Glossary of Terms
Acceleration: the right of the lender to demand payment on the outstanding balance of a loan.
Adjustable-Rate Mortgage (ARM): a mortgage loan that does not have a fixed interest rate. During the life of a loan the interest rate will change based on the index rate and as set out in the mortgage note. Historically, the change in rates causes an increase in the monthly payment amount; however, it is usually subject to a cap. Also referred to as adjustable mortgage loans (AMLs) or variable-rate mortgages (VRMs).
Annual Percentage Rate (APR): a measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is a higher rate than the simple interest of the mortgage.
Back End Ratio (debt ratio): a ratio that compares the total of all monthly debt payments (mortgage, real estate taxes and insurance, car loans, and other consumer loans) to gross monthly income.
Balance Sheet: a financial statement showing the assets, liabilities and net worth of an individual or company.
Bankruptcy: a process governed by federal law whereby a person may seek relief from payment of debt or to reorganize one's finances. A Chapter 7 bankruptcy case is generally used to discharge unsecured debt. A Chapter 13 bankruptcy case is generally used to reorganize and set up a repayment plan to pay off debt. The payments requirements will depend on a person's income and assets.
Budget: a detailed record of all of a household's income earned and spent during a specific period of time.
Capacity: the ability to make mortgage payments on time, dependant on assets and the amount of income each month after paying housing costs, debts and other obligations.
Chapter 7 Bankruptcy: see Bankruptcy above. Generally, non-exempt income and assets are liquidated to pay off or cancel.
Chapter 13 Bankruptcy: see Bankruptcy above. The consumer sets up a monthly repayment plan which must be approved and is monitored by the court. The homeowner can keep the property, but must make payments according to the court-approved plan within a three to five year period.
Credit Counseling: education focusing on how to improve bad credit and how to avoid having more debt than can be repaid.
Credit Repair Companies: private, for-profit businesses that claim to offer assistance to consumers with credit and debt repayment difficulties and their credit reports. Often these companies provide an expensive and ineffective method for 'repairing' debt difficulties and credit reports.
Creditor: any entity providing a loan or credit.
Debtor: the person or entity that owes money. The term debtor may be used interchangeably with the term borrower.
Debt-to-Income Ratio: a comparison or ratio of gross income to expenses; under FHA guidelines, the monthly mortgage payment should be no more than 29 percent of gross monthly income. Before taxes, the mortgage payment combined with non-housing debts should not exceed 41 percent of income.
Default: the inability to make timely monthly mortgage payments or otherwise comply with mortgage terms. A loan is considered in default when payment has not been paid within 30 to 90 days of becoming due. Once a loan is in default, a lender can exercise legal rights defined in the contract including acceleration of the loan balance and beginning the foreclosure process.
Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement. Generally, after 15 days a late fee may be assessed. The date the fee may be assessed and the amount of the fee are provided in the mortgage note.
Depreciation: a decrease in the value or price of a property due to changes in market conditions, wear and tear on the property, or other factors.
Due on Sale Clause: a provision of a loan allowing the lender to demand full repayment of the loan if the property is sold.
Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.
Fixed Expenses: payments that do not vary from month to month.
Fixed-Rate Mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Forbearance: one of the many options borrowers may have if they are delinquent in payments, the borrower is required to contact the lender or servicer of the loan immediately when they anticipate falling behind on payments. The lender may agree to delay filing a foreclosure lawsuit and set up a repayment plan that fits within the borrower's budget. Forbearance may include a temporary payment 'holiday,' adding the delinquent payments to the end of the loan or a repayment plan allowing for an increase in monthly payments to repay the delinquency.
Foreclosure: a legal process in which the owner of the mortgage attempts to obtain a judgment requiring the sale of the mortgaged property to pay the outstanding balance of the loan plus all of the expenses relating to loan collection. Foreclosure laws are based on the statutes of each state.
Gross Income: the amount of money earned before deducting for taxes, insurance, and other deductions. It may include income from self-employment, rental property, alimony, child support, pubic assistance payments, and retirement benefits.
Home Equity Line of Credit: a mortgage loan, usually a second mortgage, allowing a borrower to obtain cash against the equity of a home, up to a predetermined amount.
Home Equity Loan: a loan secured by the value of a home. If the borrower defaults or does not pay the loan, the lender the right to file a foreclosure lawsuit. The borrower can usually claim the interest paid on a home equity loan as a tax deduction.
Housing Counseling Agency: provides counseling assistance to individuals on a variety of issues, including home loan default, fair housing, and home buying.
HUD: the U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
Interest: a fee charged for the use of borrowing money. Interest Rate: the amount of interest charged on a monthly loan payment, expressed as a percentage.
Judgment: a legal decision; when requiring debt repayment, a judgment may be collected by filing a certified copy in any county where the defendant owns real property. In Florida, a person's home cannot be sold at a forced-sale to collect a judgment.
Late Payment Charges: the penalty the homeowner must pay when a mortgage payment is made after the due date grace period.
Lender: a term referring to a person or company that makes loans to finance real estate purchases.
Liabilities: a person's financial obligations such as long-term/short-term debt, and other financial obligations to be paid.
Lien: a legal claim against property that must be satisfied when the property is sold. Examples include a mechanic's lien, which might be for the unpaid cost of building supplies or a tax lien for unpaid property taxes. A lien is a defect on the title and needs to be settled before transfer of ownership. A lien release is a written notice of the settlement of a lien and is recorded in the public record as evidence of payment.
Life Cap: a limit on the interest rate that can be charged on an adjustable rate mortgage. A cap limits how low or high the rate may go over the life of an adjustable-rate mortgage (ARM).
Line of Credit: an agreement by a financial institution such as a bank to extend credit up to a certain amount for a certain time to a specified borrower.
Loan: money borrowed that is usually repaid with interest.
Loan Servicer: the company that collects monthly mortgage payments and disperses property taxes and insurance payments. Loan servicers also monitor nonperforming loans, contact delinquent borrowers, and notify insurers and investors if there are potential problems. Loan servicers may be the lender or a specialized company that just handles loan servicing under contract with the lender or the investor who owns the loan.
Loss Mitigation: a process to avoid foreclosure; the lender tries to help a borrower save his or her home when he or she has been unable to make loan payments and is in danger of defaulting on his or her loan. Loss mitigation options include loan forbearance, payment holidays, restructuring of the loan to decrease the principal and/or interest rate, forgiveness of delinquent amounts and short sales.
Mortgage: a lien on the property secured by a promise to repay a loan. A security agreement between the lender and the borrower in which a borrower's property is collateral for the loan. The mortgage gives the lender the right to collect payment on the loan and to foreclose if the loan obligations are not met.
Mortgage Acceleration Clause: a clause allowing a lender, under certain circumstance, to demand the entire balance of a loan is repaid in a lump sum. The acceleration clause is usually triggered if the home is sold, title to the property is changed, the loan is refinanced or the borrower defaults on a scheduled payment.
Mortgage Modification: a loss mitigation option that allows a borrower and a mortgage holder to agree to change the terms of the loan by reducing the principal of the loan, reducing the interest rate, forgiving missed payments, extending the term of the loan or other options to reduce the monthly payments and/or avoid foreclosure.
Mortgagee: the lender in a mortgage agreement.
Mortgagor: the borrower in a mortgage agreement.
No Cash Out Refinance: the refinance of an existing loan in which the borrower does not get any cash from the loan. Also called a 'rate and term refinance.'
Note: a legal document obligating a borrower to repay a mortgage loan at a stated interest rate over a specified period of time.
Notice of Default: a formal written notice to a borrower that there is a default on a loan and that legal action is possible.
PITI: Principal, Interest, Taxes, and Insurance: the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover these expenses when they become due.
PMI: Private Mortgage Insurance; insurance from a privately-owned company that provides special mortgage insurance programs for qualified borrowers with down payments of less than 20 percent of a purchase price.
Partial Claim: a loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.
Partial Payment: a payment that is less than the total amount owed on a monthly mortgage payment. Normally, lenders do not accept partial payments. The lender may make exceptions during times of difficulty. Contact your lender prior to the due date if a partial payment is needed.
Payment Due Date: contract language specifying when payments are due. The due date is always indicated and means that the payment must be received on or before the specified date. Grace periods may be allowed before a late fee is assessed or additional interest is charged but the grace period does not eliminate the responsibility of making payments on time.
Predatory Lending: abusive lending practices including providing mortgage loans with terms requiring a person to pay more than they can afford, with unreasonable interest rates or prepayments or with unreasonable or unwarranted charges. Predatory practices also include repeated refinancing of a loan charging higher interest and fees each time.
Pre-foreclosure Sale: a procedure in which the defaulting borrower is allowed to sell a mortgaged property for an amount less than what is owed on it to avoid a foreclosure. This sale fully satisfied the borrower's debt.
Prepayment Penalty: a provision in some loans that charge a fee to a borrower who pays off a loan before its final payment date.
Principal: the amount of money borrowed to buy a house or the amount of the loan that has not been paid back to the lender. This does not include the interest assessed on the amount borrowed. It is the original loan amount minus the total repayments of principal made.
Promissory Note: a written promise to repay a specified amount over a specified period of time.
Public Record Information: court and other public records of events that are a matter of public interest such as state and federal lawsuits including foreclosure lawsuits, bankruptcy cases filed, deeds, mortgages, and tax liens. The presence of foreclosure or other collection lawsuits and bankruptcy will be reported in a credit report and is regarded negatively by prospective creditors.
Refinancing: paying off one loan by obtaining another; a borrower may refinance to obtain better loan terms (like a lower interest rate).
Reinstatement Period: a phase of the foreclosure process when the homeowner has an opportunity to stop the foreclosure by paying money that is owed to the lender.
Remaining Balance: the amount of principal that has not yet been repaid.
Repayment Plan: an agreement between a lender and a delinquent borrower where the borrower agrees to make additional payments to pay down past due amounts while making regularly scheduled payments.
Reverse Mortgage (HECM): a reverse mortgage is used by senior homeowners age 62 or older to convert the equity in their home into a lump sum payment, monthly streams of income and/or a line of credit to be repaid when they no longer occupy the home. A lending institution such as a mortgage lender, bank, credit union or savings and loan association funds the FHA insured loan, commonly known as HECM.
Second Mortgage: an additional mortgage on property. In case of a default, the first mortgage must be paid before the second mortgage. Second loans are more risky for the lender and usually have a higher interest rate.
Secondary Mortgage Market: the buying and selling of mortgage loans. Investors purchase residential mortgages originated by lenders, which in turn provides the lenders with capital for additional lending.
Serious Delinquency: a mortgage that is 90 days or more past due.
Servicer: a business that collects mortgage payments from borrowers and manages the borrower's escrow accounts.
Servicing: the collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Special Forbearance: a loss mitigation option in which the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.
Terms: the interest rate and length of a loan and other provisions agreed upon by the lender and the borrower to repay a loan.
Truth-in-Lending Act: a federal law requiring a lender to give full written and uniform disclosure of all fees and terms, including the annual percentage rate, amount finances, finance charges, total of payments, payment schedule and amount of payments, and other conditions associated with the initial period of the loan. The Act requires disclosures relating to potential changes if the loan terms include an adjustable interest rate.
Variable Expenses: costs or payments that may vary from month to month, for example, gasoline or food.