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An adjustable rate mortgage is a loan with an interest rate that changes according to an index. Payments may increase or decrease according to shifts in that index. Generally, you can expect to make lower initial payments with an ARM. If interest rates increase over time, your monthly payments may increase, too.
The period elapsing between adjustment dates for an adjustable rate mortgage (ARM).
An analysis of a buyer’s ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
The gradual repayment of a mortgage loan, both principal and interest, by installments.
The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed rate mortgage.
The cost of credit articulated as a yearly rate. APR is not an interest rate. It is a way to measure the total cost of credit. It takes into account interest, origination fees, loan discounts, transaction charges, and any premiums for credit-guarantee insurance. APR is designed to give you a tool for comparing the costs of similar loans.
Borrowers complete loan applications, usually with the lender's assistance. Applications contain personal and financial information including assets, debt, income, expenses and employment details. The application is the borrower's formal request for financing. The lender uses the information in the application to make a loan approval decision. A standardized form, the Uniform Residential Loan Application or Form 1003, is used for mortgage loans involving single-family loans that are to be secured or guaranteed by Fannie Mae or Freddie Mac.
The cost for applying for a loan or line of credit. This fee may include the costs of property appraisal and pulling a credit report.
A written analysis prepared by a qualified appraiser and estimating the value of a property.
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
The transfer of a mortgage from one person to another.
An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
Short for Alternative-A paper, this loan category is assigned to borrowers who are higher risk than A-paper but less risky than subprime. Alt-A borrowers often have good credit, but their loans may have higher LTV or DTI ratios, or the borrowers might have inadequate or limited documentation supporting their incomes. Fannie Mae and Freddie Mac do not purchase Alt-A loans.
Not to be confused with an appraisal, assessed value is calculated by the property assessor in the town, city or municipality where the property is located. Property taxes are based on the assessed value. Assessed value includes numerous factors, including recent sale price, improvements to the property, and local market conditions.
With an assumable mortgage, the original borrower can transfer the loan to a new owner of that same property. The buyer can assume the remaining debt of the mortgage without having to qualify for a new mortgage. An assumable mortgage is attractive to a buyer who may have trouble qualifying for a conventional mortgage or a buyer who wants to take advantage of the mortgage's low interest rate in a market of rising or high interest rates.
Income before taxes are deducted.
A plan 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 required if the loan were a standard 30-year fixed rate mortgage. The result for the borrower is a substantial savings in interest.
A second trust that is collateralized by the borrower’s present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as “swing loan.”
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
This ratio compares the borrower's monthly expenses, or debt, to his or her monthly gross income. It is used to assess approval of a borrower's loan application. Lenders generally look for back-end ratios below 36 percent. See DTI ratio and front-end ratio.
One of the federal judicial processes used by an eligible borrower whose total debt burden is too large to stay current with payment obligations and who would otherwise default. Chapter 7 bankruptcy typically involves liquidation of some of the borrower's assets to distribute to creditors, with a result of discharge of most if not all debt. Chapter 7 bankruptcy remains on a borrower's credit history for up to 10 years and affects the borrower's ability to take out credit. Compare with Bankruptcy, chapter 13.
One of the federal judicial processes used by an eligible borrower whose total debt burden is too large to stay current with payment obligations and who would otherwise default. Chapter 13 bankruptcy involves a repayment plan typically spread out over a three to five years of regular payments, after which any remaining debt is discharged. Chapter 13 bankruptcy offers the best chance for borrowers who want to avoid foreclosure. The bankruptcy remains on borrower's credit history for up to seven years and affects the borrower's ability to take out credit. Compare with Bankruptcy, chapter 7.
The percentage of your gross monthly income that goes toward your debt.
The document used in some states instead of a mortgage. Title is conveyed to a trustee.
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Failure to make mortgage payments on time.
In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.
These are also called Points and Discount Points. Each point is equal to 1% of the principal amount of a mortgage loan. Points are commonly paid on both fixed rate and adjustable rate mortgages to cover loan origination and other types of costs supplied by the lender. Points are paid at closing and may be paid by either the borrower or seller of the property, or even split between them. Sometimes, points are incorporated into the mortgage amount, but this strategy increases the loan amount and the full cost of the loan. You can also volunteer to pay points in exchange for a lower interest rate in some cases.
The cash amount that you pay to the seller that makes up the difference between the price of the home and the loan amount.
These are also called Points and Discount Fees. Each point is equal to 1% of the principal amount of a mortgage loan. Points are commonly paid on both fixed rate and adjustable rate mortgages to cover loan origination and other types of costs supplied by the lender. Points are paid at closing and may be paid by either the borrower or seller of the property, or even split between them. Sometimes, points are incorporated into the mortgage amount, but this strategy increases the loan amount and the full cost of the loan. You can also volunteer to pay points in exchange for a lower interest rate in some cases.
In some states, a deed of trust is used as an alternative to a mortgage document. It is signed by the borrower at closing and gives a trustee, who is not the lender, an interest in the property and the right to take control of the property if the borrower defaults on the loan obligations. The trustee is typically a title insurance company and acts as the lender's agent in a non-judicial foreclosure.
A borrower’s normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.
The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage. Also called Home Equity.
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 of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning and may cause negative amortization.
A document issued by the federal government certifying a Veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
The frequency (in months) of payment and/or interest rate changes in an adjustable rate mortgage (ARM).
Closing refers to the transfer of ownership from the seller to you, the buyer. It includes the completion of all necessary paperwork and the payment of closing costs. In a mortgage situation, it also refers to the disbursement of funds from the lender to the seller. In refinancing, closing refers to the final payment of the existing loan with the refinanced loan. Also called “settlement.”
These are expenses over and above the price of the property that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used. There are mortgage loans that offer “no closing cost” options.
The property being offered to a borrower from a lender, used to secure a loan. If a borrower ever defaults on their loan, the lender can reclaim the property. This offers security to the lender, thus typically resulting in lower loan interest rates than unsecured loans.
Interest paid on the original principal balance and on the accrued and unpaid interest.
An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources.
A provision in an ARM allowing the loan to be converted to a fixed rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
This person does not have any ownership of the property. They will take financial responsibility to pay back unpaid debts if the borrower defaults on their loan.
The ability of a customer to obtain funds, goods, or services before payment based on the trust that payment(s) will be made in the future.
A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.
A credit score measures a consumer’s credit risk relative to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Issac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.
The seller or homebuilder might buy down the mortgage for the borrower by paying a fee to the mortgage lender to get a lower rate for a specified period. The lower interest rate typically lasts from one to five years, after which mortgage payments increase. A seller who pays the fee will usually increase the purchase price to offset the buy-down cost.
The Consumer Financial Protection Bureau, established in 2010 by the U.S. Congress, carries out consumer financial laws. The CFPB's primary mission is to provide consumers with essential information so they can understand financial agreements they enter. The CFPB requires lenders to provide certain disclosures to all borrowers at specified points during the financing process.
The Consumer Financial Protection Bureau created this underwriting standard to enable loan approvals for borrowers who may not meet certain underwriting standards for FHA, VA, Fannie Mae or Freddie Mac loan approval. For example, a borrower whose debt to income ratio exceeds 43 percent, the threshold for these loans, might still obtain approval by citing a compensating factor such as a larger down payment percentage than typically required.
The FHA sets this amount — currently capped at six percent of the sales price —that allows a seller to contribute to a borrower's prepaid expenses, discount points and closing costs, such as mortgage insurance premium and buy-down fees. Concession amounts cannot be used to pay condo fees or mortgage interest.
See HOA
Under the Fair Credit Reporting Act, consumers have the right to dispute inaccurate information appearing on their credit report or reports at no cost. Credit repair companies charge consumers a fee to handle this task. Unscrupulous credit repair companies promise to remove accurate derogatory information from credit reports.
A detailed rundown of a borrower's financial holdings, behaviors and history, a credit report is compiled by a credit reporting agency. A credit report is used by lenders to examine the assets, debts, defaults and financial health and habits of a borrower, as a way to assess the risk of lending to a borrower. Consumers are entitled under federal law to obtain one free credit report per year. The three main credit reporting agencies made the report easy to obtain through AnnualCreditReport.com.
Credit reporting agencies assign credit scores to borrowers, summarizing each borrower's risk. Lenders consider a borrower's credit score as a critical indicator to creditworthiness and look at the score to decide whether to approve a loan and, to a large degree, the interest rate it will charge. Various companies calculate borrowers' credit scores, the most popular being FICO. See credit report, consumer reporting agency, FICO and FICO score.
Borrowers transfer ownership of the property to the mortgage lender to avoid foreclosure and to fully satisfy the borrower's debt obligation to the lender. A deed in lieu of foreclosure constitutes one step away from foreclosure because the borrower would more than likely default otherwise. A deed in lieu of foreclosure saves the lender the hassle of filing for foreclosure.
A congressionally chartered, shareholder-owned company (otherwise called a “government-sponsored enterprise” or “GSE”) that is the nation’s largest supplier of home mortgage funds. Fannie Mae buys home loans from lenders. To finance these purchases, they package the loans into pools and then issue securities against them.
The Federal Housing Administration
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
FICO® stands for Fair Isaac Corporation, which are the creators of the FICO® score. This score is used to make up part of a credit report that lenders use to determine the borrower’s risk when extended a loan.
FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.
The primary lien against a property.
The monthly payment due on a mortgage loan including payment of both principal and interest.
A home loan in which the interest rate remains the same throughout the term of the loan. A Fixed Rate Mortgage will allow you to plan a budget and make consistent payments.
A government-sponsored enterprise (GSE) that buys home loans from lenders. To finance these purchases, they package the loans into pools and then issue securities against them.
This debt-to-income ratio takes into consideration only the borrower's monthly mortgage payment — loan principal, interest, property taxes and homeowners insurance — as part of the debt factor. The debt factor does not include other monthly expenses, such as credit card, car loan payments or tuition. Many lenders calculate the front-end ratio and back-end ratio and use both as part of their assessment of a borrower's creditworthiness. See back-end ratio and DTI ratio.
Borrowers pay this required fee for VA loans, with a few exemptions. The fee is a percentage of the loan amount and varies, depending on the down payment amount, the veteran's service record and the use of a previous VA loan. The funding fee can be rolled into the loan amount or paid upfront at the closing.
That's the legal right of a creditor to seize and sell collateral and use the proceeds to pay off a borrower's loan balance. The creditor has a priority to use the proceeds before other creditors to satisfy the outstanding loan amount.
A borrower submits a loan application. Then, later, the borrower locks in the rate. The time in between is the float. Interest rates fluctuate depending on the market, particularly certain indexes tied to the market. A borrower can let the rate float if he thinks the interest rate will go down further, at which point the borrower can lock in the rate for the borrower's mortgage loan.
Borrowers pay these fees to the lender at the start of the loan approval process. Front-end fee may also mean borrower's payment to a mortgage broker.
A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.
A wholly owned government corporation, Ginnie Mae offers government-insured loans like FHA, VA, PIH, and RD. Ginnie Mae is not a Government Sponsored Enterprise (GSE).
The list of the settlement charges that you must pay at the closing. The lender must provide this to you within three business days of receiving the mortgage application.
A fixed rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.
A loan that is insured by the Federal Housing Administration (FHA), guaranteed by the Department of Veterans Affairs (VA) or guaranteed by the Rural Housing Service (RHS). The insurance protects the lender (not the borrower) if a borrower defaults on the loan. This insurance enables a lender to provide loan options and benefits often not available through conventional financing.
Underwriters may "gross-up" the value of non-taxable income — such as Social Security benefits, Roth IRA income, disability payments, or an employer's insurance premiums paid on your behalf — by 25 percent to reflect the fact that the borrower will not pay income tax on that income. For example, if a borrower receives a monthly payment of $1,000 from a non-taxable source, the income is counted at $1,250 when calculating the borrower's DTI ratio.
The difference between the appraised value of your home and the remaining balance of your mortgage loan. Also called Equity.
The percentage of gross monthly income budgeted to pay housing expenses.
The U.S. Department of Housing and Urban Development
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.
A combination fixed rate and adjustable rate loan – also called 3/1,5/1,7/1 – can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.
The Home Affordable Modification Program is a federal program introduced in 2009 aimed at helping borrowers who are using more than 31 percent of their gross income to pay their mortgage payments. HAMP enables eligible borrowers to modify their current loans, through adjustments to the loan principal or interest rate. The program expires December 31, 2016.
A home equity line of credit is an open line of credit with a set time limit, and uses the borrower's home as collateral. Rather than a fixed amount that the homeowner receives all at once, such as in a cash-out refinance or a home equity loan, a HELOC allows a borrower to draw out money as needed. A HELOC is not the same as a home equity loan.
Senior citizens at least 62 years old can obtain FHA- insured reverse mortgages that enable them to spend down equity in their primary residences.
This is the acronym for Home Valuation Code of Conduct, based on federal rules implemented in 2009 setting forth restrictions on the interaction between home appraisers and mortgage lenders. The overarching purpose is to ensure independent appraisals. Fannie Mae and Freddie Mac purchase only those mortgages whose underwriting process included an independent appraisal. HVCC rules do not apply to FHA or VA loans.
The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.
This refers to the original interest rate of the mortgage at the time of closing that runs through an agreed upon number of months known as the initial rate period. This rate changes for an adjustable rate mortgage (ARM). It’s also known as “start rate” or “teaser.”
The regular periodic payment that a borrower agrees to make to a lender.
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).
The fee charged for borrowing money.
The rate a lender charges you each period for the loan. See Fixed Rate Mortgage and Adjustable Rate Mortgage.
The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.
An arrangement that allows the property seller to deposit money to an account. That money is then released each month to reduce the mortgagor’s monthly payments during the early years of a mortgage.
For an adjustable rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.
For an adjustable rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.
A decree by a court of law that one person is indebted to another for a specified amount. In some states, the court may place a lien against the debtor’s real property as collateral for payment of the judgment to the creditor.
Also known as a nonconforming loan. The amount of the loan exceeds standards that would make it eligible for sale to Fannie Mae and Freddie Mac. Certain geographical areas have temporary conforming loan limits higher than typical conforming limits. Lenders may charge additional fees and place certain restrictions due to the large loan amounts.
Creditors with junior liens are second in line for being paid back if the borrower cannot repay the loan and the first-in-line lender takes over the property. The creditor with a junior lien must yield to lien holders that hold a superior position before it can use the proceeds, if any remain, to satisfy the debt.
A retirement plan for self employed people which is tax deferred. People are able to deposit 20 percent of the current incomes and the funds are not available for withdrawal until age 59-1/2.
The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
An alternative financing option that allows low- and moderate-income home buyers to lease a home with an option to buy. Each month’s rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a down payment.
A person’s financial obligations. Liabilities include long-term and short-term debt.
The mortgage company’s right to claim your property if you default on your loan.
This term refers to the interest rate on a home equity line of credit (HELOC). Because you secure your credit line at the risk of your home, home equity lines of credit are required by law to have a ceiling on how high the variable interest rate can climb over the term.
For an adjustable rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.
For an adjustable rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.
A sum of borrowed money (principal) that is generally repaid with interest.
The process by which a mortgage lender makes a home loan and records a mortgage against the borrower’s real property as security for repayment of the loan.
It is a percentage calculated as the amount of your mortgage divided by the appraised value of the property. For example, a loan amount of $70,000 for a home appraised at $100,000 would equal an LTV of 70%. Generally, the higher your credit score, the higher your LTV is allowed to be when qualifying for a loan.
An option that you may exercise between application and closing to guarantee you will receive the current rate and points in the market.
The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.
Many lenders tie their rates to the London InterBank Offered Rate, or LIBOR. Lenders use this index to calculate a borrower's interest rate on ARMs. If the LIBOR index rises, a borrower's adjustable interest rate will also rise. Large banks use LIBOR as the rate for short-term loans between each other.
The Consumer Financial Protection Bureau requires lender to provide loan estimates that combine the Good Faith Estimate and Truth in Lending disclosures. The loan estimate rule goes into effect August 1, 2015.
This employee or representative of a mortgage lender assists borrowers through the loan approval and underwriting process, ultimately helping them secure financing for a home purchase. Loan officer is usually used interchangeably with loan originator.
Homeowners pay this form of income tax to the government on the proceeds of the sale of property. Usually, capital gains taxes are triggered by the difference between the sales price and original purchase price the homeowner paid, that the homeowner has owned more than one year. The tax rate is typically lower than the tax a borrower pays on regular income.
A structure that has been partially or entirely constructed at another location and moved onto the property (on a permanent foundation). A manufactured home may or may not be a mobile home.
The difference in percentage points between the index rate and the adjustable rate mortgage interest rate (ARM) at each adjustment.
The date on which the principal balance of a loan becomes due and payable.
This is the lowest payment you need to pay to keep in good standing. On an interest-only loan, it only includes the interest, but most of the time, it includes both principal and interest.
A type of residence that’s built upon a wheeled chassis and can be transported from site to site.
A factory-built home that’s erected on-site, with the appearance and characteristics of a site-built residence.
That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn’t cover all of the interest. The loan balance therefore increases instead of decreasing.
A legal document that pledges a property to the lender as security for payment of a debt. Also refers to the loan used to purchase property that is paid back over time. Many different types of mortgages are available depending on a borrower’s needs and financial status.
A company that originates mortgages exclusively for resale in the secondary mortgage market.
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
A contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
The amount paid by a mortgagor for mortgage insurance.
A type of term life insurance In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.
Generally, there are three basic mortgage programs: Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and conventional mortgage loans. VA loans are only offered to qualifying veterans and surviving spouses, while FHA loans are available to all qualifying borrowers. Both VA and FHA loans are guaranteed/insured by the federal government. This insurance protects the lender (not the borrower) should the borrower default and the lender sustains a loss. Conventional loans are available to all qualifying borrowers and are not insured or guaranteed by the federal government.
A residential property with 2 to 4 individual housing units (duplex, triplex or quadplex).
Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn’t covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.
The value of all of a person’s assets, including cash.
An asset that cannot easily be converted into cash.
A property that is worth less than the mortgage outstanding on it is in negative equity, also known as being underwater.
Such a loan does not meet Fannie Mae and Freddie Mac guidelines, one of which sets a maximum loan amount of $510,400 in most areas of the country. Additionally, a non-conforming mortgage loan may fail to meet DTI ratio guidelines and documentation requirements. A non-conforming mortgage is never owned or guaranteed by Fannie Mae or Freddie Mac, and it typically has higher interest rates than conforming mortgage loans.
The NOV is document used in VA loans, created by a VA appraiser, that discloses the estimated value of a property to the lender and borrower. When a borrower has a NOV, and then changes lenders, the second lender is required to use the same appraisal value as long as it is within the NOV's expiration date.
A type of adjustable-rate mortgage (ARM) that offers the borrower a choice of 4 monthly payment options to help provide financial flexibility to manage payments in rising rate markets and take advantage of falling interest rates.
The date on which a loan is funded or disbursed.
A fee imposed by a lender to cover certain processing expenses in connection with making a mortgage loan. Usually a percentage of the amount loaned (often 1%). The origination fee is stated in the form of points. See also: Points
A property purchase transaction in which the property seller provides all or part of the financing.
A property that the owner occupies as a principal residence.
The lender, mortgage broker or other party that works with a borrower to complete the loan application process is the loan originator. Originating a loan typically requires submitting the loan application, gathering documentation, sending the loan to underwriting and completing the transaction with a closing.
An overlay is a requirement or condition loan originators add to the minimum standard required by the mortgage insurer (such as the FHA, VA, or USDA) or the loan buyer (usually Freddie Mac or Fannie Mae). A common overlay is credit score. For example, the FHA requires borrowers to have a 500 FICO score or higher, but in practice, FHA lenders deny applications with FICO scores below 680 unless the borrower has significant compensating factors.
The date when a new monthly payment amount takes effect on an adjustable rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.
The period of time over which you make payments. Most home loans utilize monthly payments, but other options such as biweekly payments may be available.
The cash amount that will completely pay off your loan.
A limit on the amount that payments can increase or decrease during any one adjustment period.
A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).
These are also called Discount Points and Discount Fees. Each point is equal to 1% of the principal amount of a mortgage loan. . For example, if you get a mortgage for $165,000 one point means $1,650 to the lender. Points are commonly paid on both fixed rate and adjustable rate mortgages to cover loan origination and other types of costs supplied by the lender. Points are paid at closing and may be paid by either the borrower or seller of the property, or even split between them. Sometimes, points are incorporated into the mortgage amount, but this strategy increases the loan amount and the full cost of the loan. You can also volunteer to pay points in exchange for a lower interest rate in some cases.
A fee that may be charged to a borrower who pays off a loan before it is due.
A written commitment from a lender to extend a mortgage to you up to a specific amount for a specific time. It involves an analysis of your financial status and credit history.
A financial penalty that occurs when a loan is paid off before the contracted pay-off date.
A process that determines your ability to repay a loan. It takes into account your assets and income, but not your credit history. Unlike pre-approval, it does not guarantee you approval for a loan.
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage. Interest is calculated on this amount.
The outstanding balance of principal on a mortgage not including interest or any other charges.
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.
A formal or informal arrangement between a lender and a borrower where the lender agrees to offer special terms (such as a reduction in the rate or closing costs) for a future refinancing as an inducement for the borrower to enter into the original mortgage transaction.
See Short sale
The expenses that are usually paid in advance, such as escrows for taxes and insurance (which are paid at closing).
Interest collected at closing of a first mortgage, covering the period from the date of disbursement to the start of the next payment period.
A fee charged to cover the administrative costs of processing a loan request.
A written promise to repay a specified amount over a specified period of time.
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Shorthand for the classification of mortgage loans that lenders use to describe varying levels of borrower default risk, paper is usually expressed in terms of A-paper or Alt-a paper.
This is the interest rate that a borrower can qualify for with a mortgage lender. The par rate doesn't require a mortgage lender to pay a yield spread premium nor does it require the borrower to pay any discount points to secure that interest rate. A par rate is based on factors such as the borrower's loan amount, credit score and LTV ratio.
This acronym summarizes the components of a borrower's mortgage payment: principal, interest, taxes, insurance.
A home loan lender that originates, funds, and services a home loan for the life of the loan. Compare to a mortgage banker.
A conditional commitment from a lender stating that a borrower can secure financing for a specified loan amount, pre-approval is based on the borrower's personal and financial information that the lender has verified to be true. In a pre-approval, the borrower completes a loan application and the lender verifies the information. Often used by borrower in a hot market to assure seller that a deal will not fall through because of the buyer's failure to obtain financing. A pre-approval carries more weight than a pre-qualification. See pre-qualification.
In FHA reverse mortgages, the principal limit factor (PLF) is expressed as a percentage of the maximum amount the borrower can draw. The PLF is varies with the expected interest rate and the age of the youngest borrower. The younger the borrower, the lower the principal limiting factor, and the less available for the homeowner to borrower.
When a seller transfers legal ownership of a property to a buyer, the quitclaim deed documents the conclusion of the seller's ownership. The quitclaim deed does not specify the interest the seller has in the property; it contains no warranties of the seller's interests or rights — including whether the seller has valid ownership — in the property. Compare with warranty deed.
A mortgage rate lock is a promise from the lender to hold a specific combination of an interest rate and points for an agreed upon time (typically 10, 15, 30, 45 or 60 days) until the borrower can close on their home purchase. To hold rates for longer periods of time, it typically requires more points or higher interest rates.
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Real Estate Agents.
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.
Paying off one loan with the proceeds from a new loan using the same property as security. This may be done to receive more favorable rates, lower payments, or a decreased term. It may also be done to receive additional cash.
A commitment issued by a lender to a borrower guaranteeing a specific interest rate for a specified period of time. Rate lock periods are for a fixed number of days, and rate lock expiration occurs when that period has passed, subjecting the interest rate on the loan to market fluctuations since the date of the initial rate lock. When a rate lock expires, you will need to contact your lending specialist to establish a new rate lock prior to closing your loan.
A provision in a fixed-rate mortgage that gives the borrower the option to reduce the interest rate at a later date without having to refinance. Exercising a rate reduction option typically does not require requalifying for the loan.
To take the remaining balance of a mortgage loan and establish a new period of amortization after which the principal balance will be zero. Typically used after the end of the term of an interest-only loan.
A charge for a public official (typically a Registrar of Deeds or County Clerk) noting in the public record the terms of a legal document affecting title to real property such as a deed, a security instrument, a satisfaction of mortgage or an extension of mortgage.
A method used to determine income when qualifying a borrower for a loan. Borrower(s) provide their income, however no verification documentation is typically required.
A first mortgage that enables borrowers to purchase or refinance and rehabilitate homes. With this mortgage product, borrowers can qualify for loan amounts based on the as-completed value of the property, up to the maximum loan limits.
The time you have to fully repay your outstanding balance, according to your payment terms. In a home equity line of credit, for example, the repayment period (typically 20 years) is the loan term that follows the draw period (typically 10 years).
The cancellation of a contract. In certain real estate-secured transactions that involve the refinance of a primary residence, applicants have 3 business days to cancel the transaction.
This is the interest charged to borrower by the lender for extending the loan the borrower uses to refinance or purchase property.
The amount of savings, separate from the down payment, that a homebuyer sets aside in case of unforeseen events or emergencies. During the loan approval process, many lenders require reserves (typically the equivalent of 2 monthly mortgage payments) to be verified.
A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others.
A loan offered by the Rural Housing Service (RHS), an agency within the Department of Agriculture. The RHS provides financing to farmers and other qualified borrowers buying property in rural areas who are unable to obtain loans elsewhere. Funds are borrowed from the U.S. Treasury. See also: Government loan
A loan offered by the Rural Housing Service (RHS), an agency within the Department of Agriculture. The RHS provides financing to farmers and other qualified borrowers buying property in rural areas who are unable to obtain loans elsewhere. Funds are borrowed from the U.S. Treasury.
A homeowner takes money out of his property through a reverse mortgage. The real estate is collateral and the homeowner is not required to repay the loan, including principal and interest, until the he dies or sells the home. Reverse mortgages are highly regulated and typically are available only to senior citizens.
Also known as ROI, this is the benefit or "return" an investor receives from an investment.
Where existing mortgages are bought and sold.
The property that will be pledged as collateral for a loan.
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See Owner Financing.
Mortgage Lenders or service companies, handle the collection of monthly mortgage payments and the day-to-day handling of the mortgage, including record-keeping of principal and interest payments, management of escrow accounts and interaction with borrowers. The owner of the borrower's mortgage may not necessarily be the servicer; sometimes the owner of the mortgage hires the services of another company to act as the servicer. See servicing.
The costs that you are obligated to pay at the time of closing. These are more commonly called closing costs.
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
Financial companies structure investments to sell, buy and trade portfolios of mortgages in the secondary market. This process is called securitization. Typically, similar mortgages are packaged together into a product called mortgage-backed security, or MBS. Commonly held opinion points to mortgage securitization as one of the major contributors to the financial crisis of 2008.
See seller contribution
Daily management of the mortgage account is also known as mortgage servicing. Servicing involves recordkeeping, disbursals out of the escrow account to pay property taxes and homeowners insurance, and other routine tasks. The company that owns the mortgage may not necessarily be the entity servicing the mortgage. See servicer.
See Hud-1
When a property is sold for less than the outstanding mortgage, and the lender agrees to take a loss on the sale, it is a short sale. The lender agrees to a short sale because it prefers to recover some of the loan balance rather than the alternative, which is a borrower default of the loan and subsequent foreclosure. The borrower is then released from the mortgage.
A survey confirms the boundaries and location of a property and the improvements on the property. It is conducted by a professional surveyor. If used for purposes of title insurance, the survey confirms that the improvements on the property do not encroach on any easements, neighboring property or right of ways that are on record.
This is a refinance whose process is faster and more affordable to borrowers because of the omission of certain steps taken in a traditional refinance process. This refinance type is more common for loans that a lender originated and still owns at the time of refinance. The lender is already familiar with the borrower's financial information, including credit risk and verifications.
This category of loan is extended to the riskiest category of borrowers. Subprime borrowers, for various reasons, have limited credit history and are less likely to repay loans. Some borrowers choose not to provide income or asset verification. Borrowers of subprime loans pay higher interest rates than prime borrowers. The Federal Reserve has defined subprime as loans with interest rates at least three percent higher than the rate for a same-term U.S. Treasury bond.
The amount of time used to calculate the monthly mortgage payments. The term is usually the time it takes for a loan to reach maturity.
When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
A cost that is charged at every financial transaction. Every time a withdrawal, balance transfer, or cash advance is made, there may be costs associated with these events.
An index used to determine interest rate changes for certain adjustable rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
When it is worth it to refinance a loan, the borrower captures a tangible net benefit: the better terms and rates outweigh the costs of the refinance. For example, a borrower might determine that the long-term savings of refinancing to a lower interest rate outweigh the upfront closing costs of the refinance.
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
Short for Truth in Lending Act, TILA was enacted into federal law in 1968 to protect consumers during dealings with lenders and creditors. TILA requires lenders to disclose the annual percentage rate (APR) to the borrower through the Truth in Lending disclosure. See annual percentage rate.
Written evidence of ownership in property.
The agency that will investigate a property’s title (or deed) for discrepancies or undiscovered liens and that will issue title insurance to the lender after the title is deemed clear.
Insurance that protects an interested party, either the owner or the lender, against issues that would affect legal ownership of the property.
An examination of records used to determine the legal ownership of property and all liens and encumbrances on it. Usually performed by a title company or attorney.
A fiduciary that holds or controls property for the benefit of another.
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 quality of the property itself.
The person who approves or denies a home loan, based on the lender’s underwriting and approval criteria.
The standard loan application form published by the Federal National Mortgage Association (Fannie Mae) and used by most lenders.
When we use the term Unpaid Principal Balance, we mean the amount you borrowed (which may include amounts that have been added to your principal balance in connection with loan modifications) over the history of the loan that has not yet been paid back. We may charge you interest each month on the Unpaid Principal Balance (or amount owed), according to the terms of your loan.
Typically used when referring to a loan or a line of credit (unsecured loan, unsecured line of credit) that is not backed by collateral.
Typically used when referring to a loan or a line of credit (unsecured loan, unsecured line of credit) that is not backed by collateral.
The costs you must pay when applying for a loan. Typically these include loan application fees. Some lenders require some of your closing costs also be paid when you apply.
See Negative Equity
USDA-insured mortgages are available to finance the purchase of property in a suburban or rural area—typically an area with a population no larger than 20,000. If eligible, a borrower can obtain no-down payment financing with low interest rates.
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.
A vacation home is a single-family property that the borrower occupies in addition to his or her primary residence. The property cannot be considered income-producing and must not be part of a mandatory rental pool, but occasionally may be rented to friends and relatives. When property is classified as a second home, rental income may not be used to qualify the applicant. A 2- to 4-unit property is not eligible for second home status. Also known as second home.
The minimum amount you will need to pay each month on your home equity line of credit, or HELOC (does not include any payments for the Fixed- Rate Loan Payment Option). The payment amount includes both principal and interest (minimum of $100). The monthly required payment may vary each month and is based on your outstanding loan balance and fluctuating interest rate. In general, this payment is intended to repay your loan balance in substantially equal principal and interest installments over the remaining loan term, based on the balance and rate information at the time of each monthly calculation.
This is the acronym for the U.S. Department of Veterans Affairs, a cabinet-level executive department, whose mission is to serve and honor veterans.
Lenders verify, or confirm, the information a borrower has provided in a loan application to be sure it is true and accurate. The lender may verify a borrower's income, employment and assets as well as the subject property's appraisal value. For example, in a verification of employment, the lender will request that a borrower's employer fill out an official form confirming the borrower's income. The lender secures verifications as part of its documentation used in deciding whether to extend a loan to a borrower.
A wage and tax statement provided by your employer annually. The W-2 form details your income and the various local and federal taxes withheld from your income. It is provided to the IRS along with your tax return.
A final inspection shortly before settlement to make sure the property is in the same condition that it was at the time the offer contract was written.
An affordability analysis that is based on a what-if scenario. A what-if analysis is useful if you do not have complete data or if you want to explore the effect of various changes to your income, liabilities, or available funds or to the qualifying ratios or down payment expenses that are used in the analysis.
This coverage is typically required in coastal areas and pays for property damage resulting from a windstorm. Like flood and earthquake coverage, windstorm insurance covers damage to the dwelling and, in some cases, personal property and living expenses if the dwelling is uninhabitable. Some states offer market assistance programs or joint underwriting associations to help homeowners find coverage in areas where coverage is scarce.
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The report shows how much was paid in interest during the year, as well as the remaining mortgage loan balance at the end of the year. If the bank has an impound account for you, it will also show how much was paid and reserved in property taxes. If the bank does not have a property tax impound account, then tax details are not displayed on the report.
Zone of possible agreement describes the potential common ground between two negotiating parties. Each party in a negotiation should have points on which they will and will not compromise. The zone of possible agreement encompasses the points on which both sides are willing to compromise.
Yield spread premium is the difference between the interest rate a borrower pays on a mortgage loan, and the lender's par rate for which that borrower qualifies. This difference is the broker's compensation for originating the mortgage. Yield spread premiums are disclosed on the HUD-1 Form.
Yupcap is a slang term for a young, educated, working professional who can't afford to buy a home. Yupcaps have reliable, competitive income, but are kept out of homeownership due to the rising cost of real estate in the U.S.
This is a loan where you pay no points or fees up front. You pay a higher interest rate and the lender pays the closing costs. In the 1990s, this was a popular loan for first-time buyers and refinancing, but it was not advantageous for people wanting to stay in their dwelling for a long period of time.
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