Mortgage Terms

Arrears: Past-due monthly payments, also known as “arrearages”.

Broker:  The mortgage broker is the person or company you go to when you want to get a new mortgage or refinance an old one.  The broker gets information about your income, credit reports, and the property to see what type of loan you will qualify for.  Based on that information, the broker will find a lender for you.  The broker receives a commission or fee for this service that you will pay through the escrow process.

Deed of Trust:  A Deed of Trust is the formal legal document that is notarized and recorded with the county recorder’s office by your real property lender’s title company.  It states the total beginning amount of the loan and gives the “trustee” (who is designated in the document and who may have possession of the original promissory note) the right to foreclose on the property if you get behind on your house payments.  The relationship between the lender, the trustee, and the servicer has been confused in the last few years.  Many courts in California – both state courts and bankruptcy courts – have different opinions about what gives the trustee the right to proceed to foreclose on the property.

Impound or Escrow Account: If your loan requires an impound account or escrow account, the servicer will set that up for you.  If you have an impound account, the servicer will bill you for an additional amount of money each month – beyond the regular principal and interest payments on the loan.  The extra impound amount you pay each month will go into a separate account from which the servicer will pay your real property taxes and homeowner’s insurance premiums.  The servicer is allowed to require an even higher payment for this purpose, in order to accumulate enough to make the required installment payments on a timely basis. Trying to make sense of these impound accounts is very difficult these days.  The servicers frequently make mistakes in tracking payments by the borrower and tracking payments the servicer itself makes to the tax collector or insurance company.

Junior Loan:  A mortgage that was recorded last in time is junior to another mortgage on the same property that was recorded previously.  The result of being recorded last is that the junior mortgage is “subject to” the earlier (senior) mortgage.  For example, if the senior mortgage forecloses on the property and does not receive enough money to cover the balance on the senior loan, the junior mortgage will lose its security interest in the property and will become an unsecured loan.  On the other hand, if the junior mortgage forecloses on the property, the buyer will receive the property subject to the senior loan.  The senior loan will not be wiped out, but will continue to attach to and encumber the property, in preference to the buyer in the junior lender’s foreclosure sale.  If the home’s value is less than the senior mortgage amount, there is virtually no benefit for the junior lender to foreclose on the property.

Lender: The lender actually provides the money for the mortgage you want.  This money will go to pay the seller if you are buying a new property.  Or the money may be used to pay off one or more pre-existing loan on your property – this is called a refinancing.  In addition to paying off pre-existing loans on your property, the money could be used by you to repair or remodel your home.  The purposes of the money will be part of the arrangement you will have with the lender and will be based on the appraised value of the home.  The lender’s name will be on the deed of trust you sign and have notarized as part of the escrow process.

Loan-to-Value Ratio: Loan-to-Value Ratio – LTV – is a percentage that shows whether the property has equity in it or whether it is underwater.  For example, if a home is worth $200,000 and the mortgages total $150,000, you can see that the home has $50,000 in equity, and the LTV is 75% (150,000 divided by 200,000 equals 75/100 which equals 75%).  If the loan amount is higher than the value, the property is referred to as “underwater”.  For example, if the home is worth $200,000 and the loan amount is $300,000, the home is considered to be “underwater” by $100,000 and the LTV is 150% (300,000 divided by 200,000 equals 150/100 which equals 150%).  Therefore, if the LTV is less than 100%, the property has equity; and if the LTV is higher than 100%, the property has no equity and is “underwater”.

Mortgage Insurer: Some lenders require that you pay for mortgage insurance premiums that are added to your monthly payments to the servicer.  The mortgage insurance is intended to cover losses of the lender if you fall behind on your payments and the home is foreclosed.  Mortgage insurance generally is required until the balance on the loan is paid down to a point where the loan-to-value ratio shows that the lender is not likely to lose money if your house has to be foreclosed.  Mortgage insurance can be provided by Fannie Mae, in which case the loan must meet certain requirements and it is called a “conforming” loan.  Freddie Mac also insures some loans.  For “conventional” loans, private mortgage insurance companies may provide the insurance.

Promissory Note: A promissory note is a written agreement by a borrower to repay a loan to the person or company who lent the money to the borrower.  The promissory note must provide clear terms for the repayment of the debt, include the exact amount of the original debt, and be dated and signed by the borrower.  Each deed of trust must be backed up by a promissory note regarding the debt that is secured by the deed of trust.

Real Property: “Real property” is land and something fixed permanently to land.

Servicer: The servicer is the company selected by the lender to collect the monthly loan payments from you.  The servicer’s job is to read the terms of the promissory note and deed of trust and send you billing statements for the correct amount each month.

Trustee: The trustee is the company that determines whether the lender should have the right to foreclose on the property.  The trustee is named in the original deed of trust.  Afterwards, the trustee can be “substituted” for another one.  This usually happens just before the foreclosure starts if the borrower is behind on the loan payments, so that a company which conducts foreclosures on a regular basis can begin the foreclosure process.