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1

1 Month Option ARM

See flexible payment ARM.

12

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.

12 MTA Pay Option ARM

See flexible payment ARM.

80

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 of these loans is to avoid having to pay PMI which is required on first mortgages that exceed 80% of the home’s value.

100

100% loan

A loan with no down payment. The loan amount equals the property value.

125

125% loan

A loan for 125% of property value.

203

203(b)

FHA program which provides mortgage insurance to protect lenders from default; used to finance the purchase of new or existing one- to four family housing; characterized by low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amount.

203(k)

FHA mortgage insurance program enables homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.

401k

A type of employer-sponsored, defined-contribution retirement plan under section 401k of the Internal Revenue Code. A 401k plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wage paid directly into his or her 401k account. In the vast majority of these plans, the employee can select from a number of investment options – usually an assortment of mutual funds – and re-allocate money among these investment choices at any time.

A

A-Credit

Designates a consumer with the best credit rating, and consequently, deserves the lowest prices that lenders offer. Most lenders require a FICO score above 720 to qualify as A-Credit. Usually, there’s nothing to be gained for being above the A-credit level, but there’s definitely a penalty for being below it.

Acceleration Clause

This is a contractual provision that gives the lender the right to demand repayment of the entire loan balance if the borrower breaks any of the rules or clauses detailed in the mortgage.

Accrued Interest

Interest that accumulates but has not been paid, adding to the total amount owed. This is also known as negative amortization.

Adjustable Rate Mortgage (ARM)

A mortgage that can be adjusted by the lender after an initial period – usually after one, three, five or ten years. During this initial phase the interest rate is usually lower than a comparable fixed-rate mortgage. Most ARMs base their changes on a pre-selected interest rate index over which the lender has no control. See our article on ARMs vs. Fixed.

Adjustment Interval

On an ARM, the time between changes in the interest rate or monthly payment. For example, a 3/1 ARM is one where the initial rate remains unchanged for 3 years, after which it is adjusted every year.

Affordability

A consumer's capacity to afford a house. This is usually expressed in terms of the maximum price the consumer could pay for a house and be approved for by a lender. See our How Much House Can You Afford? calculator.

Agreement of sale

A contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Alternative Documentation

Expedited and simpler documentation designed to speed up the loan approval process. Instead of verifying employment with the borrower’s actual employer and bank deposits with the applicant's actual bank, the lender will accept applicant-supplied paycheck stubs, W-2s and bank statements.

Amortization

The repayment of principal from scheduled mortgage payments that exceed the interest due. Subtracting the interest from the scheduled payment equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment. Conversely, negative amortization occurs when the payment is less than the interest due and the balance rises.

Amortization Schedule

A table showing the mortgage payment, broken down by interest and amortization, the loan balance, tax and insurance payments (if made by the lender), and the balance of the tax/insurance escrow account.

Amount Financed

On the Truth-in-Lending form, the loan amount less "prepaid finance charges", which are lender fees paid at closing.

Annual Percentage Rate (APR)

Calculated by using a standard formula, the APR shows the cost of a loan. Expressed as a yearly interest rate, it includes the interest, points, mortgage insurance and other fees associated with the loan.

Application

The first step in the loan approval process, the application is a request for a loan that includes information about the potential borrower, the property and the requested loan.

Application fee

A fee that some lenders charge to accept an application. With some lenders, this fee includes other costs such as a property appraisal or credit report. Also, depending on the lender, this fee may or may not be refundable if the loan is declined.

Appraisal

A published estimate (either written or in digital form) of a property's current fair market value prepared by a certified appraiser. Generally required by a lender before loan approval, the appraisal ensures that the mortgage loan amount is not more than the value of the property.

Appraiser

A certified professional skilled in the practice of estimating the value of real estate. This person is chosen by the lender, but the associated fee is typically paid for by the borrower.

Appraisal Fee

A fee charged by an appraiser for the appraisal of a particular property.

Appreciation

The increase in a home’s value due to physical improvement, and/or market and economic conditions.

Approval

Acceptance of the borrower's loan application. Approval means that the borrower meets the lender's criteria and also its underwriting requirements. Sometimes, this approval may be conditional and require further verification of information provided by the borrower.

APR

See annual percentage rate.

ARM

See adjustable rate mortgage.

Assumable Mortgage

A mortgage that can be transferred from a seller to a buyer. Once the loan is assumed by the buyer, the seller is no longer responsible for repaying it. There may be a fee and/or a credit package involved in the transfer of an assumable mortgage.

Assumption

The act of agreeing to take on the responsibility of repaying an existing home loan.

Assumable Mortgage

A loan which allows a suitable buyer to assume the mortgage of the seller.

Automated Underwriting

A computer-driven process, which quickly informs an applicant whether they will be approved, or whether the application will be forwarded to an underwriter for manual processing. Subject to later verification, the outcome of this automated decision is based on factors such as the borrower's credit history and the subject property.

B

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 must be paid off or refinanced after a period that is shorter than the term. For example, a 15-year balloon loan would need to be paid in full at the end of the 15th year even though the monthly payment was calculated over 30 years. 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.

Bankruptcy

A federal law whereby a person's assets are turned over to a trustee and used to pay off outstanding debts. This usually occurs when someone owes more than they have the ability to repay.

Bimonthly Mortgage

A mortgage where half the monthly payment is due on the first day of the month, and the other half on the 15th.

Biweekly Mortgage

A mortgage where half the monthly payment is due every two weeks. Because this results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term.

Borrower

A person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.

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.

Building Code

Based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction and materials used in construction and modification.

Buy-Down

The payment of points in exchange for a reduced interest rate. A permanent buy-down secures a lower rate over the life of the loan. 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.

C

Cap

A rate lock, plus an option to reduce the rate if interest rates decline during the lock period. Also called a float-down. A cap costs the borrower more than a lock because it is more costly to the lender.

Cash-Out Refinance

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.

Cash reserves

A cash amount sometimes required by the lender to be held in reserve in addition to the down payment and closing costs.

Certificate Of Title

A document provided by a qualified source (such as a title company) that shows the property legally belongs to the current owner. Before the title is transferred at closing, it should be clear and free of all liens or other claims.

Closing

Also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer. It is at this time that the borrower takes on the loan obligation, pays all closing costs and receives title from the seller. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.

Closing Costs

Customary costs above and beyond the sale price of the property, and aside from the down payment, that must be paid to cover the transfer of ownership at closing. These costs generally vary by geographic location, but are detailed to the borrower after submission of a loan application. Read our article on Closing Costs.

Closing Date

The date on which the closing occurs.

Co-Borrowers

One or more persons who have signed the mortgage and are equally responsible for repaying the loan.

Commission

An amount, usually a percentage of the property sales price, that is collected by a real estate professional as a fee for negotiating the transaction.

Cost Of Funds Index (COFI)

One of many interest rate indexes used to determine interest rate adjustments on an ARM.

Conforming Mortgage

A loan eligible for purchase by the two major federal agencies that buy mortgages – Fannie Mae and Freddie Mac.

Conventional Mortgage

A home mortgage that is not guaranteed or insured by the U.S. government.

Conversion Option

The option to convert an ARM to a fixed rate mortgage at some point during its term. These loans are likely to carry a higher rate or points than ARMs that do not have the option.

Cost Of Savings Index (COSI)

One of many interest rate indexes used to determine interest rate adjustments on an ARM.

Co-Signing

The (possibly risky) practice of assuming responsibility for someone else's loan in the event that that party defaults.

Credit History

History of an individual's debt payment. Lenders use this information to gauge a potential borrower's ability to repay a loan.

Credit report

A report from a credit bureau containing a detailed information list of all past and present debts and the timeliness of their repayment.

Credit score

A numerical score, based on an individual's credit history, which quantifies that individual's creditworthiness and risk of defaulting on a loan. The most recognized is FICO.

Cumulative Interest

The sum of all interest payments over the term of a loan.

Current Index Value

The present value of the index used to figure 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 during refinancing.

Debt-To-Income Ratio

A comparison of gross income to housing and non-housing expenses. With the FHA, the monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

Deed

The document that transfers ownership of a property.

Deed In Lieu Of Foreclosure

To avoid foreclosure ("in lieu" of foreclosure), the deed is given to the lender to fulfill the obligation to repay the debt. This process doesn't allow the borrower to remain in the house, but it helps avoid the costs, time and effort associated with foreclosure.

Default

The inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms. Typically, default begins after 90 days or more of delinquency on the loan.

Deferred Interest

See negative amortization.

Delinquency

Failure of a borrower to make timely mortgage payments under a loan agreement. A mortgage payment is typically categorized as delinquent when it’s more than 30 days late.

Demand Clause

A clause in the mortgage that allows the lender to demand repayment at any time for any reason.

Depreciation

The decrease in a home’s value due to neglect, and/or market and economic conditions.

Direct Lender

A lender who offers mortgage loans directly to the public. The type of lender is distinguished from a wholesale lender who operates through mortgage brokers. Compared to a mortgage broker, one of the advantages of a direct lender is that it only chargers the borrower their fees while a broker passes on those fees and also tacks on their own administrative charges.

Discount Points

See points.

Down Payment

The portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.

Due-On-Sale Clause

A stipulation in the mortgage which commands that if the property is sold the loan balance must be repaid.

E

Earnest Money

Money put down by a potential buyer to show that he or she is serious about purchasing the home. Once submitted, it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.

Energy Efficient Mortgage (EEM)

An FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy-efficient features to a new or existing home as part of the home purchase.

Equity

An owner's financial interest in a property. It’s The difference between the value of the home and the balance of outstanding mortgage loan(s) on the home.

Escrow

A specified amount for taxes (and sometimes PMI and hazard insurance) which is paid along with the regular monthly mortgage payment. From this account, the lender pays the taxes (and insurance, if collected) when they come due.

F

Fair Housing Act

A law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status or disability.

Fair Market Value

The hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully and with complete knowledge of the situation.

Fannie Mae

Officially titled the Federal National Mortgage Association (FNMA), it’s one of two federally-chartered agencies (along with Freddie Mac) owned by private stockholders that purchase residential mortgages and convert them into securities for sale to investors. The securities are guaranteed by the agencies.

Fees

The sum of all upfront cash payments required by the lender as part of the charge for the loan.

Federal Housing Administration (FHA)

Established in 1934 to advance homeownership opportunities for all Americans, this organization assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults. By providing this protection, lenders are encouraged to make loans to borrowers who might not qualify for conventional mortgages.

FHA Mortgage

A mortgage on which the lender is insured against loss by the Federal Housing Administration. An FHA mortgage offers a very low down payment, however, the maximum loan amount is also low. Read our article on FHA mortgages.

FICO Score

See credit score.

Financing Points

Including points in the loan amount.

First Mortgage

A mortgage that has first claim against the property in the event of default on the loan.

Fixed Rate Mortgage (FRM)

A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage. See our article on ARMs vs. fixed rate mortgages.

Flexible Payment ARM.

See option ARM.

Flipping

The practice of buying a home or property and quickly reselling it at a profit.

Float

Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate (and points, if included) at any time but must do so a few days before the closing.

Flood Insurance

Insurance that protects homeowners against losses from a flood. If a home is located in a flood plain, the lender will require flood insurance before approving a loan.

Foreclosure

The legal process by which a lender acquires possession of the property when the borrower defaults.

Forbearance Agreement

A compromise where the lender agrees not to exercise its legal right to foreclose in exchange for a binding commitment from the borrower to a payment plan that will cure the borrower’s delinquency.

Freddie Mac

One of two federal agencies – Fannie Mae being the other – that purchase home loans from lenders. This federally-chartered corporation – officially known as the Federal Home Loan Mortgage Corporation (FHLM) – purchases residential mortgages, guarantees them, securitizes them, and sells them to investors. This provides lenders with funds for new homebuyers.

Front-End Fee

A mortgage broker charge paid by the borrower, as distinguished from the back-end fee paid by the lender

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. On FRMs, 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 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.

Ginnie Mae

A government-owned corporation overseen by the U.S. Department of Housing and Urban Development, the Government National Mortgage Association (GNMA) pools FHA-insured and VA-guaranteed loans to back securities for private investment. As With Fannie Mae and Freddie Mac, Ginnie Mae’s investment income provides funding that may then be lent to eligible borrowers by lenders.

Good Faith Estimate

The form that lists the estimated monthly mortgage payment as well as settlement charges due at closing. By law, the lender must provide this form within three business days of receiving the loan application from the borrower. an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

Grace Period

The period after the payment due date during which the borrower can pay without being assessed late fees. Grace periods apply only to mortgages on which interest is calculated monthly.

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.

Graduation Period

The interval at which the payment rises on a GPM.

Graduation Rate

The percentage increase in the payment on a GPM.

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 or property insurance.

Homebuyer Education Learning Program (HELP)

An educational program from the FHA that counsels people about the home buying process. HELP covers topics like budgeting, finding a home, getting a loan and home maintenance. In most cases, completion of the program may entitle the homebuyer to a reduced initial FHA mortgage insurance premium from 2.25% to 1.75% of the home purchase price.

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.

Homebuyer Protection Plan

A plan purporting to protect FHA homebuyers against property defects.

Homeowner's Equity

See equity.

Homeowner Insurance

Homeowner insurance provides damage protection for your home and personal property from a variety of events, including fire, lightning, burglary, vandalism, storms, explosions and more. In addition, all homeowner insurance policies contain personal liability coverage, which protects against lawsuits involving injuries that occurred on and off your property. Also known as hazard insurance or property insurance.

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. If you were to borrow $200,000 as a HELOC, you would have the opportunity to use any amount up to that sum at any time of your choosing. You can draw on the line in a number of ways including writing a check or using a debit card.

Home Equity Conversion Mortgage (HECM)

A reverse mortgage program administered by FHA. See reverse mortgages.

Home Equity Line

See home equity line of credit (HELOC).

Home Equity Loan

See second mortgage.

Home Inspection

An examination of the structure and mechanical systems, which determines a home's safety and condition. This review makes the potential homebuyer aware of any repairs that may be needed.

Home Warranty

A plan that offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner insurance. The coverage runs for a specific time period and does not cover the home's structure.

Home Owners Loan Corporation

A federal government agency established by Congress in 1933 to help families avoid having their homes foreclosed.

Housing Bubble

A dramatic increase in house prices fueled usually by unjustifiable expectations that prices will continue to rise.

Housing Counseling Agency

Provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing and home buying.

Housing Expense

The sum of mortgage payment, hazard insurance, property taxes and homeowner association fees (if applicable). Also known as a 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. The sum is calculated by subtracting the sale price from the loan amount.

HUD

Established in 1965, The U.S. Department of Housing and Urban Development (HUD) works to create a decent home and suitable living environment for all Americans. It does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

HUD1 Form

Also known as the "settlement sheet," this form itemizes all closing costs including all payments and receipts among the parties in the transaction, including borrower, lender, home seller, mortgage broker and various other service providers. The form must be given to the borrower at or before closing.

Hybrid ARM

An ARM which features a fixed, initial-period rate. After this initial period concludes (usually after three years or longer), it becomes an adjustable rate.

HVAC

Short for heating, ventilation and air conditioning – a home's heating and cooling system.

I

Impounds

See escrow.

Index

See interest rate index.

Indexed ARM

An ARM on which the interest rate adjusts in tandem with changes in an interest rate index.

Inflation

A situation where the number of dollars in circulation exceeds the amount of goods and services available for purchase. Inflation results in a decrease in the dollar's value.

Initial Interest Rate

An interest rate that is fixed for some specified number months or, more commonly, years, at an ARM’s inception.

Initial Rate Period

The number of months for which the initial rate holds, ranging from 1 month to 10 years.

Interest

A fee charged for the use of money.

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. Calculated like an APR, except that the APR assumes that the loan runs to term and is always measured before taxes. Conversely, interest cost is measured over the individual borrower's expected time period and it may be measured after taxes at the borrower's tax rate. Overall, since it takes into account more borrower-specific variables, it’s a much truer estimate to the borrower compared to APR.

Interest Due

The amount of interest, expressed in dollars, calculated by multiplying the loan balance at the end of the preceding period by the annual interest rate divided by the interest accrual period. Essentially, it’s the interest payment except when the mortgage payment is less than the interest due. Here, the difference is added to the balance and constitutes negative amortization.

Interest-Only Mortgage

A mortgage with a monthly mortgage payment consisting only of interest for a specified time period. During that period, the loan balance remains unchanged.

Interest Payment

The dollar amount of interest paid each month. It’s the same as interest due so long as the scheduled mortgage payment is equal to or greater than the interest due.

Interest Rate

The rate charged the borrower each period for the loan. The number is nearly always quoted on a yearly basis.

Interest Rate Adjustment Period

The frequency of rate adjustments on an ARM after the initial rate period is over. For example, a 3/1 ARM is one in which the initial rate period lasts 3 years followed by yearly rate adjustments thereafter.

Interest Rate Ceiling

The highest interest rate possible under an ARM contract. Also knows as a "lifetime cap." It is often expressed as a specified number of percentage points above the initial interest rate.

Interest Rate Decrease Cap

The maximum allowable interest rate decrease on an ARM each time the rate is adjusted.

Interest Rate Floor

Interest Rate Floor The lowest interest rate possible under an ARM contract. Floors are less common than ceilings.

Interest Rate Increase Cap

The maximum allowable interest rate increase on an ARM each time the rate is adjusted.

Interest Rate Index

The specific interest rate series to which the interest rate on an ARM is tied. Examples include the Cost of Funds Index (COFI), one-month and six-month LIBOR, six-month CDs and the Prime Rate.

Interest Rate Risk Premium

The premium above the interest rate on the least risky or "prime" loan.

Investor

In real estate, a borrower who owns or purchases a property as an investment rather than as a residence.

IRA

An IRA is an Individual Retirement Account, and provides either a tax-deferred or tax-free way of saving for retirement. There are many different types of IRA accounts, though traditional and Roth IRAs are the most common choices.

J

Jumbo Mortgage

A non-conforming mortgage larger than the maximum eligible for purchase by the two federal agencies, Fannie Mae and Freddie Mac. The average interest rates on jumbo mortgages are typically greater than is normal for conforming mortgages, and vary depending on property types and mortgage amount.

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 mortgages offer borrowers a 10 or 15-day grace period, with a late charge on payments made 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.

Lease-To-Own Purchase

An option which assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy for a specified time period. The rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.

Lender

See mortgage lender.

London Inter-Bank Offered Rate (LIBOR)

Based on rates that contributor banks in London offer each other for inter-bank deposits. LIBOR is a rate at which fellow London banks can borrow money from other banks. Rate calculations are complex as they incorporate variables such as time, maturity and currency rates. There are hundreds of LIBOR rates reported each month in numerous currencies. For example, a six month LIBOR is the LIBOR for a six month deposit in U.S. dollars on the last business day of the previous month.

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, and so on.

Loan

Money borrowed that is usually repaid with interest.

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 associated with the loan.

Loan Discount Fee

The term used to describe points on the Good Faith Estimate (GFE).

Loan Modification

See mortgage modification.

Loan Officer

Employees of lenders or mortgage brokers who find borrowers, take applications counsel them and sell the loan.

Loan Provider

A lender or a mortgage broker.

Loan-To-Value Ratio (LTV)

A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be refinanced or purchased, whichever is less. The higher the LTV, the less cash a borrower is required to pay as a down payment.

Lock

An option available to the borrower at the time of application or later, which, when executed, guarantees a specific interest rate and number of points if the loan is closed within a specific timeframe. The lender and borrower are bound to those terms, regardless of what happens between that point and the closing date.

Lock Commitment Letter

A written confirmation from a lender stating that the price and other terms of a loan have been locked. At the time of the lock, the borrower should always request this letter.

Lock Period

The number of days for which any lock or float-down holds. Generally, the longer the period, the higher the price to the borrower.

Loss Mitigation

A process to avoid foreclosure where the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.

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 the lender adds to the interest rate index to determine 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 used to ascertain an approximate default risk or cost of the loan.

Market Rate

The prevailing interest rate available at any given time.

Maturity

The period until the last payment is due. This is ordinarily 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 (LTV) Ratio

The highest allowable LTV ratio on a selected loan program.

Maximum Lock

The longest period for which the lender will lock the rate and points on any program. On average, most lenders use a 60 day lock period.

Minimum Down Payment

The lowest 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 $30,000 on a $300,000 house.

Monthly Housing Expense

See housing expense.

Monthly Debt Service

Monthly payments required on credit cards, installment loans (such as car and student loans), home equity loans, and other debts but not including payments on the loan applied for.

Monthly Total Expenses

See total housing expense.

Mortgage

A document which states and records the lien on a property taken by a lender that secures the promise to repay a loan. “Mortgage” is commonly used to refer to both the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note

Mortgage Bank

See mortgage company.

Mortgage Broker

An independent contractor who offers the loan products of multiple lenders. A mortgage broker provides information and guidance on the loans available from different lenders, takes the application, and usually processes the loan. When the process is complete, but sometimes sooner, the lender underwrites the loan. A mortgage broker must pass along the lender’s fees to the borrower, as well as charge their own for the services they offer. This is one of the advantages of a direct lender over a broker.

Mortgage Company

A company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.

Mortgage Insurance

A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan. Mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price. In most cases, the borrower pays the premiums. Also known as private mortgage insurance (PMI).

Mortgage Insurance Premium

The up-front and/or periodic charges that the borrower pays for mortgage insurance.

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 Modification

A loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan in order to reduce the monthly payments.

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. On ARMs, the price also includes the fully indexed rate and the maximum rate.

Mortgage Program

A group of mortgage characteristics that lenders see fit to distinguish as a distinct instrument. These include (but are not limited to) whether it is an FRM, ARM, or Balloon; the term; the initial and adjustment rate periods 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. Also known as deferred interest.

Negative Amortization Cap

A rise in the loan balance when the mortgage payment is less than the interest due. Also known as deferred interest.

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.

Niche

See market niche.

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 the lender and/or seller pay all settlement costs except per diem interest, escrows, homeowners insurance and transfer taxes.

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.

No-Asset Loan

A loan where the usual requirement of disclosure and documentation of assets is waived.

No-Income Loan

A loan where the usual requirement of disclosure and documentation of income is waived.

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.

No-Ratio Loan

A documentation requirement where the applicant's income is disclosed and verified but not used in qualifying the borrower.

Note

A document that states 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

Offer

An indication, generally put forth in writing, by a potential buyer of a willingness to purchase a home at a specific price.

Option ARM

An adjustable rate mortgage with flexible payment options, monthly interest rate adjustments and very low minimum payments in the early years. This initial flexibility and low payment option comes at a cost in the later years when the payment greatly increases to off-set what transpired earlier in the loan term. Also known as a flexible payment ARM.

Option Fee

An upfront fee paid by the buyer under a lease-to-own purchase, usually 1% to 5% of the price, which is put toward the price upon purchase but is lost if the purchase is never made.

Origination

The process of preparing, submitting and evaluating a loan application. This generally includes a credit check, verification of employment and a property appraisal.

Origination Fee

An upfront fee that’s charged by some lenders for originating a loan. This fee is paid at closing and usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender. Unlike points, however, an origination fee does not vary with the interest rate.

P

Partial Claim

A loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.

Partial Prepayment

Making a payment larger than the scheduled payment as a way of paying off the loan quicker.

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 on the payment adjustment date.

Payment Decrease Cap

The maximum percentage decrease in the payment on an ARM on the payment adjustment date.

Payment Period

The period over which the borrower is required to make payments. For most mortgages, the payment period is a month.

Payment Rate

The interest rate used to compute the mortgage payment.

Payment Shock

A very large increase in the payment on an ARM that may surprise the borrower.

Payoff Month

The month in which the monthly payment completely pays off the mortgage balance.

Per Diem Interest

Interest from the day of closing to the first day of the following month. This amount must be paid at the time of closing.

Permanent Buydown

Paying points as a way of reducing the interest rate.

Pick-A-Payment ARM

See flexible payment ARM.

Piggyback Mortgage

A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of the home’s value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0. Piggybacks are for those who can’t put 20% down, but want to avoid private mortgage insurance (PMI).

PITI

The acronym for the four components of the monthly housing expense – principal, interest, taxes and insurance. Payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.

PMI

Private mortgage insurance, as distinguished from insurance provided by the government under FHA and VA. This policy, required of the borrower when the down payment is less than 20% of the home’s value, protects lenders from borrower default. Also known as mortgage insurance.

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 (for example, "3 points" means a charge equal to 3% of the loan balance. Oftentimes, more points equates to a lower rate and vice versa. With a negative point loan, the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed "discounts" and "premiums."

Portable Mortgage

A mortgage that can be transferred from one property to another.

Premium

An amount paid on a regular schedule by a policyholder that maintains insurance coverage.

Pre-Approval

Given prior to the identification of a specific property, a commitment by a lender to make a mortgage loan to a specific borrower. However, this commitment remains only as long as the borrower still meets the qualification requirements at the time of purchase.

Prepayment

A payment made by the borrower in excess of 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."

Prepayment 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 prepayment or a specified number of months interest.

Pre-Foreclosure Sale

Allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.

Pre-Qualification

See qualification.

Primary Residence

The house in which the borrower will live most of the time, as distinct from a second home or an investment property.

Principal

The the amount borrowed from a lender or the portion of the scheduled monthly mortgage payment that is used to reduce the loan balance. It doesn't include interest or additional fees. Also see amortization.

Private Mortgage Insurance (PMI)

Mortgage insurance against loss provided by a private mortgage insurance company to a mortgage lender to shield against borrower default. Also see PMI and mortgage insurance.

Processing

Compiling and maintaining the file of information about a mortgage transaction including the: credit report; appraisal; verification of employment; assets; etc. The processing file is handed off to underwriting for the loan decision.

Purchase Money Mortgage

A mortgage offered by a house buyer as partial payment for the house. To a seller, this is considered seller financing.

Q

Qualification

The process of determining whether a prospective borrower has the ability – more specifically, sufficient assets and income – to repay a loan. Qualification is also known as "pre-qualification" because the submitted information is subject to verification. Qualification also does not take into account the creditworthiness of the borrower. This means they could ultimately be turned down even if they have demonstrated the capacity to repay because a poor credit history suggests that they may be unwilling to pay.

Qualification Rate

The interest rate used in calculating the initial mortgage payment when qualifying a borrower. The rate used in this calculation may or may not be the initial rate on the mortgage.

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 designated maximums. These may reflect the maximums specified by Fannie Mae and Freddie Mac; they may also vary with the LTV ratio and other factors.

Qualification Requirements

Standards set by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum LTV ratios, and so on. These are less stringent than underwriting requirements, which take account of the borrower's credit record.

R

Radon

An invisible threat in many homes, this colorless, odorless, radioactive gas is produced naturally in the soil from the decay of uranium. If it enters buildings, it can become trapped and accumulate, creating a serious health hazard. Radon is more common in certain areas of the country. In these locations, tests are needed (or are at least wise) before purchasing a home.

Rate

See Interest Rate.

Rate Caps

Limitations on the size of rate adjustments on an ARM. The actual note will list caps for maximum rate change at the first rate adjustment, maximum at all subsequent adjustments and maximum increase over the initial rate during the life of the contract.

Rate/Point Breakeven

The length of time it takes to break even (and subsequently) profit when paying points to reduce the rate.

Rate/Point Options

All the combinations of interest rates 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 possibility that rates will rise between the time the borrower applies for a loan and the time the loan closes. This protection can take the form of a "lock" or a "float-down.” In either case, the protection only runs for a specified period.

Rate Sheets

Tables of interest rates and points that lenders distribute daily to their loan officers and mortgage brokers.

Real Estate Agent

An individual who is licensed to negotiate and arrange real estate sales. This person works for a real estate broker.

REALTOR

A real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and its local and state associations.

Rebate

See negative points

Recast Payment

See 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.

Referral Fees

Payments made by service providers (e.g. lenders) to other parties (e.g. realtors) as a thanks for referring customers. Essentially, these are finder’s fees.

Refinance

To pay off one loan by obtaining another. This may be done for a number of reasons including: getting a better interest rate below the rate on the existing loan; cashing-out some equity; reducing the monthly payment; and many others.

Rehabilitation Mortgage

A mortgage that covers the costs of rehabilitating (i.e. repairing or improving) a property. Some rehabilitation mortgages - like the FHA's 203(k) - allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.

Rent Premium

A premium paid above the normal rent cost on a lease-to-own home purchase, which is credited toward the price if the home is purchased, but is lost if no sale is transacted. See also lease-to-own house purchases.

Required Cash

The total cash required of the buyer to purchase the property, including down payment, points, fees, pre-paid items such as interest, and other closing costs. The total required cash is shown on the Good Faith Estimate.

RESPA

The Real Estate Settlement Procedures Act, which was signed into law in 1974. It’s a law that protects consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices and relationships.

Retail Lender

See direct lender.

Reverse Mortgage

A loan to an elderly home owner on which the balance rises over time. The balance 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 three days of closing.

S

Scenario Analysis

The review of how potential future market interest rates could influence the potential change of an ARM’s interest rate and payment.

Scheduled Mortgage Payment

The amount the borrower is required to pay each period, including interest, principal, and mortgage insurance (if applicable), 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 (see interest only Mortgages). And on flexible payment ARMs, it can be the "minimum" payment as defined by the program.

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.

Secondary Markets

Markets in which mortgages or mortgage-backed securities are bought and sold.

Seller Contribution

A contribution to a borrower's down payment or closing costs made by the seller as an alternative to a price reduction.

Seller Financing

A home-financing technique in which the buyer borrows from the seller instead of, or in addition to, a bank. This is sometimes done when a buyer cannot qualify for a bank loan for the full amount. Also known as owner financing or a purchase-money mortgage.

Servicing

Managing loans between the time of inception to 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 impact on the borrower(s).

Servicing Transfer

When one servicing agent is replaced by another.

Settlement

See closing.

Settlement Costs

See closing costs.

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 alternative to foreclosure, this is an agreement between a troubled borrower and the lender that allows the borrower to sell the house and give the proceeds to the lender.

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.

Simple Interest Biweekly Mortgage

A biweekly mortgage on which the payment is applied to the balance every two weeks, rather than held in an account as on a conventional biweekly.

Single File Mortgage Insurance

A type of mortgage insurance paid for by the lender and priced into the interest rate.

Special Forbearance

A loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.

Stated Assets

A documentation requirement which allows the borrower to disclose their assets without any verification of such on the lender’s part.

Stated Income

A documentation requirement where the lender verifies the source of the income but not the amount.

Streamlined Refinancing

Refinancing that omits some of the standard risk control measures, and is therefore quicker and less costly.

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.

Survey

A property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.

Sweat Equity

Using labor to build or improve a property as part of the down payment.

Swing Loan

See bridge loan.

T

Tangible Net Benefit

The net gain to a borrower from a refinancing.

Tax Service Fee

A fee charged by some lenders at closing to cover the cost of paying taxes on the borrower's property from escrow, 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 Buydown

A decrease 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 typically the same as the maturity. On a 15-year balloon loan, for example, the maturity is 15 years but the term in most cases is 30 years.

Title

A document which lists: who currently owns the property; who has an interest in the property other than the owner (e.g. the bank); previous owners dating back many years; and any restrictions on the use of the property

Title 1

An FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home. Title I loans less than $7,500 don't require a property lien.

Title Insurance

Insurance that protects the lender against any claims that arise from arguments about ownership of the property. This is also available to homebuyers.

Title Search

A check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the 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.

Total Expense Ratio

The ratio of housing expense plus current debt service payments to borrower income, which is used (along with the housing expense ratio and other factors) in qualifying borrowers.

Truth in Lending (TIL) Act

The federal law obligating a lender to give full written disclosure of all fees, terms and conditions associated with the loan.

U

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 property itself.

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

The Department of Veterans Affairs – a federal agency which guarantees loans made to veterans. VA provides a loan guarantee similar to mortgage insurance that protects lenders against loss that may result from a borrower default.

VA Mortgage

A mortgage available only to only those people who have served or are serving in the military. The mortgage requires no down payment and is insured against loss by the Veterans Administration.

W

W-2 Form

This is the form that an employer must send to an employee and the IRS at the end of the year. The W-2 form reports a number of different types of data, but most importantly, an employee's annual wages and the amount of taxes withheld from his or her paycheck.

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 borrower is required to fund an escrow account (with contributions that accompany their mortgage payments), from which the lender pays the borrower’s taxes and insurance when they are due.

Wholesale Lender

A lender who provides loans through mortgage brokers. The mortgage broker initiates the transaction, takes the borrower's application and processes the loan. This is the opposite of a direct or retail lender, which doesn’t use an intermediary or “middleman.”

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. For example, on a one-month ARM with no rate adjustment caps, the rate would jump to the maximum rate stipulated in the note in the second month.

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.

Write-Down

A write-down is a form of depreciation where part of the value of an asset is removed from the balance sheet. In the mortgage industry, write-downs occur when the market value of a home or piece of property drops in comparison to the book/accounted value causing the lender a loss. This can be due to falling real estate values, and/or defaults and foreclosures.

X

Y

Yield-Spread Premium.

See negative points.

Z