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Mortgage Terms |
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| A |
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Adjustable-rate mortgage (ARM) |
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A mortgage whose interest rate changes periodically based on the changes in a specified
index.
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Adjustment period |
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The period that elapses between the adjustment dates for an adjustable-rate mortgage (ARM).
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Amortization |
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The repayment of a mortgage loan by installments with regular payments to cover principal the and interest.
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Amortization schedule |
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A timetable of mortgage payments over the course of a loan that shows how much is applied to both the principal and interest.
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Annual percentage rate (APR) |
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The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance, and loan
origination fee (points). This is the rate used to compare rates from lender to lender.
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Assumption clause |
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A provision in an assumable mortgage that allows a buyer to assume responsibility for the mortgage
from the seller. The loan does not need to be paid in full by the original borrower upon sale or
transfer of the property.
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B |
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Back ratio |
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A calculation of your total living expenses, including housing costs, divided by your income.
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Balloon mortgage |
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A mortgage that has level monthly payments that will amortize it over a stated term but that
provides for a lump sum payment to be due at the end of an earlier specified term.
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Balloon payment |
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The final lump sum payment that is made at the maturity date of a balloon mortgage.
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Basis point |
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A basis point is 1/100th of a percentage point. For example, a fee calculated as 50 basis points of a
loan amount of $100,000 would be 0.50% or $500.
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Blanket mortgage |
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The mortgage that is secured by a cooperative project, as opposed to the share loans on individual
units within the project.
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Buydown mortgage |
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A temporary buydown is a mortgage on which an initial lump sum payment is made by any party to
reduce a borrower's monthly payments during the first few years of a mortgage. A permanent buydown
reduces the interest rate over the entire life of a mortgage.
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C |
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Call option |
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A provision in the mortgage that gives the mortgagee the right to call the
mortgage due and payable at the end of a specified period for whatever reason.
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Cap |
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A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage
payments may increase or decrease.
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Cash-out refinance |
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A refinance transaction in which the amount of money received from the new loan exceeds the total
of the money needed to repay the existing first mortgage, closing costs, points, and the amount required
to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which
the borrower receives additional cash that can be used for any purpose.
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Certificate of Eligibility |
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A document issued by the federal government certifying a veteran's eligibility for a Department of
Veterans Affairs (VA) mortgage.
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Certificate of Reasonable Value (CRV) |
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A document issued by the Department of Veterans Affairs (VA) that establishes the maximum
value and loan amount for a VA mortgage.
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Closing cost item |
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Closing costs are items charged by the lender, third parties and certain service providers. These
fees can include origination fees, discount points, title fees and pre-paid items. Impounds
such as taxes and homeowner's insurance are in addition to closing costs.
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Closing statement |
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Also referred to as the HUD-1. The final statement of costs incurred to close on a loan or to purchase
a home.
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Cloud on title |
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Any conditions revealed by a title search that adversely affect the title to real estate. Usually
clouds on title cannot be removed except by a quitclaim deed, release, or court action.
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Combined loan-to-value (CLTV) |
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The relationship between the unpaid balances of all the mortgages on a property (first and second
usually) and the property's appraised value (or sales price, if it is lower.)
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Compensating factor |
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The strengths in a borrower's financial profile that may offset any weaknesses.
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Conforming loan |
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The current conforming loan limit is $275,000 and below. Conforming loan limits change annually.
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Construction loan |
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A short-term, interim loan for financing the cost of construction. The lender makes payments
to the builder at periodic intervals as the work progresses.
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Contingency |
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A condition that must be met before a contract is legally binding. For example, home purchasers
often include a contingency that specifies that the contract is not binding until the purchaser obtains
a satisfactory home inspection report from a qualified home inspector.
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Convertibility clause |
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A provision in some adjustable-rate mortgages (ARMs) that allows the borrower to change the ARM to a
fixed-rate mortgage at specified timeframes after loan origination.
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Convertible ARM |
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An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under specified conditions.
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Cost of funds index (COFI) |
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An index that is used to determine interest rate changes for certain adjustable-rate mortgage
(ARM) plans. It represents the weighted-average cost of savings, borrowings, and advances
of the 11th District members of the Federal Home Loan Bank of San Francisco.
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Covenant |
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A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in
foreclosure.
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Credit repository |
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An organization that gathers, records, updates, and stores financial and public records information
about the payment records of individuals who are being considered for credit.
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D |
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Deed in lieu |
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A deed given by a mortgagor to a mortgagee to satisfy a debt and avoid foreclosure.
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Deed of trust |
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The document used in some states instead of a mortgage; title is conveyed to a trustee.
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Detached dwelling |
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A dwelling, usually containing one living unit that is freestanding.
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Discount points |
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A fee added to your closing costs in exchange for a lower interest rate on a loan.
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Due-on-sale provision |
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A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the
property that serves as security for the mortgage.
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E |
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Earnest money deposit |
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A deposit made by the potential home buyer to show that he or she is serious about buying the house.
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Easement |
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A right of way giving persons other than the owner access to or over a property.
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Effective age |
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An appraiser's estimate of the physical condition of a building. The actual age of a building may
be shorter or longer than its effective age.
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Encumbrance |
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Anything that affects or limits the fee simple title to a property, such as mortgages, leases,
easements, or restrictions.
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Equal Credit Opportunity Act (ECOA) |
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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.
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Escrow |
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An item of value, money, or documents deposited with a third party to be delivered upon the
fulfillment of a condition.
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Escrow account |
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The account in which a mortgage servicer holds the borrower's escrow payments prior to paying
property expenses.
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Escrow agent |
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An escrow agent oversees escrow, the process that some states use to complete a home's sale or
purchase. The buyer and seller sign an agreement that gives the escrow agent a detailed list of
instructions on how escrow should be carried out, which includes how much money to collect, what
documents to prepare and when to order a title search. The escrow agent is a neutral party
who fairly represents both the seller and buyer. The escrow agent can be a lender, title company
or real estate attorney.
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F |
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Fair Credit Reporting Act |
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A consumer protection law that regulates the disclosure of consumer credit reports by
consumer/credit reporting agencies and establishes procedures for correcting mistakes
on one's credit record.
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Fannie Mae |
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A congressionally chartered, shareholder-owned company that is the nation's largest supplier
of home mortgage funds.
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Fannie Mae's Community Home Buyer's Program |
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An income-based community lending model, under which mortgage insurers and Fannie Mae
offer flexible underwriting guidelines to increase a low- or moderate-income family's buying
power and to decrease the total amount of cash needed to purchase a home. Borrowers who
participate in this model are required to attend pre-purchase home-buyer education sessions.
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Federal Home Loan Mortgage Corporation (Freddie Mac) |
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A private agency created by the federal government that buys and sells mortgages in the secondary
market.
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Federal Housing Administration (FHA) |
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An agency of the U.S. Department of Housing and Urban Development (HUD). Its main
activity is the insuring of residential mortgage loans made by private lenders. The FHA sets
standards for construction and underwriting but does not lend money or plan or construct housing.
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FHA mortgage |
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A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a
government mortgage.
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Fixed-rate mortgage (FRM) |
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A mortgage in which the interest rate does not change during the entire term of the loan.
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Front ratio |
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A calculation of your total monthly housing expenses divided by your income.
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G |
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Good faith estimate |
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An estimate of charges that a borrower is likely to incur in connection with a settlement.
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Government National Mortgage Assoc (Ginnie Mae) |
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A federal corporation that insures mortgage-backed securities, and offers
financing options to home buyers.
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H |
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Hazard insurance |
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Insurance protecting against loss to real estate caused by fire, some natural causes, vandalism,
etc., depending upon the terms of the policy.
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Home equity loan |
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A loan secured by a second deed of trust on a house, typically used as a home improvement loan.
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Home Owner's Association |
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The association that manages a condominium or a planned unit development.
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Housing ratio |
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The ratio of the monthly housing payment in total (PITI - Principal, Interest, Taxes, and Insurance)
divided by the gross monthly income. This ratio is sometimes referred to as the top ratio or
front end ratio.
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HUD |
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The U.S. Department of Housing and Urban Development.
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I |
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Impound account |
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An account used to pay your hazard insurance, mortgage insurance and property taxes.
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Income property |
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Any property, including land, which earns you money.
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J |
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Joint tenancy |
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A type of ownership where two or more people equally share ownership of a property.
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Jumbo mortgage |
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The current loan limit for a conforming loan is $275,000. Loans for amounts above
$275,000 are considered non-conforming or jumbo mortgages.
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L |
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Lifetime cap |
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A provision of an ARM that sets the highest rate that can occur over the life of the loan.
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Loan to value ratio (LTV) |
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The ratio of the amount of your loan to the appraised value of the home. The LTV will affect
programs available to the borrower and generally, the lower the LTV the more lenient the lender may
be in the approval process.
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Lock period |
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The amount of time that a lender will guarantee a loan's interest rate. Once you've locked in
the interest rate on a loan, the lender will guarantee that rate for a certain period of time, usually for
30, 45 or 60 days.
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Lock-in |
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A written agreement guaranteeing the home buyer a specified interest rate provided the loan is
closed within a set period of time. The lock-in also usually specifies the number of points to be
paid at closing.
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M |
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Margin |
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The specific amount of interest a lender adds to the index value to calculate the ARM interest rate
at each adjustment period.
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Mortgage disability insurance |
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A disability insurance policy that will pay the monthly mortgage payment in the event of a covered
disability of an insured borrower for a specified period of time.
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Mortgage insurance (MI) |
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Insurance written by an independent mortgage insurance company protecting the mortgage lender
against loss incurred by a mortgage default. Usually required for loans with an LTV
of 80.01% or higher.
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N |
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Negative amortization |
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When the amount that you owe on a loan increases despite regular monthly payments.
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No income verification |
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Some loan products require only that applicants state the source of their income without providing
supporting documentation such as tax returns or pay stubs. These programs carry a higher rate
due to increased risk to the investor. This is also known as "stated income."
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Non-conforming loan |
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Also called a jumbo loan. Conventional home mortgages not eligible for sale and delivery to
either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan
amount, loan characteristics or underwriting guidelines. Non-conforming loans usually incur
a rate and origination fee premium. The current non-conforming loan limit is $275,000 and above.
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Non-institutional lender |
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Any non-traditional lender, which is usually not strictly regulated by state or federal agencies.
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O |
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Origination fee |
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A fee imposed by a lender to cover certain processing expenses in connection with making a real
estate loan. Usually a percentage of the amount loaned, such as one percent.
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Owner financing |
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A property purchase transaction in which the property seller provides all or part of the financing.
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P |
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PITI |
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Principal, interest, taxes and insurance--the components of a monthly mortgage payment.
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Planned Unit Developments (PUD) |
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A subdivision of five or more individually owned lots with one or more other parcels owned in
common or with reciprocal rights in one or more other parcels.
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Points |
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Charges levied by the mortgage lender and usually payable at closing. One point represents
1% of the face value of the mortgage loan. Points reduce the interest rate to the borrower
while increasing yield to the investor.
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Prepaids |
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Those expenses of property which are paid in advance of their due date and will usually be prorated
upon sale, such as taxes, insurance, rent, etc.
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Prepayment penalty |
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A charge imposed by a mortgage lender on a borrower who wants to pay off part or all of a mortgage
loan in advance of schedule.
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Private mortgage insurance (PMI) |
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Insurance provided by non-government insurers that protects lenders against loss if a borrower
defaults. Investors generally require private mortgage insurance for loans with
loan-to-value (LTV) percentages greater than 80%.
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Q |
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Qualifying ratios |
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The ratio of your fixed monthly expenses to your gross monthly income, used to determine
how much you can afford to borrow. The fixed monthly expenses would include PITI along with
other obligations such as student loans, car loans, or credit card payments.
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R |
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Rate cap |
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A limit on how much the interest rate can change, either at each adjustment period or over the life
of the loan.
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Real Estate Settlement Procedure Act (RESPA) |
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A federal law that says a lender must give a borrower an estimate of closing costs within
3 business days of applying for a loan.
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Refinancing |
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The process of paying off one loan with the proceeds from a new loan using the same
property as security.
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Real Estate Settlement Procedure Act (RESPA) |
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A federal law that says a lender must give a borrower an estimate of closing costs within
3 business days of applying for a loan.
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Regulation Z |
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A federal law that requires a lender to give borrowers the Truth in Lending Disclosure stating
the annual percentage rate (APR) among other things.
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Residential loan application form (1003) |
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The name of the standard loan application that all lenders require a borrower to complete when
applying for a loan.
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Residential mortgage credit report (RMCR) |
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A report requested by your lender that utilizes information from at least two of the three national
credit bureaus and information provided on your loan application.
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S |
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Second mortgage |
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A loan that is in second position behind the first mortgage. Sometimes used as additional
down payment or to pull equity from the home.
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Secondary market |
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Companies that buy groups of loans from lenders and then sell them to other lenders and investors.
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Seller carry back |
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An agreement in which the owner of a property provides financing, often in combination with
an assumed mortgage.
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Settlement statement |
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A document that gives a breakdown of the costs that the buyer and seller are responsible
for on the closing date.
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Sole and separate |
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A type of ownership in a property regardless of marital status. Community property states
require additional Disclaimers for married persons holding title in this manner.
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Sweat equity |
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A program that gives a buyer part or all of the money for a down payment in exchange for hours of
labor helping to build the home. This program has very specific guidelines and is typically
not available to conventional borrowers.
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T |
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Title insurance |
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Insurance against loss resulting from defects of title to a specifically described parcel of real property.
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Title search |
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An investigation into the history of ownership of a property to check for liens, unpaid claims,
restrictions or problems, to prove that the seller can transfer free and clear ownership.
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Total debt ratio |
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Monthly debt and housing payments divided by gross monthly income. Also known as
Obligations-to-Income Ratio or Back-End Ratio.
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Trailing spouse income |
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The anticipated income of the spouse of an employee who is being transferred to a new
area. Typically, 50% of the income previously earned by the spouse is used.
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Truth-in-Lending Act |
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A federal law requiring a disclosure of credit terms using a standard format. This is
intended to facilitate comparisons between the lending terms of different financial institutions.
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U |
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Underwriting |
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A lender's process to evaluate whether or not to approve the borrower for a loan.
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Unsecured loan |
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A debt that isn't backed by collateral.
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V |
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Verification of deposit (VOD) |
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A form completed by a bank or other depository to verify available funds. Normally bank
statements are used in lieu of this form.
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Verification of Employment (VOE) |
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A form completed by the employer to confirm income and dates of employment.
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Veterans Administration (VA) |
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A government agency guaranteeing mortgage loans with no down payment to qualified veterans.
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