Defining Common Mortgage Terms
Adjustable rate mortgage (ARM)
A mortgage loan with an interest rate that can change at any time, usually in response to the market or Treasury bill rates.
Paying off a debt by making regular installment payments over a set period of time, at the end of which the loan balance is zero.
A mortgage loan with initially low interest payments, but that requires one large payment due upon maturity.
(DTI) is a calculation frequently used by mortgage companies when qualifying borrowers for a mortgage or a workout solution to resolve delinquency. It is the relationship between the consumer’s monthly debt payments and their monthly income, expressed as a ratio. Lenders will often set a maximum debt-to-income ratio and usually do not make loans to consumers whose ratios exceed the lender’s standard.
A legal document under which ownership of a property is conveyed.
Deed-in-lieu of foreclosure
The transfer of title from a homeowner to the mortgage company to satisfy the mortgage debt and avoid foreclosure; also called a “voluntary conveyance.”
A borrower is in default when he or she fails to meet the terms of a loan agreement. Usually this is based on failure to make payments on time.
The difference between what a foreclosed home sold for and the remaining mortgage balance. The mortgage company may require the homeowner to pay the amount of the deficiency balance.
Ownership interest in a property. This is the difference between the home’s market value and the outstanding balance of the mortgage loan (as well as any other liens on the property).
An account (held by the mortgage company) where a homeowner pays money toward the taxes and insurance of a home.
Federal National Mortgage Association (Fannie Mae) and Federal Home Mortgage Corporation (Freddie Mac)
A high percentage of mortgages are now held by investors. The two largest investors that purchase mortgages on the secondary market are Fannie Mae and Freddie Mac. These “government-sponsored enterprises” (GSE) were created by Congress to provide liquidity or capital in the housing market by purchasing mortgages. The originating lender must follow certain guidelines specified by Freddie Mac and Fannie Mae when qualifying the borrower for a loan, commonly called underwriting guidelines.
A mortgage loan in which the interest rate remains the same for the life of the loan.
An agreement to temporarily suspend or reduce monthly mortgage payments for a specific period of time. The mortgage company will then postpone legal action when a homeowner is delinquent. A forbearance is usually granted when a homeowner makes satisfactory arrangements to bring the overdue mortgage payments up to date.
The legal process by which a property may be sold and the proceeds of the sale applied to the mortgage debt. A foreclosure occurs when the loan becomes delinquent because payments have not been made or when the homeowner is in default for a reason other than the failure to make timely mortgage payments.
Government sponsored enterprises; See: Federal National Mortgage Association (Fannie Mae) and Federal Home Mortgage Corporation (Freddie Mac).
A hardship is the reason a homeowner is having trouble making mortgage payments, such as job loss, medical emergency or divorce. A hardship may be short-term (less than six months) or long-term (more than six months). When contacting a mortgage company or a housing counselor for assistance, homeowners may be required to demonstrate/explain any hardship they are experiencing.
Home equity line of credit
A way of borrowing money against the equity or assets that the homeowner has in the home to pay for things such as home repairs, college education or other personal uses.
A mortgage where the homeowner pays only the interest on the loan for a specified amount of time.
Loan-to-value (LTV) ratio
Loan to value is a calculation frequently used by mortgage companies when qualifying borrowers for a mortgage. It is calculated by dividing the mortgage balance by the home’s current market value. The more equity in the property, the lower the percentage. Conversely, the less equity, the higher the percentage.
When the homeowner and the mortgage company are working together to determine the appropriate option/workout solution to bring the mortgage current and avoid foreclosure.
Any change to the terms of a mortgage loan, including changes to the interest rate, loan balance or loan term.
A legal document that pledges property to the mortgage company as security for the repayment of the loan. The term is also used to refer to the loan itself.
Mortgage companies may originate (i.e., the lender) as well as service the loan. The lender that originated the mortgage may or may not service the loan. When the mortgage company services the mortgage, it does the following: collects the homeowner’s mortgage payments, pays taxes and insurance, generally manages escrow accounts and provides customer service and support.
NPV (net present value)
The NPV test compares the net present value of the money the mortgage loan owner would receive if the loan were modified with what would be received if no modification were made. If the servicer can expect a greater return from modifying the mortgage (the NPV of the modified loan is higher than the NPV of the loan before modification), then the modification is considered to be “NPV positive.”
A new mortgage with new terms, interest rates and monthly payments. The new loan completely replaces the current mortgage and may lower payments.
Servicer (loan servicer)
The loan servicer is the financial institution that collects the monthly mortgage payments and has responsibility for the management and accounting of the loan. It is possible that the owner of the mortgage also services it; however, many loans are owned by groups of investors and these investors hire loan servicers to interact with homeowners on their behalf. Many lenders also have the loan servicers handle all contact with homeowners. For example, the loan servicer could be “Bank A” but the investor on the loan could be Fannie Mae, Freddie Mac or a group of investors.
Short sale (also called preforeclosure)
The process in which a mortgage company works with a delinquent homeowner to sell the house by a real estate agent prior to the foreclosure sale. The sale price is less than what is owed on the mortgage.
The documented evidence that a person or organization has ownership of real property.
The steps a lender must take to determine the homeowner’s monthly payment under HAMP.
Our attorneys at Levitt & Slafkes, P.C., have decades of experience representing New Jersey residents with mortgage issues. Discuss your situation with a qualified lawyer today.
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