Malik W. Ahmad

Loan Modification Glossary


Amortization: Repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years)

Annual Percentage Rate (APR): Calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.

ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.

Bankruptcy: A federal law whereby a person’s assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.

Borrower: A person who has been approved to receive a loan and is then obligated to repay it as well as additional fees according to the loan terms.

Credit history: History of an individual’s debt payment; lenders use this information to gauge a potential borrower’s ability to repay a loan.

Credit report: A record that lists all past and present debts and the timeliness of their repayment; it documents an individual’s credit history.

Debt-to-income ratio (DTI): A comparison of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

Deed-in-lieu: To avoid foreclosure (“in lieu” of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process doesn’t allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.

Delinquency: Failure of a borrower to make timely mortgage payments under a loan agreement.

Equity: An owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s) from the fair market value of the property.

Fair market value: The hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.

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.

Foreclosure: A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.

Forbearance: A loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.

Government Sponsored Enterprises (GSE): The government sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors: agriculture, home finance and education.

Good faith estimate (GFE): An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

Hard expenses: Hard expenses are monthly expenses that are definite and documented. Examples include installment debt like mortgage payments, car loans, and personal loans. Most hard expenses will be included on one’s credit report.

Interest: A fee charged for the use of money.

Interest rate: The amount of interest charged on a monthly loan payment expressed as a percentage.

Interest Only: A feature of some MLCC loan programs that allows the borrower to pay only the interest on a loan, without paying down any principal with each monthly payment.

Lender: To give/lend money on condition that it is returned and that interest is paid for its temporary use. Banks are commonly known as lenders. Your mortgage broker is not a lender, but rather sold your loan to a lender.

Lien: A legal claim against property that must be satisfied when the property is sold.

Loan-to-value (LTV) ratio: A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.

Loss mitigation: A process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.

Mortgage (Mortgage Backed Security): A lien on the property that secures the Promise to repay a loan.

Mortgage banker: A company that originates loans and resells them to secondary mortgage lenders like: Fannie Mae or Freddie Mac.

Mortgage broker: A firm that originates and processes loans for a number of lenders.

Mortgage insurance: A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price.

Principal Balance Reduction: Instance where the bank forgives a portion of your principal balance as part of a loan modification. The mortgage payment due for this note is based off the new loan amount. Only applicable in heavily depreciated areas.

Refinancing: Paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).

Repayment Plan: Adding a portion of the delinquent mortgage balance on top of the normal monthly payments until caught up.

RESPA: Real Estate Settlement Procedures Act (visithttp://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm for details)

Short Sale: A sale of a house in which the proceeds fall short of what the owner still owes on the mortgage. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what he owes.

Soft expenses: Monthly expenses that fluctuate and are difficult to document. These include food, gas, incidentals, entertainment and are not reported on one’s credit report.

Teaser Rate: A temporary rate reduction at the inset of a loan.

TILA: Truth in Lending Act. (Visit http://www.fdic.gov/regulations/laws/rules/6500-200.html for details)

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