ACCELERATION CLAUSE allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should you default on your loan.
ADJUSTABLE RATE MORTGAGE (ARM) is a mortgage which the interest rate is adjusted periodically based on pre-selected index. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.
ADJUSTMENT INTERVAL on an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years ending on the 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) an interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. This APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.
APPRAISAL an estimate of the value of property, made by a qualified professional called an "appraiser".
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 costs and new, and possibly higher, market-rate interest charges will apply.
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BALLOON (PAYMENT) MORTGAGE usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount or the principal at a time specified in the contract.
BROKER an individual in the business of assisting the buyer in arranging, funding or negotiating rates for a client but who does not loan the money himself. Brokers are paid out of the origination fee so that their services are at no extra cost to the customer.
BUY-DOWN when the lender and/or the homebuilder subsidizes 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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CAPITAL GAINS TAX The taxable profit derived from the sale of a capital asset. The capital gain is the difference between the sale price and the basis of the property, after making appropriate adjustments for closing costs, fixing up expenses, capital improvements, allowable depreciation, etc.
CAPS (INTEREST) consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan.
CAPS (PAYMENT) consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.
CLOSING the meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement.
CLOSING COSTS Expenses incurred in the closing of a real estate or mortgage transaction. Purchaser's expenses normally include; costs of title examination, premiums for title policies, survey, attorney fee, lenders service fees, and recording charges. In addition, the purchaser may have to place in escrow a sum of money to cover accrued real estate taxes and insurance.
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.
CONSTRUCTION LOAN a short-term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.
CONVENTIONAL LOAN a mortgage not insured by FHA or guaranteed by the VA or Farmers Home Loan (FMHA).
CREDIT REPORT a report documenting the credit history and current status of a borrower's credit standing.
CRV Certificate of reasonable value. A document (appraisal) issued by the VA establishing their opinion of maximum value.
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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 or her net effective income (VA loans) or gross monthly income (FHA & conventional loans). See housing expenses-to-income ratio.
DEED OF TRUST in many states, this document is used in place of a mortgage to secure the payment of a note.
DEFAULT failure to meet legal obligations in a contract, specifically failure to make the monthly payments on a mortgage.
DEFERRED INTEREST see negative amortization.
DELINQUENCY Failure to make payments on time. This can lead to foreclosure.
DEPARTMENT OF VETERANS AFFAIRS (VA) an independent agency of the federal government which guarantees long-term, low-or no down payment mortgages to eligible veterans.
DISCOUNT POINTS see points.
DOWNPAYMENT money paid to make up the difference between the purchase price and the mortgage amount. Down payments usually are 5 percent to 20 percent of the sales price on conventional and FHA loans, and no money down up to 5 percent on and VA loans.
DUE-ON-SALE-CLAUSE a provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
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EARNEST MONEY money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
EQUAL CREDIT OPPORTUNITY ACT (ECOA) is a federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color; religion, national origin, age, sex, marital status or receipt of income from public assistance programs.
EQUITY the difference between the fair market value and current indebtedness. Also referred to as the owner's interest.
ESCROW refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing".
ESCROW PAYMENT That portion of a mortgagor's monthly payment held in trust by the lender to pay the taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due, known as impounds in some states.
EXCHANGE The trading of an equity in a piece of property for the equity in another.
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FANNIE MAE see Federal National Mortgage Association.
FARMERS HOME ADMINISTRATION (FMHA) provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
FEDERAL HOME LOAN BANK BOARD (FHLBB) regulatory and supervisory agency for federally chartered savings institutions.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) also called "Freddie Mac", is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and FHLMC approved mortgage bankers.
FEDERAL HOUSING ADMINISTRATION (FHA) a division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) also known as "Fannie Mae". A tax paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
FHA LOAN a loan Insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.
FHA MORTGAGE INSURANCE requires a small fee (up to 3.8% of the loan amount) paid at closing. On a 9.5% $75,000 30 year fixed-rate FHA loan, this fee would amount to $2,850 at closing. In addition, FHA mortgage insurance requires an annual fee of .5% of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.
FIRM COMMITMENT A lender's agreement to make a loan to a specific borrower on a specific property. An FHA or PMI agreement to insure a loan on a specific property, with designated purchaser.
FIXED-RATE MORTGAGE a mortgage on which the interest rate is set for the term of the loan.
FORECLOSURE a legal procedure in which property securing debt is sold by the lender to pay the defaulting borrower's debt.
FREDDIE MAC Nickname for Federal Home Loan Mortgage Corporation ( FHLMC), a federally controlled and operated corporation to support the secondary market. It purchases and sells residential conventional home mortgages.
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GINNIE MAE see Government National Mortgage Association.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) also known as "Ginnie Mae", provides sources of funds for residential mortgages insured or guaranteed by FHA or VA.
GRADUATED PAYMENT MORTGAGE (GPM) a type of flexible payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.
GROSS MONTHLY INCOME the total amount the borrower earns per month, before any expenses are deducted.
GUARANTY a promise by one party to pay a debt or perform an obligation contracted by another if the original party tails to pay or perform according to a contract.
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HAZARD INSURANCE a form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
HOUSING EXPENSES-TO-INCOME RATIO the ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (VA loans) or gross monthly income (FHA & conventional loans). See debt-to-income ratio.
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IMPOUND that portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
INDEX a published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one-, three-, and five year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average cost of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.
INVESTOR The holder of a mortgage or the permanent lender for whom the mortgage banker services the loan. Any person or institution that invests in mortgages.
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JUMBO LOAN A loan which is larger than the limits 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.
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LIEN a claim upon a piece of property for the payment or satisfaction of a debt or obligation.
LEASE PURCHASE AGREEMENT Buyer makes a deposit for the future purchase of a property with the right to lease the property in the interim.
LOAN COMMITMENT A written promise by a lender to make a loan under certain terms and conditions. These include interest rate, length of the loan, lender fees, annual percentage rate, mortgage and hazard insurance and other special requirements.
LOAN TO VALUE RATIO The ratio of the mortgage loan principal (amount borrowed) to the property's appraised value (selling price). On a $100,000 home, with a mortgage loan principal of $80,000, the loan to value ratio is 80%.
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MARGIN the amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
MARKET VALUE the highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold at a given time.
MORTGAGE/DEED OF TRUST Pledge of real property to secure a debt by a written instrument given by the mortgagor. Should be recorded in the County Recorders Office.
MORTGAGE INSURANCE PREMIUM (MIP) The consideration paid by a mortgagor for mortgage insurance either to FHA or a private mortgage insurance (PMI) company. On an FHA loan, the payment is one-half of one-percent annually on the declining balance of the mortgage. It is a part of the regular monthly payment and is used by FHA to meet operating expenses and provide loss reserves.
MORTGAGEE the lender.
MORTGAGOR the borrower or home owner.
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NEGATIVE AMORTIZATION occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the homebuyer can end up owing more than the original amount of the loan.
NET EFFECTIVE INCOME the borrower's gross income minus income tax.
NON-ASSUMPTION CLAUSE a statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.
NOTE A written promise to pay a certain amount of money.
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ORIGINATION FEE The fee charged by the lender to prepare loan documents, make credit checks and inspect a property, usually computed as a percentage of the face value of the loan.
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PITI principal, interest, taxes and insurance. Also called monthly housing expense.
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.
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 a privilege in a mortgage permitting the borrower to make payments in advance of their due date.
PREPAYMENT PENALTY A fee paid to the mortgagee for paying the mortgage before it becomes due. Also known as prepayment fee or reinvestment fee.
PRINCIPAL the amount of debt, not counting interest left on a loan.
PRIVATE MORTGAGE INSURANCE (PMI) In the event t hat you do not have a 20% down payment, lenders will allow a smaller down payment as low as 5% in some cases. With the smaller down payment loans, however, borrowers are required to carry private mortgage insurance. Private mortgage insurance will require a monthly premium payment.
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REALTOR a real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
RECISION the cancellation of a contract. 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.
RENEGOTIABLE RATE MORTGAGE (RRM) a loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.
RENT WITH OPTION A contract which gives one the right to lease property at a certain sum with the option to purchase at a future date.
RESPA short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish the information after application only.
REVERSE ANNUITY MORTGAGE (RAM) form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security.
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SECOND MORTGAGE/SECOND TRUST Junior Mortgage or Junior Lien; an additional loan imposed on property with a first mortgage. Generally at a higher interest rate and shorter terms than a first mortgage.
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.
SETTLEMENT/SETTLEMENT COSTS see closing/closing costs.
SHARED APPRECIATION MORTGAGE (SAM) a mortgage in which a borrower receives a below-market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgages where the borrower shares the monthly principal and interest payments with another party in exchange for a part of the appreciation.
STRAIGHT LOAN A loan with periodic payments of interest only; the principal sum due in one lump sum upon maturity.
SURVEY a measurement of land, prepared by a registered land surveyor showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.
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TERM MORTGAGE see balloon payment mortgage.
TITLE a document that gives evidence of an individual's ownership of property.
TITLE INSURANCE An insurance policy which protects the insured (purchaser or lender) against loss arising from defects in title.
TITLE SEARCH an examination of municipal records to determine the legal ownership of property which is usually performed by a title inspection company.
TRUTH-IN-LENDING a federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.
TWO-STEP MORTGAGE A mortgage in which the borrower receives a below market interest rate for a specified number of years (most often 3,5,7 or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 60 days notice at the end of the first step period.
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UNDERWRITING the decision whether to make a loan to a potential homebuyer 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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VA LOAN a long-term, low-or no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.
VA MORTGAGE FUNDING FEE a premium of up to 3% of the sales price (depending on the size of the down payment paid) on a VA-backed loan. On a $75,000, 30-year fixed-rate mortgage with no down payment, this would amount to $2250 either paid at closing or added to the amount financed.
VARIABLE RATE MORTGAGE (VRM) see adjustable rate mortgage.
VERIFICATION OF DEPOSIT (VOD) a document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
VERIFICATION OF EMPLOYMENT (VOE) a document signed by the borrower's employer verifying his/her position and salary.
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WRAP AROUND results when an existing loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.