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Ohio Mortgage Loan Glossary
Terms You Should Know
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Acceleration
The acceleration clause allows a lender to
accelerate when your loan comes due. If your loan is accelerated, the mortgage
lender can demand immediate payment of the remaining balance due in the event
that you fall behind on payments and default on the loan.
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage has an interest rate
that changes over a period of time. The change is based off of a preselected
index and may change after a period of months or years. If the interest rate of
an adjustable rate mortgage goes up or down, then the payment will go up or
down to reflect the change.
Amortization
A mortgage amortization schedule sets forth the
dates that payments are to be made; how much of each payment goes towards
interest, how much of each payment goes towards the principal balance and what
the balance of the loan will be after each payment is made. The amortization
schedule covers the whole life of the loan from the first payment all the way
through the end of the loan term. Amortization of your loan might change a
little from the original one that you are provided with when you take out your
mortgage loan if you decide to make extra payments to the principal balance or
your interest rate changes during the life of the loan.
Annual Percentage Rate (APR)
The annual percentage rate is interest on a
mortgage that takes into the account the total cost of the loan. The APR may be
higher than the interest rate than the rate that is stated on your mortgage
note because the APR takes origination fees and insurance into account.
Appraisal
An appraisal is done before property is purchased
or refinanced and it is done by a professional appraiser. The appraisal
estimates the amount of money the property is worth and takes several factors
into consideration. Mortgage lenders often look for the “fair market value” of
the property, which is the amount of money the property could sell for in a
competitive market. The appraised value is often different than the asking
price or sale price of the property and the market value of the property can
change over time depending on the market.
Assumption
A mortgage assumption is an agreement between the
seller of the property and a buyer, which allows the buyer to take over the
mortgage payments on the seller’s existing mortgage agreement. A mortgage
assumption can save a lot of money since it eliminates closing costs, a
possible higher interest rate and additional fees. However, assumptions are
usually only allowed on FHA, VA loans and other government loans.
Balloon Payment (Mortgage)
A balloon payment normally occurs at the end of a
fixed rate loan that has small payments over a short period of time. The
remaining balance of the loan is due in one large payment once the term of the
loan is up. An example would be a loan that requires interest only payments
every month over the course of 5 years with the remaining principal balance
being due when the contract is up.
Broker
A broker is a person who has the responsibility of
arranging loan funding and negotiating contracts but the broker does not lend
out the money him or herself. A broker may work independently or they may work
for a company of brokers.
Caps (Interest)
An interest cap is a safeguard that protects
consumers and limits the amount of interest a lender can charge a customer on
an adjustable rate mortgage. The interest cap may be imposed on the amount of
interest the lender charges the customer per year and/or during the life of the
loan.
Closing
The closing is the meeting between the seller, the
buyer, the lender and the lender’s respected agents. During this meeting, the
funds and the property change hands and the deed is transferred to the new
owners. The place of closing can be made at a location that is convenient for
all parties involved.
Closing Costs
The closing costs include the amount of money due
for the loan origination fees, appraisal fees, discount points, title search, title insurance, Deed recording fee, survey fee, taxes and
credit report fees. Closing costs are due on the day of settlement or “day of
closing” and are typically around 3% or more of the mortgage amount.
Construction Loan
A construction loan is a short term loan that is
often modified into a conventional; 30 year fixed rate loan once the
construction of the property is complete. During the construction process, the
lender will release funds to the builders or contractors for materials and
labor at various different stages of the building process.
Conventional Loan
A conventional mortgage loan is a mortgage loan
which is not guaranteed by the federal government, (such as FHA and VA loans
are). Conventional loans have standard terms and follow the guidelines of
Fannie Mae. Conventional mortgage loans usually have a term of 30 years, though
some conventional mortgages are 15 or 20 year terms.
Credit Ratio
The credit ratio is expressed as a percentage and
it figures what the buyer’s monthly payment obligation is on long term debts
and then that amount is divided into the buyer’s gross monthly income. For
example, if a buyer’s payments on their long term debt totals
$1000.00 per month and their gross monthly income is $4,000.00, then their
credit ratio is 25%.
Deed of Trust
The deed of trust is a document which contains an
agreement between a lender and a borrower to transfer the interest in the
borrower’s property to a neutral third party, who is a trustee, in order to
secure the payment of debt by a borrower. In some states, a deed of trust is
used instead of a mortgage note.
Default
Default means that there was a failure to meet the
legal obligations of the contract. Most often, a defaulted loan refers to the
property owners failure to make the required payments
that are set forth in the mortgage contract.
Delinquency
Delinquency is the failure to make the required
payments on time.
Department of Veteran Affairs (VA)
The Department of Veteran Affairs, otherwise known
as the “VA”, is a government agency which offers long term, low down payment or
no down payment loans to eligible veterans. Along with mortgages, the VA also
offers other various services to current and past service members of the United
States.
Discount Points
A discount point refers to prepaid interest that is
paid at the time of closing from the buyer to the lender. Each discount point
is equal to 1% of the mortgage amount and is an option to buyers that are
looking for an interest reduction over the course of the loan. Buyers normally
have the option of paying for a half discount point as well.
Down Payment
The down payment the money paid to make up the
difference between the purchase price of the property and the amount of the
mortgage. Depending on the type of mortgage loan that the buyer has, the down
payment requirement can range anywhere from 3% to 20% of the purchase price of
the property. For example, if a home is purchased for $100,000.00 and the
mortgage is $80,000.00, then the down payment would be 20%, which is
$20,000.00.
Earnest Money
Earnest money, which is also known as a good faith
payment or money is given from the buyer to the seller to bind the transaction
or to assure payment for the property. The earnest money is typically given to
a real estate agency or real estate broker and the amount can vary from a few
dollars to a few thousand dollars depend on what’s custom in your regions real
estate market.
Equal Credit Opportunity Act (ECOA)
The equal credit opportunity act is a federal law
that requires lenders to make credit available to people without discriminating
against a person’s race, color, religion, national origin, age, sex, marital
status or the receipt of income from public assistance programs. For example, a
lender could not deny an applicant a loan solely based on the fact that the
customer’s income comes from social security disability.
Equity
Equity is the difference between the fair market
value of the property and the amount of debt that the property owner owes on
the property. For example, if a property’s fair market value is $100,000.00 and
the owner only has one mortgage with a$60,000.00 balance left on it and there
are no other liens against the property, then the equity is $40,000.00.
Escrow
Escrow is an account that is held by the lender in
which the home buyer pays money into for property taxes and homeowners
insurance. Home buyers typically deposit money into the escrow account by
paying a set amount of money on top of their principal and interest payment
every month. When the tax bill or homeowners insurance
bill is due, the lender will pay the taxing authority or insurance company out
of the funds that are in the escrow account.
Farmers Home Administration (FMHA)
The Farmers Home Administration (FMHA) is a federal
agency that provides mortgage loans to farmers and other qualified borrowers
that are unable to secure financing through other means. Along with farmers,
the FMHA may also be able to provide loans for those who live in small towns or
rural areas.
Federal Home Loan Mortgage Corporation (FHLMC)
The Federal Home Loan Mortgage Corporation,
otherwise known as “Freddie Mac”, is a government agency that purchases
conventional mortgage loans from insured depository institutions and HUD
approved mortgage bankers. If a loan is owned by Freddie Mac, it is typically
not serviced by Freddie Mac and is instead serviced by the originating lender
or a lender that the mortgage was sold to.
Federal Housing Administration (FHA)
A division of the department
of urban housing (HUD), which has the main activity of insuring residential
mortgage loans made by private lending institutions. The FHA also sets forth the standard in mortgage underwriting. The FHA
insures mortgages on single family homes, multi-family homes, manufactured
homes and hospitals and is the largest mortgage insurer in the world.
Federal National Mortgage Association (FNMA)
The Federal National Mortgage Association is also
known as “Fannie Mae”, is a tax paying corporation that was created by
Congress. Fannie Mae purchases and sells conventional mortgage loans, as well
as those which are insured by FHA or guaranteed by the VA.
FHA Loan
A FHA loan is insured by the Federal Housing
Administration and loans are open to all qualified home buyers. There is a
limit on how much a FHA loan can be, but the limit is high enough to cover most
moderately priced homes all most anywhere in the country. Homebuyers that are
interested in FHA loans can apply for one with their local lender.
Fixed Rate Mortgage
A fixed rate mortgage is a mortgage loan which has
a set interest rate for the term of the loan. With a fixed rate mortgage, the
interest rate does not change and the payment stays the same for the life of
the loan. Fixed rate mortgages are the most popular type of mortgage loan
available.
Foreclosure
A foreclosure is a legal proceeding which is
initiated by the lender when the property owner fails to make the required
payments. The secured debt is sold back to the lender in order to pay for the
amount that the borrower defaulted on. The laws regarding when a lender can
start the foreclosure process varies from state to state.
Government National Mortgage Association (GNMA)
The Government National Mortgage Association, also
known as “Ginnie Mae”, provides the source of funds for residential mortgages
that are insured or guaranteed by the FHA or VA. Ginnie Mae also is the funds
source for the Rural Housing Service (RHS) and the Office of Public and Indian
Housing (PIH). Ginnie Mae does not buy loans, sell loans or issue mortgage
backed securities.
Gross Monthly Income
The gross monthly income is the amount of money
that a borrower earns or makes per month before typical deductions, such as
taxes are deducted from their pay. The gross monthly income is what lenders
typically take into account when they are qualifying a buyer for a mortgage.
Guarantee
A guarantee is a promise by one party/person to pay
the debt or perform an obligation of another party/person in the event that the
original party fails to meet their obligations or pay the debt according to the
contract. A person who guarantees the loan for another person is different than
a co-signer, since the person guaranteeing the loan does not hold any ownership
to the property.
Hazard Insurance
Hazard insurance is another term for home owner’s
insurance. Hazard insurance protects the insured from losses that occur due to
fire and other types of property damage. In a hazard insurance policy, the
structure of the property and the contents inside are typically both insured.
An insurance agent will determine how much money it would cost to rebuild the structure
or property in the event that there is a loss. The insured amount is typically
more than the fair market value of the home or property.
Housing Expenses to Income Ratio
The housing expenses to income ratio is a
percentage that reflects the borrower’s housing expenses divided by the
borrower’s gross monthly income. Lenders use this ratio often times in
conjunction with a borrower’s debt to income ratio to help determine what a
borrower can afford to pay per month for a home or property.
Impound
Impound is another term for “escrow” and an impound
account is used to pay for the home owner’s insurance and tax payments. The
impound account is held by the lender and the home owner can either deposit
money into it or pay an extra amount on top of their principal and interest
payment every month in order to deposit funds. Most borrowers elect to include the impound or escrow amount in their monthly mortgage
payments.
Investor
An investor is the money source for the lender.
Jumbo Loan
A jumbo loan is a loan in an amount that is higher
than the limit that the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation sets forth. Jumbo loans cannot be funded by
either of those two agencies and can therefore cost more and have higher
interest rates.
Lien
A lien is a claim against a piece of property for
the payment or satisfaction of a debt or an obligation that the property owner
owes.
Loan to Value Ratio
The loan to value ratio is the difference between
the amount of the mortgage loan and the appraised value of the property. For
example, if a buyer took out an $80,000 mortgage and the appraised value of the
home is $100,000.00 then the loan to value ratio would be 80/20.
Margin
The margin is the amount the lender adds to the
index on an adjustable rate mortgage to establish the adjusted interest rate.
The total interest rate that a borrow pays on their ARM is the combined amount
of the index and the margin. For example, the index rate may 4% and the margin
may be 3%, meaning that the interest rate would be 7%.
Market Value
The market value is considered the highest amount
that a buyer would pay for a property and the lowest amount that the seller
would accept for the property. The market value can differ from the amount of
money that a property could realistically sell for depending on the housing
market.
Mortgage Insurance
Mortgage insurance is money paid by the borrower to
ensure the mortgage when the down payment is less than 20% to insure. Mortgage
insurance is also known as PMI (personal mortgage insurance) and it protects
the lender in the event that the borrower defaults on the loan. Mortgage
insurance is usually required when the ratio is less than 80/20 and it will
continue until the home owner had at least 20% equity in the property, either by
paying down the mortgage or by the appraised value going up.
Mortgagee
The mortgagee is the lender.
Mortgager
The mortgager is the borrower or home owner. There
may be more than one mortgager on a loan.
Negative Amortization
Negative amortization occurs when the payments that
are being made on the loan are not large enough in order to cover the interest
that is due on the loan. If negative amortization occurs, then the unpaid
interest is added to the balance of the loan. Negative amortization can be
dangerous because the home owner will owe more than the original amount of the
loan. Negative amortization can happen if a borrower is making principal only
payments for one reason or another.
Net Effective Income
A borrower’s net effective income is their gross
income minus the federal taxes that are deducted.
Non-Assumption Clause
A non-assumption clause is part of a mortgage
contract that states the loan is not allowed to be assumed by another person
without approval from the lender. If the property owner lets another person
assume the mortgage without the lender’s approval, then the lender has a right
to accelerate the loan.
Origination Fee
The origination fee is the amount of money charged
by the lender to prepare the loan. The origination fee often also includes the
fees for credit checks and can sometimes include the appraisal and/or home
inspection fees. Origination fees are a percentage of the total mortgage amount
and the money is due at closing.
PITI
PITI stands for principal, interest, taxes and
insurances. It is also referred to as a person’s monthly housing expense and is
used for the housing expenses to income ratio that lenders use.
Power of Attorney
A power of attorney is a legal document that states
that one person has the authority to act on the behalf of another person. If a
person is the power of attorney for another person, then they can usually sign
documents for them, make financial transactions for them and handle other
various matters. A power of attorney can give a person the ability to handle
one aspect for another person, or it may give them complete authority and
decision making power.
Prepaids
Prepaids are the expenses that are necessary in
order to set up a borrower’s escrow account or to adjust the seller’s existing
escrow. Prepaids typically include funds for property taxes, hazard insurance,
prepaid interest and private mortgage insurance. Prepaids are due at the time
of closing.
Prepayment
Prepayment or a prepayment clause in the mortgage
contract states that the borrower may make payments early on the loan or pay
off the loan early. Not all mortgage contracts and lenders agree to let buyers
pay before the due date or pay the loan off early without being assessed fees
for paying early.
Prepayment Penalty
A prepayment penalty can occur if the borrower pays
off the amount of the loan before the existing due date for the loan to be paid
in full. There are times where prepayment penalties are charged even if the
full amount of the debt is not being paid in full, only partially being paid
early or if the borrower makes early payments. Prepayment penalties are
disclosed in mortgage contracts and 36 states, including the District of
Columbia currently allow lenders to charge prepayment penalties.
Principal
The principal balance of a mortgage loan is the
remaining balance of the loan, not counting the interest.
Private Mortgage Insurance (PMI)
Private mortgage insurance is normally required if
the buyer does not put 20% of the total purchase price down on the property
and/or the appraised value of the home is not 20% more than the amount of the
mortgage being taken out. It is rare however for the home to have an appraised
value of more than 20% of the mortgage being taken out against it. PMI allows
the borrower to put down a small down payment, usually around 5% of the
purchase price of the home. PMI insures the lender against a loss in the event
that the buyer defaults on the loan. The cost of PMI depends on the amount of
the loan and the price that the lender’s insurance company charges.
Realtor
A realtor is either a real estate broker or
associate who holds an active membership with a local real estate board that is
associated with the National Association of Realtors. Realtors generally act on
behalf of the seller, but it has become more common for buyers to use a realtor
or real estate agent when they are searching for a home to purchase.
Rescission
Rescission refers to the cancelation of a contract.
There is a 3 day cancelation clause in some mortgage loans that have to deal
with taking out equity in a property that a person already owns or refinancing
an existing mortgage. The 3 day cancelation clause does not apply to real
estate contracts where the home is being purchased through a real estate
contract. In general, real estate contracts can only be cancelled due to fraud,
non-disclosure, misrepresentation or specific contingencies that were set forth
in the contract.
Recording Fees
Recording fees are paid to the lender by the
borrower/home buyer to pay for fees charged by the local municipal authorities
to record the deed (make it a public record). Recording fees vary from area and
to area and the deed is normally recorded on the date of closing.
Renegotiable Rate Mortgage (RRM)
A renegotiable rate mortgage or RRM is a mortgage
where the interest rate adjusts periodically. A RRM has a fixed rate for a
period of time and the monthly payments stay the same during this time period.
When it comes time to adjust the interest rate at the end of a predetermined
period, the interest rate and payment will adjust. RRM loans are also sometimes
referred to “rollover” loans.
Real Estate Settlement Procedures Act (RESPA)
The Real; Estate Settlement
Procedures ACT, known as RESPA for short is a federal law to help protect
consumers. RESPA allows consumers to view the lender’s
information on the estimated closings costs for their mortgage loan. Consumers
can receive an estimate after the application is made and once again before
closing. Due to the regulations of RESPA, consumers can more accurately plan
for the amount of money that they will need for closing costs and it also gives
them the ability to catch any mistakes.
Reverse Annuity Mortgage (RAM)
A reverse annuity mortgage, which is known as RAM
for short is when the lender makes payments to the home owner using the equity
in the home as the security for the loan. The payments that home owners receive
from the lender on their reverse mortgage are also tax free. Single family
homes, 2-4 family homes and manufactured homes that were built after 1976 are
usually eligible for reverse mortgages. Condominiums and co-ops are usually not
eligible for reverse mortgages.
Servicing
The servicing of a loan includes all of the actions
that a lender performs in order to keep a loan in good standing. The servicing
includes the collection of payments, taxes and insurance to name a few. It also
includes the disbursements of the funds that are held in escrow in order to pay
for taxes and insurance for the property owner.
Survey
A survey is the measurement of land and is done by
a registered land surveyor. The survey shows the property boundaries, lists any
known reference points and the location of any structures which are located on
the property. In some instances, a property survey is required every time the
ownership of the property changes hand. A map (the survey) will also be
included in your mortgage paperwork.
Title
The title is a document which provides evidence of
an individual’s ownership in property. The title is needed to transfer the
property from one owner to another to prove that the selling party has legal
ownership of the property and therefore has the authority to sell it.
Title Insurance
Title insurance is a policy that is issued by a
title insurance company and it insures the home buyer against errors made in
the title search. The cost of title insurance depends on the value of the
property in most instances and it is often paid for by the buyer or the seller.
Title insurance protects a property owner and lenders from claims and suits
brought forth by others who claim to have an interest in the property and it
protects against liens that were imposed by previous owners
debts that were not found in the title search.
Title Search
The title search is done by a title company and the
search examines public records to determine who the legal owner of the property
is. A title search also examines if there are any outstanding liens against the
property. If any issues are discovered in the title search, those issues need
to be addressed before the loan closes.
Truth-In-Lending
The truth in lending act was put into place in 1968
and it requires lenders to fully disclose the annual percentage rate (APR) to
the home buyers shortly after the buyers submit their application. The truth in
lending disclosure also must disclose all costs and fees that the buyer or
receiver of the loan is responsible for.
Underwriting
Underwriting is the process performed by the lender
that decides whether or not the person or persons who applied for the loan are
able to be approved based on their credit history, assets, employment history
and other factors. The underwriting process determines the risk that the lender
would be taking if they agreed to lender the person or persons the funds that
they requested.
VA Loan
VA loans are long term and/or low or no down
payment loans that are guaranteed by the Department of Veteran Affairs. VA
loans are restricted to those who qualify by military service or other
entitlements. VA loans cannot go above a certain amount of money and the
maximum amount is determined by geographic location. The maximum amount is
updated on a yearly basis and eligibility can be determined online. In order to
apply for a VA loan, the home buyer must use a lender who offers VA loans.
VA Mortgage Funding Fee
The VA mortgage funding fee is a premium of to 2%
and depends on the amount of the down payment that is paid on a VA backed loan.
The VA mortgage funding fee is often times waived if the applicant is receiving
military disability. The funding fee is higher (a little over 3%) for those who
are obtaining their 2nd VA mortgage loan.
Verification of Deposit (VOD)
A verification of deposit is a form that is signed
by the borrower’s bank that verifies the status and the balance of the
borrowers account or accounts.
Verification of Employment
Verification of
employment is a signed document by the borrower’s employer that states the
borrower’s length of employment and salary. The verification of employment also
might ask the employer to list any potential pay increases and whether or not
there is a good chance of continued employment.
