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A
An interest rate that periodically changes in relation to an index. Payments may go up or down as the rate is adjusted.
Amortization
A repayment method in which the amount borrowed is repaid though regular monthly payments of principal and interest.
Annual Percentage Rate (APR)
The cost of credit on an annual basis, expressed as a percentage.
Application Fee
The fees that are paid when making an application. An application fee may include charges for property appraisal ($200-$400) and a credit report ($30-50).
Appraisal Fee
A fee charged by an appraiser to estimate the market value of a specific property on a specific date. Required by most lenders to obtain a loan.
Appraisal Report
A written report by an appraiser containing an opinion as to the value of a property and the reasoning leading to that opinion.
B
Balloon (Payment) Mortgage
Usually a short-term fixed-rate loan which involves smaller payments for a certain period of time and one large payment for the remaining unpaid balance when loan is matured.
Points
1/100th of 1% expressed as margin over index rate. For example, .25% equals 25 basis points. An index of 5% plus 275 basis points would equal an interest rate of 7.25%.
C
Cap
The maximum an adjustable-rate mortgage may increase, regardless of index changes.
Cash Out
Receiving money back when refinancing a present mortgage.
Certificate of Title
A statement provided by an abstract company, title company or attorney stating that the title of real estate is legally held by the current owner.
Clear Title
A title which has no liens on a specific piece of property.
Closing
The meeting between the buyer, lender, and seller (if applicable) at which all documents for a loan are signed, dated and (if applicable) notarized. Also referred to as settlement.
Closing Costs
The fees assessed at the closing or settlement which are associated with the purchase of a piece of property. This generally includes an origination fee, discount points, attorneys fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.
Comparative Market Analysis
An estimate of the value of a property based on an analysis of recent sales of similar properties.
Credit History
A record of a person’s unpaid and fully repaid debts. A credit history helps to determine if a borrower has a history of repaying their debts in a timely manner.
Credit Report
A report of a person’s credit history (including legal history on bankruptcy) prepared by a credit reporting agency and used by a lender in determining a loan applicant’s creditworthiness.
D
Debt Service
The periodic payments made on loans such as credit card, auto, mortgage or other debts.
Debt-to-Income Ratio
The ratio of a borrower’s monthly payment obligation on long-term debts (including housing expense) divided by their gross monthly income. For example, if your monthly payment obligations on long-term debts total $1,400 and your gross monthly income is $4,500, then you debt-to-income ratio would be 31%.
Default
The failure to make timely payments or comply with other requirements of a loan.
Delinquency
The failure to make payments when they are due.
Discount Points (or Points)
The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent of the loan amount. Three points charged on a loan in the amount of $150,000, would be $4,500.
Down Payment
The difference between the purchase price and that portion of the purchase price being financed.
E
Engineering Report
A report generated by an engineer describing the current physical condition of the property and its major building systems.
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
The difference between the appraised value of a property and the outstanding loan balance.
Escrow
An account set up by the lender in which money is held to pay for taxes and insurance.
F
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer credit reporting agencies. It establishes procedures for correcting mistakes on one’s credit report.
Fair Market Value
The price which a property would bring in a competitive market.
Fixed Rate Loan
A loan on which the same rate of interest is charged for the life of the loan.
Foreclosure
The process by which a lender takes back a property on which the mortgagee has defaulted—usually the process of foreclosure occurs if payments are more than 90 days past due.
G
Good Faith Estimate
A written estimate of closing fees, which a lender must provide to the borrower within three days of submitting an application.
Grace Period
The time during which a loan payment may be paid after its due date but not incur a late penalty. Such late payments may be reported on your credit report.
Gross Income
Total income of the borrower before deducting taxes or expenses.
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.
Historical scenario
The assumption that the index value to which the rate on an ARM is tied follows the same pattern as in some prior historical period. In meeting their disclosure obligations in connection with ARMs, some lenders show how the mortgage payment would have changed on a mortgage originated some time in the past. That is not very useful. Showing how a mortgage originated now would change if the index followed a historical pattern would be useful, but nobody does it.
Homebuyer protection plan
A plan purporting to protect FHA homebuyers against property defects.
Homeowner’s equity
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. See What Is a HELOC and How Do You Shop For a HELOC?
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.
Home Keeper
A reverse mortgage program administered by Fannie Mae. See Reverse Mortgages.
Home Owners Loan Corporation
A Federal Government agency established by Congress in 1933 to help families avoid having their homes foreclosed.
Housing bank
A government-owned or affiliated housing lender. With minor exceptions, government in the US has never loaned directly to consumers, but housing banks are widespread in many developing countries
Housing bubble
A marked increase in house prices fueled partly by expectations that prices will continue to rise. See A Look at Housing Bubbles.
Housing expense
The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees.
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. See Qualifying for a Mortgage.
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, including 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
Index
A published interest rate. An index which determines changes in the interest rate of an adjustable-rate loan. Examples of an index are Wall Street Journal prime, U. S. Treasury Rates, etc.
Interest Rate
The sum charged for borrowing money, expressed as a percentage.
J
Jumbo mortgage
A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $333,700 in 2004 (see Non-conforming mortgage). However, some lenders use the term to refer to programs for even larger loans, such as, e.g., greater than $500,000.
Junk fees
A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount.
K
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. Read Are These Mortgage Late Fees Kosher?
Late payment
A payment received after the grace period stipulated in the note. Most mortgage grace periods are 10 or 15 days.
Lead-Generation site
A mortgage web site designed to provide leads (potential customers) to lenders. Where a referral site provides information about lenders to consumers, with consumers contacting the lenders, a lead-generation site provides information about the consumers to the lenders, and the lenders contact the consumers. They are sometimes called “auction sites” because lenders post their prices directly to the consumer. See Mortgage Auction (or Lead Generation) Sites .
Lease-to-own purchase
A transaction in which a hopeful home buyer leases a home with an option to buy it within a specified period. See Lease-to-Own House Purchases.
Lender
The financial institution offering the loan.
Lien
The right to take and hold or sell the property of a debtor as a security or payment for a debt.
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 “churning”
The process of raising cash periodically through successive cash-out refinancings. It is a scam initiated by mortgage brokers that victimizes wholesale lenders, with the connivance of borrowers. See Periodic Mortgage Refinacings: Who Gets Conned?
Loan discount fee
The term used to describe points on the Good Faith Estimate.
Loan Origination Fee
The fee charged by a lender, to prepare all the documents associated with a loan.
Loan Origination Fee
The fee charged by a lender, to prepare all the documents associated with a loan.
Loan modification
See Mortgage modification.
Loan officer
Employees of lenders or mortgage brokers who find borrowers, sell and counsel them, and take applications. See Mortgage Lenders, Mortgage Brokers and Loan Officers.
Loan provider
A lender or a mortgage broker.
Loan-To-Value Ratio (LTV)
The ratio of the principal amount of the mortgage balance, at origination or thereafter, to the current value of the underlying real estate collateral. For example, if the current value of your home is $200,000, and the balance of your first mortgage is $120,000, then your loan-to-value ratio is 60%.
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. See Locking the Price of a Mortgage Loan, and Mortgage Concepts Home Buyers Should Know.
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. See Did You Pay For Insurance You Didn’t Get?
Lock failure
The inability or unwillingness of a lender to honor a mortgage price that a borrower had believed was guaranteed. See Questions About the Failure of Mortgage Locks.
Lock jumper
A borrower, usually refinancing rather than purchasing a home, who allows a lock to expire when interest rates go down in order to lock again at the lower rate. See Is the Borrower Committed by a Mortgage Lock?
Lock period
The number of days for which any lock or float-down holds. Ordinarily, the longer the period, the higher the price to the borrower.
M
Margin
An amount added to the index to determine the interest rate for adjustable rate loans.
Minimum Payment
The minimum amount that must be paid on a loan.
Maturity
The date the loan becomes due.
N
Negative Amortization
When interest accrued during a payment period is greater than the scheduled payment and that excess amount is added to the outstanding loan balance.
Note
A written agreement containing a promise of the signer to pay a definite sum of money at a specified date or on demand.
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.
Principal
The amount of debt (excluding interest) that remains on a loan.
Q
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. For articles on qualification, see Qualifying For a Mortgage. Also see Mortgage Concepts Home Buyers Should Know.
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 record.
R
Rate
The annual rate of interest on a loan, expressed as a percentage.
Right to Rescission
The legal right to void or cancel a loan agreement in such a way as to regard the contract as if it never happened. This right is given to you for the three days following closing on the refinance of your first mortgage or the taking of a second, third, etc. mortgage on your primary residence.
Refinance
The renewal of an existing loan by the same borrower.
S
Servicing a Loan
The ongoing process by the lender of collecting payments, including accounting for and payment of annual taxes and/or insurance.
T
Term
The borrowing length of the loan.
Title
The written, legal document establishing the right of ownership of a specific piece of property.
Title Insurance
An insurance policy that insures against legal errors in the title search so as to financially guarantee the borrower and lender in the property.
Title Search
An investigation into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership.
Total Debt Ratio
Monthly debt payments, divided by gross monthly income.
Truth-In-Lending Act
A federal law requiring a disclosure of credit terms using a standard format to facilitate comparisons between the lending terms of different financial institutions.
U
Underwriting
The process of deciding whether to make a loan based on factors such as credit, employment and assets.
V
Variable Rate
An interest rate that changes periodically in relation to an index. Payments may go up or down as the rate is adjusted.
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.
Wholesale mortgage prices The interest rate and points quoted by wholesale lenders to mortgage brokers and correspondent lenders.
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.
Y
Yield-Spread premium.
Same as Negative points.
Yield-Spread premium abuse
The practice by mortgage brokers of pocketing a rebate from the lender for delivering a high-rate loan, without the knowledge of the borrower. See Eliminating Yield Spread Premium Abuse.
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. See With a Flat Yield Curve, Which Mortgages Are Best?
1 Month Option ARM
Same as Flexible Payment ARM.
3/2 Downpayment
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, 80/15/5, 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. See Piggy Back Loans: Two Mortgages Cost Less than One?
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. See Which Adjustable Rate Mortgage Index Is the Best?
12 MTA Pay Option ARM
Same as Flexible Payment ARM.
3.95% ARM
A monthly ARM on which the initial rate is 3.95%. See Is a 3.95% Adjustable Rate Mortgage a Good Deal?
100% loan
A loan with no down payment. The loan amount equals the property value. See 100% Mortgage Loans: Blessing or Curse?
125% loan
A loan for 125% of property value.
40-Year Mortgage
A mortgage with a term of 40 years. See 40-Year Loan or Modify the 30 and 15?
