adjustable-rate
mortgage (ARM)
A mortgage whose interest rate changes periodically based on
the changes in a specified index.
adjustment date The date on which the interest rate changes for an
adjustable-rate mortgage (ARM).
adjustment period The period that elapses between the adjustment
dates for an adjustable-rate mortgage (ARM).
amortization
The repayment of a mortgage loan by installments with
regular payments to cover the principal and interest.
amortization term
The amount of time required to amortize the mortgage loan.
The amortization term is expressed as a number of months.
For example, for a 30-year fixed-rate mortgage, the
amortization term is 360 months.
annual percentage
rate (APR)
The cost of a mortgage stated as a yearly rate; includes
such items as interest, mortgage insurance, and loan
origination fee (points).
application
A form, commonly referred to as a 1003 form, used to apply
for a mortgage and to provide information regarding a
prospective mortgagor and the proposed security.
appraisal
A written analysis of the estimated value of a property
prepared by a qualified appraiser.
appraiser
A person qualified by education, training, and experience to
estimate the value of real property and personal property.
appreciation
An increase in the value of a property due to changes in
market conditions or other causes. The opposite of
depreciation.
asset
Anything of monetary value that is owned by a person. Assets
include real property, personal property, and enforceable
claims against others (including bank accounts, stocks,
mutual funds, and so on).
assignment
The transfer of a mortgage from one person to another.
assumable
mortgage
A mortgage that can be taken over ("assumed") by the buyer
when a home is sold.
assumption The transfer of the seller's existing mortgage to
the buyer.
assumption clause A provision in an assumable mortgage that allows a
buyer to assume responsibility for the mortgage from the
seller. The loan does not need to be paid in full by the
original borrower upon sale or transfer of the property.
assumption fee
The fee paid to a lender (usually by the purchaser of real
property) resulting from the assumption of an existing
mortgage.
balance sheet
A financial statement that shows assets, liabilities, and
net worth as of a specific date.
balloon
mortgage
A mortgage that has level monthly payments that will
amortize it over a stated term but that provides for a lump
sum payment to be due at the end of an earlier specified
term.
balloon
payment
The final lump sum payment that is made at the maturity date
of a balloon mortgage.
bankrupt
A person, firm, or corporation that, through a court
proceeding, is relieved from the payment of all debts after
the surrender of all assets to a court-appointed trustee.
bankruptcy
A proceeding in a federal court in which a debtor who owes
more than his or her assets can relieve the debts by
transferring his or her assets to a trustee.
basis point
A basis point is 1/100th of a percentage point. For example,
a fee calculated as 50 basis points of a loan amount of
$100,000 would be 0.50% or $500.
beneficiary
The person designated to receive the income from a trust,
estate, or a deed of trust.
binder
A preliminary agreement, secured by the payment of an
earnest money deposit, under which a buyer offers to
purchase real estate.
biweekly
payment mortgage
A mortgage that requires payments to reduce the debt every
two weeks (instead of the standard monthly payment
schedule). The 26 (or possibly 27) biweekly payments are
each equal to one-half of the monthly payment that would be
required if the loan were a standard 30-year fixed-rate
mortgage, and they are usually drafted from the borrower's
bank account. The result for the borrower is a substantial
savings in interest.
blanket
mortgage
The mortgage that is secured by a cooperative project, as
opposed to the share loans on individual units within the
project.
bond
An interest-bearing certificate of debt with a maturity
date. An obligation of a government or business corporation.
A real estate bond is a written obligation usually secured
by a mortgage or a deed of trust.
bridge loan
A form of second trust that is collateralized by the
borrower's present home (which is usually for sale) in a
manner that allows the proceeds to be used for closing on a
new house before the present home is sold. Also known as
"swing loan."
broker
A person who, for a commission or a fee, brings parties
together and assists in negotiating contracts between them.
buydown mortgage
A temporary buydown is a mortgage on which an initial lump
sum payment is made by any party to reduce a borrower's
monthly payments during the first few years of a mortgage. A
permanent buydown reduces the interest rate over the entire
life of a mortgage.
call option
A provision in the mortgage that gives the mortgagee the
right to call the mortgage due and payable at the end of a
specified period for whatever reason.
cap
A provision of an adjustable-rate mortgage (ARM) that limits
how much the interest rate or mortgage payments may increase
or decrease.
capital
improvement
Any structure or component erected as a permanent
improvement to real property that adds to its value and
useful life.
cash-out
refinance
A refinance transaction in which the amount of money
received from the new loan exceeds the total of the money
needed to repay the existing first mortgage, closing costs,
points, and the amount required to satisfy any outstanding
subordinate mortgage liens. In other words, a refinance
transaction in which the borrower receives additional cash
that can be used for any purpose.
Certificate
of Eligibility
A document issued by the federal government certifying a
veteran's eligibility for a Department of Veterans Affairs
(VA) mortgage.
Certificate of
Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA)
that establishes the maximum value and loan amount for a VA
mortgage.
certificate
of title
A statement provided by an abstract company, title company,
or attorney stating that the title to real estate is legally
held by the current owner.
chain of
title
The history of all of the documents that transfer title to a
parcel of real property, starting with the earliest existing
document and ending with the most recent.
change
frequency
The frequency (in months) of payment and/or interest rate
changes in an adjustable-rate mortgage (ARM).
clear title
A title that is free of liens or legal questions as to
ownership of the property.
closing
A meeting at which a sale of a property is finalized by the
buyer signing the mortgage documents and paying closing
costs. Also called "settlement."
closing cost item
A fee or amount that a home buyer must pay at closing for a
single service, tax, or product. Closing costs are made up
of individual closing cost items such as origination fees
and attorney's fees. Many closing cost items are included as
numbered items on the HUD-1 statement. Expenses (over and above the price of the
property) incurred by buyers and sellers in transferring
ownership of a property. Closing costs normally include an
origination fee, an attorney's fee, taxes, an amount placed
in escrow, and charges for obtaining title insurance and a
survey. Closing costs percentage will vary according to the
area of the country.
closing statement
Also referred to as the HUD-1. The final statement of costs
incurred to close on a loan or to purchase a home.
cloud on title
Any conditions revealed by a title search that adversely
affect the title to real estate. Usually clouds on title
cannot be removed except by a quitclaim deed, release, or
court action.
collateral
An asset (such as a car or a home) that guarantees the
repayment of a loan. The borrower risks losing the asset if
the loan is not repaid according to the terms of the loan
contract.
collection
The efforts used to bring a delinquent mortgage current and
to file the necessary notices to proceed with foreclosure
when necessary.
combination
loan
With this type of loan, you receive a first mortgage for 80
percent of the loan amount, and a second mortgage at the
same time for the remainder of the balance. If avoiding PMI
(mortgage insurance) is important to you, consider
combination loans--known as 80/10/10 loans or 80/20's.
combined
loan-to-value (CLTV)
The unpaid principal balances of all the mortgages on a
property (first and second usually) divided by the
property's appraised value.
co-maker
A person who signs a promissory note along with the
borrower. A co-maker's signature guarantees that the loan
will be repaid, because the borrower and the co-maker are
equally responsible for the repayment. See endorser.
commission
The fee charged by a broker or agent for negotiating a real
estate or loan transaction. A commission is generally a
percentage of the price of the property or loan.
commitment
letter
A formal offer by a lender stating the terms under which it
agrees to lend money to a home buyer. Also known as a "loan
commitment."
common areas
Those portions of a building, land, and amenities owned (or
managed) by a planned unit development (PUD) or condominium
project's homeowners' association (or a cooperative
project's cooperative corporation) that are used by all of
the unit owners, who share in the common expenses of their
operation and maintenance. Common areas include swimming
pools, tennis courts, and other recreational facilities, as
well as common corridors of buildings, parking areas, means
of ingress and egress, etc.
Community
Home Improvement Mortgage Loan
An alternative financing option that allows low- and
moderate-income home buyers to obtain 95 percent financing
for the purchase and improvement of a home in need of modest
repairs. The repair work can account for as much as 30
percent of the appraised value.
community property
In some western and southwestern states, a form of ownership
under which property acquired during a marriage is presumed
to be owned jointly unless acquired as separate property of
either spouse.
comparables
An abbreviation for "comparable properties"; used for
comparative purposes in the appraisal process. Comparables
are properties like the property under consideration; they
have reasonably the same size, location , and amenities and
have recently been sold. Comparables help the appraiser
determine the approximate fair market value of the subject
property.
condominium
A real estate project in which each unit owner has title to
a unit in a building, an undivided interest in the common
areas of the project, and sometimes the exclusive use of
certain limited common areas.
condominium conversion
Changing the ownership of an existing building (usually a
rental project) to the condominium form of ownership.
conforming
loan
The current conforming loan limit is $333,700 and below.
Conforming loan limits change annually.
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.
consumer
reporting agency (or bureau)
An organization that prepares reports that are used by
lenders to determine a potential borrower's credit history.
The agency obtains data for these reports from a credit
repository as well as from other sources.
contingency
A condition that must be met before a contract is legally
binding. For example, home purchasers often include a
contingency that specifies that the contract is not binding
until the purchaser obtains a satisfactory home inspection
report from a qualified home inspector.
contract
An oral or written agreement to do or not to do a certain
thing.
conventional mortgage
A mortgage that is not insured or guaranteed by the federal
government.
convertibility clause
A provision in some adjustable-rate mortgages (ARMs) that
allows the borrower to change the ARM to a fixed-rate
mortgage at specified timeframes after loan origination.
convertible
ARM
An adjustable-rate mortgage (ARM) that can be converted to a
fixed-rate mortgage under specified conditions.
cooperative
(co-op)
A type of multiple ownership in which the residents of a
multiunit housing complex own shares in the cooperative
corporation that owns the property, giving each resident the
right to occupy a specific apartment or unit.
corporate
relocation
Arrangements under which an employer moves an employee to
another area as part of the employer's normal course of
business or under which it transfers a substantial part or
all of its operations and employees to another area because
it is relocating its headquarters or expanding its office
capacity.
cost of funds
index (COFI)
An index that is used to determine interest rate changes for
certain adjustable-rate mortgage (ARM) plans. It represents
the weighted-average cost of savings, borrowings, and
advances of the 11th District members of the Federal Home
Loan Bank of San Francisco.
covenant
A clause in a mortgage that obligates or restricts the
borrower and that, if violated, can result in foreclosure.
credit
An agreement in which a borrower receives something of value
in exchange for a promise to repay the lender at a later
date.
credit
history
A record of an individual's open and fully repaid debts. A
credit history helps a lender to determine whether a
potential borrower has a history of repaying debts in a
timely manner.
credit
report
A report of an individual's credit history prepared by a
credit bureau and used by a lender in determining a loan
applicant's creditworthiness.
credit repository
An organization that gathers, records, updates, and stores
financial and public records information about the payment
records of individuals who are being considered for credit.
deed
The legal document conveying title to a property.
deed-in-lieu
A deed given by a mortgagor to the mortgagee to satisfy a
debt and avoid foreclosure.
deed of
trust
The document used in some states instead of a mortgage;
title is conveyed to a trustee.
default
Failure to make mortgage payments on a timely basis or to
comply with other requirements of a mortgage.
delinquency
Failure to make mortgage payments when mortgage payments are
due.
deposit
A sum of money given to bind the sale of real estate, or a
sum of money given to ensure payment or an advance of funds
in the processing of a loan.
depreciation
A decline in the value of property; the opposite of
appreciation.
down
payment
The part of the purchase price of a property that the buyer
pays in cash and does not finance with a mortgage.
due-on-sale provision
A provision in a mortgage that allows the lender to demand
repayment in full if the borrower sells the property that
serves as security for the mortgage.
earnest money deposit
A deposit made by the potential home buyer to show that he
or she is serious about buying the house.
easement
A right of way giving persons other than the owner access to
or over a property.
effective
age
An appraiser's estimate of the physical condition of a
building. The actual age of a building may be shorter or
longer than its effective age.
effective gross income
Normal annual income including overtime that is regular or
guaranteed. The income may be from more than one source.
Salary is generally the principal source, but other income
may qualify if it is significant and stable.
encumbrance
Anything that affects or limits the fee simple title to a
property, such as mortgages, leases, easements, or
restrictions.
endorser
A person who signs ownership interest over to another party.
Contrast with co-maker.
Equal Credit
Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to
make credit equally available without discrimination based
on race, color, religion, national origin, age, sex, marital
status, or receipt of income from public assistance
programs.
equity
A homeowner's financial interest in a property. Equity is
the difference between the fair market value of the property
and the amount still owed on its mortgage.
escrow
An item of value, money, or documents deposited with a third
party to be delivered upon the fulfillment of a condition.
For example, the deposit by a borrower with the lender of
funds to pay taxes and insurance premiums when they become
due, or the deposit of funds or documents with an attorney
or escrow agent to be disbursed upon the closing of a sale
of real estate.
escrow
account
The account in which a mortgage servicer holds the
borrower's escrow payments prior to paying property
expenses.
escrow
analysis
The periodic examination of escrow accounts to determine if
current monthly deposits will provide sufficient funds to
pay taxes, insurance, and other bills when due.
escrow
collections
Funds collected by the servicer and set aside in an escrow
account to pay the borrower's property taxes, mortgage
insurance, and hazard insurance.
escrow disbursements
The use of escrow funds to pay real estate taxes, hazard
insurance, mortgage insurance, and other property expenses
as they become due.
escrow
payment
The portion of a mortgagor's monthly payment that is held by
the servicer to pay for taxes, hazard insurance, mortgage
insurance, lease payments, and other items as they become
due. Known as "impounds" or "reserves" in some states.
estate
The ownership interest of an individual in real property.
The sum total of all the real property and personal property
owned by an individual at time of death.
eviction
The lawful expulsion of an occupant from real property.
examination
of title
The report on the title of a property from the public
records or an abstract of the title.
Fair Credit Reporting
Act
A consumer protection law that regulates the disclosure of
consumer credit reports by consumer/credit reporting
agencies and establishes procedures for correcting mistakes
on one's credit record.
fair market
value
The highest price that a buyer, willing but not compelled to
buy, would pay, and the lowest a seller, willing but not
compelled to sell, would accept.
Fannie Mae
A congressionally chartered, shareholder-owned company that
is the nation's largest supplier of home mortgage funds.
Fannie
Mae's Community Home Buyer's Program
An income-based community lending model, under which
mortgage insurers and Fannie Mae offer flexible underwriting
guidelines to increase a low- or moderate-income family's
buying power and to decrease the total amount of cash needed
to purchase a home. Borrowers who participate in this model
are required to attend pre-purchase home-buyer education
sessions.
Federal Housing
Administration (FHA)
An agency of the U.S. Department of Housing and Urban
Development (HUD). Its main activity is the insuring of
residential mortgage loans made by private lenders. The FHA
sets standards for construction and underwriting but does
not lend money or plan or construct housing.
fee simple
The greatest possible interest a person can have in real
estate.
FHA
mortgage
A mortgage that is insured by the Federal Housing
Administration (FHA). Also known as a government mortgage.
finder's fee
A fee or commission paid to a mortgage broker for finding a
mortgage loan for a prospective borrower.
first adjustment
When you can expect the first rate adjustment in your ARM
loan.
first
mortgage
A mortgage that is the primary lien against a property.
fixed-rate mortgage
(FRM)
A mortgage in which the interest rate does not change during
the entire term of the loan.
flood insurance
Insurance that compensates for physical property damage
resulting from flooding. It is required for properties
located in federally designated flood areas.
foreclosure
The legal process by which a borrower in default under a
mortgage is deprived of his or her interest in the mortgaged
property. This usually involves a forced sale of the
property at public auction with the proceeds of the sale
being applied to the mortgage debt.
fully amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment
that is sufficient to amortize the remaining balance, at the
interest accrual rate, over the amortization term.
hazard insurance
Insurance protecting against loss to real estate caused by
fire, some natural causes, vandalism, etc., depending upon
the terms of the policy.
home
equity line of credit
a credit line that is secured by a second deed of trust on a
house. Equity lines of credit are revolving accounts that
work like a credit card, which can be paid down or charged
up for the term of the loan. The minimum payment due each
month is interest only.
home
equity loan
a loan secured by a second deed of trust on a house,
typically used as a home improvement loan.
housing ratio
The ratio of the monthly housing payment in total (PITI -
Principal, Interest, Taxes, and Insurance) divided by the
gross monthly income. This ratio is sometimes referred to as
the top ratio or front end ratio.
HUD The U.S. Department of Housing and Urban
Development.
index
A published interest rate to which the interest rate on an
Adjustable Rate Mortgage (ARM) is tied. Some commonly used
indices include the 1 Year Treasury Bill, 6 Month LIBOR, and
the 11th District Cost of Funds (COFI).
Impound Account
An impound account is an account established by the lender
to pay a borrower's tax and insurance costs. The borrower's
monthly mortgage payment is then increased to cover these
costs, with the additional amount being held in the impound
account and disbursed by the lender when the payments are
due. Lenders typically prefer this arrangement because it
reduces the possibility of a lapse in tax or insurance
payments that could diminish the value of the lender's
investment (your house). Therefore, while it is often
possible to opt out of an impound account it will result in
additional charges.
Interest-only loan option
Loan payments have two components, principal and interest.
An interest-only loan has no principal component for a
specified period of time. These special loans minimize your
monthly payments by eliminating the need to pay down your
balance during the interest-only period, giving you greater
cash flow control and/or increased purchasing power.
jumbo mortgage
The current loan limit for a conforming loan is $333,700.
Loan amounts of $333,701 and above are considered
non-conforming or jumbo mortgages and are usually subject to
higher pricing.
lien
An encumbrance against property for money due, either
voluntary or involuntary.
lender
The bank, mortgage company, or mortgage broker offering the
loan.
LIBOR
LIBOR stands for London Inter-Bank Offered Rate. This is a
favorable interest rate offered for U.S. dollar deposits
between a group of London banks. There are several different
LIBOR rates, defined by the maturity of their deposit. The
LIBOR is an international index that follows world economic
conditions. LIBOR-indexed ARMs offer borrowers aggressive
initial rates and have proven to be competitive with popular
ARM indexes like the Treasury bill.
lifetime cap
A provision of an ARM that limits the highest rate that can
occur over the life of the loan.
loan to value ratio
(LTV)
The unpaid principal balance of the mortgage on a property
divided by the property's appraised value. The LTV will
affect programs available to the borrower and generally, the
lower the LTV the more favorable the terms of the programs
offered by lenders.
lock period
The amount of time that a lender will guarantee a loan's
interest rate. Once you've locked in the interest rate on a
loan, the lender will guarantee that rate for a certain
period of time, usually for 30, 45 or 60 days.
lock-in
A written agreement guaranteeing the home buyer a specified
interest rate provided the loan is closed within a set
period of time. The lock-in also usually specifies the
number of points to be paid at closing.
margin
The number of percentage points a lender adds to the index
value to calculate the ARM interest rate at each adjustment
period.
mortgage
A legal document that pledges a property to the lender as
security for payment of a debt
mortgage
disability insurance
A disability insurance policy which will pay the monthly
mortgage payment in the event of a covered disability of an
insured borrower for a specified period of time.
mortgage insurance
(MI)
Insurance written by an independent mortgage insurance
company protecting the mortgage lender against loss incurred
by a mortgage default. Usually required for loans with an
LTV of 80.01% or higher.
mortgagee
The person or company who receives the mortgage as a pledge
for repayment of the loan. The mortgage lender.
mortgagor
The mortgage borrower who gives the mortgage as a pledge to
repay.
non-conforming loan
Also called a jumbo loan. Conventional home mortgages not
eligible for sale and delivery to either Fannie Mae (FNMA)
or Freddie Mac (FHLMC) because of various reasons, including
loan amount, loan characteristics or underwriting
guidelines. Non-conforming loans usually incur a rate and
origination fee premium. The current non-conforming loan
limit is $333,701 and above.
note
A written agreement containing a promise of the signer to
pay to a named person, or order, or bearer, a definite sum
of money at a specified date or on demand.
origination fee
A fee imposed by a lender to cover certain processing
expenses in connection with making a real estate loan.
Usually a percentage of the amount loaned, such as one
percent.
owner
financing
A property purchase transaction in which the property seller
provides all or part of the financing.
periodic cap
The maximum rate increase for a specific period for a
specific loan (ARM) only.
PITI
Principal, interest, taxes and insurance--the components of
a monthly mortgage payment.
Planned Unit
Developments (PUD)
A subdivision of five or more individually owned lots with
one or more other parcels owned in common or with reciprocal
rights in one or more other parcels.
points
Charges levied by the mortgage lender and usually payable at
closing. One point represents 1% of the face value of the
mortgage loan.
prepaids
Those expenses of property which are paid in advance of
their due date and will usually be prorated upon sale, such
as taxes, insurance, rent, etc.
prepayment
penalty
A charge imposed by a mortgage lender on a borrower who
wants to pay off part or all of a mortgage loan in advance
of schedule.
principal
Amount of debt, not including interest. The face value of a
note or mortgage.
private mortgage
insurance (PMI)
Insurance provided by non-government insurers that protects
lenders against loss if a borrower defaults. Fannie Mae
generally requires private mortgage insurance for loans with
loan-to-value (LTV) percentages greater than 80%.
qualifying ratios
The ratio of your fixed monthly expenses to your gross
monthly income, used to determine how much you can afford to
borrow. The fixed monthly expenses would include PITI along
with other obligations such as student loans, car loans, or
credit card payments.
rate
The annual rate of interest on a loan, expressed as a
percentage of 100.
rate cap
A limit on how much the interest rate can change, either at
each adjustment period or over the life of the loan.
rate lock-in
A written agreement in which the lender guarantees the
borrower a specified interest rate, provided the loan closes
within a set period of time.
rebate
Compensation received from a wholesale lender which can be
used to cover closing costs or as a refund to the borrower.
Loans with rebates often carry higher interest rates than
loans with "points" (see above).
refinancing
The process of paying off one loan with the proceeds from a
new loan using the same property as security.
residential
mortgage credit report (RMCR)
A report requested by your lender that utilizes information
from at least two of the three national credit bureaus and
information provided on your loan application.
seller carry back
An agreement in which the owner of a property provides
financing, often in combination with an assumed mortgage.
stated/documented income
Some loan products require only that applicants "state" the
source of their income without providing supporting
documentation such as tax returns.
subordination
If you are refinancing your first mortgage and have an
existing second or home equity line, one option is to
"subordinate" the second mortgage: request that your second
mortgage holder go back into the second lien position when
you replace your existing first mortgage with the new
refinance loan.
survey
A print showing the measurements of the boundaries of a
parcel of land, together with the location of all
improvements on the land and sometimes its area and
topography.
tenants-in-common
An undivided interest in property taken by two or more
persons. The interest need not be equal. Upon death of one
or more persons, there is no right of survivorship.
term
The period of time which covers the life of the loan. For
example, a 30 year fixed loan has a term of 30 years.
title
The evidence one has of right to possession of land.
title
insurance
Insurance against loss resulting from defects of title to a
specifically described parcel of real 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 and housing payments divided by gross monthly
income. Also known as Obligations-to-Income Ratio or
Back-End Ratio.
Truth-in-Lending Act
A federal law requiring a disclosure of credit terms using a
standard format. This is intended to facilitate comparisons
between the lending terms of different financial
institutions.
Types of
Ownership
There are four types of ownership: They are:
a. Sole Ownership - Only one person owns the property.
b. Tenants in Common - Two or more persons have an undivided
ownership in the property. The percentage of ownership need
not be equal; each party has a right to sell his/her
interest, and upon the death of any of the owner's that
owner's interest in the property goes to the deceased's
heirs.
c. Joint Tenants - Ownership taken by two or more persons at
the same time in equal percentages with an undivided right
to possession. If one owner dies, his or her interest
automatically goes to the remaining owners(s).
d. Tenants by the Entireties - Owners are husband and wife
and together they hold title to the property with a right of
survivorship. Upon the death of either, the survivor takes
sole ownership to the exclusion of the deceased spouse's
heirs.
