Adjustable rate mortgage (ARM)
Is a mortgage in which
the interest rate is adjusted periodically based on a pre-selected
index. Also sometimes known as the re-negotiable rate mortgage, the
variable rate mortgage or the Canadian rollover mortgage.
Adjustment interval
On an adjustable rate mortgage,
the time between changes in the interest rate and/or monthly
payment, typically one, three or five years, 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 A.P.R.
Is a interest rate
reflecting the cost of a mortgage as a yearly rate. This rate is
likely to be higher than the stated note rate or advertised rate on
the mortgage, because it takes into account points and other credit
costs. The APR allows home buyers to compare different types of
mortgages based on the annual cost for each loan. Appraisal An
estimate of the value of property, made by a qualified professional
called an "appraiser". Assessment A local tax levied against a
property for a specific purpose, such as a sewer or street
lights.
Assumption
The agreement between buyer and seller
where the buyer takes over the payments on an existing mortgage from
the seller. Assuming a loan can usually save the buyer money since
this is an existing mortgage debt, unlike a new mortgage where
closing cost and new, probably higher, market-rate interest charges
will apply.
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 us ally charge a fee or receive
a commission for their services.
Buy-down
The action to pay additional discount points
(buy down subsidy) to the lender in exchange for a lower interest
rate. The reduced rate may apply for all or a portion of the loan
term. This subsidy amount may be paid by the buyer, lender, seller
or a combination of parties.
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.)
Caps (interest)
Consumer safeguards which limit the
amount the interest rate on an adjustable rate mortgage may change
per year and/or the life of the loan.
Caps (payment)
Consumer safeguards which limit the
amount monthly payments on an adjustable rate mortgage may
change.
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 Determination of Eligibility.
Certificate of Reasonable Value (CRV) A certification for 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) or 6 years in the reserves. 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.
Co Borrower (co signer, co mortgagor)
One who signs a
mortgage contract with another party or parties and is hereby
jointly obligated to repay the loan. Generally a co borrower
provides some assistance in meeting the requirements of the loan,
and receives a share of interest in the encumbered property.
Commitment
An agreement, often in writing, between a
lender and a borrower to loan money at a future date subject to the
completion of paperwork or compliance with stated conditions.
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. construction loan (interim loan): A loan to provide
the funds necessary 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.
Construction loan
A short term interim loan for
financing the cost of construction. The lender advance funds to the
builder at periodic intervals as the work progresses.
Conventional loan
A mortgage not insured by FHA or
guaranteed by the VA.
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 net effective
income (FHA/VA loans) or gross monthly income (conventional loans).
See housing expenses-to-income ratio.
Deed of trust
In many states, this document is used in
place of a mortgage to secure the payment of a note.
Default
Failure to meet legal obligations in a
contract, specifically, failure to make the monthly payments on a
mortgage.
Deferred interest:
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.
see negative amortization
Delinquency
Failure to make payments on time. this can
lead to foreclosure.
Department of Veterans Affairs (VA)
An independent
agency of the federal government which guarantees long-term, low-or
no-down payment mortgages to eligible veterans. Discount Point see
point
Down Payment
Money paid to make up the difference
between the purchase price and the mortgage amount. Down payments
can range from 3 percent to 20 percent or more of the sales price on
conventional loans.
Due-On-Interest:
A clause inserted in a mortgage that
allows the lender to call the loan due and payable at its option
upon the transfer of the property also known as paragraph "17" in
FNMA/ FHLMC Mortgage.
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 value an owner has in real estate over and
above the obligation against the property.
Escrow
Funds that are set aside and held in trust,
usually for payment of taxes and insurance on real property. Also
earnest deposits held pending loan closing.
Escrow
Refers to a neutral third party who carries out
the instruction of both the buyer and seller to handle all the
paperwork of settlement or closing." Escrow may also refer to an
account held by the lender into which the home buyer pays money for
tax or insurance payments.
Fannie
Mae
see Federal National Mortgage Association.
Farmers Home Administration (FmHA)
Provides financing
to farmers and other qualified borrowers who are unable to obtain
loans elsewhere.
Federal Home Loan Bank Board (FHLBB)
A regulatory and
supervisory agency for federally chartered savings institutions.
Federal Home Loan Mortgage Corporation(FHLMC)
also
called "Freddie Mac" 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 (HUD). 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 private corporation, federally chartered to
provide financial products and services that increase the
availability and affordability of housing for low-, moderate-, and
middle-income Americans. The largest corporation in America, Fannie
Mae has $287 billion in assets and an additional $544 billion in
Mortgage-Backed Securities outstanding. Next to the U.S. Treasury,
it is often the second largest borrower in the capital markets.
Fannie Mae is traded on the New York Stock Exchange (FNM) and has
approximately 190,000 shareholders.
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), they are generous
enough to handle moderately-priced homes almost anywhere in the
country.
FHA Mortgage Insurance Premium (MIP)
An amount equal
to 2.25 percent of the loan amount paid at closing or financed into
the loan amount. In addition, FHA mortgage insurance requires an
annual fee of 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 saving and loans by purchasing their
conventional loans. Also known as "Freddie Mac."
Firm Commitment
A promise by FHA to insure a mortgage
loan 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.
Foreclosure
A legal procedure in which property
securing debt is sold by the lender to pay the defaulting borrower's
debt.
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
mortgage, 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
A promise 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 (Homeowners 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
A published interest rate against which lenders
measure the difference between the current interest rate on an
adjustable rate mortgage and that earned by other investments (such
as one- three-, and five-year U.S. Treasury security yields
(T-Bills), the monthly average interest rate on loans closed by
savings and loan institutions, and the monthly average
costs-of-funds incurred by savings and loans), which is then used to
adjust the interest rate on an adjustable mortgage up or down.
Investor
A money source for a lender (FNMA, FHLMC,
GNMA).
Interim Financing
A construction loan made during
completion of a building or a project. A permanent loan usually
replaces this loan after completion.
Jumbo
Loan
A loan which is larger (more than $207,000) 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.
LNOV (Lenders Notification Of Reasonable Value)
A
certification for an appraisal issued by the Lender in place of a
CRV showing the property's current market value.
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 amount a lender adds to the index on
an adjustable rate mortgage to establish the adjusted interest
rate.
Market Value
The highest price that a buyer would pay
and the lowest price a seller would accept on a property. Market
value may be different from the price a property could actually be
sold for at a given time.
MIP: Mortgage Insurance Premium
A monthly premium paid
by the homeowner in addition to the Up Front MIP that is generally
financed. The monthly mortgage insurance is equal to the mortgage
amount multiplied by .005 divided by 12. ($100,000 x .005 / 12 =
$41.67 per month)
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
Occurs when your monthly
payments are not large enough to pay all the interest due on the
loan. This unpaid interest is added to the unpaid balance of the
loan. the danger of negative amortization is that the home buyer
ends up owing more than the original amount of the loan.
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.
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 (loan discount points)
Prepaid interest
assessed at closing by the lender. Each point is equal to 1 percent
of the loan amount (e.g., two points on a $100,000 mortgage would
cost $2,000).
Power of Attorney
A legal document authorizing one
person to act on behalf of another.
Prepaid Expenses
Necessary to create an escrow account
or to adjust the seller's existing escrow account. Can include
taxes, hazard insurance, private mortgage insurance and special
assessments.
Prepayment
A privilege in a mortgage permitting the
borrower to make payments in advance of their due date.
Prepayment Penalty
Money charged for an early
repayment of debt. Prepayment penalties are allowed in some form
(but not necessarily imposed) in 36 states and the District of
Columbia.
Primary Mortgage Market
Lenders making mortgage loans
directly to borrower's such as savings and loan association,
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 3 percent in some cases. With the smaller
down payment loans, however, borrowers are required to carry private
mortgage insurance which is generally paid monthly, and obtained by
the lender through a Private Mortgage Insurance Company (GE, MGIC,
United Guarantee, Amerin, PMI, etc).
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.
Negotiable Rate Mortgage (RBM)
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 as Satisfaction of Mortgage: The
document issued by the mortgagee when the mortgage loan 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. term mortgage see balloon
payment mortgage.
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 us ally a function of the
value of the property, and is often borne by the purchaser and/or
seller.
Title Search
An examination of municipal records to
determine the legal ownership of property. Usually is performed by
an attorney or title company.
Truth-In-Lending
A federal law requiring disclosure of
the Annual Percentage Rate and other loan terms to home buyers
within 72 hours of loan application per 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 7or 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 7or 10 years. also called "Super Seven" or
"Premier" mortgage.
Underwriting
The decision whether to make a loan
to a potential home buyer based on income, assets, credit,
collateral 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 3 %
(depending on the size of the down payment, and previous use of
benefits) paid on a VA-backed loan. An eligible veteran who is using
his eligibility for the first time will pay a 2% funding fee which
can be 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. This document is generally not needed if
recent bank statements are available.
Verification of Employment (VOE)
A document signed by
the borrower's employer verifying his/her position and salary. This
document is generally not needed if recent pay stubs are
available.
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.
