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Mortgage Glossary

 

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.

Agreement for sale: A formal, written document in which the purchaser agrees to buy certain Real Estate and the seller agrees to sell under stated conditions and terms. BEWARE – Title will generally not pass on to you until you have paid off the whole agreement amount. Consult a Lawyer if you are offered such a transaction. There are some situations, where this can be a good deal for you.Amenities: In a Condominium Project – All aspects of a property that enhances its value. Reserved parking, nearness of good public transportation tennis courts, recreation facilities or swimming pool are a few examples.Amortization: The gradual repayment of a mortgage by instalments.Amortization schedule: A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance on the loan. Appreciation: An increase in the value of a house due to changes in market conditions or other causes.

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

Appraisal: An independent evaluation of the property. The Lender will usually require that you hire an independent appraiser to estimate the current market value of the house. The appraiser has no vested interest in the purchase/sale and as such can estimate the “fair market value”.

Assets: A list of things of liquid value owned by the applicant/borrower. These can include cash, term deposits, GIC’s, RRSP’s, real estate properties, automobiles, stocks, bonds, mutual funds, jewellery and other household goods.

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

Buy Down: The cost of making the effective interest rate lower than the current market rate. This is usually paid by the vendor but may also be paid by the borrower. Example: Say current interest rates are 10% for a one year term and the vendor wants to make his property more attractive by offering financing at 7% on a mortgage of $100,000. for a one year term. The cost to “buy down” the interest would be approximately $2,700.00. This would be paid directly to the lender.

CMHC Canada Mortgage and Housing Corporation: This is a Crown Corporation set up under the National Housing Act (NHA) to insure lenders of high ratio mortgages against losses in case of default by the borrower.

CMHC Mortgage: Mortgage insured by CMHC. See High Ratio Mortgage

Clear title: A title that is free of liens and legal questions as to ownership of the property.

Closed Mortgage: A mortgage that CANNOT be prepaid or repaid in advance of the maturity date without penalty.

Common Tenancy: The ownership of property by two of more persons, where on the death of one, his share is credited to his own estate.

Completion: The date where the Real Estate transaction is legally concluded in the Registry Office. The Purchaser pays his money on this date and the Vendor receives it.

Conventional Mortgage: A mortgage where the loan does not exceed 80% of the value of a house/property. For example a $160,000. mortgage on a purchase price of $200,000. would be classified as a Conventional Mortgage.

Convertible Mortgage: A mortgage where a Borrower has a “window” of opportunity to renegotiate the term of the mortgage. This is a very worthwhile feature and should be investigated for persons wishing to wait a while before committing to a long term mortgage. The rates for convertible mortgages are typically 1/2 of 1% less than an “open” mortgage.

Co-Covenantor: An individual who contractually undertakes to discharge the responsibilities of the borrower in the event of the borrower’s default.

Common Areas: Lands or improvements on land that are designated for common use and enjoyment by all occupants, tenants or owners. A pool, tennis court, hot tub or common halls would all be part of the Common Area.

Compounded: Indicates the frequency with which interest is computed and added to the principal to arrive at a new actual balance. The essential point to remember if you are a borrower is the the less frequent the compounding, the better deal for you. If you are a Lender (or saver at the bank) the more often the frequency of compounding, the more you will get in return. In Canada, Lenders, generally compound mortgages semi-annually.

Condominium: A form of property ownership in which the homeowner holds title to an individual dwelling unity plus an interest in common areas of a multi-unit project. Conveyance: Transfer of Title of real estate property from one individual to another.

Covenant: Solemn or written agreement.

Covenantor: In a mortgage this means the Borrower

Deed: The legal document conveying title to a property.

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

Deposit: Cash paid to the seller when a formal sales contract is signed.

Depreciation: A decline in the value of a property; the opposite of “appreciation”.

Down payment: The part of the purchase price which the buyer pays in cash and does not finance with a mortgage.

Easement: A right to the limited use or enjoyment of land. The Easement is usually held by another and is a registered interest in land to enable sewer or other municipal services, power lines, roads or to allow for access to the property.

Encroachment: An improvement (building, fence, etc) that illegally violates another’s property.

Equity: The difference between the market value of a property and the homeowner’s outstanding mortgage balance. If your home is worth $100,000 and you owe $65,000, you are said to have 35% equity in your home.

Fair Market Value: The price or value at which property is transferred between a willing and informed buyer and a willing and informed seller, each of whom has a reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell.

First Time Home Buyers: Defined by CMHC as one of the buyers who has not owned Real Estate property in the last 5 years. Different definition as it applies to BC Purchase Property Tax Exemption, where one must have NEVER owned a house anywhere.

First mortgage: The mortgage that has first claim (or “lien”) in the event of a default.

Fixed-rate mortgage: A mortgage in which the interest rate does not change during the entire term of the loan.

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

Gross Debt Service Ratio: GDSR or GDS The measure by which Lenders define the ability of the borrowers to pay for their mortgage debt. This is the total mortgage debt service expressed as a percentage of the borrowers income. This ratio is calculated by dividing the total of Principal, Interest, Taxes and a Heating component into the Borrowers total income. FOR EXAMPLE: Suppose a Borrower has a total monthly income of $5,000. and suppose the Principal and Interest component of his mortgage total $1,200. and that the monthly property tax component is $100. Also assume an arbitrary heating component of $50.00 a month for a total of $1,350. Therefore $5,000. divided by $1,350.00 would give you a GDS R of 27%. Lenders vary as the maximum they will allow a borrower’s GDS to be. This can range from 27% to 33%. Most of our Lenders will allow 33% and up to 35% for First Time Home Buyers

Homeowner’s insurance: An insurance policy that combines liability coverage and hazard insurance.

Homeowner’s warranty: A type of insurance that covers repairs to specified parts of a house for a specific period of time.

High Ratio Mortgage: A mortgage for more than 75% of the value. of the purchase price or value. These have to be “insured” by CMHC and a premium is added to the loan. For example if you had a loan of $100,000.00 against a purchase price of $115,000.00, a “premium” of $2,500.00 would be added to the loan. Therefore the Borrowers would start with an indebtedness of $102,500.00. It should be pointed out that most all Lenders insure their High Ratio mortgages this way.

Inter Alia Mortgage: Also referred to as a Blanket Mortgage. The words “Inter Alia” are Latin for “Amongst other things”. Therefore an Inter Alia Mortgage would cover more than one property. Typically it is a mortgage covering 2 or more properties.

Interest: Consideration in the form of money, paid for the use of money. Usually expressed as a percentage, compounded semi-annually. Can also mean a right, share or title in property.

Interest Rate Differential: IRD. Usually refers to compensation due to the Lender on payout. This is the value of the difference between the contractual rate of the mortgage and the rate the Lender can now get for his money. Example: A mortgage has a term of 3 years to go at 13% and now the Lender can only get a market rate of 8%. You want to pay out your mortgage. The Lender may ask you to pay the difference in interest. This can add up to thousands of dollars. Payout penalties are usually quoted as the “greater” of IRD or 3 months interest penalty. Borrowers not asking about the IRD may be in for a shock if rates decline considerably.

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

Joint Tenancy: Ownership of Real Property by two or more people. when one dies, his share automatically passes to the survivors.

Liabilities: The amount of debts a person owes

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

Lifetime cap: A provision of an ARM that limits the total increase in interest rates over the life of the loan.

Loan Servicing: The collection of mortgage payments from borrowers and the related responsibilities of a loan service, such as foreclosure, tax and insurance escrow, etc.

Margin: The set percentage the lender adds to the index rate to determine the current interest rate of an ARM.

MICC: A private mortgage insurer, Mortgage Insurance Company of Canada. Not frequently used by Lenders. Generally has the guidelines as CMHC.

Mortgage Broker: A firm or more frequently and Individual who brings the Borrower together. Does the mortgage shopping for the Borrower. In B.C. the Broker must be licensed.

Mortgagee: The lender in a mortgage agreement.

Mortgagor: The borrower in a mortgage agreement.

Mortgage broker: A company that for a fee matches borrowers with lenders.

Negative amortization: Payment terms under which the borrower’s monthly payments do not cover the interest due; as a result, the balance due is added to the loan balance making it rise – thus “negative amortization”.

Net Worth: The residual after deducting Assets from Liabilities

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

Open Mortgage: A mortgage that can be prepaid at anytime during the contract, and before maturity, without penalty.

Prepayment Clause: In a mortgage, an agreement giving the Borrower the privilege of paying additional sums off the principal balance over and above the agreed contractual payments.

Prepayment penalty: A fee charged to a borrower who pays off a loan before it is due. Some loan programs contain a prepayment penalty, others do not – check with your loan officer for details.

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

Purchase Property Tax: In British Columbia, we have a Purchase Property Tax which applies to most properties. There are exemptions for First Time Buyers. Generally, the tax is 1% of the first $200,000.00 purchase and 1% of the balance. There are property purchase price limits. Generally, again, the tax applies on any purchase over $425,000.

Radon: A radioactive gas found in some homes that in sufficient concentrations can cause health problems. Your lender may require a radon check on your home.

Real Property – Real Estate Property: Land and appurtenances, including anything of a permanent nature such as structures, trees, minerals and the interest, benefits and inherent rights thereof. Sometimes called Real Estate.

Real estate agent: A person licensed to negotiate and transact the sale of real estate on behalf of either the borrower or seller, or in some cases both partied.

Refinancing: The process of paying off one loan with the proceeds from a new loan secured by the same property. This is most often done to get the better interest rates offered by the new loan.

Second Mortgage: A mortgage that has rights that are subordinate to the rights of the first mortgage. As such, these loans are often less secure and may demand a slightly higher interest rate.

Secondary mortgage market: The buying and selling of existing mortgages.

Strata Fees: Monthly levies by the corporation owning the Condominium for the maintenance of common areas, cleaning, reserves for repairs to major common areas like the roof, etc.

Survey: A drawing showing the legal boundaries of a property, it’s fixtures, and any easements or encroachments.

TDS or TDSR: See Total Debt Service Ratio

Term: The amount of time that the contract is written for and that the interest rate is guaranteed for. Not to be confused with “Amortization”. Typically in Canada terms range from 1 to 5 years.

Title: A legal document establishing the right of ownership.

Title company: A company that specializes in title searches and insuring title to 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 one owner to another. Total Debt Service Ratio: TDSR or TDS. Add all other debt payments to the GDSR and measure as a percentage of the total income of the Borrower. Suppose in the Example of the GDSR above the Borrower had a monthly car payment of $300.00 on top of his PITH (principal, interest, taxes, heat) for a total monthly obligation of $1,650.00 This represents 33% of the Borrowers total income. Lender will usually allow up to 40 or 42% maximum TDS.

Vendor: The Seller

 
 
 
 
 
 
 

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