BMO Mortgage Glossary of Terms

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Acceleration clause
A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

Adjustable Rate Mortgage (ARM)
A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.

Method used to calculate repayment of principal and interest over a given period of time.

Amortization schedule
A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the balance remaining.

Annual Percentage Rate (APR)
The total yearly cost of a mortgage stated as a percentage of the loan amount; includes such items as the base interest rate; private mortgage insurance and loan origination fees (points).

A written report establishing the market value of the property. Appraisals must be performed by state licensed and/or certified appraisers according to Uniform Appraisal Standards.

An increase in the value of a property due to changes in market conditions or other causes.

Common acronym for Adjustable Rate Mortgage. ARMs offer lower initial interest rates and payments with potential adjustments occurring at periodic intervals over the life of the loan, subject to criteria and limitations set forth in the promissory note.

Assessed value
The valuation placed upon property by a public tax assessor for the purposes of taxation.

Assumable mortgage
A mortgage that can be taken over ("assumed") by the buyer when a home is sold.

The transfer of the seller's existing mortgage to a buyer.

A preliminary agreement secured by the payment of earnest money, under which a buyer offers to purchase real estate.

Predetermined limitations on the amount that the interest rate on an adjustable rate loan may change at each adjustment, and over the life of the loan.

Cash reserve
A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two monthly mortgage payments.

Clear title
A title that is free of liens or legal questions as to ownership of property.

In real estate, the final procedure in which documents are executed and/or recorded and the sale (or loan) is completed. Also called "settlement".

Closing costs
Expenses (over and above the price of property) incurred by buyers and sellers in transferring ownership of a property. Also called "settlement costs".

Commitment letter
A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer.

A form of property ownership in which the homeowner holds title to an individual dwelling unit, an undivided interest in common areas of a mult-unit project and sometimes the exclusive use of certain limited common areas.

Loans with terms, balances and conditions set forth by the main secondary market conduits, FNMA and FHLMC. The limit changes annually. For 2011, the limit is $417,000.

Commonly, the dependence upon a stated event which must occur before a contract is legally binding.

Conventional mortgage
Any mortgage that is not insured or guaranteed by the federal government.

Conversion option
A prearranged opportunity to modify the original terms of the repayment agreement within certain limitations.

Convertible ARM
An adjustable rate mortgage that can be converted to a fixed rate mortgage under specified conditions.

A type of multiple ownership in which the residents of a multi-unit housing complex own shares in the corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.

Most commonly in real estate, assurances set forth (expressed) in a deed by the grantor or implied by law.

Credit report
A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.

The legal document conveying title to a property.

Deed of Trust
The document used in some states instead of a mortgage; title is conveyed to a trustee by the borrower (trustor), in favor of the lender (beneficiary) and conveyed upon payment in full.

The failure to make mortgage payments on a timely basis or to otherwise comply with other requirements of a mortgage.

A loan in which a payment is overdue but not yet in default.

Money given by the buyer with an offer to purchase. Shows good faith. Also called Earnest money.

A decline in the value of a property; the opposite of "appreciation".

(part of "points") A cost charged by investors when purchasing loans with lower yields, i.e: higher discount points paid by borrowers at closing result in lower note rates and vice versa.

Down payment
Cash portion paid by a buyer from his/her own funds as opposed to that portion of the purchase price which is financed with a mortgage.

Due-on-sale clause
A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

Earnest money
A deposit made by the potential home buyer to show that he or she is serious about buying the house.

A right of way giving persons other than the owner access to or over a property.

Equal Credit Opportunity Act (ECOA)
A federal law that prohibits lenders from denying mortgages on the basis of the borrower's race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

A homeowner's financial interest in a property. Equity is the difference between the fair market value of a property and the amount still owed on the mortgage.

Equity loan
A loan based on the borrower's equity in his or her home.

Escrow account
An account established with the lender at the time of closing, and paid into monthly by borrowers along with their principal and interest payments for the payment of real estate taxes, hazard insurance, PMI and flood insurance.

Escrow agent/Escrow closing
An independent third party (title company) who acts as an agent for the borrower and the lender carrying out the instructions of each and disbursing documentation and funds to the proper parties at closing.

Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer/credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record.

FHA mortgage
A mortgage that is insured by the Federal Housing Administration. Also referred to as a "government" mortgage.

First mortgage
A mortgage that has first claim in the event of default.

Fixed Rate Mortgage
A mortgage in which the interest rate does not change during the entire term of the mortgage.

Flood insurance
Flood insurance is required on all properties located in Special Flood Hazard Zones. Flood certifications will indicate whether the property lies within an area so designated. Flood insurance, if required, will be escrowed for and paid on the borrowers behalf by the lender as part of servicing the loan.

The lender's postponement of foreclosure to give the borrower time to catch up on overdue payments.

The legal process by which a mortgaged property may be sold when a mortgage is in default.

Graduated payment mortgage
A mortgage that starts with low monthly payments that increase at a predetermined rate. The initial monthly payments are set at an amount lower than that required for full amortization of the debt.

Hazard insurance
Insurance to protect the homeowner and the lender against physical damage to the property from fire, wind, vandalism, or other hazard. Evidence of existing policies along with a paid receipt for the first year's premium are required. Standard requirements generally call for coverage providing benefits in an amount equal to the principal balance of the mortgage or the maximum insurable value of the property, whichever is less.

Homeowner's insurance
An insurance policy that combines personal liability coverage and hazard insurance coverage for a dwelling and its contents.

Homeowner's warranty (HOW)
A type of insurance that covers repairs to specified parts of a house for a specific period of time. It is provided by the builder or property seller as a condition of sale.

A moving financial reference rate upon which interest rate changes are based. Indices used on Adjustable Rate Mortgages are not controlled by the lender, and their movement generally reflects that of prevailing mortgage rates. Common indices include one, three, and five year government Treasury Securities.

The fee charged for borrowing money.

Interest rate adjustment period
The point(s) in time at which the interest rate on an ARM loan automatically adjusts. Interest rate adjustment periods may range from six months to as long as ten years as stated in the terms of the note.

Interest rate cap
A provision of an ARM limiting how much interest rates may increase or decrease per adjustment period or over the life of the mortgage. See also Lifetime cap.

Joint tenancy
A form of co-ownership giving each tenant equal interest and equal rights in the property, including the right of survivorship.

Jumbo or Non-Conforming
Loans which exceed the FNMA/FHLMC loan limits.

Late charge
The penalty a borrower must pay when a payment is made after the due date.

A legal claim against a property that must be paid off when the property is sold.

Lifetime cap
A provision of an ARM that limits the highest interest rate that can occur over the life of the loan.

Loan servicing
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.

Loan-to-value percentage (LTV)
The relationship between the unpaid principal balance of the mortgage and the appraised value (or sales price if lower) of the property.

Lender's guarantee that the mortgage terms quoted will remain in effect for a specific number of days (during loan processing) despite market changes.

The amount, expressed as a percentage, which is added to the index value to determine the fully indexed, or "accrual rate" of the loan. ARM loans will seek this rate at each adjustment, subject to the limitations of the caps.

A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage insurance premium (MIP)
The fee paid by a borrower to FHA or a private insurer for mortgage insurance.

Mortgage margin
The set percentage the lender adds to the index value to determine the interest rate of an ARM.

Mortgage note
A legal document obligating a borrower to repay a loan at stated interest rate during a specified period of time; the mortgage note is secured by a mortgage.

Mortgage interest rate
The rate of interest in effect for the monthly payment due.

The lender in a mortgage agreement.

The borrower in a mortgage agreement.

Notice of default
A formal written notice to a borrower that a default has occurred and that legal action may be taken.

Origination fee
(part of "points") The fee charged by the lender to originate and process a mortgage loan request. Typically one percent of the loan amount.

Owner financing
A property purchase transaction in which the property seller provides all or part of the financing.

Payment cap
A provision of some ARMs limiting the amount by which the borrower's payments may increase regardless of any interest rate increase; may result in negative amortization. See Adjustable Rate Mortgage.

Principal, interest, taxes and insurance. For calculating qualifying ratios, total monthly housing expense will include these items as well as Private Mortgage Insurance and Condominium Assessments if applicable.

An amount equal to one percent of the principal amount of the loan.

A firm loan commitment based on verified information prior to finding a home.

Pre-payment penalty
A fee that may be charged to a borrower who pays off the loan before it is due.

A quick analysis of how much loan you can afford based on verbal information you provide. It will give a general idea of the price range you should shop for a home.

The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

Private mortgage insurance (PMI)
Insurance provided by non-government insurers that protects lenders against loss if a borrower defaults. Generally requires private mortgage insurance for loans with loan-to-value (LTV) percentages greater than 80 percent.

Purchase and sale agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property is sold.

Qualifying ratios
Guidelines applied by the lenders to determine how large a loan to grant a home buyer.

Real Estate Sales professional
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner and/or buyer.

Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

The process of paying off one loan with the proceeds from a new loan using the same property as security.

Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act)
A consumer protection law that requires a nationwide licensing and registration system for residential mortgage loan originators.

Second mortgage
A mortgage that has a lien position subordinate to the first mortgage.

Secondary mortgage market
The buying and selling of existing mortgages.

An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

Settlement sheet
The computations of costs payable at closing that determine the seller's net proceeds and the buyer's net payment.

Plot or improvement map showing the legal boundaries of the property. The map must be based on an instrument survey made, dated and certified by a licensed civil engineer or registered surveyor.

Temporary buydown
An option offered by many lenders which offsets lower payments over the first one or two years of the loan by establishing a subsidy account with buyer, seller or investor funds.

Tenancy by entirety
A type of joint ownership of property that provides rights of survivorship and is available only to a husband and wife.

Tenancy in common
A type of joint ownership in a property without legal right of survivorship.

Number of years over which the loan is scheduled to be repaid.

A legal document evidencing a person's right to, or ownership of, a property.

Title company
A company that specializes in examining and insuring titles to real estate.

Title insurance
Insurance to protect the lender (Lender's Policy) and owner (equity policy) against loss arising from disputes over ownership of the property.

Title search
A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Transfer tax
State or local tax payable when title passes from own owner to another.

A federal law that requires lenders to fully disclose in writing, the terms and conditions of a mortgage, including the APR and other charges.

The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower's creditworthiness and the quality of the property itself.