A
Adjustable-rate mortgage (ARM)
A mortgage loan or deed of trust which allows the lender to adjust the interest rate in accordance with a specified index periodically and as agreed to at the inception of the loan. Also called a variable rate mortgage (VRM).
Amortization
Repayment of a mortgage debt with equal periodic payments of both prinicipal and interest, calculated to retire the obligation at the end of a fixed period of time.
Annual percentage rate (APR)
This is not the note rate on your loan. It is a value created according to a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. The APR is can be higher than the actual note rate on your loan.
Appraisal
An opinion or estimate of value. Also refers to the process by which a value estimate is obtained.
Appraised Value
An opinion of value reached by an appraiser based upon knowledge, experience and a study of pertinent data.
B
Back Ratio
The proportion of purchaser income a lender will allow for principal, interest , taxes, insurance and regular monthly debt when evaluation loan applications, normally reflected in a percentage.
Balloon mortgage
A mortgage loan that requires the remaining principal balance be paid at a specific point in time. For example, a loan may be amortized as if it would be paid over a thirty year period, but requires that at the end of the tenth year the entire remaining balance must be paid.
Balloon payment
The final lump sum payment that is due at the termination of a balloon mortgage.
C
Cap
A limit on how much the interest rate or the monthly payment can change, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning, so they may cause negative amortization
Cash-out refinance
When a borrower refinances his mortgage at a higher amount than the current loan balance with the intention of pulling out money for personal use, it is referred to as a “cash out refinance.”
Certificate of Eligibility
A document issues by the Veteran’s Administration, which verifies a veteran’s eligibility for a VA mortgage guarantee.
Chain of title
An analysis of the transfers of title to a piece of property over the years.
Clear title
A title that is free of liens or legal questions as to ownership of the property.
Closing
In real estate, the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to consummate a sale or loan transaction
Closing costs
Closing costs are separated into what are called “non-recurring closing costs” and “pre-paid items.” Non-recurring closing costs are any items which are paid just once as a result of buying the property or obtaining a loan. “Pre-paids” are items which recur over time, such as property taxes and homeowners insurance. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate which they must issue to the borrower within three days of receiving a home loan application.
Conforming loan
Conventional home mortgages eligible for sale and deliver to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). These agencies generally purchase traditional fixed rate level payment first mortgage up to loan amounts mandated by Congressional directive.
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 Financing
In real estate, mortgage financing, which is not insured or guaranteed by a government agency such as HUD/FHA, VA or the Farmers Home Administration.
Credit history/ credit history
A record of an individual’s repayment of debt. Credit histories are reviewed my mortgage lenders as one of the underwriting criteria in determining credit risk.
D
Debt Ratio
The relationship between the borrower’s long term debt payments and the monthly income.
Deed
A written document signed, delivered and usually recorded, which conveys title to property from one owner to another.
Deed of Trust:
A type of security instrument in which the borrower conveys a trust to hold property to a third party (trustee) as security for the lender, with the condition that the trustee shall re-convey the title upon the payment of the debt, and, conversely, will sell the land and pay the debt in the event of default by the borrower. Also called a mortgage.
Delinquency
A loan in which a payment is overdue but not yet in default.
Down payment
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
E
Earnest money deposit
A deposit made by the potential home buyer to show that he or she is serious about buying the house
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 and other liens.
Escrow account
Once you close your purchase transaction, you may have an escrow account or impound account with your lender. This means the amount you pay each month includes an amount above what would be required if you were only paying your principal and interest. The extra money is held in your impound account (escrow account) for the payment of items like property taxes and homeowner’s insurance when they come due. The lender pays them with your money instead of you paying them yourself.
F
FHA mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Along with VA loans, an FHA loan will often be referred to as a government loan.
First mortgage
The mortgage that is in first place among any loans recorded against a property. Usually refers to the date in which loans are recorded, but there are exceptions.
Fixed-rate mortgage
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.
Front Ratio
The proportion of purchaser income lenders will allow for principal, interest, taxes and insurance when evaluating loan applications.
H
Hazard insurance
Insurance coverage that in the event of physical damage to a property from fire, wind, vandalism, or other hazards.
Home Equity Conversion Mortgage (HECM) (AKA: Reverse Mortgage)
Usually referred to as a reverse annuity mortgage, what makes this type of mortgage unique is that instead of making payments to a lender, the lender makes payments to you. It enables older home owners to convert the equity they have in their homes into cash, usually in the form of monthly payments. Unlike traditional home equity loans, a borrower does not qualify on the basis of income but on the value of his or her home. In addition, the loan does not have to be repaid until the borrower no longer occupies the property.
Home inspection
An inspection by a professional that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser.
HUD-1 settlement statement
A document that provides an itemized listing of the funds that were paid at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow (impound) amounts. Each type of expense goes on a specific numbered line on the sheet. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing. It is called a HUD1 because the form is printed by the Department of Housing and Urban Development (HUD). The HUD1 statement is also known as the “closing statement” or “settlement sheet.”
J
Jumbo loan
A loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits. Also called a nonconforming loan. Freddie Mac and Fannie Mae loans are referred to as conforming loans.
L
Late charge
The penalty a borrower must pay when a payment is made a stated number of days. On a first trust deed or mortgage, this is usually fifteen days.
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.
Lien
A legal claim against a property that must be paid off when the property is sold. A mortgage or first trust deed is considered a lien.
Liquid asset
A cash asset or an asset that is easily converted into cash.
Loan
A sum of borrowed money (principal) that is generally repaid with interest.
Loan-to-value (LTV)
The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower).
Lock-in
An agreement in which the lender guarantees a specified interest rate for a certain amount of time at a certain cost.
Lock-in period
The time period during which the lender has guaranteed an interest rate to a borrower.
M
Maturity
The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable.
Mortgage insurance (MI)
Insurance that covers the lender against some of the losses incurred as a result of a default on a home loan. Often mistakenly referred to as PMI, which is actually the name of one of the larger mortgage insurers. Mortgage insurance is usually required in one form or another on all loans that have a loan-to-value higher than eighty percent. Mortgages above 80% LTV that call themselves “No MI” are usually a made at a higher interest rate. Instead of the borrower paying the mortgage insurance premiums directly, they pay a higher interest rate to the lender, which then pays the mortgage insurance themselves. Also, FHA loans and certain first-time homebuyer programs require mortgage insurance regardless of the loan-to-value.
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.
N
Negative amortization
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment, which is why this is called “deferred interest.” The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.
No cash-out refinance
A refinance transaction which is not intended to put cash in the hand of the borrower. Instead, the new balance is calculated to cover the balance due on the current loan and any costs associated with obtaining the new mortgage. Often referred to as a “rate and term refinance.”
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.
O
Occupancy
The use of property as a full-time residence, either by the title holder (owner-occupancy) or by another party through formal agreement.
Original principal balance
The total amount of principal owed on a mortgage before any payments are made.
P
PITI
This stands for principal, interest, taxes and insurance. If you have an “impounded” loan, then your monthly payment to the lender includes all of these and probably includes mortgage insurance as well. If you do not have an impounded account, then the lender still calculates this amount and uses it as part of determining your debt-to-income ratio.
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.
Planned unit development (PUD)
A type of ownership where individuals actually own the building or unit they live in, but common areas are owned jointly with the other members of the development or association. Contrast with condominium, where an individual actually owns the airspace of his unit, but the buildings and common areas are owned jointly with the others in the development or association.
Prepayment
The payment of all or part of a mortgage debt before it is due.
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 borrower before application for a loan.
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. See remaining balance.
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 on conventional loans for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
Q
Qualifying ratios
Calculations that are used in determining whether a borrower can qualify for a mortgage. There are two ratios. The “top” or “front” ratio is a calculation of the borrower’s monthly housing costs (principle, taxes, insurance, mortgage insurance, homeowner’s association fees) as a percentage of monthly income. The “back” or “bottom” ratio includes housing costs as will as all other monthly debt.
R
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 at a specific cost.
Refinance transaction
The process of paying off one loan with the proceeds from a new loan using the same property as security.
Revolving debt
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.
S
Second mortgage
A mortgage that has a lien position subordinate to the first mortgage.
Servicing
The collection of payments, interest and principal, and escrow or trust items, such as property taxes and hazard insurance on a note for a fee. The servicing fee is included in the price of the loan, so it is invisible to the borrower. Servicing includes the accounting functions and operational procedures for late payment, tax payments, and loan analysis. Servicing rights are a valuable and marketable commodity in the secondary market and have a bearing on the interest rate quoted for a loan.
Subordinate financing
Any mortgage or other lien that has a priority that is lower than that of the first mortgage.
T
Title
A legal document evidencing a person’s right to or ownership of a property.
Transfer tax
State or local tax payable when title passes from one owner to another.
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.
V
Veterans Administration (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.
W
Warranty Deed
A deed in which the grantor or seller warrants or guarantees that good title being conveyed, as opposed to a qui-claim deed that contains no representations or warranty as to the quality of title being passed.
