Get to know the most commonly used terms:
Amortization - periodic payments of a debt composed of one amount to reduce the principal balance and another amount to pay the interest.
Applicant or Principal Debtor - person or legal entity that applies for a loan and is obligated to repay the debt.
Appraisal - report made by a qualified appraiser that sets forth the appraiser’s opinion about a real property’s market value, which is determined by investigating and conducting studies on the property.
ARM (Adjustable Rate Mortgage) - this type of financing offers various benefits. Its initial interest is fixed for a term and then gets adjusted periodically. Both the term of the first interest revision as well as the subsequent revisions are establish at closing and can be for 1 year, 3 years, or 5 years. The interest rate will be adjusted according to the changes in the index established at the closing of the loan. After each adjustment, the type of interest remains fixed until the next adjustment. This type of mortgage loan gives the client the advantage of repaying the loan with an initial interest rate that is lower than the prevailing in the market and offers the stability of maintaining a fixed interest rate between adjustment dates.
Bankruptcy - occurs when a person is legally declared insolvent or incapable of paying their debts and requests the Federal Bankruptcy Court to administer their assets and divide them among creditors.
Co-applicant or co-debtor - Any additional borrower(s) whose name(s) appear on loan documents and whose income and credit history are used to qualify for a loan. Under this arrangement, all parties involved have an obligation to repay the loan. For mortgages, the names of applicable co-borrowers also appear on the property's title.
Consumer Credit Counselling - a not-for-profit organization that offers free services to consumers who are in a precarious economic situation, to help them evaluate and reorganize their resources and obligations, and if possible, establish payment plans with their creditors.
Fannie Mae (FNMA – Federal National Mortgage Association) and Freddie Mac (FHLMC – Federal Home Loan Mortgage Corporation) - are corporations that are dedicated to purchasing conventional mortgage loans in the secondary market.
FHA Loans (Federal Housing Administration) - FHA's mortgage insurance programs help low- and moderate-income families become homeowners by lowering some of the costs of their mortgage loans.
Foreclosure - a legal proceeding that declares a debt due, and demands total payment of loan balance. It is used by a creditor when the debtor does not meet their obligation to repay the loan or otherwise breaches the agreements set forth in the Note or Mortgage Deed. The debt is satisfied with the proceeds of the judicial sale (at auction) of the property used as security.
Ginnie Mae (GNMA – Government National Mortgage Association) - federal agency that is dedicated to purchase mortgage loans that are guaranteed by FHA, Rural or VA in the secondary market.
Housing and Urban Development - the United States federal agency created in 1965; that administers federal programs dealing with better housing and urban renewal.
LTV (“Loan-to-Value Ratio”) - ratio between the mortgage loan and the value of the property. It is calculated by dividing the amount of the loan by the sales price or the value of the appraisal, whichever is less.
MGIC (Mortgage Guarantee Insurance Corporation) - private mortgage insurance company that backs conventional mortgage loans.
Mortgage Insurance –Mortgage Insurance (also known as
mortgage guarantee and home-loan insurance) is an insurance policy that compensates lenders or investors for losses due to the default of a mortgage loan.
Payment by Assignment of Property - voluntary delivery of a property to a creditor in exchange for paying off the loan. It is a tool used by debtors to avoid mortgage foreclosures, collection actions or other legal actions.
Prepayment Penalty - clause in a loan note that establishes that the bank can charge a penalty if the loan is paid off before a set date.
Primary Residence - residential property occupied by the owner of the property for most of the year.
Repayment Methods - mortgage loans can be repaid in various ways: 1)
Fixed Interest Loan – under this method, the interest remains fixed for the life of the loan and the monthly payments are all the same; 2)
Balloon Loan – in this type of loan the monthly payments are calculated based on one term while the loan is repaid based on a much shorter term. After this term, the client has the alternative of paying off the balance of the loan or renewing the loan under new financing terms. The advantage of this type of loan is that you will have lower monthly payments since it has a lower interest rate.
Sales Agreement - agreement between the buyer and the seller of a property where the price and the terms of the transaction are defined.
Second Home - residential property that the owner physically occupies only part of the year, using it for rest and recreation.
Transfer Clause (“Due-on-sale”) - a clause present in certain mortgage contracts; establishing that a buyer is interested in acquiring the property that is guaranteeing a mortgage, and assuming the debt. The prospective buyer needs to request the bank’s consent to realize the transaction. If he does not get consent, the bank may declare the debt expired and demand payment of the balance to the original debtor.
VA Guarantee Loan (Department of Veterans Affairs) - federal agency that provides home loan guaranty benefits to veterans or their widows, reservists and eligible members of the National Guard. The VA guarantees a portion of the loan, enabling the lender to offer more favorable terms.