A

 

Adjustable Rate Mortgage (ARM) – Is a mortgage in which the interest rate is adjusted periodically based on a preselected index.

 

Amortization - Means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

 

Annual Percentage Rate (APR) – Is the cost of credit expressed as an annual rate. It must be calculated by using a formula set by federal law and disclosed to the Borrower to aid in comparing different credit plans. All finance charges imposed by Lender are included in this calculation, and an APR is always higher than the simple interest rate when such finance charges like points, origination fees or mortgage insurance are charges by a lender.

 

Appraisal – An estimate of the value of property; made by a qualified professional called an “appraiser.”

 

Assessed Valuation – The value that a taxing authority places on real or personal property for the purpose of taxation.

 

Assessment - A charge against a property for purpose of taxation. This may take the form of a levy for a special purpose or a tax in which the property owner pays a share of the cost of community improvements according to the valuation of his or her property.

 

Assumability – An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, a new buyer may not assume it.

 

Assumption - The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will apply.

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B

Balloon Mortgage – A loan, which is amortized for a longer period than the term of the loan. Usually, this refers to a thirty-year amortization and a five-year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment. Balloon Payment – The final lump sum paid at the maturity date of a balloon mortgage.

 

Borrower – A person (also known as mortgagor) who receives funds in the form of a loan with an obligation to repay principal with interest.

 

Bridge Loan – A second trust that is collateralized by the borrower’s present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as “swing loan.”

 

Broker - An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan money himself. Brokers usually charge a fee or receive a commission for their services.

 

Buy-Down – When the lender and/or the homebuilder subsidized the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

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C

Cash to Close - Liquid assets that are readily available to be used to pay the closing costs involved in a closing of a mortgage transaction.

 

Closing – The consummation of a real estate transaction. The closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to complete the sale and loan transaction.

 

Closing Costs - Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes. Deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing are usually about 2% to 4% of the mortgage amount.

 

Closing Statement - A form used at closing that gives an account of the funds received and paid at the closing, including the escrows deposits for taxes, hazard insurance, and mortgage insurance.

 

Co-Borrower – Additional borrower(s) whose income contributes to qualifying for a loan and whose names(s) appears on documents with equal legal obligations. Collateral – Property pledged as security for a debt, such as the real estate pledged as security for a mortgage.

 

Commitment - An agreement, often in writing, between a Lender and a Borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

 

Conforming Loan – Conventional home mortgages eligible for sale and delivery to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). These agencies generally purchase first mortgages up to loan amounts mandated by congressional directive.

 

Construction Loan – A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.

 

Conventional Loans – Loans are not guaranteed by the FHA or VA. May require a large down payment. May require Private Mortgage Insurance (PMI). Fixed and adjustable rate loans available.

 

Credit Report – A report documenting the credit history and current status of a Borrower’s monthly payment obligation on long-term debts.

 

Credit Risk Score – A credit risk score is a statistical summary of the information contained in a consumer’s credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.

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D

Debt-To-Income Ratio – The ratio, expressed as a percentage, which results when a Borrower’s monthly payment obligation on long-term debts is divided by his/her gross monthly income.

 

Default - Failure to meet legal obligations in a contract, specifically, failure to make monthly payments on a mortgage. Deposit – A sum of money given to bind a sale of real estate. Also known as earnest money.

 

Depreciation - A loss of value in real property brought about by age, physical deterioration, and functional or economic obsolescence.

 

Discount Point – Amount payable to the lender institution by the borrower or seller to increase the lender’s effective yield. One point is equal to one percent on the loan amount.

 

Down Payment - Money paid to make up the difference between the purchase price and the mortgage amount. Down payments are usually 5% to 20% of the sale price on conventional loans.

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E

Earnest Money – A portion of the down payment delivered with a purchase offer by the purchaser of real estate to the seller or an escrow agency by the purchaser of real estate with a purchase offer as evidence of good faith. Also known as a deposit.

 

Equity - The difference between the fair market value and current indebtedness; also referred to as the owner’s interest.

 

Equal Credit Opportunity Act (ECOA) – A federal law requiring lenders and other creditors to make credit equally available with discrimination based on race, color, religion, national origin, sex, age, marital status, receipt of income from public assistance program or past exercising of rights under Consumer Credit Protection Act.

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F

Fair Credit Reporting Act (FCRA) - A federal law, which requires a lender who is rejecting a loan request because of adverse credit information to inform the borrower of the source of such information. This law also requires consumer reporting agencies to exercise fairness, confidentiality and accuracy in preparing and disclosing credit information.

 

Federal Housing Administration (FHA) - Federal Housing Administration guarantees the repayment of loan to lender. 3% down payment required. Borrower pays Private Mortgage Insurance (PMI). More lenient credit guidelines than conventional financing. Fixed and adjustable rate loans available.

 

Federal Home Loan Mortgage Corporation - FHLMC (FREDDIE MAC) – A quasi-governmental agency that purchases conventional mortgages in the secondary mortgage market from insured depository institutions and HUD-approved mortgage bankers. It sells participation sales certificates secured by pools of conventional mortgage loans, their principal, and interest guaranteed by the federal government through the FHLMC. It also sells Government National Mortgage Association bonds to raise funds to finance the purchases of mortgages. Popularly known as Freddie Mac.

 

Federal National Mortgage Association – FNMA (FANNIE MAE) – A taxpaying corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages.

 

First Mortgage – A real estate loan that has priority over any subsequently recorded mortgages. Fixed Interest Rate – An interest rate, which does not change during the loan term.

 

Foreclosure – A legal procedure in which property mortgaged as security for a loan is sold to pay the defaulting borrower’s debt.

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G

Gift Letter – A written explanation signed by the individual giving the gift stating, “This is a bona fide gift and there is no obligation expressed or implied to repay this sum at any time”.

 

Gross Monthly Income – The total amount the Borrower earns per month, before expenses are deducted.

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H

Hazard Insurance – A contract whereby an insurer, for a premium, undertakes to compensate the insured for loss on a specific property due to certain hazards (i.e. fire).

 

Homeowners’ Association Dues – The fees imposed by a condominium or homeowners’ association for maintenance of common areas.

 

Housing Expenses-to Income Ratio – The ratio, expressed as a percentage, which results when a borrower’s housing expenses are divided by his/her gross monthly income. See debt-to-income ratio.

 

HUD-1 Statement - A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts.

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I

Insured Mortgage - A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (PMI).

Interest – Consideration in the form of money paid for the use of money. Also a right, share or title in property.

Interest rate - The percentage of an amount of money, which is paid for its use for a specified time. Investment property real estate owned with the intent of supplementing income and not intended for owner occupancy.

Interim Financing - A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.

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J

Jumbo Loan – A loan amount that exceeds standard loan limits set by FannieMae/FreddieMac. The loans can be either fixed rate or adjustable rate.

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L

Lien - A legal claim or attachment against property as security for payment of an obligation.

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M

Market Value - The highest price that you would pay and the lowest price the Seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

Maturity – The termination or due date on which final payment on a loan must be paid in full.

Monthly Payment - Usually, the amount of PITI (principal, interest, taxes, and insurance) paid each month on a mortgage loan. Mortgage – The conveyance of an interest in real property given as security for the payment of a loan.

Mortgagee - The lender on a mortgage transaction.

Mortgage Insurance Premium (MIP) - The consideration paid by the mortgagor (borrower) for mortgage insurance-either to the FHA or to a private mortgage insurer.

Mortgage Note – A written promise to pay a sum of money at a stated interest rate during a specified term. The note contains a complete description of the conditions under which the loan is to be repaid and when it is due.

Mortgagor – The borrower in a mortgage transaction who pledges property as security for a debt.

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N

Non-Conforming Loan - Conventional home mortgages not eligible for sale and delivery to either FNMA or FHLMC because of various reasons, including loan amount, loan characteristics or underwriting guidelines.

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O

Occupancy - The use of a property as a full-time residence, either by the titleholder (owner-occupancy) or by another party through a formal agreement.

Origination Fee – The amount charged for services performed by the company handling the initial application and processing of the loan.

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P

PITI (Principal, Interest, Taxes, and Insurance) – The most common components of the monthly mortgage payment.

Points (Loan Discount Points) – Prepaid interest assessed at closing by the Lender. Each point is equal to 1% of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

Power of Attorney – A legal document authorizing one person to act on behalf of another.

Pre-Approval – The process of determining how much money you will be eligible to borrow before you apply for a loan.

Prepayment - A privilege in a mortgage permitting the Borrower to make payment in advance of their due date.

Preliminary Title Report – The results of a title search by the title company prior to issuing a title binder or commitment to insure clear title.

Prepaid Expenses – Necessary to create an escrow account or to adjust the seller’s existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

Prepayment Penalty – Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.

Primary Residence – A residence which the borrower intends to occupy as the principal residence.

Principal Balance – The remaining balance due on a debt, exclusive of accrued interest.

Private Mortgage Insurance (PMI) – May be required by your Lender if the loan you apply for cannot be granted because the loan does not meet the normal standards for the Lender. The most common reason this requirement is a smaller down payment, the Lender usually requires 20% down. This insurance protects the Lender from loss if the Borrower defaults. It does not protect the Borrower, though it may allow the Borrower to qualify for a loan he/she could not otherwise get. This insurance will require an initial premium payment of .5% to 2% of your mortgage amount plus an additional monthly fee, depending on your loan structure.

Processing - The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.

PUD (Planned Unit Development) – A planned combination of diverse land uses, such as housing, recreation, and shopping in one contained development or subdivision. A major feature of a PUD includes areas of common land for use by housing unit owners: the association of unit owners generally owns, pays fees, and maintains the common areas.

Purchase Contract (Agreement/Offer) – An agreement between a buyer and seller of real property, setting forth the price and terms of the sale. Also known as a sales contract.

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Q

Qualifying Ratios – Calculations used to determine if a borrower could qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

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R

Rate Lock - A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

Realtor – A real estate broker or an association holding active membership in a local real estate board affiliated with the National Association of Realtors.

Real Estate Agent - A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA) - A federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs. It also establishes guidelines for escrow account balances.

Real Property – Land and that which is affixed to it.

Recission – The cancellation of a contact. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

Recording Fees - Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

Refinancing – The repayment of a debt from the proceed of a new loan using the same property as security.

Reverse Annuity Mortgage (RAM) - A form of mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as collateral for and repayment of the loan.

Revolving Liability - A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.

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S

Satisfaction of Mortgage – The recordable instrument issued by the lender verifying full payment of a mortgage debt.

Second Home (Vacation Home, Weekend Home) – A residence other than the borrower’s primary residence which the borrower intends to occupy for a portion of each year. Must be suitable for year-round occupancy.

Second Mortgage – A mortgage made subsequent to another mortgage and subordinate to the first one. Security – The property that will be pledged as collateral for a loan.

Servicer - An organization that collects principal and interest payments from borrowers and manages borrows’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Servicing – All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like. Simple Interest – Interest which is computed only on the principal balance.

Standard Payment Calculation – The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.

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T

Title – A document that gives evidence of an individual’s ownership of property.

Title Insurance – A policy, usually issued by a title insurance company, which insures against errors in the title search. The cost of the policy is usually a function of the value of the property and is often borne by the Purchaser and/or the Seller.

Title Search – An examination of municipal or country records to determine the legal ownership of property, usually performed by a title company.

Total Expense Ratio - Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Truth-in-Lending – A federal law requiring disclosure of the annual percentage rate to homebuyers shortly after they apply for the loan. Also known as Regulation Z.

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U

Underwriting – The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

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V

Veterans Affairs (VA) - Department of Veterans Affairs has guarantees of repayment of loan to lender. No down payment required. No Private Mortgage Insurance Required (PMI). Available for qualified veterans only.

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