Acceleration
The right of the mortgagee (lender) to demand the immediate
repayment of the mortgage loan balance upon the default of the
mortgagor (borrower), or by using the right vested in the Due-on-Sale
Clause.
Adjustable-Rate Mortgage (ARM)
A mortgage where the interest rate is not fixed, but changes
during the life of the loan in line with movements in an index
rate. You may also see ARMs referred to as AMLs (adjustable
mortgage loans) or VRMs (variable-rate mortgages).
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, depending on the index.
Amortization
Means loan payment by equal periodic payment calculated
to pay off the debt at the end of a fixed period, including
accrued interest on the outstanding balance.
Annual Percentage Rate (APR)
A measure of the cost of credit, expressed as a yearly rate.
It includes interest as well as other charges. Because all lenders
follow the same rules to ensure the accuracy of the annual percentage
rate, it provides consumers with a good basis for comparing
the cost of loans, including mortgage plans.
Appraisal
An estimate of the value of property, made by a qualified
professional called an "appraiser".
Assessment
A local tax levied against a property for a specific purpose,
such as a sewer or street lights.
Assumability
When a home is sold, the seller may be able to transfer
the mortgage to the new buyer. This means the mortgage is assumable.
Lenders generally require a credit review of the new borrower
and may charge a fee for the assumption. Some mortgages contain
a due-on-sale clause, which means that the mortgage may not
be transferable to a new buyer. Instead, the lender may make
you pay the entire balance that is due when you sell the home.
Assumability can help you attract buyers if you sell your home.
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 of the principal at a time specified
in the contract.
Blanket Mortgage
A mortgage covering at least two pieces of real estate as
security for the same mortgage.
Borrower (Mortgagor)
One who applies for and receives a loan in the form of a
mortgage with the intention of repaying the loan in full
Broker
An individual in the business of assisting in arranging
funding or negotiating contracts for a client buy who does not
loan the money himself. Brokers usually charge a fee or receive
a commission for their services.
Buydown
With a buydown, the seller pays an amount to the lender
so that the lender can give you a lower rate and lower payments,
usually for an early period in an ARM. The seller may increase
the sales price to cover the cost of the buydown. Buydowns can
occur in all types of mortgages, not just ARMs.
Cash Flow
The amount of cash derived over a certain period of time
from an income-producing property. The cash flow should be large
enough to pay the expenses of the income producing property
(mortgage payment, maintenance, utilities, etc.)
Cap
A limit on how much the interest rate or the monthly payment
can change, either at each adjustment or during the life of
the mortgage. Payment caps don't limit the amount of interest
the lender is earning, so they may cause negative amortization.
Certificate of Eligibility
The document given to qualified veterans which entitles
them to VA guaranteed loans for homes, business, and mobile
homes. certificates of eligibility may be obtained by sending
DD-214 (Separation Paper) to the local VA office with VA form
1880 (request for Certificate of Eligibility)
Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans Administration showing
the property's current market value
Certificate of veteran status
The document given to veterans or reservists who have served
90 days of continuous active duty (including training time)
It may be obtained by sending DD 214 to the local VA office
with form 26-8261a (request for certificate of veteran status.
This document enables veterans to obtain lower down payments
on certain FHA insured loans).
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 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 cost of closing usually
are about 3 percent to 6 percent of the mortgage amount.
Commitment
A promise by a lender to make a loan on specific terms or
conditions to a borrower or builder. A promise by an investor
to purchase mortgages from a lender with specific terms or conditions.
an agreement, often inwriting, 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 to pay for the construction of
buildings or homes. These are usually designed to provide periodic
disbursements to the builder as he progresses.
Contract sale or deed
A contract between purchaser and a seller of real estate
to convey title after certain conditions have been met. It is
a form of installment sale.
Conventional loan
A mortgage not insured by FHA or guaranteed by the VA.
Conversion Clause
A provision in some ARMs that allows you to change the ARM
to a fixed-rate loan at some point during the term. Usually
conversion is allowed at the end of the first adjustment period.
At the time of the conversion, the new fixed rate is generally
set at one of the rates then prevailing for fixed rate mortgages.
The conversion feature may be available at extra cost.
Credit Report
A report documenting the credit history and current status
of a borrower's credit standing.
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 gross monthly income. 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
When a mortgage is written with a monthly payment that is
less than required to satisfy the note rate, the unpaid interest
is deferred by adding it to the loan balance.Seenegative
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
In an ARM with an initial rate discount, the lender gives
up a number of percentage points in interest to give you a lower
rate and lower payments for part of the mortgage term (usually
for one year or less). After the discount period, the ARM rate
will probably go up depending on the index rate.
Down Payment
Money paid to make up the difference between the purchase
price and the mortgage amount.
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.
Earnest Money
Money given by a buyer to a seller as part of the purchase
price to bind a transaction or assure payment.
Entitlement
The VA home loan benefit is called entitlement. Entitlement
for a VA guaranteed home loan. This is also known as eligibility.
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. The
value an owner has in real estate over and above the obligation
against the property.
Escrow
An account held by the lender into which the home buyer
pays money for tax or insurance payments. Also earnest deposits
held pending loan closing.
Fannie Mae
seeFederal 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) The former name for the regulatory and supervisory
agency for federally chartered savings institutions. Agency
is now called the Office of Thrift Supervision
Federal Home Loan Mortgage Corporation
(FHLMC) also called "Freddie Mac", is a quasi-governmental
agency that purchases conventional mortgage from insured depository
institutions and HUD-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 know 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 ($155,250 as of 1/1/96), they are generous
enough to handle moderately-priced homes almost anywhere in
the country.
FHA mortgage insurance
Requires a fee (up to 2.25 percent of the loan amount) paid
at closing to insure the loan with FHA. In addition, FHA mortgage
insurance requires an annual fee of up to 0.5 percent of the
current loan amount, paid in monthly installments. The lower
the down payment, the more years the fee must be paid.
FHLMC
The Federal Home Loan Mortgage Corporation provides a secondary
market for savings and loans by purchasing their conventional
loans. Also known as "Freddie Mac."
Firm Commitment
A promise by FHA to insure a mortgage loam for a specified
property and borrower. A promise from a lender to make a mortgage
loan.
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these
mortgages throughout the term of the mortgage for the original
borrower.
FNMA
The Federal National Mortgage Association is a secondary
mortgage institution which is the largest single holder of home
mortgages in the United States. FNMA buys VA, FHA, and conventional
mortgages from primary lenders. Also known as "Fannie Mae."
Foreclosure
A legal process by which the lender or the seller forces
a sale of a mortgaged property because the borrower has not
met the terms of the mortgage. Also known as a repossession
of property.
Freddie Mac
see Federal Home Loan Mortgage Corporation
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.
Guaranty
Apromise by one party to pay a debt or perform an obligation
contracted by another if the original party fails to pay or
perform according to a contract
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 gross monthly
income. See debt-to-income ratio.
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
The index is the measure of interest rate changes that the
lender uses to decide how much the interest rate on an ARM will
change over time. No one can be sure when an index rate will
go up or down. To help you get an idea of how to compare different
indexes, the following chart shows a few common indexes over
a ten-year period (1977-87). As you can see, some index rates
tend to be higher than others, and some more volatile. (But
if a lender bases interest rate adjustments on the average value
of an index over time, your interest rate would not be as volatile.)
You should ask your lender how the index for any ARM you are
considering has changed in recent years, and where it is reported.
Interim Financing
A construction loam made during completion of a building
or a project. A permanent loan usually replaces this loan after
completion.
Investor
A money source for a lender.
Jumbo Loan
A loan which is larger (more than $214,600 as of 1/1/97)
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.
Lien
A claim upon a piece of property for the payment or satisfaction
of a debt or obligation.
Loan-to-Value Ratio
The relationship between the amount of the mortgage loan
and the appraised value of the property expressed as a percentage.
Margin
The number of percentage points the lender adds to the index
rate to calculate the ARM interest rate at each adjustment.
Market Value
The 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
for at a given time.
MIP (Mortgage Insurance Premium)
It is insurance from FHA to the lender against incurring
a loss on account of the borrower's default.
Mortgage Insurance
Money paid to insure the mortgage when the down payment
is less than 20 percent. See private mortgage insurance,
FHA mortgage insurance.
Mortgagee
The lender
Mortgagor
The borrower or homeowner
Negative Amortization
Amortization means that monthly payments are large enough
to pay the interest and reduce the principal on your mortgage.
Negative amortization occurs when the monthly payments do not
cover all of the interest cost. The interest cost that isn't
covered is added to the unpaid principal balance. This means
that even after making many payments, you could owe more than
you did at the beginning of the loan. Negative amortization
can occur when an ARM has a payment cap that results in monthly
payments not high enough to cover the interest due.
Net Effective Income
The borrower's gross income minus federal 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:
The signed obligation to pay a debt, as a mortgage note.
Office of Thrift Supervision (OTS)
The regulatory and supervisory agency for federally chartered
savings institutions. Formally known as Federal Home Loan
Bank Board
Origination Fee
The fee charged by a lender to prepare loan documents, make
credit checks, inspect and sometimes appraise a property; usually
computed as a percentage of the face value of the loan.
Permanent Loan
A long term mortgage, usually ten years or more. Also called
an "end loan."
PITI
Principal, Interest, Taxes and Insurance. Also called monthly
housing expense.
Pledged account Mortgage (PAM)
Money is placed in a pledged savings account and this fund
plus earned interest is gradually used to reduce mortgage payments.
Points
A point is equal to one percent of the principal amount
of your mortgage. For example, if you get a mortgage for $65,000,
one point means you pay $650 to the lender. Lenders frequently
charge points in both fixed-rate and adjustable-rate mortgages
in order to increase the yield on the mortgage and to cover
loan closing costs. These points usually are collected at closing
and may be paid by the borrower or the home seller, or may be
split between them.
Power of Attorney
A legal document 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
Money charged for an early repayment of debt. Prepayment
penalties are allowed in some form (but not necessarily imposed)
in many states.
Primary Mortgage Market
Lenders making mortgage loans directly to borrower's such
as savings and loan associations, commercial banks, and mortgage
companies. These lenders sometimes sell their mortgages into
the secondary mortgage markets such as to FNMA or GNMA,
etc.
Principal
The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment,
lenders will allow a smaller down payment - as low as 5 percent
in some cases. With the smaller down payment loans, however,
borrowers are usually required to carry private mortgage insurance.
Private mortgage insurance will usually require an initial premium
payment and may require an additional monthly fee depending
on you loan's structure.
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.
Refinance
Obtaining a new mortgage loan on a property already owned.
Often to replace existing loans on the property.
Renegotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically.
See adjustable rate mortgage.
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 cost once after application
and once prior to or at a settlement. The law requires lenders
to furnish the information after application only.
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 asSatisfaction
of Mortgage: The document issued by the mortgagee when the mortgage
loam is paid in full. Also called a "release of mortgage."
Second Mortgage
A mortgage made subsequent to another mortgage and subordinate
to the first one.
Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages
they make to obtain more funds to originate more new loans.
It provides liquidity for the lenders. security.
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 mortgage where the borrowers shares the monthly principal
and interest payments with another party in exchange for part
of the appreciation.
Simple Interest
Interest which is computed only on the principle balance.
Survey
A measurement of land, prepared by a registered land surveyor,
showing the location of the land with reference to know points,
its dimensions, and the location and dimensions of any buildings.
Sweat Equity
Equity created by a purchaser performing work on a property
being purchased.
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 a home buyer 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 seller.
Policies are also available to protect the lender's interests.
Title Search
An examination of municipal records to determine the legal
ownership of property. Usually is performed by a title company.
Truth-In-Lending
A federal law requiring disclosure of the Annual Percentage
Rate to home buyers shortly after they apply for the loan. Also
known as Regulation Z.
Two-Step Mortgage
A mortgage in which the borrower receives a below-market
interest rate for a specified number of years (most often seven
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 30 days notice
at the end of seven or 10 years. also called "Super Seven"
or "Premier" mortgage.
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.
USURY
Interest charged in excess of the legal rate established
by law.
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 1-7/8 percent (depending on the size
of the down payment) paid on a VA-backed loan. On a $75,000
fixed-rate mortgage with no down payment, this would amount
to $1,406 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.
Warehouse Fee
Many mortgage firms must borrow funds on a short term basis
in order to originate loans which are to be sold later in the
secondary mortgage market (or to investors). When the prime
rate of interest is higher on short term loans than on mortgage
loans, the mortgage firm has an economic loss which is offset
by charging a warehouse fee.
Wraparound mortgage
Results when an existing assumable 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.