A
"A" Loan or "A" Paper: a
credit rating where the FICO score is 660 or above. There have been
no late mortgage payments within a 12-month period. This is the best
credit rating to have when entering into a new 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.
Acceleration: the
right of the lender to demand payment on the outstanding balance of
a loan.
Additional Principal Payment: money
paid to the lender in addition to the established payment amount
used directly against the loan principal to shorten the length of
the loan.
Adjustable-Rate Mortgage (ARM): a
mortgage loan that does not have a fixed interest rate. During the
life of the loan the interest rate will change based on the index
rate. Also referred to as adjustable mortgage loans (AMLs) or
variable-rate mortgages (VRMs).
Adjustment Date: the
actual date that the interest rate is changed for an ARM.
Adjustment Index: the
published market index used to calculate the interest rate of an ARM
at the time of origination or adjustment.
Adjustment Interval: the
time between the interest rate change and the monthly payment for an
ARM. The interval is usually every one, three or five years
depending on the index.
Amortization: a
payment plan that enables you to reduce your debt gradually through
monthly payments. The payments may be principal and interest, or
interest-only. The monthly amount is based on the schedule for the
entire term or length of the loan.
Annual Mortgagor Statement: yearly
statement to borrowers detailing the remaining principal and amounts
paid for taxes and interest.
Annual Percentage Rate (APR): a
measure of the cost of credit, expressed as a yearly rate. It
includes interest as well as other charges. Because all lenders, by
federal law, follow the same rules to ensure the accuracy of the
annual percentage rate, it provides consumers with a good basis for
comparing the cost of loans, including mortgage plans. APR is a
higher rate than the simple interest of the mortgage.
Application: the
first step in the official loan approval process; this form is used
to record important information about the potential borrower
necessary to the underwriting process.
As-is Condition: the
purchase or sale of a property in its existing condition without
repairs.
Assessor: a
government official who is responsible for determining the value of
a property for the purpose of taxation.
Assumable Mortgage: when
a home is sold, the seller may be able to transfer the mortgage to
the new buyer. This means the mortgage is assumable. Lenders
generally require a credit review of the new borrower and may charge
a fee for the assumption. Some mortgages contain a due-on-sale
clause, which means that the mortgage may not be transferable to a
new buyer. Instead, the lender may make you pay the entire balance
that is due when you sell the home. An assumable mortgage can help
you attract buyers if you sell your home.
Assumption Clause: a
provision in the terms of a loan that allows the buyer to take legal
responsibility for the mortgage from the seller.
Automated Underwriting: loan
processing completed through a computer-based system that evaluates
past credit history to determine if a loan should be approved. This
system removes the possibility of personal bias against the buyer.
Average Price: determining
the cost of a home by totaling the cost of all houses sold in one
area and dividing by the number of homes sold.
B
"B" Loan or "B" Paper: FICO
scores from 620 - 659. Factors include two 30 day late mortgage
payments and two to three 30 day late installment loan payments in
the last 12 months. No delinquencies over 60 days are allowed.
Should be two to four years since a bankruptcy. Also referred to as
Sub-Prime.
Back End Ratio (debt ratio): a
ratio that compares the total of all monthly debt payments
(mortgage, real estate taxes and insurance, car loans, and other
consumer loans) to gross monthly income.
Back to Back Escrow: arrangements
that an owner makes to oversee the sale of one property and the
purchase of another at the same time.
Balance Sheet: a
financial statement that shows the assets, liabilities and net worth
of an individual or company.
Balloon Loan or Mortgage: a
mortgage that typically offers low rates for an initial period of
time (usually 5, 7, or 10) years; after that time period elapses,
the balance is due or is refinanced by the borrower.
Balloon Payment: the
final lump sum payment due at the end of a balloon mortgage.
Biweekly Payment Mortgage: a
mortgage paid twice a month instead of once a month, reducing the
amount of interest to be paid on the loan.
Bridge Loan: a
short-term loan paid back relatively fast. Normally used until a
long-term loan can be processed.
Buy Down: the
seller pays an amount to the lender so the lender provides a lower
rate and lower payments many times for an ARM. The seller may
increase the sales price to cover the cost of the buy down.
C
"C" Loan or "C" Paper: FICO
scores typically from 580 to 619. Factors include three to four 30
day late mortgage payments and four to six 30 day late installment
loan payments or two to four 60 day late payments. Should be one to
two years since bankruptcy. Also referred to as Sub - Prime.
Callable Debt: a
debt security whose issuer has the right to redeem the security at a
specified price on or after a specified date, but prior to its
stated final maturity.
Cap: a
limit, such as one placed on an adjustable rate mortgage, on how
much a monthly payment or interest rate can increase or decrease,
either at each adjustment period or during the life of the mortgage.
Payment caps do not limit the amount of interest the lender is
earning, so they may cause negative amortization.
Capacity: The
ability to make mortgage payments on time, dependant on assets and
the amount of income each month after paying housing costs, debts
and other obligations.
Capital Gain: the
profit received based on the difference of the original purchase
price and the total sale price.
Capital Improvements: property
improvements that either will enhance the property value or will
increase the useful life of the property.
Capital or Cash Reserves: an
individual's savings, investments, or assets.
Cash Reserves: a
cash amount sometimes required of the buyer to be held in reserve in
addition to the down payment and closing costs; the amount is
determined by the lender.
Charge-Off: the
portion of principal and interest due on a loan that is written off
when deemed to be uncollectible.
Clear Title: a
property title that has no defects. Properties with clear titles are
marketable for sale.
Closing: the
final step in property purchase where the title is transferred from
the seller to the buyer. Closing occurs at a meeting between the
buyer, seller, settlement agent, and other agents. At the closing
the seller receives payment for the property. Also known as
settlement.
Closing Costs: fees
for final property transfer not included in the price of the
property. Typical closing costs include charges for the mortgage
loan such as origination fees, discount points, appraisal fee,
survey, title insurance, legal fees, real estate professional fees,
prepayment of taxes and insurance, and real estate transfer taxes. A
common estimate of a Buyer's closing costs is 2 to 4 percent of the
purchase price of the home. A common estimate for Seller's closing
costs is 3 to 9 percent.
Cloud On The Title: any
condition which affects the clear title to real property.
Co-Borrower: an
additional person that is responsible for loan repayment and is
listed on the title.
Co-Signed Account: an
account signed by someone in addition to the primary borrower,
making both people responsible for the amount borrowed.
Co-Signer: a
person that signs a credit application with another person, agreeing
to be equally responsible for the repayment of the loan.
Collateral: security
in the form of money or property pledged for the payment of a loan.
For example, on a home loan, the home is the collateral and can be
taken away from the borrower if mortgage payments are not made.
Collection Account: an
unpaid debt referred to a collection agency to collect on the bad
debt. This type of account is reported to the credit bureau and will
show on the borrower's credit report.
Comparative Market Analysis (COMPS): a
property evaluation that determines property value by comparing
similar properties sold within the last year.
Compensating Factors: factors
that show the ability to repay a loan based on less traditional
criteria, such as employment, rent, and utility payment history.
Conforming loan: is
a loan that does not exceed Fannie Mae's and Freddie Mac's loan
limits. Freddie Mac and Fannie Mae loans are referred to as
conforming loans.
Construction Loan: a
short-term, to finance the cost of building a new home. The lender
pays the builder based on milestones accomplished during the
building process. For example, once a sub-contractor pours the
foundation and it is approved by inspectors the lender will pay for
their service.
Contingency: a
clause in a purchase contract outlining conditions that must be
fulfilled before the contract is executed. Both, buyer or seller may
include contingencies in a contract, but both parties must accept
the contingency.
Conventional Loan: a
private sector loan, one that is not guaranteed or insured by the
U.S. government.
Conversion Clause: a
provision in some ARMs allowing it to change to a fixed-rate loan at
some point during the term. Usually conversions are allowed at the
end of the first adjustment period. At the time of the conversion,
the new fixed rate is generally set at one of the rates then
prevailing for fixed rate mortgages. There may be additional cost
for this clause.
Convertible ARM: an
adjustable-rate mortgage that provides the borrower the ability to
convert to a fixed-rate within a specified time.
Cost of Funds Index (COFI): an
index used to determine interest rate changes for some
adjustable-rate mortgages.
Credit Bureau: an
agency that provides financial information and payment history to
lenders about potential borrowers. Also known as a National Credit
Repository.
Credit Enhancement: a
method used by a lender to reduce default of a loan by requiring
collateral, mortgage insurance, or other agreements.
Credit Grantor: the
lender that provides a loan or credit.
Credit Risk: a
term used to describe the possibility of default on a loan by a
borrower.
Credit Score: a
score calculated by using a person's credit report to determine the
likelihood of a loan being repaid on time. Scores range from about
360 - 840: a lower score meaning a person is a higher risk, while a
higher score means that there is less risk.
Credit Union: a
non-profit financial institution federally regulated and owned by
the members or people who use their services. Credit unions serve
groups that hold a common interest and you have to become a member
to use the available services.
Creditor: the
lending institution providing a loan or credit.
Creditworthiness: the
way a lender measures the ability of a person to qualify and repay a
loan.
D
Debtor: The
person or entity that borrows money. The term debtor may be used
interchangeably with the term borrower.
Debt-to-Income Ratio: a
comparison or ratio 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.
Debt Security: a
security that represents a loan from an investor to an issuer. The
issuer in turn agrees to pay interest in addition to the principal
amount borrowed.
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
does not 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. Generally after fifteen days a late fee may be assessed.
Deposit (Earnest Money): money
put down by a potential buyer to show that they are serious about
purchasing the home; it becomes part of the down payment if the
offer is accepted, is returned if the offer is rejected, or is
forfeited if the buyer pulls out of the deal. During the contingency
period the money may be returned to the buyer if the contingencies
are not met to the buyer's satisfaction.
Depreciation: a
decrease in the value or price of a property due to changes in
market conditions, wear and tear on the property, or other factors.
Disclosures: the
release of relevant information about a property that may influence
the final sale, especially if it represents defects or problems.
"Full disclosure" usually refers to the responsibility of the seller
to voluntarily provide all known information about the property.
Some disclosures may be required by law, such as the federal
requirement to warn of potential lead-based paint hazards in
pre-1978 housing. A seller found to have knowingly lied about a
defect may face legal penalties.
Discount Point: normally
paid at closing and generally calculated to be equivalent to 1% of
the total loan amount, discount points are paid to reduce the
interest rate on a loan. In an ARM with an initial rate discount,
the lender gives up a number of percentage points in interest to
give you a lower rate and lower payments for part of the mortgage
term (usually for one year or less). After the discount period, the
ARM rate will probably go up depending on the index rate.
Document Recording: after
closing on a loan, certain documents are filed and made public
record. Discharges for the prior mortgage holder are filed first.
Then the deed is filed with the new owner's and mortgage company's
names.
Due on Sale Clause: a
provision of a loan allowing the lender to demand full repayment of
the loan if the property is sold.
E
Earnest Money (Deposit): money
put down by a potential buyer to show that they are serious about
purchasing the home; it becomes part of the down payment if the
offer is accepted, is returned if the offer is rejected, or is
forfeited if the buyer pulls out of the deal. During the contingency
period the money may be returned to the buyer if the contingencies
are not met to the buyer's satisfaction.
Easements: the
legal rights that give someone other than the owner access to use
property for a specific purpose. Easements may affect property
values and are sometimes a part of the deed.
EEM: Energy
Efficient Mortgage; an FHA program that helps homebuyers save money
on utility bills by enabling them to finance the cost of adding
energy efficiency features to a new or existing home as part of the
home purchase
Eminent Domain: when
a government takes private property for public use. The owner
receives payment for its fair market value. The property can then
proceed to condemnation proceedings.
Encroachments: a
structure that extends over the legal property line on to another
individual's property. The property surveyor will note any
encroachment on the lot survey done before property transfer. The
person who owns the structure will be asked to remove it to prevent
future problems.
Encumbrance: anything
that affects title to a property, such as loans, leases, easements,
or restrictions.
Equal Credit Opportunity Act (ECOA): a
federal law requiring lenders to make credit available equally
without discrimination based on race, color, religion, national
origin, age, sex, marital status, or receipt of income from public
assistance programs.
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.
Escape Clause: a
provision in a purchase contract that allows either party to cancel
part or the entire contract if the other does not respond to changes
to the sale within a set period. The most common use of the escape
clause is if the buyer makes the purchase offer contingent on the
sale of another house.
Escrow: funds
held in an account to be used by the lender to pay for home
insurance and property taxes. The funds may also be held by a third
party until contractual conditions are met and then paid out.
Escrow Account: a
separate account into which the lender puts a portion of each
monthly mortgage payment; an escrow account provides the funds
needed for such expenses as property taxes, homeowners insurance,
mortgage insurance, etc.
Exclusive Listing: a
written contract giving a real estate agent the exclusive right to
sell a property for a specific timeframe.
F
FICO Score: FICO
is an abbreviation for Fair Isaac Corporation and refers to a
person's credit score based on credit history. Lenders and credit
card companies use the number to decide if the person is likely to
pay his or her bills. A credit score is evaluated using information
from the three major credit bureaus and is usually between 300 and
850.
FSBO (For Sale by Owner): a
home that is offered for sale by the owner without the benefit of a
real estate professional.
Fair Credit Reporting Act: federal
act to ensure that credit bureaus are fair and accurate protecting
the individual's privacy rights enacted in 1971 and revised in
October 1997.
Fair Housing Act: a
law that prohibits discrimination in all facets of the home buying
process on the basis of race, color, national origin, religion, sex,
familial status, or disability.
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.
Familial Status: HUD
uses this term to describe a single person, a pregnant woman or a
household with children under 18 living with parents or legal
custodians who might experience housing discrimination.
Fannie Mae: Federal
National Mortgage Association (FNMA); a federally-chartered
enterprise owned by private stockholders that purchases residential
mortgages and converts them into securities for sale to investors;
by purchasing mortgages, Fannie Mae supplies funds that lenders may
loan to potential homebuyers. Also known as a Government Sponsored
Enterprise (GSE).
FHA: Federal
Housing Administration; established in 1934 to advance homeownership
opportunities for all Americans; assists homebuyers by providing
mortgage insurance to lenders to cover most losses that may occur
when a borrower defaults; this encourages lenders to make loans to
borrowers who might not qualify for conventional mortgages.
First Mortgage: the
mortgage with first priority if the loan is not paid.
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.
Fixture: personal
property permanently attached to real estate or real property that
becomes a part of the real estate.
Float: the
act of allowing an interest rate and discount points to fluctuate
with changes in the market.
Flood Insurance: insurance
that protects homeowners against losses from a flood; if a home is
located in a flood plain, the lender will require flood insurance
before approving a loan.
Forbearance: a
lender may decide not to take legal action when a borrower is late
in making a payment. Usually this occurs when a borrower sets up a
plan that both sides agree will bring overdue mortgage payments up
to date.
Foreclosure: a
legal process in which mortgaged property is sold to pay the loan of
the defaulting borrower. Foreclosure laws are based on the statutes
of each state.
Freddie Mac: Federal
Home Loan Mortgage Corporation (FHLM); a federally chartered
corporation that purchases residential mortgages, securitizes them,
and sells them to investors; this provides lenders with funds for
new homebuyers. Also known as a Government Sponsored Enterprise
(GSE).
Front End Ratio: a
percentage comparing a borrower's total monthly cost to buy a house
(mortgage principal and interest, insurance, and real estate taxes)
to monthly income before deductions.
G
GSE: abbreviation
for government sponsored enterprises: a collection of financial
services corporations formed by the United States Congress to reduce
interest rates for farmers and homeowners. Examples include Fannie
Mae and Freddie Mac.
Ginnie Mae: Government
National Mortgage Association (GNMA); a government-owned corporation
overseen by the U.S. Department of Housing and Urban Development,
Ginnie Mae pools FHA-insured and VA-guaranteed loans to back
securities for private investment; as With Fannie Mae and Freddie
Mac, the investment income provides funding that may then be lent to
eligible borrowers by lenders.
Good Faith Estimate: 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.
Graduated Payment Mortgages: mortgages
that begin with lower monthly payments that get slowly larger over a
period of years, eventually reaching a fixed level and remaining
there for the life of the loan. Graduated payment loans may be good
if you expect your annual income to increase.
Grantee: an
individual to whom an interest in real property is conveyed.
Grantor: an
individual conveying an interest in real property.
Gross Income: money
earned before taxes and other deductions. Sometimes it may include
income from self-employment, rental property, alimony, child
support, public assistance payments, and retirement benefits.
Guaranty Fee: payment
to FannieMae from a lender for the assurance of timely principal and
interest payments to MBS (Mortgage Backed Security) security
holders.
H
HECM (Reverse Mortgage): the
reverse mortgage is used by senior homeowners age 62 and older to
convert the equity in their home into monthly streams of income
and/or a line of credit to be repaid when they no longer occupy the
home. A lending institution such as a mortgage lender, bank, credit
union or savings and loan association funds the FHA insured loan,
commonly known as HECM.
Hazard Insurance: protection
against a specific loss, such as fire, wind etc., over a period of
time that is secured by the payment of a regularly scheduled
premium.
HELP: Homebuyer
Education Learning Program; an educational program from the FHA that
counsels people about the home buying process; HELP covers topics
like budgeting, finding a home, getting a loan, and home
maintenance; in most cases, completion of the program may entitle
the homebuyer to a reduced initial FHA mortgage insurance
premium-from 2.25% to 1.75% of the home purchase price.
Home Equity Line of Credit: a
mortgage loan, usually in second mortgage, allowing a borrower to
obtain cash against the equity of a home, up to a predetermined
amount.
Home Warranty: offers
protection for mechanical systems and attached appliances against
unexpected repairs not covered by homeowner's insurance; coverage
extends over a specific time period and does not cover the home's
structure.
Homeowner's Insurance: an
insurance policy, also called hazard insurance, that combines
protection against damage to a dwelling and its contents including
fire, storms or other damages with protection against claims of
negligence or inappropriate action that result in someone's injury
or property damage. Most lenders require homeowners insurance and
may escrow the cost.
Flood insurance is generally not included in standard policies and
must be purchased separately.
Homestead Credit: property
tax credit program, offered by some state governments, that provides
reductions in property taxes to eligible households.
HUD: the
U.S. Department of Housing and Urban Development; established in
1965, HUD works to create a decent home and suitable living
environment for all Americans; it does this by addressing housing
needs, improving and developing American communities, and enforcing
fair housing laws.
HUD1 Statement: also
known as the "settlement sheet," or "closing statement" it itemizes
all closing costs; must be given to the borrower at or before
closing. Items that appear on the statement include real estate
commissions, loan fees, points, and escrow amounts.
I
Index: the
measure of interest rate changes that the lender uses to decide how
much the interest rate of an ARM will change over time. No one can
be sure when an index rate will go up or down. If a lender bases
interest rate adjustments on the average value of an index over
time, your interest rate would not be as volatile. You should ask
your lender how the index for any ARM you are considering has
changed in recent years, and where it is reported.
Inflation: the
number of dollars in circulation exceeds the amount of goods and
services available for purchase; inflation results in a decrease in
the dollar's value.
Inflation Coverage: endorsement
to a homeowner's policy that automatically adjusts the amount of
insurance to compensate for inflationary rises in the home's value.
This type of coverage does not adjust for increases in the home's
value due to improvements.
Inquiry: a
credit report request. Each time a credit application is completed
or more credit is requested counts as an inquiry. A large number of
inquiries on a credit report can sometimes make a credit score
lower.
Interest: a
fee charged for the use of borrowing money.
Interest Rate: the
amount of interest charged on a monthly loan payment, expressed as a
percentage.
Intermediate Term Mortgage: a
mortgage loan with a contractual maturity from the time of purchase
equal to or less than 20 years.
Insurance: protection
against a specific loss, such as fire, wind etc., over a period of
time that is secured by the payment of a regularly scheduled
premium.
J
Joint Tenancy (with Rights of Survivorship): two
or more owners share equal ownership and rights to the property. If
a joint owner dies, his or her share of the property passes to the
other owners, without probate. In joint tenancy, ownership of the
property cannot be willed to someone who is not a joint owner.
Jumbo Loan: or
non-conforming loan, is a loan that exceeds Fannie Mae's and Freddie
Mac's loan limits. Freddie Mac and Fannie Mae loans are referred to
as conforming loans.
K
L
Late Payment Charges: the
penalty the homeowner must pay when a mortgage payment is made after
the due date grace period.
Lease: a
written agreement between a property owner and a tenant (resident)
that stipulates the payment and conditions under which the tenant
may occupy a home or apartment and states a specified period of
time.
Lease Purchase (Lease Option): assists
low to moderate income homebuyers in purchasing a home by allowing
them to lease a home with an option to buy; the rent payment is made
up of the monthly rental payment plus an additional amount that is
credited to an account for use as a down payment.
Lender: A
term referring to an person or company that makes loans for real
estate purchases. Sometimes referred to as a loan officer or lender.
Lender Option Commitments: an
agreement giving a lender the option to deliver loans or securities
by a certain date at agreed upon terms.
Liabilities: a
person's financial obligations such as long-term / short-term debt,
and other financial obligations to be paid.
Liability Insurance: insurance
coverage that protects against claims alleging a property owner's
negligence or action resulted in bodily injury or damage to another
person. It is normally included in homeowner's insurance policies.
Lien: a
legal claim against property that must be satisfied when the
property is sold. A claim of money against a property, wherein the
value of the property is used as security in repayment of a debt.
Examples include a mechanic's lien, which might be for the unpaid
cost of building supplies, or a tax lien for unpaid property taxes.
A lien is a defect on the title and needs to be settled before
transfer of ownership. A lien release is a written report of the
settlement of a lien and is recorded in the public record as
evidence of payment.
Lien Waiver: A
document that releases a consumer (homeowner) from any further
obligation for payment of a debt once it has been paid in full. Lien
waivers typically are used by homeowners who hire a contractor to
provide work and materials to prevent any subcontractors or
suppliers of materials from filing a lien against the homeowner for
nonpayment.
Life Cap: a
limit on the range interest rates can increase or decrease over the
life of an adjustable-rate mortgage (ARM).
Line of Credit: an
agreement by a financial institution such as a bank to extend credit
up to a certain amount for a certain time to a specified borrower.
Liquid Asset: a
cash asset or an asset that is easily converted into cash.
Listing Agreement: a
contract between a seller and a real estate professional to market
and sell a home. A listing agreement obligates the real estate
professional (or his or her agent) to seek qualified buyers, report
all purchase offers and help negotiate the highest possible price
and most favorable terms for the property seller.
Loan Acceleration: an
acceleration clause in a loan document is a statement in a mortgage
that gives the lender the right to demand payment of the entire
outstanding balance if a monthly payment is missed.
Loan Fraud: purposely
giving incorrect information on a loan application in order to
better qualify for a loan; may result in civil liability or criminal
penalties.
Loan Origination Fee: a
charge by the lender to cover the administrative costs of making the
mortgage. This charge is paid at the closing and varies with the
lender and type of loan. A loan origination fee of 1 to 2 percent of
the mortgage amount is common.
Loan Servicer: the
company that collects monthly mortgage payments and disperses
property taxes and insurance payments. Loan servicers also monitor
nonperforming loans, contact delinquent borrowers, and notify
insurers and investors of potential problems. Loan servicers may be
the lender or a specialized company that just handles loan servicing
under contract with the lender or the investor who owns the loan.
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.
Lock-In: since
interest rates can change frequently, many lenders offer an interest
rate lock-in that guarantees a specific interest rate if the loan is
closed within a specific time.
Lock-in Period: the
length of time that the lender has guaranteed a specific interest
rate to a borrower.
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.
M
Margin: the
number of percentage points the lender adds to the index rate to
calculate the ARM interest rate at each adjustment.
Market Value: the
amount a willing buyer would pay a willing seller for a home. An
appraised value is an estimate of the current fair market value.
Maturity: the
date when the principal balance of a loan becomes due and payable.
Median Price: the
price of the house that falls in the middle of the total number of
homes for sale in that area.
Medium Term Notes: unsecured
general obligations of Fannie Mae with maturities of one day or more
and with principal and interest payable in U.S. dollars.
Merged Credit Report: raw
data pulled from two or more of the major credit-reporting firms.
Mitigation: term
usually used to refer to various changes or improvements made in a
home; for instance, to reduce the average level of radon.
Modification: when
a lender agrees to modify the terms of a mortgage without
refinancing the loan.
Mortgage: a
lien on the property that secures the Promise to repay a loan. A
security agreement between the lender and the buyer in which the
property is collateral for the loan. The mortgage gives the lender
the right to collect payment on the loan and to foreclose if the
loan obligations are not met.
Mortgage Acceleration Clause: a
clause allowing a lender, under certain circumstances, demand the
entire balance of a loan is repaid in a lump sum. The acceleration
clause is usually triggered if the home is sold, title to the
property is changed, the loan is refinanced or the borrower defaults
on a scheduled payment.
Mortgage-Backed Security (MBS): a
Fannie Mae security that represents an undivided interest in a group
of mortgages. Principal and interest payments from the individual
mortgage loans are grouped and paid out to the MBS holders.
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 Life and Disability Insurance: term
life insurance bought by borrowers to pay off a mortgage in the
event of death or make monthly payments in the case of disability.
The amount of coverage decreases as the principal balance declines.
There are many different terms of coverage determining amounts of
payments and when payments begin and end.
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. Insurance purchased by
the buyer to protect the lender in the event of default. Typically
purchased for loans with less than 20 percent down payment. The cost
of mortgage insurance is usually added to the monthly payment.
Mortgage insurance is maintained on conventional loans until the
outstanding amount of the loan is less than 80 percent of the value
of the house or for a set period of time (7 years is common).
Mortgage insurance also is available through a government agency,
such as the Federal Housing Administration (FHA) or through
companies (Private Mortgage Insurance or PMI).
Mortgage Insurance Premium (MIP): a
monthly payment -usually part of the mortgage payment - paid by a
borrower for mortgage insurance.
Mortgage Interest Deduction: the
interest cost of a mortgage, which is a tax - deductible expense.
The interest reduces the taxable income of taxpayers.
Mortgage Modification: a
loss mitigation option that allows a borrower to refinance and/or
extend the term of the mortgage loan and thus reduce the monthly
payments.
Mortgage Note: a
legal document obligating a borrower to repay a loan at a stated
interest rate during a specified period; the agreement is secured by
a mortgage that is recorded in the public records along with the
deed.
Mortgage Qualifying Ratio: Used
to calculate the maximum amount of funds that an individual
traditionally may be able to afford. A typical mortgage qualifying
ratio is 28: 36.
Mortgage Score: a
score based on a combination of information about the borrower that
is obtained from the loan application, the credit report, and
property value information. The score is a comprehensive analysis of
the borrower's ability to repay a mortgage loan and manage credit.
Mortgagee: the
lender in a mortgage agreement. Mortgagor - The borrower in a
mortgage agreement.
Mortgagor: the
borrower in a mortgage agreement.
N
National Credit Repositories: currently,
there are three companies that maintain national credit - reporting
databases. These are Equifax, Experian, and Trans Union, referred to
as Credit Bureaus.
Negative Amortization: amortization
means that monthly payments are large enough to pay the interest and
reduce the principal on your mortgage. Negative amortization occurs
when the monthly payments do not cover all of the interest cost. The
interest cost that isn't covered is added to the unpaid principal
balance. This means that even after making many payments, you could
owe more than you did at the beginning of the loan. Negative
amortization can occur when an ARM has a payment cap that results in
monthly payments not high enough to cover the interest due.
Net Income: Your
take-home pay, the amount of money that you receive in your paycheck
after taxes and deductions.
No Cash Out Refinance: a
refinance of an existing loan only for the amount remaining on the
mortgage. The borrower does not get any cash against the equity of
the home. Also called a "rate and term refinance."
No Cost Loan: there
are many variations of a no cost loan. Generally, it is a loan that
does not charge for items such as title insurance, escrow fees,
settlement fees, appraisal, recording fees or notary fees. It may
also offer no points. This lessens the need for upfront cash during
the buying process however no cost loans have a higher interest
rate.
Nonperforming Asset: an
asset such as a mortgage that is not currently accruing interest or
which interest is not being paid.
Note: a
legal document obligating a borrower to repay a mortgage loan at a
stated interest rate over a specified period of time.
Note Rate: the
interest rate stated on a mortgage note.
Notice of Default: a
formal written notice to a borrower that there is a default on a
loan and that legal action is possible.
Notional Principal Amount: the
proposed amount which interest rate swap payments are based but
generally not paid or received by either party.
Non-Conforming loan: is
a loan that exceeds Fannie Mae's and Freddie Mac's loan limits.
Freddie Mac and Fannie Mae loans are referred to as conforming
loans.
Notary Public: a
person who serves as a public official and certifies the
authenticity of required signatures on a document by signing and
stamping the document.
O
Offer: indication
by a potential buyer of a willingness to purchase a home at a
specific price; generally put forth in writing.
Original Principal Balance: the
total principal owed on a mortgage prior to any payments being made.
Origination: the
process of preparing, submitting, and evaluating a loan application;
generally includes a credit check, verification of employment, and a
property appraisal.
Origination Fee: the
charge for originating a loan; is usually calculated in the form of
points and paid at closing. One point equals one percent of the loan
amount. On a conventional loan, the loan origination fee is the
number of points a borrower pays.
Owner Financing: a
home purchase where the seller provides all or part of the
financing, acting as a lender.
Ownership: ownership
is documented by the deed to a property. The type or form of
ownership is important if there is a change in the status of the
owners or if the property changes ownership.
Owner's Policy: the
insurance policy that protects the buyer from title defects.
P
PITI: Principal,
Interest, Taxes, and Insurance: the
four elements of a monthly mortgage payment; payments of principal
and interest go directly towards repaying the loan while the portion
that covers taxes and insurance (homeowner's and mortgage, if
applicable) goes into an escrow account to cover the fees when they
are due.
PITI Reserves: a
cash amount that a borrower must have on hand after making a down
payment and paying all closing costs for the purchase of a home. The
principal, interest, taxes, and insurance (PITI) reserves must equal
the amount that the borrower would have to pay for PITI for a
predefined number of months.
PMI: Private
Mortgage Insurance; privately-owned companies that offer standard
and special affordable mortgage insurance programs for qualified
borrowers with down payments of less than 20% of a purchase price.
Partial Claim: a
loss mitigation option offered by the FHA that allows a borrower,
with help from a lender, to get an interest-free loan from HUD to
bring their mortgage payments up to date.
Partial Payment: a
payment that is less than the total amount owed on a monthly
mortgage payment. Normally, lenders do not accept partial payments.
The lender may make exceptions during times of difficulty. Contact
your lender prior to the due date if a partial payment is needed.
Payment Cap: a
limit on how much an ARM's payment may increase, regardless of how
much the interest rate increases.
Payment Change Date: the
date when a new monthly payment amount takes effect on an
adjustable-rate mortgage (ARM) or a graduated-payment mortgage
(GPM). Generally, the payment change date occurs in the month
immediately after the interest rate adjustment date.
Payment Due Date: Contract
language specifying when payments are due on money borrowed. The due
date is always indicated and means that the payment must be received
on or before the specified date. Grace periods prior to assessing a
late fee or additional interest do not eliminate the responsibility
of making payments on time.
Perils: for
homeowner's insurance, an event that can damage the property.
Homeowner's insurance may cover the property for a wide variety of
perils caused by accidents, nature, or people.
Personal Property: any
property that is not real property or attached to real property. For
example furniture is not attached however a new light fixture would
be considered attached and part of the real property.
Planned Unit Development (PUD): a
development that is planned, and constructed as one entity.
Generally, there are common features in the homes or lots governed
by covenants attached to the deed. Most planned developments have
common land and facilities owned and managed by the owner's or
neighborhood association. Homeowners usually are required to
participate in the association via a payment of annual dues.
Points: a
point is equal to one percent of the principal amount of your
mortgage. For example, if you get a mortgage for $95,000, one point
means you pay $950 to the lender. Lenders frequently charge points
in both fixed-rate and adjustable-rate mortgages in order to
increase the yield on the mortgage and to cover loan closing costs.
These points usually are collected at closing and may be paid by the
borrower or the home seller, or may be split between them.
Power of Attorney: a
legal document that authorizes another person to act on your behalf.
A power of attorney can grant complete authority or can be limited
to certain acts or certain periods of time or both.
Pre-Approval: a
lender commits to lend to a potential borrower a fixed loan amount
based on a completed loan application, credit reports, debt, savings
and has been reviewed by an underwriter. The commitment remains as
long as the borrower still meets the qualification requirements at
the time of purchase. This does not guaranty a loan until the
property has passed inspections underwriting guidelines.
Predatory Lending: abusive
lending practices that include a mortgage loan to someone who does
not have the ability to repay. It also pertains to repeated
refinancing of a loan charging high interest and fees each time.
Predictive Variables: The
variables that are part of the formula comprising elements of a
credit-scoring model. These variables are used to predict a
borrower's future credit performance.
Pre-foreclosure Sale: a
procedure in which the borrower is allowed to sell a property for an
amount less than what is owed on it to avoid a foreclosure. This
sale fully satisfies the borrower's debt.
Prepayment: any
amount paid to reduce the principal balance of a loan before the due
date or payment in full of a mortgage. This can occur with the sale
of the property, the pay off the loan in full, or a foreclosure. In
each case, full payment occurs before the loan has been fully
amortized.
Prepayment Penalty: a
provision in some loans that charge a fee to a borrower who pays off
a loan before it is due.
Pre-Qualify: a
lender informally determines the maximum amount an individual is
eligible to borrow. This is not a guaranty of a loan.
Premium: an
amount paid on a regular schedule by a policyholder that maintains
insurance coverage.
Prepayment: payment
of the mortgage loan before the scheduled due date; may be Subject
to a prepayment penalty.
Prepayment Penalty: a
fee charged to a homeowner who pays one or more monthly payments
before the due date. It can also apply to principal reduction
payments.
Prepayment Penalty Mortgage (PPM): a
type of mortgage that requires the borrower to pay a penalty for
prepayment, partial payment of principal or for repaying the entire
loan within a certain time period. A partial payment is generally
defined as an amount exceeding 20% of the original principal
balance.
Prime Rate: the
interest rate that banks charge to preferred customers. Changes in
the prime rate are publicized in the business media. Prime rate can
be used as the basis for adjustable rate mortgages (ARMs) or home
equity lines of credit. The prime rate also affects the current
interest rates being offered at a particular point in time on fixed
mortgages. Changes in the prime rate do not affect the interest on a
fixed mortgage.
Principal: the
amount of money borrowed to buy a house or the amount of the loan
that has not been paid back to the lender. This does not include the
interest paid to borrow that money. The principal balance is the
amount owed on a loan at any given time. It is the original loan
amount minus the total repayments of principal made.
Principal, Interest, Taxes, and Insurance (PITI): the
four elements of a monthly mortgage payment; payments of principal
and interest go directly towards repaying the loan while the portion
that covers taxes and insurance (homeowner's and mortgage, if
applicable) goes into an escrow account to cover the fees when they
are due.
Private Mortgage Insurance (PMI): insurance
purchased by a buyer to protect the lender in the event of default.
The cost of mortgage insurance is usually added to the monthly
payment. Mortgage insurance is generally maintained until over 20
Percent of the outstanding amount of the loan is paid or for a set
period of time, seven years is normal. Mortgage insurance may be
available through a government agency, such as the Federal Housing
Administration (FHA) or the Veterans Administration (VA), or through
private mortgage insurance companies (PMI).
Promissory Note: a
written promise to repay a specified amount over a specified period
of time.
Property (Fixture and Non-Fixture): in
a real estate contract, the property is the land within the legally
described boundaries and all permanent structures and fixtures.
Ownership of the property confers the legal right to use the
property as allowed within the law and within the restrictions of
zoning or easements. Fixture property refers to those items
permanently attached to the structure, such as carpeting or a
ceiling fan, which transfers with the property.
Property Tax: a
tax charged by local government and used to fund municipal services
such as schools, police, or street maintenance. The amount of
property tax is determined locally by a formula, usually based on a
percent per $1,000 of assessed value of the property.
Property Tax Deduction: the
U.S. tax code allows homeowners to deduct the amount they have paid
in property taxes from there total income.
Public Record Information: Court
records of events that are a matter of public interest such as
credit, bankruptcy, foreclosure and tax liens. The presence of
public record information on a credit report is regarded negatively
by creditors.
Purchase Offer: A
detailed, written document that makes an offer to purchase a
property, and that may be amended several times in the process of
negotiations. When signed by all parties involved in the sale, the
purchase offer becomes a legally binding contract, sometimes called
the Sales Contract.
Q
Qualifying Ratios: guidelines
utilized by lenders to determine how much money a homebuyer is
qualified to borrow. Lending guidelines typically include a maximum
housing expense to income ratio and a maximum monthly expense to
income ratio.
Quitclaim Deed: a
deed transferring ownership of a property but does not make any
guarantee of clear title.
R
RESPA: Real
Estate Settlement Procedures Act; a law protecting consumers from
abuses during the residential real estate purchase and loan process
by requiring lenders to disclose all settlement costs, practices,
and relationships
Rate Cap: a
limit on an ARM on how much the interest rate or mortgage payment
may change. Rate caps limit how much the interest rates can rise or
fall on the adjustment dates and over the life of the loan.
Rate Lock: a
commitment by a lender to a borrower guaranteeing a specific
interest rate over a period of time at a set cost.
Real Estate Property Tax Deduction: a
tax deductible expense reducing a taxpayer's taxable income.
Real Estate Settlement Procedures Act (RESPA): a
law protecting consumers from abuses during the residential real
estate purchase and loan process by requiring lenders to disclose
all settlement costs, practices, and relationships
Real Property: land,
including all the natural resources and permanent buildings on it.
Recording: the
recording in a registrar's office of an executed legal document.
These include deeds, mortgages, satisfaction of a mortgage, or an
extension of a mortgage making it a part of the public record.
Recording Fees: charges
for recording a deed with the appropriate government agency.
Refinancing: paying
off one loan by obtaining another; refinancing is generally done to
secure better loan terms (like a lower interest rate).
Rehabilitation Mortgage: a
mortgage that covers the costs of rehabilitating (repairing or
Improving) a property; some rehabilitation mortgages - like the
FHA's 203(k) - allow a borrower to roll the costs of rehabilitation
and home purchase into one mortgage loan.
Reinstatement Period: a
phase of the foreclosure process where the homeowner has an
opportunity to stop the foreclosure by paying money that is owed to
the lender.
Remaining Balance: the
amount of principal that has not yet been repaid.
Remaining Term: the
original amortization term minus the number of payments that have
been applied.
Repayment plan: an
agreement between a lender and a delinquent borrower where the
borrower agrees to make additional payments to pay down past due
amounts while making regularly scheduled payments.
Reverse Mortgage (HECM):
the reverse mortgage is used by senior homeowners age 62 and older
to convert the equity in their home into monthly streams of income
and/or a line of credit to be repaid when they no longer occupy the
home. A lending institution such as a mortgage lender, bank, credit
union or savings and loan association funds the FHA insured loan,
commonly known as HECM.
Right of First Refusal: a
provision in an agreement that requires the owner of a property to
give one party an opportunity to purchase or lease a property before
it is offered for sale or lease to others.
Risk Scoring: an
automated way to analyze a credit report verses a manual review. It
takes into account late payments, outstanding debt, credit
experience, and number of inquiries in an unbiased manner.
S
Sale Leaseback: when
a seller deeds property to a buyer for a payment, and the buyer
simultaneously leases the property back to the seller.
Second Mortgage: an
additional mortgage on property. In case of a default the first
mortgage must be paid before the second mortgage. Second loans are
more risky for the lender and usually carry a higher interest rate.
Secondary Mortgage Market: the
buying and selling of mortgage loans. Investors purchase residential
mortgages originated by lenders, which in turn provides the lenders
with capital for additional lending.
Secured Loan: a
loan backed by collateral such as property.
Security: the
property that will be pledged as collateral for a loan.
Seller Take Back: an
agreement where the owner of a property provides second mortgage
financing. These are often combined with an assumed mortgage instead
of a portion of the seller's equity.
Servicer: a
business that collects mortgage payments from borrowers and manages
the borrower's escrow accounts.
Servicing: the
collection of mortgage payments from borrowers and related
responsibilities of a loan servicer.
Settlement: another
name for closing.
Settlement Statement: a
document required by the Real Estate Settlement Procedures Act
(RESPA). It is an itemized statement of services and charges
relating to the closing of a property transfer. The buyer has the
right to examine the settlement statement 1 day before the closing.
This is called the HUD 1 Settlement Statement.
Special 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.
Sub-Prime Loan: "B"
Loan or "B" paper with FICO scores from 620 - 659. "C" Loan or "C"
Paper with FICO scores typically from 580 to 619. An industry term
to used to describe loans with less stringent lending and
underwriting terms and conditions. Due to the higher risk, sub-prime
loans charge higher interest rates and fees.
Subordinate: to
place in a rank of lesser importance or to make one claim secondary
to another.
Survey: a
property diagram that indicates legal boundaries, easements,
encroachments, rights of way, improvement locations, etc. Surveys
are conducted by licensed surveyors and are normally required by the
lender in order to confirm that the property boundaries and features
such as buildings, and easements are correctly described in the
legal description of the property.
T
Third Party Origination: a
process by which a lender uses another party to completely or
partially originate, process, underwrite, close, fund, or package
the mortgages it plans to deliver to the secondary mortgage market.
Terms: The
period of time and the interest rate agreed upon by the lender and
the borrower to repay a loan.
Title: a
legal document establishing the right of ownership and is recorded
to make it part of the public record. Also known as a Deed.
Title 1: an
FHA-insured loan that allows a borrower to make non-luxury
improvements (like renovations or repairs) to their home; Title I
loans less than $7,500 don't require a property lien.
Title Company: a
company that specializes in examining and insuring titles to real
estate.
Title Defect: an
outstanding claim on a property that limits the ability to sell the
property. Also referred to as a cloud on the title.
Title Insurance: insurance
that protects the lender against any claims that arise from
arguments about ownership of the property; also available for
homebuyers. An insurance policy guaranteeing the accuracy of a title
search protecting against errors. Most lenders require the buyer to
purchase title insurance protecting the lender against loss in the
event of a title defect. This charge is included in the closing
costs. A policy that protects the buyer from title defects is known
as an owner's policy and requires an additional charge.
Title Search: a
check of public records to be sure that the seller is the recognized
owner of the real estate and that there are no unsettled liens or
other claims against the property.
Transfer Agent: a
bank or trust company charged with keeping a record of a company's
stockholders and canceling and issuing certificates as shares are
bought and sold.
Transfer of Ownership: any
means by which ownership of a property changes hands. These include
purchase of a property, assumption of mortgage debt, exchange of
possession of a property via a land sales contract or any other land
trust device.
Transfer Taxes: State
and local taxes charged for the transfer of real estate. Usually
equal to a percentage of the sales price.
Treasury Index: can
be used as the basis for adjustable rate mortgages (ARMs) It is
based on the results of auctions that the U.S. Treasury holds for
its Treasury bills and securities.
Truth-in-Lending: a
federal law obligating a lender to give full written disclosure of
all fees, terms, and conditions associated with the loan initial
period and then adjusts to another rate that lasts for the term of
the loan.
Two Step Mortgage: an
adjustable-rate mortgage (ARM) that has one interest rate for the
first five to seven years of its term and a different interest rate
for the remainder of the term.
Trustee: a
person who holds or controls property for the benefit of another.
U
Underwriting: the
process of analyzing a loan application to determine the amount of
risk involved in making the loan; it includes a review of the
potential borrower's credit history and a judgment of the property
value.
Up Front Charges: the
fees charged to homeowners by the lender at the time of closing a
mortgage loan. This includes points, broker's fees, insurance, and
other charges.
V
VA (Department of Veterans Affairs): a
federal agency, which guarantees loans made to veterans; similar to
mortgage insurance, a loan guarantee protects lenders against loss
that may result from a borrower default.
VA Mortgage: a
mortgage guaranteed by the Department of Veterans Affairs (VA).
Variance: a
special exemption of a zoning law to allow the property to be used
in a manner different from an existing law.
Vested: a
point in time when you may withdraw funds from an investment
account, such as a retirement account, without penalty.
W
Walk Through: the
final inspection of a property being sold by the buyer to confirm
that any contingencies specified in the purchase agreement such as
repairs have been completed, fixture and non-fixture property is in
place and confirm the electrical, mechanical, and plumbing systems
are in working order.
Warranty Deed: a
legal document that includes the guarantee the seller is the true
owner of the property, has the right to sell the property and there
are no claims against the property.
X
Y
Z
Zoning: local
laws established to control the uses of land within a particular
area. Zoning laws are used to separate residential land from areas
of non-residential use, such as industry or businesses. Zoning
ordinances include many provisions governing such things as type of
structure, setbacks, lot size, and uses of a building.
