58°F
A
Adjustable Rate Mortgage (ARM)
ARMs are mortgages with an interest rate that changes periodically,
according to an index that is selected when the mortgage is issued, plus
a margin that remains constant. Although the initial interest rate may
be lower than that of a fixed-rate mortgage, the monthly payments can
increase or decrease when the rate is adjusted.
Amortization
Amortization is the gradual repayment of a mortgage loan by regular
installments, including both interest and principal. The timetable for
this process is called an amortization schedule.
Annual Percentage Rate (APR)
APR is the interest rate that reflects the cost of a mortgage as
a yearly rate. It is usually higher than the stated loan rate because it
takes into account points and other charges.
Application Fee
An application fee is charged by the lender to the borrower to apply
for a loan. Payment of this fee does not guarantee that a loan will be
approved. Some lenders may apply the cost of the application fee to certain
closing costs.
Appraisal
Appraisals determine a property’s value based on recent sales information
for similar properties.
Appreciation
Appreciation is an increase in the value of a property, due to changes
in the market and/or improvements to the property.
B
Back-End Ratio
This is the ratio of monthly debt—including any new/proposed housing
expenses—divided by the gross monthly income.
Balloon Payment Mortgage
A Balloon Payment Mortgage is usually a short-term mortgage with
regular monthly payments that are insufficient to pay off the loan at the
end of the term. A lump sum payment (balloon payment) is then required
at the maturity date.
Bridge Financing
The “bridge” is an interim loan, made when a borrower needs
additional time before obtaining permanent financing. A bridge loan is
often required between the purchase of a new home and the sale of the borrower’s
current home.
Broker
Brokers assist in arranging funding or negotiating contracts for
a client, but they do not personally loan money. Brokers usually charge
a fee or receive a commission for their services.
Buy Down
This refers to a temporary reduction in an interest rate made by
paying a lump sum or discount points up front.
C
Caps
Caps are a set percentage amount by which an adjustable rate mortgage
may change each adjustment period. For adjustable loans caps are usually
quoted as two numbers, such as 2/6. The first number indicates how much
a loan may adjust at each adjustment period, while the second number
indicates how much a loan may adjust over its lifetime.
Certificate of Eligibility
Certificates of Eligibility are obtained by a veteran from a Veteran’s
Administration office, stating that the borrower is eligible for a VA-insured
loan.
Certificate of Reasonable Value (CRV)
A CRV is an appraisal of property required for a VA mortgage.
Charge Off
This refers to the portion of principal and interest due on a loan
that is written off when deemed to be uncollectible.
Chattel
Chattel is another way of referring to Personal Property.
Closing
Also known as a settlement, closing is the meeting at which the sale
of a property is finalized, closing costs and escrow amounts are paid,
and the buyer and seller sign documents to transfer ownership of a property.
Closing Agent
Also known as an escrow officer, the closing agent is a neutral third
party, usually an escrow company/title company that facilitates the closing
of real estate transactions.
Closing Costs
These are expenses related to obtaining a loan, and they normally
include an origination fee, lender fees, title fees, etc.
Cloud on Title
A “cloud” is any fact or condition that could have a negative
impact on a property’s title.
Comparables
Also known as “comps,” comparables literally compare properties
of similar size, location, and features, to determine the value of a specified
property.
Conditional Commitment
This is a lender’s promise to issue a loan subject to certain conditions.
The loan will not be funded until these conditions have been met.
Conditional Offer
Also known as a contingent offer, a buyer will make a conditional
offer to purchase property only after certain events occur, such as selling
a current home or obtaining financing.
Conforming Loan
A conforming loan refers to a mortgage loan of $322,700 or less.
Construction Loan
These are short-term loans designed to fund construction costs. The
lender advances funds to the builder as the work progresses.
Conversion
A borrower may have the right to convert an adjustable rate mortgage
or a balloon loan into a fixed loan.
Convertible ARMs
An adjustable rate mortgage may be converted into a fixed rate mortgage,
subject to certain conditions specified in the mortgage note.
Conventional Mortgage
This is a mortgage loan that is not insured or guaranteed by the
federal government.
Credit Rating
Borrowers are rated by lenders according to the borrower’s credit
worthiness or risk profile. Credit ratings are expressed as letter grades
such as A, A-, B, etc. These ratings are based on various factors such
as a borrower’s payment history, foreclosures, bankruptcies, and
charge-offs. There is no exact science to rating a borrower’s credit,
and different lenders may assign different grades to the same borrower.
Credit Report
A credit report is obtained by a lender from the three major reporting
bureaus, for the purpose of determining a borrower’s history of debt
repayment. Borrowers may examine their own credit reports, although they
may have to pay a fee.
Credit Scoring
This process uses recorded information about individuals and their
loan requests to assess, in a quantifiable, objective, and consistent manner,
their future performance regarding debt repayment.
D
Debt-to-Income Ratio
The ratio is expressed as a percentage and is used by lenders as
a measure of eligibility for a loan. It is the ratio of a borrower’s
monthly payment obligation, divided by his/her monthly income. A front-end
ratio compares all monthly housing expenses to their gross income. A
back-end ratio also considers all other debts, such as auto loans, credit
cards, child support, etc.
Deed
A deed is the legal document conveying title to a property.
Deed of Trust
A deed of trust is the document given by the borrower to a third
party (trustee), vesting title to the property in the trustee as security
for the borrower’s repayment of the mortgage loan.
Default
When a borrower fails to comply with the terms of a promissory note
or the provisions of a mortgage, they are in default.
Delinquency
This describes a mortgage loan for which a payment has not been made
by the due date.
Discount Point
A discount point is a type of point paid to the lender that reduces
a loan’s interest rate.
Down Payment
This lump sum, paid to the seller when the property is purchased,
is usually 5 to 20 percent of the sales price, although some loans will
allow for a lesser down payment.
E
Earnest Money
This is a cash deposit paid by the buyer during negotiations to demonstrate
serious interest in purchasing the property.
Equity
Equity is the difference between the fair market value of the property
and the homeowner’s mortgage debt. Equity increases as the mortgage
is paid and/or the property appreciates.
Escrow
Escrow usually refers to an account set up by the lender, in which
money is held to pay taxes and insurance.
Escrow Payment
The portion of the homeowner’s monthly payment held in trust by the
lender to pay for taxes and insurance, it is also known as “impounds” in
some states.
F
Fannie Mae
The nickname for the Federal National Mortgage Association, FNMA
is the largest of the secondary market investors that purchases loans
from mortgage companies. The company is a private corporation and is
listed on the New York Stock Exchange.
Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development
(HUD), the FHA insures first mortgages and can enable lenders to lend a
very high percentage of the purchase price. The FHA itself does not actually
lend money.
Federal Reserve Bank
This regulatory agency sets monetary policy for the country and provides
liquidity for supervised financial institutions.
FHA Loan
This is a government-backed mortgage loan supported by the U.S. Federal
Housing Administration (FHA) and the Department of Housing and Urban Development
(HUD).
Fiduciary
An entity, such as a real estate broker or mortgage broker, is designated
to act in the best interest of a client.
Finance Charge
The total dollar amount your loan will cost you, finance charges
include all interest payments for the life of the loan, any interest paid
at closing, your origination fee, and any other charges paid to the lender
and/or broker. Appraisal, credit report, and title search fees are not
included in the finance charge calculation.
Fixed Rate Mortgage
This is a mortgage whereby the interest rate does not change for
the life of the loan.
First Mortgage
Used to describe a mortgage that is the primary lien against a property,
it is not necessarily the first mortgage obtained chronologically.
Float
Between the time of application and closing, a borrower may choose
to bet on interest rates decreasing by electing to “float.” Floating
is essentially choosing not to lock the interest rate. Since it is the
borrower’s responsibility to lock his/her rate before closing, choosing
to float is considered risky and may result in a higher interest rate.
It is advisable to request information from your lender regarding lock
procedures.
Forbearance
The lender’s postponement of legal action when a borrower is delinquent
is usually granted when a borrower makes satisfactory arrangements to bring
the overdue mortgage payments up to date.
Foreclosure
Foreclosure is a legal process that occurs when a homeowner is in
default on a mortgage and is deprived of interest in the property, so that
it may be sold to satisfy the debt.
Freddie Mac
The nickname for the Federal Home Loan Mortgage Corporation (FHLMC),
this is another major secondary market purchaser of loans. FHLMC is a government-sponsored
agency that is publicly traded on the New York Stock Exchange.
Front-End Ratio
This ratio reflects the current or proposed total monthly housing
expenses for the borrower’s primary residence, divided by the gross
monthly income.
G
Ginnie Mae
The nickname for the Government National Mortgage Association (GNMA),
Ginnie Mae acts as a secondary market conduit for FHA and VA loans, guaranteeing
payment to investors.
Good Faith Estimate
This is a written disclosure of costs provided by a lender to a prospective
borrower.
H
Hazard Insurance
Also known as homeowner’s insurance, hazard insurance provides property
coverage for fire and other natural disasters. This policy typically combines
personal liability insurance and fire insurance on the dwelling structure
and its contents. Such a policy is generally required to obtain a loan.
Housing and Urban Development (HUD)
HUD is the federal government agency that oversees the FHA.
Housing Ratio
This ratio of the monthly housing payment to total gross monthly
income is also called the Front-End Ratio.
HUD 1
HUD requires this closing document, which outlines the settlement
cost of a loan. It contains an itemized list of closing costs and is signed
by the buyer and the seller.
I
Impound Account
A lender holds this account for payment of taxes, insurance, or other
related expenses.
Index
An index is a published interest rate not controlled by the lender,
to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied.
The index and the interest rate linked to it may increase or decrease.
Insured Mortgage
This describes a mortgage insured against loss to the mortgagee in
the event of default.
Intermediate Term Mortgage
This is a mortgage loan with a contractual maturity at the time of
purchase equal to or less than 20 years.
Interest Rate
An interest rate is the percentage added to a loan that covers the
lender’s costs for supplying the money. This amount is part of an
APR.
Interest Payment Notification
A federal tax form (1098) is used to notify borrowers of the interest
they paid on their mortgage over the course of the year.
J
Joint Tenancy
This describes an interest in property taken by two or more joint
tenants.
Jumbo Mortgage
A loan above $322,700, limits are set by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. Because jumbo
loans cannot be funded by these two agencies, they usually carry a higher
interest rate.
Junior Mortgage
A junior mortgage is subordinate to another mortgage. For example,
a second mortgage is a junior mortgage because it is subordinate to a first
mortgage.
K
There are no Glossary Terms for K at this time.
L
Late Charge
This is a penalty assessed for failure to make a payment on time.
Lease with Option to Purchase
This is a lease arrangement in which a portion of the agreed upon
rent payment is applied to a down payment for the purchase of the property.
Lender
The bank, mortgage company, or mortgage broker offering the loan
is the lender. Many institutions “originate” loans and then
resell the obligations to third parties.
Lien
A legal claim is made by one party on the property of another party.
In a mortgage, it is used as security for repayment of the loan.
Life Cap
This is the maximum interest rate that can be charged during the
life of a loan. Also called a Lifetime Cap, the value is often expressed
as an increment above the initial loan rate. For example, an adjustable
rate loan with an initial rate of 7.25% and a 6% lifetime cap will never
adjust above a rate of 13.25% (7.25 + 6.0).
Listing Agreement
An agreement between a property owner and a real estate broker, it
authorizes the broker to find a buyer for the property. If the sale is
consummated, the listing broker will be paid a fee.
Loan Officer
A qualified individual who helps borrowers through the selection,
processing, and closing of a mortgage loan, the loan officer may be an
employee of a mortgage broker, mortgage banker, or other lending institution.
Loan Servicing
Loan servicing describes the tasks a lender performs to protect a
mortgage investment, including collecting monthly payments from borrowers
and dealing with delinquencies.
Loan-to-Value Ratio (LTV)
The LTV is a ratio of the mortgage loan amount to the property’s
appraised value or selling price, whichever is less. For example, a property
appraised at $100,000 with a mortgage amount of $75,000 is said to have
a 75% LTV.
Lock
This is the act of committing to a mortgage rate. This action, taken
by a borrower some time between the application and the closing dates,
usually coincides with a payment by the borrower to the lender.
M
Mandatory Delivery Commitment
This is an agreement that a lender will deliver loans or securities
by a certain date at agreed-upon terms.
Margin
A margin is the amount a lender adds to the quoted index rate for
an adjustable rate loan, to determine the new interest rate.
Mortgage Insurance (MI)
See “Private Mortgage Insurance.”
Modification
Any change to the original terms of a mortgage is considered a modification.
Monthly Housing Expense
Total principal, interest, taxes, and insurance paid by the borrower
on a monthly basis constitutes the monthly housing expense. It is compared
with the gross monthly income to determine affordability.
Mortgage
While the term also is used to refer to a loan, a mortgage is a legal
document that pledges property to a lender as security for the repayment
of the loan.
Mortgagor
This is another term for “borrower.”
Mortgage-Backed Security (MBS)
An MBS is 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 security holders.
Multi-Family Housing
This term describes a building with more than four residential rental
units.
N
Negative Amortization
This term describes a gradual increase in a mortgage debt that occurs
when the monthly payment does not cover the entire principal and interest
due. This can create a condition known as being “upside down” in
a mortgage.
Net-Effective Income
Net-effective income is gross income less federal income tax.
Non-Performing Asset
An asset, such as a mortgage, that is not currently accruing interest
or on which interest is not being paid is called a non-performing asset.
Note
This is a document that shows evidence of a debt, including the amount
and terms of repayment.
O
Origination Fee
This is a fee imposed by a lender to cover certain processing expenses
in connection with making a loan. It is usually a percentage of the amount
loaned.
Owner Financing
Also known as a “seller carry back,” it is a note carried all
or in part by an owner selling a property.
P
PITI (Principal, Interest, Taxes, and Insurance)
These are the four components that typically make up a homeowner’s
mortgage payment.
Planned Unit Development (PUD)
A PUD is a type of real estate development that includes common areas
and rules governed by an owners’ association.
Points
Points are monies paid to “buy down” the interest rate of a
mortgage loan. One “point” equals 1% of the mortgage amount.
Typically, the more points paid, the lower the interest rate. The best
choice of interest rate/points may depend on how often you refinance.
Pre-Foreclosure Sale
A procedure in which the borrower is allowed to sell his or her property
for an amount less than what is owed on it to avoid a foreclosure, the
sale fully satisfies the borrower’s debt.
Pre-Paids
Expenses such as taxes, insurance, and assessments are paid in advance
of their due date and must be paid by the buyer on a prorated basis at
closing.
Prepayment Penalty
Lenders who impose prepayment penalties will charge borrowers a fee
if they wish to repay part or all of their loan in advance of the regular
schedule.
Principal
Principal is the amount of debt, not including interest, on a loan.
Pre-Qualification
Pre-qualification is a lender’s initial evaluation of a borrower’s
credit and financial situation to determine eligibility for a loan.
Private Mortgage Insurance (PMI)
This is usually required by a lender if the down payment or equity
position is less than 20% of the sale price/appraised value. PMI protects
the lender in the event of a default, and it is usually terminated when
the homeowner has built up 20% equity in the home.
Q
Qualifying Ratio
This ratio is described as the borrower’s fixed monthly expenses
compared to his/her gross monthly income. Ratios are expressed as two numbers
like 28/36, whereby 28 would the Front-End Ratio and 36 would be the Back-End
Ratio (see “Front-End Ratio” and “Back-End Ratio”).
R
Real Estate
Also known as real property, this describes land and anything permanently
affixed to the land, such as a building.
Real Estate Agent
Also known as a realtorŪ, a real estate agent is a licensed individual,
designated to act on the behalf of either the buyer or the property owner,
in a real estate transaction.
Recourse
Recourse describes the right of the holder of a note secured by a
mortgage or deed of trust to look personally to the borrower or endorser
for payment.
Refinancing
This is a process by which a homeowner may secure a new loan that
pays off the current mortgage(s), using the same property as security.
Refinancing is often done to obtain a lower interest rate or to gain access
to equity for cash back.
Release
This is an instrument releasing property from the lien of the mortgage,
judgment, etc.
RESPA (Real Estate Settlement Procedures Act)
RESPA is a federal regulation that requires lenders and mortgage
brokers to disclose to borrowers, in advance, the fees required to obtain
a mortgage loan.
Restrictive Covenant
A restrictive covenant is a clause in a deed that restricts the use
of property for some period of time.
S
Second Mortgage
This is a mortgage that has a lien in the second position.
Secondary Market
The buying and selling of existing mortgages by entities such as
commercial banks, pension funds, and Wall Street firms is referred to as
the secondary market.
Servicer
Often designated when a loan has been purchased by a secondary market
investor, the entity that collects payments and manages escrow accounts
of a loan is a servicer.
Sub-Prime
Credit that is less-than-perfect is called sub-prime. This may include
late or missed payments, past bankruptcies, or judgments. A borrower whose
credit is considered sub-prime may still be eligible for a loan, but he/she
will generally be subject to higher interest rates.
T
Tax Lien
A tax lien is imposed for non-payment of taxes.
Title Search
This is an examination of city, town, or county records to determine
the legal ownership of real estate.
Total Debt Ratio
See “Back-End Ratio.”
Truth-In-Lending
This refers to a federal law that requires lenders to disclose, in
writing, the complete terms and conditions of a mortgage.
U
Underwriter
Underwriters are the persons or companies that actually decide whether
to release funds for a mortgage. They make a final analysis of a borrower’s
credit worthiness and may request additional information before issuing
a loan.
Up-Front Mortgage Insurance (UFMIP)
UFMIP is Private Mortgage Insurance that is paid in a lump sum at
the inception of a mortgage either by financing it into the total mortgage
amount or paying in cash. UFMIP is used either to lower monthly mortgage
insurance amounts or to eliminate monthly mortgage insurance altogether.
UFMIP is required on FHA loans and is an option on some conventional loans.
V
VA Mortgage
A loan guaranteed by the Department of Veterans Affairs, these mortgage
have low or no down payment requirements, less stringent requirements
for qualification, and are only available to active members of the armed
forces, veterans, and their spouses.
W
There are no Glossary Terms for W at this time.
X
There are no Glossary Terms for X at this time.
Y
There are no Glossary Terms for Y at this time.