| |
| 1 Month Option ARM - Same as flexible payment ARM. |
| 3/2 Down-Payment - Programs offered by some lenders under which a borrower who is able to secure a grant or gift equal to 2% of the down payment will only have to provide a 3% down payment from their own funds. This can be a good deal for a cash-short borrower. |
| 80/10/10, 10/15/5 and 80/20/0 Loan Plans -
Combination first mortgages for 80% of sale price or value and second mortgages for 10%, 15%, or 20%. The purpose is to avoid mortgage insurance, which is required on first mortgages that exceed 80% of value. |
| 12 MTA - An interest rate index that is used on some ARMs. It is the average of the most recent 12 monthly values of the Treasury One-Year Constant Maturity series. |
| 100% Loan - A loan with no down payment. The loan amount equals the property value. |
| 40-Year Mortgage - A mortgage with an amortization term of 40 years. |
| A |
| A-Credit - A consumer with the best credit rating, deserving of the lowest prices that lenders offer. Most lenders require a FICO score above 720. There is seldom any payoff for being above the A-credit threshold but you pay a penalty for being below it. |
| Accrued Interest - Interest that is earned but not paid, adding to the amount owed. Same as Negative amortization. |
| Adjustable rate mortgage (ARM) -
A mortgage on which the interest rate, after an initial period, can be changed by the lender. While ARMs in many countries abroad allow rate changes at the lender's discretion ("discretionary ARMs"), in the US most ARMs base rate changes on a pre-selected interest rate index over which the lender has no control. These are "indexed ARMs". There is no discretion associated with rate changes on indexed ARMs. |
| Adjustment interval - On an ARM, the time between changes in the interest rate or monthly payment. The rate adjustment interval is often displayed in x/y format, where "x" is the period until the first adjustment, and "y" is the adjustment period thereafter. For example, a 5/1 ARM is one on which the initial rate holds for 5 years, after which it is adjusted every year. The rate adjustment interval and the payment adjustment interval are the same on a fully amortizing ARM, but may not be on a negative amortization ARM. |
| Affordability - A consumer's capacity to afford a house. Affordability is usually expressed in terms of the maximum price the consumer could pay for a house, and be approved for the mortgage required to pay that amount. |
| Agreement of sale - A contract signed by buyer and seller stating the terms and conditions under which a property will be sold. |
| ALT-A - A mortgage risk categorization that falls between prime and sub-prime, but is closer to prime. Also referred to as "A minus". |
| Alternative Documentation - Expedited and simpler documentation requirements designed to speed up the loan approval process. Instead of verifying employment with the applicant's employer and bank deposits with the applicant's bank, the lender will accept paycheck stubs, W-2s, and the borrower's original bank statements. Alternative documentation remains “full documentation”, as opposed to the other documentation options. |
| Amortization - The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment. |
| Amount financed - On the “Truth in Lending” form, the loan amount less "prepaid finance charges", which are lender fees paid at closing. |
| Application - A request for a loan that includes the information about the potential borrower, the property and the requested loan that the solicited lender needs to make a decision. |
| Application Fee - A fee that some lenders charge to accept an application. It may or may not cover other costs such as a property appraisal or credit report, and it may or may not be refundable if the lender declines the loan. |
| Appraisal - A written estimate of a property's current market value prepared by an appraiser. |
| Appraiser - A professional with knowledge of real estate markets and skilled in the practice of appraisal. When a property is appraised in connection with a loan, the appraiser is selected by the lender, but the appraisal fee is usually paid by the borrower. |
| Appraisal fee - A fee charged by an appraiser for the appraisal of a particular property. |
| APR: Annual Percentage Rate - The Annual Percentage Rate which must be reported by lenders under “Truth in Lending” regulations. It is a comprehensive measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges. It is also adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid ten years down the road. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons. |
| Approval - Acceptance of the borrower's loan application. Approval means that the borrower meets the lender's qualification requirements and also it’s underwriting requirements. In some cases, especially where approval is provided quickly as with automated underwriting systems, the approval may be conditional on further verification of information provided by the borrower. |
| Assumption - A method of selling real estate where the buyer of the property agrees to become responsible for the repayment of an existing loan on the property. Unless the lender also agrees, however, the seller remains liable for the mortgage. |
| Assumable mortgage - A mortgage contract that allows, or does not prohibit, a creditworthy buyer from assuming the mortgage contract of the seller. Assuming a loan will save the buyer money if the rate on the existing loan is below the current market rate, and closing costs are avoided as well. A loan with a "due-on-sale" clause stipulating that the mortgage must be repaid upon sale of the property is not assumable. |
| Authorized User - Someone authorized by the original credit card holder to use the holder’s card. The card-holder is responsible for the charges of the authorized user, but the authorized user is not responsible for paying any charges, including their own. But sometimes authorized users are dunned for the unpaid bills of the card holder. |
| Automated Underwriting - A computer driven process for informing the loan applicant very quickly, sometimes within a few minutes, whether the applicant will be approved or whether the application will be forwarded to an underwriter. The quick decision is based on information provided by the applicant, which is subject to later verification, and other information retrieved electronically including information about the borrower's credit history and the subject property. |
| Automated Underwriting System - A particular computerized system for doing automated underwriting. Mortgage insurers and some large lenders have developed such systems, but the most widely used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”. |
| B |
| Bad-Faith Estimate - The practice of low-balling figures for settlement costs on the Good Faith Estimate to make them appear more attractive to mortgage shoppers. |
| Balance - The amount of the original loan remaining to be paid. It is equal to the loan amount less the sum of all prior payments of principal. |
| Balloon mortgage - A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher rate later. They are riskier than ARMs because there is no limit on the extent of a rate increase at the end of the balloon period. |
| Bi-monthly Mortgage - A mortgage on which the borrower pays half the monthly payment on the first day of the month, and the other half on the 15th. |
| Bridge Loan - A short-term loan, usually from a bank, that "bridges" the period between the closing date of a home purchase and the closing date of a home sale. Unsecured bridge loans are available if the borrower has a firm contract to sell the existing house. Secured bridge loans are available without such a contract. |
| Buy-down - A permanent buy-down is the payment of points in exchange for a lower interest rate. See Points. A temporary buy-down concentrates the rate reduction in the early years. |
| Buy-up - Paying a higher interest rate in exchange for a rebate by the lender which reduces upfront costs. See Negative Points. |
| C |
| Cash-Out Refi - Refinancing for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes "cash-out" of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan. |
| Closing - On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender. |
| Closing Costs - Same as Settlement costs. |
| Closing Date - The date on which the closing occurs. |
| Co-Borrowers - One or more persons who have signed the note, and are equally responsible for repaying the loan. Unmarried co-borrowers who live together are advised to agree beforehand on what happens if they split. |
| COFI - Cost of funds index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage. |
| Conforming Mortgage - A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. |
| Construction Financing - The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house. |
| Contract Knavery - Inserting provisions into a loan contract that severely disadvantage the borrower, without the borrower’s knowledge, and sometimes despite oral assurances to the contrary. Prepayment penalties are perhaps the most frequently cited subject of such abuse. |
| Conventional Mortgage - A home mortgage that is neither FHA-insured nor VA-guaranteed. |
| Conversion Option - The option to convert an ARM to an FRM at some point during its life. These loans are likely to carry a higher rate or points than ARMs that do not have the option. |
| COSI - Cost of savings index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage. |
| Co-signing a Note - Assuming responsibility for someone else's loan in the event that that party defaults. A risk not to be taken lightly. |
| Credit Report - A report from a credit bureau containing detailed information bearing on credit worthiness, including the individual's credit history. |
| Credit Score - A single numerical score based on an individual's credit history that measure that individual's credit worthiness. Credit scores are as good as the algorithm used to derive them. The most widely used credit score is called FICO for Fair Isaac Co. which developed it. |
| Cumulative Interest - The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money. See Interest cost. |
| Current Index Value - The most recently published value of the index used to adjust the interest rate on an indexed ARM. |
| D |
| Debt Consolidation- Rolling short-term debt into a home mortgage loan, either at the time of home purchase or later. |
| Deed in Lieu of Foreclosure - Deeding the property over to the lender as an alternative to having the lender foreclose on the property. |
| Default - Failure of the borrower to honor the terms of the loan agreement. Lenders (and the law) usually view borrowers delinquent 90 days or more as in default. |
| Deferred interest - Same as negative amortization. |
| Delinquency - A mortgage payment which is more than 30 days late. Don't confuse with late payment. |
| Demand Clause - A clause in the note that allows the lender to demand repayment at any time for any reason. |
| Discount Mortgage Broker - A mortgage broker who claims to be compensated entirely by the lender rather than by the borrower. |
| Discount Points - Same as points. |
| Discretionary ARM - An adjustable rate mortgage on which the lender has the right to change the interest rate at any time subject only to advance notice. Discretionary ARMs are found abroad, not in the US. |
| Documentation Requirements - The set of lender requirements that specify how information about a loan applicant's income and assets must be provided, and how it will be used by the lender. |
| Down Payment - The difference between the value of the property and the loan amount, expressed in dollars, or as a percentage of the price. For example, if the house sells for $100,000 and the loan is for $80,000, the down payment is $20,000 or 20%. |
| Dual Index Mortgage - A mortgage on which the interest rate is adjustable based on an interest rate index, and the monthly payment adjusts based on a wage and salary index. |
| Due-on-sale Clause - A provision of a loan contract that stipulates that if the property is sold the loan balance must be repaid. This bars the seller from transferring responsibility for an existing loan to the buyer when the interest rate on the old loan is below the current market. A mortgage containing a due-on-sale clause is not an assumable mortgage. |
| E |
| Effective Rate - A term used in two ways. In one context it refers to a measure of interest cost to the borrower that is identical to the APR except that it is calculated over the time horizon specified by the borrower. The APR is calculated on the assumption that the loan runs to term, which most loans do not. In most texts on the mathematics of finance, however, the "effective rate" is the quoted rate adjusted for intra-year compounding. |
| Escrow - An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due. |
| Escrow Abuse- The practice of using escrow accounts inappropriately to generate more income from hapless borrowers. |
| F |
| Fees - The sum of all upfront cash payments required by the lender as part of the charge for the loan. Origination fees and points are expressed as a percent of the loan. Junk fees are expressed in dollars. |
| Fannie Mae - One of two Federal agencies that purchase home loans from lenders (The other is Freddie Mac). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities. |
| Fees - The sum of all upfront cash payments required by the lender as part of the charge for the loan. Origination fees and points are expressed as a percent of the loan. Junk fees are expressed in dollars. |
| FHA Mortgage - A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low. |
| FICO Score - See credit score. |
| Financing Points - Included points in the loan amount. |
| First Mortgage - A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan. For example, a borrower defaults on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only what is left of the $100,000. |
| Fixed Rate Mortgage (FRM)- A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage. |
| Flexible Payment (ARM) - Same as Option ARM. |
| Float - Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing. Allowing the rate to float exposes the borrower to market risk, and also to the risk of being taken advantage of by the loan provider. |
| Float-Down - A rate lock, plus an option to reduce the rate if market interest rates decline during the lock period. Also called a cap. A float-down costs the borrower more than a lock because it is more costly to the lender. Float-downs vary widely in terms of how often the borrower can exercise (usually only once), and exactly when the borrower can exercise. |
| Foreclosure - The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults. |
| Forbearance Agreement - An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrower’s delinquency. |
| Freddie Mac - One of two Federal agencies that purchase home loans from lenders. The other is Fannie Mae. |
| Fully Amortizing Payment - The monthly mortgage payment which, if maintained unchanged through the remaining life of the loan at the then-existing interest rate, will pay off the loan over the remaining life. See Mortgage Amortization: How Does It Work? On FRM's the payment is always fully amortizing, provided the borrower has made no prepayments (If the borrower makes prepayments, the monthly payment is more than fully amortizing). On GPM's, the payment in the early years is always less than fully amortizing. On ARMs, the payment may or may not be fully amortizing, depending on the type of ARM. |
| Fully Indexed Interest Rate - The current index value plus the margin on an ARM. Usually, initial interest rates on ARMs are below the fully indexed rate. If the index does not change from its initial level, after the initial rate period ends the interest rate will rise to the fully indexed rate after a period determined by the interest rate increase cap. |
| G |
| Gift of Equity - A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as down payment. |
| Good Faith Estimate - The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application. |
| Government National Mortgage Association (GNMA) - A Federal agency that guarantees mortgage securities that are issued against pools of FHA and VA mortgages. |
| Grace Period - The period after the payment due date during which the borrower can pay without being hit for late fees. Grace periods apply only to mortgages on which interest is calculated monthly. Simple interest mortgages do not have a grace period because interest accrues daily. |
| Graduated Payment Mortgage (GPM) - A mortgage on which the payment rises by a constant percent for a specified number of periods, after which it levels out over the remaining term and amortizes fully. For example, the payment might increase by 7.5% every 12 months for 60 months, after which it is constant for the remaining term at a fully amortizing level. |
| Guaranteed Mortgage Price Agreement - A proposal by HUD in 2002 to allow lenders and others to offer packages of loans and settlement services at a single price. |
| H |
| Hazard Insurance - Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as "homeowner insurance", it is the second "I" in PITI. |
| Homebuyer Protection Plan - A plan purporting to protect FHA homebuyers against property defects. |
| Homeowners Insurance - Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. It is the second "I" in PITI. |
| Home Equity Line of Credit (HELOC) - A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $150,000, in an amount and at a time of your choosing. You can draw on the line by writing a check, using a special credit card, or in other ways. |
| Home Equity Conversion Mortgage (HECM) - A reverse mortgage program administered by FHA. See Reverse Mortgages. |
| Home Equity Line - Same as HELOC. |
| Home Equity Loan - Same as second mortgage. |
| Housing Bubble - Marked increase in house prices fueled partly by expectations that prices will continue to rise. |
| Housing Expense - The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees. Same as PITI and "monthly housing expense." |
| Housing Expense Ratio - The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers. |
| Housing Investment - The amount invested in a house, equal to the sale price less the loan amount. |
| HUD1 Form - The form a borrower receives at closing that details all the payments and receipts among the parties in a real estate transaction. This includes the borrower, lender, home seller, mortgage broker and various other service providers. |
| Hybrid ARM - An ARM on which the initial rate holds for some period, during which it is "fixed-rate", after which it becomes adjustable rate. Generally, the term is applied to ARMs with initial rate periods of 3 years or longer. |
| I |
| Impounds - Same as Escrow. |
| Indexed ARM- An ARM on which the interest rate adjusts mechanically based on changes in an interest rate index, as opposed to a "discretionary ARM" on which the lender can change the rate at any time subject only to advance notice. All ARMs in the US are indexed. |
| Initial Interest Rate - The interest rate that is fixed for some specified number of months at the beginning of the life of an ARM. The initial rate is sometimes referred to as a "teaser" when it is below the fully indexed interest rate. |
| Initial Rate Period - The number of months for which the initial rate holds, ranging from 1 month to 10 years. |
| Interest Accrual Period - The period over which the interest due the lender is calculated. |
| Interest Cost - A time adjusted measure of cost to a mortgage borrower. It is calculated in the same way as the APR except that the APR assumes that the loan runs to term, and is always measured before taxes. The formula is shown in Mortgage Formulas. Interest cost is measured over the individual borrower's time horizon, and it may be measured after taxes at the individual borrower's tax rate. In addition, the cost items included in interest cost may be more or less inclusive than those included in the APR. |
| Interest Due - The amount of interest, expressed in dollars, computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by the interest accrual period. It is the same as interest payment except when the scheduled mortgage payment is less than the interest due, in which case the difference is added to the balance and constitutes negative amortization. |
| Interest Only Mortgage - A mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged. |
| Interest Payment - The dollar amount of interest paid each month. It is the same as interest due so long as the scheduled mortgage payment is equal to or greater than the interest due. Otherwise, the interest payment is equal to the scheduled payment. |
| Interest Rate - The rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A mortgage interest rate is a rate on a loan secured by a specific property. |
| Interest Rate Adjustment Period - The frequency of rate adjustments on an ARM after the initial rate period is over. The rate adjustment period is sometimes but not always the same as the initial rate period. |
| Interest Rate Ceiling - The highest interest rate possible under an ARM contract; same as "lifetime cap." It is often expressed as a specified number of percentage points above the initial interest rate. |
| Interest Rate Floor - The lowest interest rate possible under an ARM contract. Floors are less common than ceilings. |
| Interest Rate Increase Cap - Financial institutions such as banks, insurance companies, savings and loans or any lending institution whose loans are regulated by law. |
| Interest Rate Decrease Cap - The maximum allowable decrease in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points. |
| Interest Rate Index - The specific interest rate series to which the interest rate on an ARM is tied, such as "Treasury Constant Maturities, 1-Year," or "Eleventh District Cost of Funds". All the indices are published regularly in readily available sources. |
| J |
| Jumbo Mortgage - A mortgage which is larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac ($333,700 in 2004). However, some lenders use the term to refer to programs for even larger loans, such as, e.g., greater than $500,000. |
| K |
| No available terms in this section. |
| L |
| Late Fees - Fees that lenders are entitled to collect from borrowers who don't pay within the grace period. Most mortgage notes offer borrowers a 10 or 15-day grace period, with a late charge of about 5% on payments received on the 16th or later. |
| Late Payment - A payment received after the grace period stipulated in the note. Most mortgage grace periods are 10 or 15 days. |
| Lender - See mortgage lender. |
| Lien - The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc. |
| Loan Amount - The amount the borrower promises to repay, as set forth in the mortgage contract. It differs from the amount of cash disbursed by the lender by the amount of points and other upfront costs included in the loan. |
| Loan Discount Fee - The term used to describe points on the Good Faith Estimate. |
| Loan Modification - A change in the terms of a loan, usually the interest rate and/or term length of the loan, in response to the borrower's inability to make the payments under the existing term. |
| Loan Officer - Employees of lenders or mortgage brokers, who find borrowers, sell and counsel them, and take applications. |
| Loan Provider - A lender or a mortgage broker. |
| Loan-to-Value Ration - The loan amount divided by the lesser of the selling price or the appraised value; also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts. |
| Lock - An option exercised by the borrower, at the time of the loan application or later, to "lock in" the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date. |
| Lock Commitment Letter -
A written statement from a lender verifying that the price and other terms of a loan have been locked. Borrowers who lock through a mortgage broker should always demand to see the lock commitment letter. |
| Lock Period - The number of days for which any rate lock or float-down holds. Ordinarily, the longer the rate lock period, the higher the price to the borrower. |
| M |
| Mandatory Disclosure - The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure. |
| Margin - The amount added to the interest rate index, ranging generally from 2 to 3 percentage points, to obtain the fully indexed interest rate on an ARM. |
| Market Niche - A particular combination of loan, borrower and property characteristics that lenders use in setting prices and underwriting requirements. These characteristics are believed to affect the default risk or cost of the loan. As examples, borrowers who don't intend to occupy the house they purchase pay more than those who do, and borrowers who refinance only the balance on their existing loan pay less than those who take "cash out". |
| Maturity - The period until the last payment is due. This is usually but not always the term, which is the period used to calculate the mortgage payment. |
| Maximum Loan Amount - The largest loan size permitted on a particular loan program. For programs where the loan is targeted for sale to Fannie Mae or Freddy Mac, the maximum will be the largest loan eligible for purchase by these agencies. On FHA loans, the maximums are set by the Federal Housing Administration, and vary somewhat by geographical area. On other loans, maximums are set by lenders. |
| Maximum Loan to Value Ratio- The maximum allowable loan-to-value ratio on the selected loan program. |
| Maximum Lock - The longest period for which the lender will lock the rate and points on any program. The most common maximum lock period is 60 days, but on some programs the maximum is 90 days; only a few go beyond 90 days. |
| Minimum Down Payment - The minimum allowable ratio of down payment to sale price on any program. If the minimum is 10%, for example, it means that you must make a down payment of at least $10,000 on a $100,000 house, or $20,000 on a $200,000 house. |
| Monthly Debt Service - Monthly payments required on credit cards, installment loans, home equity loans, and other debts but not including payments on the loan applied for. |
| Mortgage - A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note. |
| Mortgage Broker - An independent contractor who offers the loan products of multiple lenders, termed wholesalers. A mortgage broker counsels on the loans available from different wholesalers, takes the application, and usually processes the loan. When the file is complete, but sometimes sooner, the lender underwrites the loan. In contrast to a correspondent, a mortgage broker does not fund a loan. |
| Mortgage Company - A mortgage lender who sells all loans in the secondary market; as distinguished from a portfolio lender, who retains loans in its portfolio. Mortgage companies may or may not service the loans they originate. |
| Mortgage Insurance - Insurance against loss provided to a mortgage lender in the event of borrower default. In most cases, the borrower pays the premiums. |
| Mortgage Insurance Premium - The up-front and/or periodic charges that the borrower pays for mortgage insurance. There are different mortgage insurance plans with differing combinations of up-front, monthly and annual premiums. The most widely used premium plan is a monthly charge with no upfront premium. |
| Mortgage Insurance Cancellation - Canceling a mortgage insurance policy. |
| Mortgage Lender - The party who disburses funds to the borrower at the closing table. The lender receives the note evidencing the borrower's indebtedness and obligation to repay, and the mortgage which is the lien on the subject property. |
| Mortgage Payment - The monthly payment of interest and principal made by the borrower. |
| Mortgage Price - The interest rate, points and fees paid to the lender and/or mortgage broker. On ARMs, the price also includes the fully indexed rate and the maximum rate. |
| Mortgage Program - A bundle of mortgage characteristics that lenders see fit to distinguish as a distinct instrument. These include whether it is an FRM, ARM, or Balloon; the term; the initial rate period on an ARM; whether it is FHA-insured or VA-guaranteed; and if is not FHA or VA, whether it is "conforming" (eligible for purchase by Fannie Mae or Freddie Mac) or "non-conforming". |
| Mortgage Suitability - The doctrine that mortgage lenders should be held liable for providing loans that are not suitable for the borrower. |
| N |
| Negative Amortization - A rise in the loan balance when the mortgage payment is less than the interest due; sometimes called "deferred interest." Negative amortization arises most frequently on ARMs. |
| Negative Amortization Cap - The maximum amount of negative amortization permitted on an ARM, usually expressed as a percentage of the original loan amount (e.g., 110%). Reaching the cap triggers an automatic increase in the payment, usually to the fully amortizing payment level, overriding any payment increase cap. |
| Negative Homeowners Equity - The condition of owing more on the house than the house is worth. |
| Negative Points - Points paid by a lender for a loan with a rate above the rate on a zero point loan. When negative points are retained by a mortgage broker, they are called a "yield spread premium". |
| No Change Scenario - On an ARM, the assumption that the value of the index to which the rate is tied does not change from its initial level. |
| No Cost Mortgage - A mortgage on which all settlement costs except per diem interest, escrows, homeowners insurance and transfer taxes are paid by the lender and/or the home seller. |
| Non-Conforming Mortgage - A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation. |
| Non-Permanent Resident Alien - A non-citizen without a green card who is employed in the US. As distinct from a permanent resident alien, who has a green card and who lenders do not distinguish from US citizens. Non-permanent resident aliens are subject to somewhat more restrictive qualification requirements than US citizens. |
| No Asset Loan - A documentation requirement where the applicant's assets are not disclosed. |
| No Income Loan- A documentation requirement where the applicant's income is not disclosed. |
| Non-Warrantable Condo - A condominium that does not meet the lender’s requirements. |
| No-Surprise Adjustable Rate Mortgage - An ARM with a preset graduated payment combined with variable term. |
| Nominal Interest Rate - A quoted interest rate that is not adjusted for either intra-year compounding, or for inflation. A quoted rate of 6% on a mortgage, for example, is nominal. Adjusted rates are called "effective. |
| No Ratio Loan - A documentation requirement where the applicant's income is disclosed and verified but not used in qualifying the borrower. The conventional maximum ratios of expense to income are not applied. |
| Note - A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents. |
| O |
| Option ARM - An adjustable rate mortgage with flexible payment options, monthly interest rate adjustments, and very low minimum payments in the early years. They carry a risk of very large payments in later years. |
| Option Fee - An upfront fee paid by the buyer under a lease-to-own purchase, usually 1% to 5% of the price, which is credited to the purchase price when the option is exercised but is lost if it is not. |
| Origination Fee - An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate. |
| Overage - The difference between the price posted to its loan officers by a lender or mortgage broker, and the price charged the borrower. |
| P |
| Partial Pre-Payment - Making a payment larger than the scheduled payment as a way of paying off the loan earlier. |
| Payment Adjustment Interval - The period between payment changes on an ARM, which may or may not be the same as the interest rate adjustment period. Loans on which the payment adjusts less frequently than the rate may generate negative amortization. |
| Payment Increase Cap - The maximum percentage increase in the payment on an ARM at a payment adjustment date. |
| Payment Decrease Cap - The maximum percentage decrease in the payment on an ARM at a payment adjustment date. |
| Payment Period - The period over which the borrower is obliged to make payments. On most mortgages, the payment period is a month, but on some it is biweekly. |
| Payment Rate - The interest rate used to calculate the mortgage payment, which is usually but not necessarily the interest rate. |
| Payoff Month - The month in which the loan balance is paid down to a zero balance. It may or may not be the term. |
| Per Diem Interest - Interest from the day of closing to the first day of the following month. In some cases, however, the borrower can get a credit at closing by making the first payment a month earlier. |
| Permanent Buy-down - Paying points as a way of reducing the interest rate. |
| Piggyback Mortgage - A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down. |
| PITI - Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense. |
| PMI - Private mortgage insurance, as distinguished from insurance provided by government under FHA and VA. |
| Points - An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., "3 points" means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRM's), including combinations with negative points. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed "discounts" and "premiums," respectively. |
| Portfolio Lender - A lender that holds the loans it originates in its portfolio rather than selling them, as a temporary lender does. |
| Posted Prices - The mortgage prices delivered by lenders to loan officers and mortgage brokers, as opposed to the final prices paid by borrowers. |
| Pre-Approval - A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Unlike a pre-qualification, the lender checks the applicant's credit. |
| Predatory Lending- A variety of unsavory lender practices designed to take advantage of unwary borrowers. |
| Pre-Payment - A payment made by the borrower over and above the scheduled mortgage payment. If the additional payment pays off the entire balance it is a "prepayment in full"; otherwise, it is a "partial prepayment”. |
| Pre-Payment Penalty - A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of pre-payment, or a specified number of months interest. |
| Pre-Qualification - Same as qualification. |
| Price-Gouging - Charging interest rates and/or fees that are excessive relative to what the same borrowers could have found had they shopped the market. |
| Primary Residence - The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented. |
| Principal - The portion of the monthly payment that is used to reduce the loan balance. |
| Principal Limit - The present value of a house, given the elderly owner's right to live there until death or voluntary move-out, under the FHA reverse mortgage program. |
| Private Mortgage Insurance - Mortgage insurance provided by private mortgage insurance companies, or PMI’s. See Mortgage Insurance. |
| Processing - Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. The processing file is handed off to underwriting for the loan decision. |
| Purchasing Money Mortgage - A mortgage offered by a house buyer as partial payment for the house. From the seller's point of view, it is seller financing. |
| Q |
| Qualification - The process of determining whether a prospective borrower has the ability; meaning sufficient assets and income to repay a loan. Qualification is sometimes referred to as "pre-qualification" because it is subject to verification of the information provided by the applicant. Qualification is short of approval because it does not take account of the credit history of the borrower. Qualified borrowers may ultimately be turned down because, while they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay. |
| Qualification Rate - The interest rate used in calculating the initial mortgage payment in qualifying a borrower. The rate used in this calculation may or may not be the initial rate on the mortgage. On ARMs, for example, the borrower may be qualified at the fully indexed rate rather than the initial rate. |
| Qualification Ratios - Requirements stipulated by the lender that the ratio of housing expense to borrower income, and housing expense plus other debt service to borrower income cannot exceed specified maximums, e.g., 28% and 35%. These may reflect the maximums specified by Fannie Mae and Freddie Mac; they may also vary with the loan-value ratio and other factors. |
| Qualification Requirements - Standards imposed by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum loan-to-value ratios, and so on. Less comprehensive than underwriting requirements, which take account of the borrower's credit history. |
| R |
| Rate - See Interest Rate. |
| Rate Caps - Limitations on the size of rate adjustments on an ARM, often expressed in a/b/c fashion: "a" is the maximum rate change at the first rate adjustment, "b" is the maximum at all subsequent adjustments, and "c" is the maximum increase over the initial rate during the life of the contract. |
| Rate/Point Break even- The period you must retain a mortgage in order for it to be profitable to pay points to reduce the rate. |
| Rate/Points Options - All the combinations of interest rate and points that are offered on a particular loan program. On an ARM, rates and points may also vary with the margin and interest rate ceiling. |
| Rate Protection - Protection for a borrower against the danger that rates will raise between the time a borrower applies for a loan and the time the loan closes. This protection can take the form of a "lock" where the rate and points are frozen at their initial levels until the loan closes; or a "float-down" where the rates and points cannot rise from their initial levels but they can decline if market rates decline. In either case, the protection only runs for a specified period. If the loan is not closed within that period, the protection expires and the borrower will either have to accept the terms quoted by the lender on new loans at that time, or start the shopping process anew. |
| Rate Sheets - Tables of interest rates and points that lenders distribute daily to their loan officer employees or mortgage brokers. |
| Rebate - Same as negative points. |
| Recast Payment - Raising the mortgage payment to the fully amortizing payment. Periodic recasts are sometimes used on ARMs in lieu of or in addition to negative amortization caps. |
| Refinance - The paying off of an old loan while simultaneously taking on a new loan. This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan. It may be done to raise cash, as an alternative to a home equity loan. Or it may be done to reduce the monthly payment. |
| Required Cash - The total cash required of the home buyer to close the transaction, including down payment, points and fixed dollar charges paid to the lender, any portion of the mortgage insurance premium that is paid upfront, and other settlement charges associated with the transaction such as title insurance, taxes, etc. The total required cash is shown on the Good Faith Estimate of Settlement that every borrower receives. |
| RESPA - The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks. |
| Retail Lender - A lender who offers mortgage loans directly to the public; as distinct from a wholesale lender who operates through mortgage brokers and correspondents. |
| Reverse Mortgage - A loan to an elderly home owner on which the balance rises over time, and which is not repaid until the owner dies, sells the house, or moves out permanently. |
| Right of Rescission - The right of refinancing borrowers, under the Truth in Lending Act, to cancel the deal at no cost to themselves within 3 days of closing. |
| S |
| Scenario Analysis - Determining how the interest rate and payment on an ARM will change in response to specified future changes in market interest rates, called "scenarios". |
| Scheduled Mortgage Payment - The amount the borrower is obliged to pay each period, including interest, principal, and mortgage insurance, under the terms of the mortgage contract. Paying less than the scheduled amount results in delinquency. On most mortgages, the scheduled payment is the fully amortizing payment throughout the life of the loan. On some mortgages, however, the scheduled payment for the first 5 or 10 years is the interest payment. |
| Second Mortgage - A loan with a second priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid. They are also known as "home equity loans". |
| Secure Option ARM - An option ARM on which the initial rate holds for 5 years rather than one month. |
| Secondary Markets - Markets in which mortgages or mortgage-backed securities are bought and sold. |
| Self Employed Borrower - A borrower who must document income using tax returns rather than information provided by an employer. This complicates the process somewhat. |
| Seller Contribution - A contribution to a borrower's down payment or settlement costs made by a home seller, as an alternative to a price reduction. |
| Seller Financing - Provision of a mortgage by the seller of a house, often a second mortgage, as a condition of the sale. |
| Servicing - Administering loans between the time of disbursement and the time the loan is fully paid off. This includes collecting monthly payments from the borrower, maintaining records of loan progress, assuring payments of taxes and insurance, and pursuing delinquent accounts. |
| Servicing Agent - The party who services a loan, who may or may not be the lender who originated it. |
| Servicing Release Premium - A payment made by the purchaser of a mortgage to the seller for the release of the servicing on the mortgage. It has no direct relevance to borrowers. |
| Settlement Costs - Costs that the borrower must pay at the time of closing in addition to the down payment. |
| Shared Appreciation Mortgage - A mortgage on which the borrower gives up a share in future price appreciation in exchange for a lower interest rate and/or interest deferral. |
| Short Sale - An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure. |
| Simple Interest Mortgage - A mortgage on which interest is calculated daily based on the balance at the time of the last payment. The daily interest charge within the month is constant; interest is not charged on the interest charges of prior days. |
| Simple Interest Bi-weekly Mortgage - A bi-weekly mortgage on which the bi-weekly payment is applied to the balance every two weeks, rather than held in an account as on a conventional bi-weekly. |
| Single File Mortgage Insurance- A type of mortgage insurance on which the lender pays the premium and prices it in the interest rate. |
| Stated Assets - A documentation requirement where the borrower discloses her assets but they are not verified by the lender. |
| Stated Income - A documentation requirement where the lender verifies the source of the income but not the amount. |
| Subordinate Financing- A second mortgage on the property which is not paid off when a new loan is taken out. The second mortgage lender must allow subordination of the second to the new first mortgage. |
| Subordination Policy - The policy of a second mortgage lender for allowing a borrower to refinance the first mortgage while leaving the second in place. |
| Sub-Prime Borrower - A borrower with poor credit, who can borrow only from sub-prime lenders who specialize in dealing with borrowers who have poor credit. Such borrowers pay more than prime borrowers, and are sometimes taken advantage of. Not all borrowers who deal with sub-prime lenders, however, are sub-prime borrowers. |
| Sub-Prime Lender - A lender who specializes in lending to sub-prime borrowers. |
| Sub-Prime Market - Same as bridge loan. |
| Swing Loan- An agreement whereby a prior mortgage agrees to subordinate or give up their priority position to an existing or anticipated future lien. |
| T |
| Tangible Net Benefit - The net gain to a borrower from a refinancing, which some proposed legislation would make the responsibility of lenders. |
| Tax Service Fee - A fee charged by some lenders at closing to cover the cost of paying taxes on the borrower's property when they come due, or (if the borrower is paying the taxes), verifying that the payment has been made. |
| Teaser Rate - The initial interest rate on an ARM, when it is below the fully indexed rate. |
| Temporary Buy-Down - A reduction in the mortgage payment in the early years of the loan in exchange for an upfront cash payment provided by the home buyer, the seller, or both. |
| Temporary Lender - A lender that sells the loans it originates, as opposed to a portfolio lender who holds them. |
| Term - The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity. |
| Title Insurance- Insurance against loss arising from problems connected to the title to property. |
| Total Housing Expense - Housing expense plus monthly debt service. |
| Total Expense Ratio - The ratio of total housing expense to borrower income. |
| Total Interest Payments - The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money. See effective rate. |
| Truth in Lending (TIL) - The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information. |
| U |
| Underage - Fees collected from a borrower by a loan officer that are lower than the target fees specified by the lender or mortgage broker who employs the loan officer. |
| Underwriting - The process of examining all the data about a borrower's property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter. |
| Underwriting Requirements - The standards imposed by lenders in determining whether a borrower qualifies for a loan. These standards are more comprehensive than qualification requirements in that they include an evaluation of the borrower’s creditworthiness. |
| V |
| VA Mortgage - A mortgage with no down payment requirement, available only to ex-servicemen and women as well as those on active duty, on which the lender is insured against loss by the Veterans Administration. |
| W |
| Waive Escrows - Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure where the lender adds a charge to the monthly mortgage payment that is deposited in an escrow account, from which the lender pays the borrower’s taxes and insurance when they are due. On some loans lenders will not waive escrows, and on loans where waiver is permitted lenders are likely either to charge for it in the form of a small increase in points, or restrict it to borrowers making a large down payment. |
| Warehouse Lender - A firm that lends to temporary lenders against the collateral of closed mortgage loans prior to the sale of the loans in the secondary market. Warehouse lenders can call the loans if the loans "in the warehouse" drop in value. |
| Warrantable Condos - A condominium project with features that lenders view as protections against hazards that would threaten the value of condo units. These features include the project being completed with most units sold rather than rented, no one party owning more than 10% of them, adequate insurance coverage of common structures, and an ownership association independent of the developer. |
| Wholesale Lender - A lender who provides loans through mortgage brokers or correspondents. The mortgage broker or correspondent initiates the transaction, takes the borrower's application, and processes the loan. As distinct from a retail lender. |
| Workout Assumption - The assumption of a mortgage, with permission of the lender, from a borrower unable to continue making the payments. |
| Worst Case Scenario - The assumption that the interest rate on an ARM rises to the maximum extent permitted in the note. On a one-month ARM with no rate adjustment caps, for example, the rate would jump to the maximum rate stipulated in the note in month 2. |
| Wrap-Around Mortgage - A mortgage on a property that already has a mortgage, where the new lender assumes the payment obligation on the old mortgage. Wrap-around mortgages arise when the current market rate is above the rate on the existing mortgage, and home sellers are frequently the lender. A due-on-sale clause prevents a wrap-around mortgage in connection with sale of a property except by violating the clause. |
| X |
No available terms in this section.
|
| Y |
| Yield-Spread Premium - Same as negative points. |
| Yield Curve - A graph that shows, at any given time, how the yield varies with the period to maturity. Usually, the curve slopes upwards but occasionally it slopes down or is flat. A flat yield curve means that yields on long-term bonds are not much higher than those on short-term notes. |
| Z |
| No available terms in this section. |
