than what is owed on it to avoid a foreclosure. This sale fully satisfies the borrower’s debt.
May be part of a Forbearance plan or an escape plan to save on the fees incurred by foreclosure procedures.
An agreement between a lender and a borrower who is delinquent on his or her mortgage payments, in which the borrower agrees to make additional payments to pay down past due amounts while still making regularly scheduled payments.
Part of a Forbearance plan to prevent foreclosure.
A financial tool that provides seniors with funds from the equity in their homes. Generally, no borrower payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed not to exceed the proceeds from the sale of the home.
Reverse mortgages may be a wonderful tool to aid the owner in paying living expenses above their retirement income. It does result in a lien on the property that must be satisfied when the owner moves from the property and stands no reasonable expectations of returning. Repayment must be made by the individual or by the estate after vacating the property. Prior to changing the ownership of the property the balance of the reverse mortgage payments due must be satisfied. This is either done by a lump sum payment by the estate or sale of the property.
Secondary mortgage market:
The market in which residential mortgages or mortgage securities are bought and sold.
Usually of no consequence to the individual borrower unless their mortgage servicer changes as a result of the Secondary mortgage market sale.
The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower’s ability and willingness to repay the debt and the value of the property.
All mortgage applications must pass the underwriters to get the loan to buy or refinance the property. Underwriters get the entire package: loan application, credit report, mortgage documents, and property appraisal. Theoretically, underwriters screen the paperwork for accuracy and do a risk assessment of all aspects of the loan. Their approval of the entire package, or vote of confidence triggers the release of funds for the borrower to purchase or refinance.