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Acceleration clause
A provision in a mortgage that gives the lender the right to demand
payment of the entire principal balance if a monthly payment is missed.
Additional principal payment
A payment by a borrower of more than the scheduled principal amount due in
order to reduce the remaining balance on the loan.
Adjustable-rate mortgage (ARM)
A mortgage that permits the lender to adjust its interest rate
periodically on the basis of changes in a specified index.
Adjustment date
The date on
which the interest rate changes for an adjustable-rate mortgage (ARM).
Adjustment period
The period
that elapses between the adjustment dates for an adjustable-rate mortgage
(ARM).
Amortization
The gradual repayment of a mortgage loan by installments.
Amortization schedule
A timetable for payment of a mortgage loan. An amortization schedule shows
the amount of each payment applied to interest and principal and shows the
remaining balance after each payment is made.
Amortization term
The amount of time required to amortize the mortgage loan. The
amortization term is expressed as a number of months. For example, for a
30-year fixed-rate mortgage, the amortization term is 360 months.
Amortize
To repay a
mortgage with regular payments that cover both principal and interest.
Annual mortgagor statement
A report sent to the mortgagor each year. The report shows how much was
paid in taxes and interest during the year, as well as the remaining
mortgage loan balance at the end of the year.
Annual percentage rate (APR)
The cost of a mortgage stated as a yearly rate; includes such items as
interest, mortgage insurance, and loan origination fee (points).
Application
A form used to apply for a mortgage loan and to record pertinent
information concerning a prospective mortgagor and the proposed security.
Appraisal
A written analysis of the estimated value of a property prepared by a
qualified appraiser.
Appraised value
An opinion of a property's fair market value, based on an appraiser's
knowledge, experience, and analysis of the property.
Appraiser
A person qualified by education, training, and experience to estimate the
value of real property and personal property.
Asset
Anything of monetary value that is owned by a person. Assets include real
property, personal property, and enforceable claims against others
(including bank accounts, stocks, mutual funds, and so on).
Assignment
The transfer of a mortgage from one person to another.
Assumable mortgage
A mortgage that can be taken over ("assumed") by the buyer when
a home is sold.
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Balloon mortgage
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.
Balloon payment
The final lump sum payment that is made at the maturity date of a balloon
mortgage.
Before-tax income
Income before taxes are deducted.
Biweekly payment mortgage
A mortgage that requires payments to reduce the debt every two weeks
(instead of the standard monthly payment schedule). The 26 (or possibly
27) biweekly payments are each equal to one-half of the monthly payment
that would be required if the loan were a standard 30-year fixed-rate
mortgage, and they are usually drafted from the borrower’s bank account.
The result for the borrower is a substantial savings in interest.
Bridge loan
A form of second trust that is collateralized by the borrower's present
home (which is usually for sale) in a manner that allows the proceeds to
be used for closing on a new house before the present home is sold. Also
known as "swing loan."
Buydown mortgage
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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Cap
A provision of an adjustable-rate mortgage (ARM) that limits how much the
interest rate or mortgage payments may increase or decrease.
Capital
(1) Money used to create income, either as an investment in a business or
an income property. (2) The money or property comprising the wealth owned
or used by a person or business enterprise. (3) The accumulated wealth of
a person or business. (4) The net worth of a business represented by the
amount by which its assets exceed liabilities.
Cash-out refinance
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.
Certificate of Eligibility
A document issued by the federal government certifying a veteran’s
eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that
establishes the maximum value and loan amount for a VA mortgage.
Change frequency
The frequency (in months) of payment and/or interest rate changes in an
adjustable-rate mortgage (ARM).
Clear title
A title that is free of liens or legal questions as to ownership of the
property.
Closing
A meeting at which a sale of a property is finalized by the buyer signing
the mortgage documents and paying closing costs. Also called
"settlement."
Closing cost item
A fee or amount that a homebuyer must pay at closing for a single service,
tax, or product. Closing costs are made up of individual closing cost
items such as origination fees and attorney's fees. Many closing cost
items are included as numbered items on the HUD-1 statement.
Closing costs
Expenses (over and above the price of the property) incurred by buyers and
sellers in transferring ownership of a property. Closing costs normally
include an origination fee, an attorney's fee, taxes, an amount placed in
escrow, and charges for obtaining title insurance and a survey. Closing
costs percentage will vary according to the area of the country; lenders
or realtors® often provide estimates of closing costs to
prospective homebuyers..
Collateral
An asset that guarantees the repayment of a loan. Generally a home is
considered collateral when speaking of mortgages.
Co-borrower
A person who signs a promissory note along with the borrower. A co-maker's
signature guarantees that the loan will be repaid, because the borrower
and the co-maker are equally responsible for the repayment. See endorser.
Commitment letter
A formal offer by a lender stating the terms under which it agrees to lend
money to a home buyer. Also known as a "loan commitment."
Comparables (or “Comps”)
An abbreviation for "comparable properties"; used for
comparative purposes in the appraisal process. Comparables are properties
like the property under consideration; they have reasonably the same size,
location, and amenities and have recently been sold. Comparables help the
appraiser determine the approximate fair market value of the subject
property.
Compound interest
Interest paid on the original principal balance and on the accrued and
unpaid interest.
Construction loan
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.
Conventional or Conforming mortgage
A mortgage that is not insured or guaranteed by the federal government.
Generally refers to loans purchased by FNMA or FHLMC.
Convertible ARM
An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate
mortgage under specified conditions.
Cost of funds index (COFI)
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.
Covenant
A clause in a mortgage that obligates or restricts the borrower and that,
if violated, can result in foreclosure.
Credit
An agreement in which a borrower receives something of value in exchange
for a promise to repay the lender at a later date.
Credit history
A record of an individual's open and fully repaid debts. A credit history
helps a lender to determine whether a potential borrower has a history of
repaying debts in a timely manner.
Credit life insurance
A type of insurance often bought by mortgagors because it will pay off the
mortgage debt if the mortgagor dies while the policy is in force.
Creditor
A person to whom money is owed.
Credit report
A report of an individual's credit history prepared by a credit bureau and
used by a lender in determining a loan applicant's creditworthiness. See
merged credit report.
Credit repository
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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Deed
The legal document conveying title to a property.
Deed-in-lieu
A deed given by a mortgagor to the mortgagee to satisfy a debt and avoid
foreclosure.
Default
Failure to make mortgage payments on a timely basis or to comply with
other requirements of a mortgage.
Delinquency
Failure to make mortgage payments when mortgage payments are due.
Discount points
See “Points”
Down payment
The part of the purchase price of a property that the buyer pays in cash
and does not finance with a mortgage.
Due-on-sale provision
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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Effective age
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.
Equal Credit Opportunity Act (ECOA)
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
A homeowner's financial interest in a property. Equity is the difference
between the fair market value of the property and the amount still owed on
its mortgage.
Escrow
An item of value, money, or documents deposited with a third party to be
delivered upon the fulfillment of a condition. For example, the deposit by
a borrower with the lender of funds to pay taxes and insurance premiums
when they become due, or the deposit of funds or documents with an
attorney or escrow agent to be disbursed upon the closing of a sale of
real estate.
Escrow account
The account in which a mortgage servicer holds the borrower’s escrow
payments prior to paying property expenses.
Escrow payment
The portion of a mortgagor’s monthly payment that is held by the
servicer to pay for taxes, hazard insurance, mortgage insurance, lease
payments, and other items as they become due. Known as
"impounds" or "reserves" in some states.
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Fair Credit Reporting Act
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.
Fannie Mae/Freddie Mac
Fannie Mae (FNMA) and Freddie Mac (FHLMC) are two quasi-government
agencies that provide the lion’s share of home financing money in the
United States. While both are stock companies traded on the NYSE, they are
government chartered and regulated.
Federal Housing Administration (FHA)
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.
Fee simple
The greatest possible interest a person can have in real estate.
FHA mortgages
A mortgage that is insured by the Federal Housing Administration (FHA).
Also known as a government mortgage.
First mortgage
A mortgage that is the primary lien against a property.
Fixed-rate mortgage (FRM)
A mortgage in which the interest rate does not change during the entire
term of the loan.
Flood insurance
Insurance that compensates for physical property damage resulting from
flooding. It is required for properties located in federally designated
flood areas.
Foreclosure
The legal process by which a borrower in default under a mortgage is
deprived of his or her interest in the mortgaged property. This usually
involves a forced sale of the property at public auction with the proceeds
of the sale being applied to the mortgage debt.
Fully amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is
sufficient to amortize the remaining balance, at the interest accrual
rate, over the amortization term.
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Government National Mortgage Association
A government-owned corporation within the U.S. Department of Housing and
Urban Development (HUD).
Growing-equity mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment increases over an
established period of time, with the increased amount of the monthly
payment applied directly toward reducing the remaining balance of the
mortgage.
Guarantee mortgage
A mortgage that is guaranteed by a third party.
Guaranteed loan
Also known as a government mortgage.
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Hazard insurance
Insurance coverage that compensates for physical damage to a property from
fire, wind, vandalism, or other hazards.
Home equity line of credit
A mortgage loan, which is usually in a subordinate position, that allows
the borrower to obtain multiple advances of the loan proceeds at his or
her own discretion, up to an amount that represents a specified percentage
of the borrower's equity in a property.
Home inspection
A thorough inspection that evaluates the structural and mechanical
condition of a property. A satisfactory home inspection is often included
as a contingency by the purchaser.
Housing expense ratio
The percentage of gross monthly income that goes toward paying housing
expenses.
HUD median income
Median family income for a particular county or metropolitan statistical
area (MSA), as estimated by the Department of Housing and Urban
Development (HUD).
HUD-1 statement
A document that provides an itemized listing of the funds that are payable
at closing. Items that appear on the statement include real estate
commissions, loan fees, points, and initial escrow amounts. Each item on
the statement is represented by a separate number within a standardized
numbering system. The totals at the bottom of the HUD-1 statement define
the seller's net proceeds and the buyer's net payment at closing. The
blank form for the statement is published by the Department of Housing and
Urban Development (HUD). The HUD-1 statement is also known as the
"closing statement" or "settlement sheet."
Investment or Income property
Real estate developed or improved to produce income.
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Index
A number used to compute the interest rate for an adjustable-rate mortgage
(ARM). The index is generally a published number or percentage, such as
the average interest rate or yield on Treasury bills. A margin is added to
the index to determine the interest rate that will be charged on the ARM..
This interest rate is subject to any caps that are associated with the
mortgage.
In-file credit report
An objective account, normally computer-generated, of credit and legal
information obtained from a credit repository.
Initial interest rate
The original interest rate of the mortgage at the time of closing. This
rate changes for an adjustable-rate mortgage (ARM). Sometimes known as
"start rate" or "teaser."
Installment
The regular periodic payment that a borrower agrees to make to a lender.
Installment loan
Borrowed money that is repaid in equal payments, known as installments. A
furniture loan is often paid for as an installment loan.
Insurable title
A property title that a title insurance company agrees to insure against
defects and disputes.
Insurance binder
A document that states that insurance is temporarily in effect. Because
the coverage will expire by a specified date, a permanent policy must be
obtained before the expiration date.
Interest
The fee charged for borrowing money.
Interest accrual rate
The percentage rate at which interest accrues on the mortgage. In most
cases, it is also the rate used to calculate the monthly payments,
although it is not used for an adjustable-rate mortgage (ARM) with payment
change limitations.
Interest rate
The rate of interest in effect for the monthly payment due.
Interest rate ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as
specified in the mortgage note.
Interest rate floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as
specified in the mortgage note.
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Jumbo loan
A loan that exceeds FNMA & FHLMC legislated mortgage amount limits.
Also called a nonconforming loan. Currently any loan exceeding $240,000
for single family homes.
Late charge
The penalty a borrower must pay when a payment is made a stated number of
days (usually 15) after the due date.
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Legal description
A property description, recognized by law, that is sufficient to locate
and identify the property without oral testimony.
Liabilities
A person's financial obligations. Liabilities include long-term and
short-term debt, as well as any other amounts that are owed to others.
Lifetime payment cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments
can increase or decrease over the life of the mortgage. See cap.
Lifetime rate cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the
interest rate can increase or decrease over the life of the loan. See cap.
Liquid asset
A cash asset or an asset that is easily converted into cash.
Loan origination
The process by which a mortgage lender brings into existence a mortgage
secured by real property.
Loan-to-value (LTV) percentage
The relationship between the principal balance of the mortgage and the
appraised value (or sales price if it is lower) of the property. For
example, a $100,000 home with an $80,000 mortgage has a LTV percentage of
80 percent.
Lock-in
A written agreement in which the lender guarantees a specified interest
rate if a mortgage goes to closing within a set period of time. The
lock-in also usually specifies the number of points to be paid at closing.
Lock-in period
The time period during which the lender has guaranteed an interest rate to
a borrower.
Margin
For an adjustable-rate mortgage (ARM), the amount that is added to the
index to establish the interest rate on each adjustment date, subject to
any limitations on the interest rate change.
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Maturity
The date on which the principal balance of a loan, bond, or other
financial instrument becomes due and payable.
Merged credit report
A credit report that contains information from three credit repositories.
When the report is created, the information is compared for duplicate
entries. Any duplicates are combined to provide a summary of a your
credit.
Modification
The act of changing any of the terms of the mortgage.
Mortgage
A legal document that pledges a property to the lender as security for
payment of a debt.
Mortgage banker
A company that originates mortgages exclusively for resale in the
secondary mortgage market.
Mortgage broker
An individual or company that brings borrowers and lenders together for
the purpose of loan origination. Mortgage brokers typically require a fee
or a commission for their services.
Mortgagee
The lender in a mortgage agreement.
Mortgage insurance
A contract that insures the lender against loss caused by a mortgagor's
default on a government mortgage or conventional mortgage. Mortgage
insurance can be issued by a private company or by a government agency
such as the Federal Housing Administration (FHA).
Mortgage insurance premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either to a
government agency such as the Federal Housing Administration (FHA) or to a
private mortgage insurance (MI) company.
Mortgage life insurance
A type of term life insurance often bought by mortgagors. The amount of
coverage decreases as the principal balance declines. In the event that
the borrower dies while the policy is in force, the debt is automatically
satisfied by insurance proceeds.
Mortgagor
The borrower in a mortgage agreement.
Negative amortization
A gradual increase in mortgage debt that occurs when the monthly payment
is not large enough to cover the entire principal and interest due. The
amount of the shortfall is added to the remaining balance to create
"negative" amortization.
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No cash-out refinance
A refinance transaction in which the new mortgage amount is limited to the
sum of the remaining balance of the existing first mortgage, closing costs
(including prepaid items), points, the amount required to satisfy any
mortgage liens that are more than one year old (if the borrower chooses to
satisfy them), and other funds for the borrower's use (as long as the
amount does not exceed 1 percent of the principal amount of the new
mortgage).
Note
A legal document that obligates a borrower to repay a mortgage loan at a
stated interest rate during a specified period of time.
Note rate
The interest rate stated on a mortgage note.
Original principal balance
The total amount of principal owed on a mortgage before any payments are
made.
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Origination fee
A fee paid to a lender for processing a loan application. The origination
fee is stated in the form of points. One point is 1 percent of the
mortgage amount.
Owner financing
A property purchase transaction in which the property seller provides all
or part of the financing.
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Payment change date
The date when a new monthly payment amount takes effect on an
adjustable-rate mortgage (ARM) or a graduated-payment
adjustable-rate mortgage (GPARM). Generally, the payment change date
occurs in the month immediately after the adjustment date.
Periodic payment cap
For an adjustable-rate mortgage (ARM), a limit on the amount that
payments can increase or decrease during any one adjustment period.
Periodic rate cap
For an adjustable-rate mortgage (ARM), a limit on the amount that
the interest rate can increase or decrease during any one-adjustment
period, regardless of how high or low the index might be.
Personal property
Any property that is not real property.
PITI reserves
A cash amount that a borrower must have on hand after making a down
payment and paying all closing costs for the purchase of a home. The
principal, interest, taxes, and insurance (PITI) reserves must equal
the amount that the borrower would have to pay for PITI for a
predefined number of months.
Point
A one-time charge by the lender for originating a loan. A point is 1
percent of the amount of the mortgage. .
Prearranged refinancing agreement
A formal or informal arrangement between a lender and a borrower
wherein the lender agrees to offer special terms (such as a
reduction in the costs) for a future refinancing of a mortgage being
originated as an inducement for the borrower to enter into the
original mortgage transaction.
Prepayment
Any amount paid to reduce the principal balance of a loan before the
due date. Payment in full on a mortgage that may result from a sale
of the property, the owner's decision to pay off the loan in full,
or a foreclosure. In each case, prepayment means payment occurs
before the loan has been fully amortized.
Prepayment penalty
A fee that may be charged to a borrower who pays off a loan before
it is due.
Pre-qualification
The process of determining how much money a prospective homebuyer
will be eligible to borrow before he or she applies for a loan.
Prime rate
The interest rate that banks charge to their preferred customers.
Changes in the prime rate influence changes in other rates,
including mortgage interest rates.
Principal
The amount borrowed or remaining unpaid. The part of the monthly
payment that reduces the remaining balance of a mortgage.
Principal balance
The outstanding balance of principal on a mortgage. The principal
balance does not include interest or any other charges.
Principal, interest, taxes, and insurance (PITI)
The four components of a monthly mortgage payment. Principal refers
to the part of the monthly payment that reduces the remaining
balance of the mortgage. Interest is the fee charged for borrowing
money. Taxes and insurance refer to the amounts that are paid into
an escrow account each month for property taxes and mortgage and
hazard insurance.
Private mortgage insurance (MI)
Mortgage insurance that is provided by a private mortgage insurance
company to protect lenders against loss if a borrower defaults. Most
lenders generally require MI for a loan with a loan-to-value (LTV)
percentage in excess of 80 percent.
Purchase money transaction
The acquisition of property through the payment of money or its
equivalent.
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Qualifying ratios
Calculations that are used in determining whether a borrower can qualify
for a mortgage. They consist of two separate calculations: a housing
expense as a percent of income ratio and total debt obligations as a
percent of income ratio.
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Quitclaim deed
A deed that transfers without warranty whatever interest or title a
grantor may have at the time the conveyance is made.
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Rate lock
A commitment issued by a lender to a borrower or other mortgage originator
guaranteeing a specified interest rate for a specified period of time.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance
notice of closing costs.
Rescission
The cancellation or annulment of a transaction or contract by the
operation of a law or by mutual consent. Borrowers usually have the option
to cancel a refinance transaction within three business days after it has
closed.
Recording
The noting in the registrar’s office of the details of a properly
executed legal document, such as a deed, a mortgage note, a satisfaction
of mortgage, or an extension of mortgage, thereby making it a part of the
public record.
Refinance transaction
The process of paying off one loan with the proceeds from a new loan using
the same property as security.
Revolving liability
A credit arrangement, such as a credit card, that allows a customer to
borrow against a preapproved line of credit when purchasing goods and
services. The borrower is billed for the amount that is actually borrowed
plus any interest due.
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Second mortgage
A mortgage that has a lien position subordinate to the first mortgage.
Secondary mortgage market
The buying and selling of existing mortgages.
Secured loan
A loan that is backed by collateral.
Security
The property that will be pledged as collateral for a loan.
Seller take-back
An agreement in which the owner of a property provides financing, often in
combination with an assumable mortgage.
Servicer
An organization that collects principal and interest payments from
borrowers and manages borrowers’ escrow accounts. The servicer often
services mortgages that have been purchased by an investor in the
secondary mortgage market.
Servicing
The collection of mortgage payments from borrowers and related
responsibilities of a loan servicer.
Step-rate mortgage
A mortgage that allows for the interest rate to increase according to a
specified schedule (i.e., seven years), resulting in increased payments as
well. At the end of the specified period, the rate and payments will
remain constant for the remainder of the loan.
Subordinate financing
Any mortgage or other lien that has a priority that is lower than that of
the first mortgage.
Survey
A drawing or map showing the precise legal boundaries of a property, the
location of improvements, easements, rights of way, encroachments, and
other physical features.
Sweat equity
Contribution to the construction or rehabilitation of a property in the
form of labor or services rather than cash.
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Title
A legal document evidencing a person's right to or ownership of a
property.
Title company
A company that specializes in examining and insuring titles to real
estate.
Title insurance
Insurance that protects the lender (lender's policy) or the buyer (owner's
policy) against loss arising from disputes over ownership of a property.
Title search
A check of the title records to ensure that the seller is the legal owner
of the property and that there are no liens or other claims outstanding.
Total expense ratio
Total obligations as a percentage of gross monthly income. The total
expense ratio includes monthly housing expenses plus other monthly debts.
Transfer tax
State or local tax payable when title passes from one owner to another.
Treasury index
An index that is used to determine interest rate changes for certain
adjustable-rate mortgage (ARM) plans. It is based on the results of
auctions that the U.S. Treasury holds for its Treasury bills and
securities or is derived from the U.S. Treasury's daily yield curve, which
is based on the closing market bid yields on actively traded Treasury
securities in the over-the-counter market.
Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the
terms and conditions of a mortgage, including the annual percentage rate
(APR) and other charges.
Two-step mortgage
An adjustable-rate mortgage (ARM) that has one interest rate for the first
five or seven years of its mortgage term and a different interest rate for
the remainder of the amortization term.
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Underwriting
The process of evaluating a loan application to determine the risk
involved for the lender. Underwriting involves an analysis of the
borrower's creditworthiness and the quality of the property itself.
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VA mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA).
Also known as a government mortgage.
Department of Veterans
Affairs (VA)
An agency of the federal government that guarantees residential mortgages
made to eligible veterans of the military services. The guarantee protects
the lender against loss and thus encourages lenders to make mortgages to
veterans.
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