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Mortgage & Lending Glossary:

Making sense of all the mumbo-jumbo...

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US Mortgage Glossary:

In Alphabetical Order...

The U.S. mortgage industry is full of terms that are gibberish to many people. The following glossary of terms should help you translate the mortgage language into everyday English thereby helping you make better sense of the mortgage process.

Annual Percentage Rate - This is not the note rate applied for, but rather is a government mandated formula that shows the cost of the loan in a yearly rate by using the note rate plus certain other upfront costs, in other words this is the rate you are paying at the end of the day.

Appraisal - An expert opinion on the value of a property by a accredited appraiser.

ARM Loan - Adjustable Rate Mortgage. Mortgage characterized by an interest rate that can adjust up or down at certain intervals based on a current index (commonly the 1 year T-Bill) plus a preset margin.

Balloon - A mortgage that is characterized by level fixed payments for a predetermined time frame followed by either a refinance or adjustment in interest rate after this time.

Cash to Close - The amount needed from the borrower at closing. Consists of down payment, closing costs and prepaid items. This amount needs to be in the form of a cashier check made payable to the buyer.

Closing Date - Date stated on the purchase agreement that buyer and seller agree to finalize or close the transaction.

Capital Gains - The tax paid upon certain types of real estate transactions. When it comes to anything that involves the IRS and your money it's best to contact an accountant for specifics.

Closing Costs - Costs associates with the setting up and funding of the transaction - including closing fee, title insurance, appraisal fees, underwriting fee, mortgage registration tax etc.

Credit Bureaus - Agencies that provide compilations of your credit history. The three main credit bureaus are Experian, Trans Union, and Equifax.

Credit Report - A report provided by the credit bureaus which shows the history, current status, and profile of an individual that is used by a lender in deciding whether or not to lend to an individual.

Credit Scores - The number generated by the credit bureaus which is a numerical representation of the subjects credit profile, range is from 450 on the low side to 900 being the highest score possible.

Condo/Town Home - These property types usually have the following characteristics: they are attached, have a homeowners association and monthly dues, the outside & common area maintenance is taken care of by the association, and the common areas as well as the amenities are available to all owners in the association for their use and enjoyment.

Conventional Financing - Standard, non-government financing.

Debt Ratios - Ratio of debt to pretax income, often expressed as a front (housing payment only) or back (all debt) ratios. Ex- $5000 monthly income, $1500 housing payment, $2000 total debt would equal ratios of 30% / 40%.

Down Payment - Difference between loan amount and purchase price.

Discount Points - One point equals one percent of the loan amount. Points are used to lower the interest rate. One point does not equate into lowering the interest rate one percent. Generally lowering the interest rate 1/8 will cost about 1/2 point, although this can vary based on daily pricing. Typically this is tax deductible.

Earnest Money - Deposit toward down payment submitted with a purchase agreement as evidence of the buyers commitment. This demonstrates that you're serious.

Equifax Information Services
PO Box 740243
Atlanta, GA 30374
(800) 685-1111

Experian Information Services
PO Box 2002,
Allen, TX 75013-3742
(888) 397-3742

Escrows - The portion of the monthly payment that is not applied to principal or interest, but rather is used to pay mortgage insurance, homeowners insurance and property taxes.

Fannie Mae - Short name for the Federal National Mortgage Association. One of the main Government Sponsored Agencies which are the companies who sell mortgage backed bonds to investors. They are the ultimate source of the money that we lend. Fannie Mae protects its investors by issuing underwriting guidelines that are to be followed to ensure quality lending.

Freddie Mac - Short name for Federal Home Loan Mortgage Corporation - see above.

FHA Financing - Government backed minimum down financing program which has a lower mortgage insurance premium and greater credit leeway as compared to conventional minimum down programs.

Floating - Not locking in a rate, but rather choosing to float the interest rate as the market moves up or down. Not for everyone as a major fluctuation can cause cash flow issues.

Flood Certification - Required document on all loans. Confirms if the property is in or out of a FEMA designated flood zone.

Fixed Loan - Most common type of financing. Terms ranging from 10 to 30 years. Interest rate and P&I payment remains constant throughout life of loan.

Funds held in Escrow - Generally only applies to new construction. Monies held from the seller to provide payment for repairs or non completed items.

Government Financing - Financing provided from government agencies such as FHA , VA etc .

Good Faith Estimate - Document prepared by lender which estimates and delineates the various fees and closing costs associated with the home purchase.

HELOC - Home Equity Line of Credit. Second mortgage product, generally characterized by interest only payments and the ability to draw, pay back, and redraw it's an extremely flexible lending instrument.

Home Inspection - Not required by a lender but a wise idea for a purchaser in helping determine the overall condition of a property it should be done be a licensed or accredited property inspector. The buyer is free to choose whomever he or she wants.

Homeowners Association Dues - Amount paid by owners of a townhome or condo to cover various amenities or services provided by the homeowners association (examples -- common areas, hazard insurance, garbage, mowing, snow removal).

Homeowners/hazard Insurance - Insurance which covers damage or loss to the property. The premium is usually paid into an escrow account held by the mortgage company, which then pays the insurance company once a year.

HUD-I (Settlement statement) - Document prepared by title company at closing which shows where all of the money in the transaction was coming from and going to.

Jumbo Loan - Loan with an initial balance greater than $300,700

Jumbo Pricing - Refers to the fact that rates are generally slightly higher on jumbo loans.

Lock-in Period - Time period that a rate is protected for during the loan process.

Locking in - Choosing to protect a particular rate and program for a specific period of time.

Loan-to-Value (LTV) - Ratio of liens versus value of property or sales price. Ex. 100,000 owed on a property worth 200,000 equals an 50% LTV.

Mortgage Insurance (MI) - Insurance which protects the LENDER against default. Generally the higher the loan-to-value the higher the monthly premium to help offset the risk.

Mortgage Document - This document signed at closing is the collateralization of the property to the note or loan.

Note - Document. This document signed at closing is the promise by the signers to repay the loan.

Origination Fee - 1% of the loan amount. It can be avoided by paying a higher rate; typically is tax deductible.

Odd Days Interest/Per Diem Interest - Collected at closing, it is money collected/refunded to borrower to synchronize the closing to the monthly payments.

Piggy Back - A second mortgage closed at the same time as a first mortgage. It's primary purpose is to avoid mortgage insurance, jumbo pricing, or for future needs.

PITI - Monthly payment. Stands for Principal, Interest, Tax escrow, Insurance (both hazard and mortgage) escrow.

Pre-Approval - A preliminary approval that is based on documented income, assets, and credit.

Pre-paids - Group of items paid at closing including monies to set up the escrow account and to pay prepaid or odd days interest.

Pre-Qualification - A pre-qualification is based on stated income, assets and debt. Information is not verified during this process therefore it's not as useful or informative as a Pre-Approval.

Paying Points - Money paid upfront to lower the interest rate. Rule of thumb - breakeven point is (where monthly savings meets/exceeds money paid upfront) usually around 60 payments or 5 years. This means that in many cases paying points will pay off as long as you do not sell or refinance your loan before the breakeven point. (actual breakeven point may vary, make sure you discuss your specific situation with your lender and or mortgage broker) There are instances in which some specialty products and products may require points to be paid.

Pre Payment Penalty - An option on certain loan types. A benefit in that the rate is lower on these products compared to other similar products.

Property Taxes - Amount of tax due on a property. Usually is collected as part of the escrow portion of the monthly payment, with the lender being responsible to forward the escrowed money as the bills come due on May 15 and Oct 15.

Purchase Agreement - Contract between buyer and seller outlining the terms of the agreement mutually agreed upon.

Single Family Residence - Standard, one unit home, as opposed to a Condo/Town Home with a homeowners association.

Title Company - Company that prepares title work and is where the closing is held.

Trans Union Information Services
PO Box 1000
Chester , PA 79022
(800) 916-8800

Title Insurance - Policy provided by the title company on their title work guaranteeing the accuracy and completion. Lenders Policy is required and only protects the Lender from loss, Owners Policy is available at buyers discretion and protects the owner.

Title Work - Document prepared by title company which outlines the ownership of the property and other various details.

Underwriting - Act of approving a loan application. Underwriters are bound by guidelines set forth by Fannie Mae, Freddie Mac, FHA or VA as applicable.

VA Financing - Government backed financing available only for service veterans, characterized by no down payment, no mortgage insurance, but with a funding fee. It's there to help making home ownership for servicemen and women.


Canadian Mortgage Glossary:

In Alphabetical Order...

Agreement of Purchase and Sale - A legal agreement that offers a certain price for a home. The offer may be firm (no conditions attached), or conditional (certain conditions must be fulfilled before the deal can be closed).

Amortization Period - The time over which all regular payments would pay off the mortgage. This is usually 25 years for a new mortgage, however can be greater, up to a maximum of 35 years.

Appraisal - The process of determining the value of property, usually for lending purposes. This value may or may not be the same as the purchase price of the home.

Appraisal Value - An estimate of the market value of the property.

Assumability - Allows the buyer to take over the seller’s mortgage on the property. Guidelines on this vary from lender to lender.
Arms Length - A transaction between unrelated entities where a willing seller (the seller is not compelled to sell) transacts with a willing buyer (the buyer is not compelled to buy).

Blended Payments - Payments consisting of both a principal and an interest component, paid on a regular basis (e.g. weekly, biweekly, monthly) during the term of the mortgage. The principal portion of payment increases, while the interest portion decreases over the term of the mortgage, but the total regular payment usually does not change.

Canada Mortgage and Housing Corporation (CMHC) - The National Housing Act (NHA) authorized Canada Mortgage and Housing Corporation (CMHC) to operate a Mortgage Insurance Fund which protects NHA Approved Lenders from losses resulting from borrower default. CMHC provides this mortgage insurance where the overall loan to value is in excess of 80%.

Certificate of Location or Survey - A document specifying the exact location of the building on the property and describing the type and size of the building including additions, if any.

Certificate of Search or Abstract of Title - A document setting out instruments registered against the title to the property, e.g. deed, mortgages, etc.

Closed Mortgage - A mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms.

Closing Costs - Various expenses associated with purchasing a home. These costs can include, but are not limited to, legal/notary fees and disbursements, property land transfer taxes, as well as adjustments for prepaid property taxes or condominium common expenses, if any.

Closing Date - The date on which the sale of a property becomes final, and monies and title exchange hands. In some cases this is also the possession date, the date on which the new owner takes possession of the home.

CMHC or GENWORTH or AIG Insurance Premium - Mortgage insurance insures the lender against loss in case of default by the borrower. Mortgage insurance is provided to the lender by CMHC or GENWORTH or AIG and the premium is paid by the borrower.

Conditional Offer - An offer to purchase subject to conditions. These conditions may relate to financing, or the sale of an existing home. Usually a time limit in which the specified conditions must be satisfied is clearly spelled out.

Conventional Mortgage - A mortgage that does not exceed 80% of the purchase price of the home. Mortgages that exceed this limit in Canada must be insured against default, and are referred to as high-ratio mortgages.

Compound Period - The number of times per year in which the interest rate is compounded. In Canada, mortgages are generally compounded semi-annually which is twice per year.

Debt-Service Ratio - The percentage of the borrower's gross income that will be used for monthly payments of principal, interest, taxes, heating costs and condominium fees.

Deed (Certificate of Ownership) - The document signed by the seller transferring ownership of the home to the purchaser. This document is then registered against the title to the property as evidence of the purchaser's ownership of the property. This is handled by the lawyers or notaries involved in the sales transaction.

Deposit - A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor's agent, broker, lawyer or notary until the closing of the transaction at which time these funds are applied against the total proceeds required.

Equity - The interest of the owner in a property over and above all claims against the property. It is usually the difference between the market value of the property and any outstanding encumbrances.

Effective Interest Rate - This is the actual interest rate paid on a loan or mortgage. In Canada, mortgages typically have a higher effective interest rate because of the fact that interest rates are compounded semi-annually or twice per year. In Canada, effective interest rates have to be disclosed to the borrower.

Fire Insurance - Before a mortgage can be advanced by the lender, the purchaser must have arranged fire insurance. A certificate or binder from the insurance company may be required on closing.

Firm & Binding Offer - An offer to buy the property as outlined in the offer to purchase with no conditions attached.

Fixed-Rate Mortgage - A mortgage for which the rate of interest is fixed for a specific period of time (the term).

Foreclosure - A legal procedure whereby the lender eventually obtains ownership of the property through the courts after the borrower has defaulted on payments.

First Mortgage - The first mortgage in the mortgage agreement that is considered to be in first place, and will have first claim on assets in the event of any default.  This is not necessarily the largest mortgage, but rather, the one that is registered first against the title.

Gross Debt Service (GDS) Ratio - The percentage of gross income required to cover monthly payments associated with housing costs. Most lenders recommend that the GDS ratio be in the range of 32% - 35% of your gross (before tax) monthly income.

Gross Household Income - Gross household income is the total salary, wages, commissions and other assured income, before deductions, by all household members who are co-applicants for the mortgage.

High Ratio Mortgage - If you don't have 20% of the lesser of the purchase price or appraised value of the property, your mortgage must be insured against payment default by a Mortgage Insurer, such as CMHC.

Holdback - An amount of money required to be withheld by the lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.

Home Equity - The difference between the price for which a home is sold or could be sold (market value as determined by an appraiser) and the total debts registered against it.

HELOC - (Home Equity Line Of Credit) This is an open mortgage product offered by most lending institutions that allows borrowers a vast amount of flexibility in re-payment options. For most lenders the minimum payment requirement is typically interest only, the interest rate for these products is also tied to the institutions prime rate and fluctuates accordingly. This is also a fully open product as such there is no bonus of interest penalty for full repayment of the outstanding principal.

Inspection - The examination of the house by a licensed building inspector selected by the purchaser. An excellent idea when purchasing a property in helping to avoid any costly surprises.

Interest Rate Differential Amount (IRD) - An IRD amount is a compensation charge that may apply if you pay off your mortgage principal prior to the maturity date or pay the mortgage principal down beyond the prepayment privilege amount. The IRD amount is calculated on the amount being prepaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate that a lender can now charge when re-lending the funds for the remaining term of the mortgage. The formula and guidelines used for calculating this vary from lender to lender, for specifics it's best to contact your mortgage holder.

Interim Financing - Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.

Inter Alia Mortgage - “Inter Alia” also known as a blanket mortgage.  An Inter Alia Mortgage is a mortgage that is secured by more than one property.  A single mortgage document is executed and registered against each property that is used as security.Loan to Value Ratio - The ratio of the loan to the appraised value or purchase price of the property, whichever is lower. For example, if you purchased a home for $400,000 and it appraised for the same, and you needed a mortgage for $200,000 that would be a 50% loan to value ratio.
LOC - LOC is short for line of credit. There are two distinct types of lines of credit, secured and unsecured. Generally most mortgage lenders grant secured lines of credit, which use the property as additional security.
Maturity Date - Last day of the term of the mortgage agreement and the date on which any and all outstanding principal & interest is due.

Mortgage Insurance - Mortgage Insurance is offered through most lenders, it comes in a variety of forms covering both disability and death. It's a good idea to review all of the documentation relating to your specific coverage prior to signing.

Mortgagee and Mortgagor - The lender is the mortgagee and the borrower is the mortgagor.

Mortgage Life Insurance - A form of reducing term insurance recommended for all mortgagors. If you die, have a terminal illness, or suffer an accident, the insurance can pay the balance owing on the mortgage. The intent is to protect survivors from the loss of their homes.

Mortgage Disability Insurance - A form of insurance, designed to protect the mortgagor should he or she suffer a disability that would prevent them from working and thereby not being able to make their payments.

Mortgage Term - The number of years or months over which you pay a specified interest rate. In Canada terms usually range from six months to 10 years.

Nominal Interest Rate - An interest rate which does not necessarily correspond to the effective interest rate. In Canada, these two rates do not correspond.

Open Mortgage - A mortgage which can be prepaid at any time, without penalty such as a HELOC.

OSB (Outstanding balance) - The amount of principal which is still outstanding at the end of the term, or at any point in time during the mortgage.

Payment Frequency - The choice of making regular mortgage payments every week, every other week, twice a month or monthly.
P.I.T. - Principal, interest and taxes. Together, these make up the regular payment on a mortgage if you elect to include property taxes in your mortgage payments

Porting - This allows you to move to another property without having to lose your existing interest rate. You can keep your existing mortgage balance, term and interest rate plus save money by avoiding early discharge penalties provided the new property and overall mortgage terms meet the lenders criteria. Once again policies related to this do vary between lenders so if this may become important to you down the road it's best to confirm the details surrounding it today.

Prepayment Charge - A fee charged by the lender when the borrower prepays all or part of a closed mortgage more quickly than is set out in the mortgage agreement.

Prepayment Option - The ability to prepay all or a portion of the principal balance. Prepayment charges may be incurred on the exercise of prepayment options. Again prepayment privileges vary between lenders and it's best to compare these prior to signing any mortgage documentation.

Principal - The amount of money borrowed for a new mortgage.

Pre-Approved Mortgage - Qualifies you for a mortgage before you start shopping.  You know exactly how much you can spend and are free to make a “firm” offer when you find the right home.  Even with pre-approvals, it’s generally recommended that any and all offers for the purchase of a subject property be made with a “subject to financing” clause.

Refinancing - Renegotiating your existing mortgage agreement. May include increasing the principal, reducing it or paying out the mortgage in full.

Renewal - At the end of a mortgage term, the mortgage may "roll over" on new terms and conditions acceptable to both the lender and the borrower. This is known as renewing a mortgage. Otherwise, the lender is entitled to be repaid in full. In this case, the borrower may seek alternative financing. Typically a lender will contact you 2-3 months prior to the maturity of a mortgage to discuss renewal terms.

Rate Commitment - A lender’s commitment to offer to hold a specific rate for a certain length of time. Rate commitments or rate holds can vary from 30 to 180 days depending again on the lender and institution.

Security - In the case of mortgages, the real estate offered as collateral for the loan is the security.

Second Mortgage - Secondary or additional financing, usually has a shorter term and higher interest rate than the first mortgage. The primary reason for this is, that the secondary lender usually has increased risk, as the loan to value ratio increases with additional financing.

Term - The length of the current mortgage agreement. A mortgage may be amortized over a long period (such as 35 years) with a shorter term (six months to five years or more). After the term expires, the balance of the principal then owing on the mortgage can be repaid or a new mortgage agreement can be entered into at the then current interest rates.
Total Debt Service (TDS) Ratio - The percentage of gross income needed to cover monthly payments for housing and all other debts and financing obligations. This requirement does vary somewhat from lender to lender but typically most lenders like to have borrowers fall within a range of 42% - 44%.

Title - Legal ownership in a property.

Variable Rate Mortgage - A mortgage for which the rate of interest fluctuates with changes in the prime rate. This is sometimes referred to as a floating rate mortgage.

Vendor Take-Back Mortgage - When the seller provides some or all of the mortgage financing in order to sell their property.  In this situation, the vendor is the mortgagee.

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