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A-Credit A consumer with the best credit rating, deserving of the lowest prices that lenders offer. Most lenders require a FICO score above 720. There is seldom any payoff for being above the A-credit threshold, but you pay a penalty for being below it.
Adjustable Rate Mortgage (ARM) A mortgage on which the interest rate, after an initial period, can be changed by the lender. While ARM’s in many countries abroad allow rate changes at the lender’s discretion (“discretionary ARMs”), in the
Alternative documentation Expedited and simpler documentation requirements designed to speed up the loan approval process. Instead of verifying employment with the applicant’s employer and bank deposits with the applicant’s bank, the lender will accept paycheck stubs, W-2s, and the borrower’s original bank statements. Alternative documentation remains “full documentation”, as opposed to the other documentation options.
Amortization The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment. If the payment is less than the interest due, the balance rises, which is negative amortization.
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 amount.
Amount Financed On the Truth in Lending form, the loan amount less “prepaid finance charges”, which are lender fees paid at closing. For example, if the loan is for $100,000 and the borrower pays the lender $4,000 in fees, the amount financed is $96,000.
Appraisal A written estimate of a property’s current market value prepared by an appraiser.
Appraiser A professional with knowledge of real estate markets and skilled in the practice of appraisal. When a property is appraised in connection with a loan, the appraiser is selected by the lender, but the appraisal fee is usually paid by the borrower.
APR The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a comprehensive measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges. It is also adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid ten years down the road. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons.
Approval Acceptance of the borrowers loan application. Approval means that the borrower meets the lender’s qualification requirements and also it’s underwriting requirements. In some cases, especially where approval is provided quickly as with automated underwriting
Assumption A mortgage contract that allows, or does not prohibit, a creditworthy buyer from assuming the mortgage contract of the seller. Assuming a loan will save the buyer money if the rate on the existing loan is below the current market rate, and closing costs are avoided as well. A loan with a “due-on-sale” clause stipulating that the mortgage must be repaid upon sale of the property is not assumable.
Automated Underwriting A computer-driven process for informing the loan applicant very quickly, sometimes within a few minutes, whether the applicant will be approved, or whether the application will be forwarded to an underwriter. The quick decision is based on information provided by the applicant, which is subject to later verification, and other information retrieved electronically including information about the borrower’s credit history and the subject property.
Automated Underwriting System A particular computerized system for doing automated underwriting. Mortgage insurers and some large lenders have developed such systems, but the most widely used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.
Balloon Mortgage A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. 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.
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 purchase, and the closing date of a home sale. To qualify for a bridge loan, the borrower must have a contract to sell the existing house.
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.
Closing On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the seller and the lender to the buyer, and the execution of all the documents associated with the sale and the loan. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.
Closing Costs Same as Settlement Costs
Co-Borrowers One or more persons who have signed the note, and are equally responsible for repaying the loan. Unmarried co-borrowers who live together are advised to agree beforehand on what happens if they split.
Conforming Mortgage A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.
Correspondent A lender who delivers loans to a (usually larger) wholesale lender against prior price commitments the wholesaler has made to the correspondent. The commitment protects the correspondent against risk.
Credit Score A single numerical score, based on an individual’s credit history, that measures that individual’s credit worthiness. Credit scores are as good as the algorithm used to derive them. The most widely used credit score is called the FICO for Fair Issac Co. which developed it. Many of the in credit issues discuss factors that affect the FICO score, including payoff delinquencies to improve credit.
Deed in lieu of foreclosure Deeding the property over to the lender as an alternative to having the lender foreclose on the property.
Default Failure of the borrower to honor the terms of the loan agreement. Lenders (and the law) usually view borrowers as delinquent 90 days or more as in default. Equity In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home. Escrow (Impound Account) An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due. Fannie Mae One of two Federal agencies that purchase home loans from lenders. (the other is Freddie Mac). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities.
Fees The sum of all upfront cash payments required by the lender as part of the charge for the loan. Origination fees and points are expressed as a percent of the loan.
FHA Mortgage A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low.
FICO Score See credit score
First Mortgage A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan. For example, a borrower defaults on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only what is left of the $100,000.
Fixed Rate Mortgage (FRM) A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage.
Foreclosure The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults.
Freddie Mac One of two Federal agencies that purchase home loans from lenders. The other is Fannie Mae
Good Faith Estimate The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application.
Government National Mortgage Association (GNMA) A Federal agency that guarantees mortgage securities that are issued against pools of FHA and VA mortgages
Grace Period The period after the payment due date during which the borrower can pay without being hit for late fees. Grace periods apply only to mortgages on which interest is calculated monthly. Simple interest mortgages do not have a grace period because interest accrues daily.
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”.
Homebuyer Protection Plan A plan purporting to protect FHA homebuyers against property defects.
Home Equity Conversion Mortgage (HECM) A reverse mortgage program administered by FHA.
Home Keeper A reverse mortgage program administered by Fannie Mae.
Interest-only Mortgage A mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged.
Interest rate increase cap The maximum allowable increase in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points. Investor In real estate, a borrower who owns or purchases a property as an investment rather than as a residence.
Jumbo Mortgage A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $359,650 in 2005. However, some lenders use the term to refer to programs for even larger loans, such as e.g., greater than $500,000
Junk Fees A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount.
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, which in turn will be satisfied before the claim of a lender holding a third lien, etc.
Loan Officer Employees of lenders or mortgage brokers who find borrowers, sell, counsel them, and take applications.
Loan-to-value ratio The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts.
Lock An option exercised by the borrower, at the time of the loan application or later, to “lock in” the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.
Lock Period The number of days for which any lock or float-down holds. Ordinarily, the longer the period, the higher the price to the borrower.
Manufactured Housing A house built entirely in a factory, transported to a site and installed there. They are usually built without knowing where they will be sited, and are subject to a Federal building code administered by HUD.
Maturity The period until the last payment is due. This is usually but not always the term, which is the period used to calculate the mortgage payment.
Mortgage A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.
Mortgage Broker An independent contractor who offers the loan products of multiple lenders, termed wholesalers. A mortgage broker counsels on the loans available from different wholesalers, takes the application and usually processes the loan. When the file is complete, but sometimes sooner, the lender underwrites the loan. In contrast to a correspondent, a mortgage broker does not fund a loan.
Mortgage Insurance Insurance provided the lender against loss on a mortgage in the event of borrower default. In most cases, the borrower pays the premiums.
Mortgage Insurance Premiums The up-front and/or periodic charges that the borrower pays for mortgage insurance. There are different mortgage insurance plans with differing combinations of up-front, monthly and annual premiums.
Negative Amortization A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called deferred interest. Negative amortization arises most frequently on ARMs.
Negative Points Points paid by a lender for a loan with a rate above the rate on a zero point loan. For example, a wholesaler quotes the following prices to a mortgage broker. 8% 0 points, 7.5%/3 points, 8.75% -3 points. On mortgage web sites, negative points are usually referred to as “rebates” because they are used to reduce a borrower’s settlement costs. When negative points are retained by a mortgage broker, they are called a “yield spread premium”.
No-Cost Mortgage A mortgage on which all settlement costs except per diem interest and escrows are paid by the lender and/or the home seller.
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.
Note A document that evidences 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.
Origination Fee An upfront fee charged by some lenders, expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, and origination fee does not vary with the interest rate.
Payment Shock A very large increase in the payment on an ARM that may surprise the borrower. Also used to refer to a large difference between the rent being paid by a first-time home buyer, and the monthly housing expense on the purchased home.
Per Diem Interest Interest from the day of closing to the first day of the following month.
PITI Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.
PMI Private Mortgage Insurance, as distinguished from insurance provided by government under FHA and VA.
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; e.g., “3 points” means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations with negative points. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed “discounts” and “premiums,” respectively.
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.
Primary Residence The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented.
Principal The portion of the monthly payment that is used to reduce the loan balance. Processing Compiling and maintaining the file of information about the transaction, including the credit report, appraisal, verification of employment and assets, and so on. The processed file is then handed to underwriting for the loan decision.
Property Flipping Successive sham home sales at progressively higher prices as part of a scheme to defraud FHA.
Refinance Paying off an old loan while simultaneously taking a new one. This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan. Or it may be done to raise cash, as an alternative to a home equity loan.
RESPA The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.
Reverse Mortgage A loan to an elderly home owner on which the balance rises over time, and which is not repaid until the owner dies, sells the house, or moves out permanently.
Servicing Administering loans between the time of disbursement and 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.
Settlement Costs Costs that the borrower must pay at the time of closing, in addition to the down payment.
Short Sale An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure.
Silent Second A second mortgage offered at preferential (subsidized) terms to those who qualify. For example, a labor union may offer members who are first-time homebuyers a silent second to finance closing costs or the down payment. The second might bear no interest, and might not be repayable until the first mortgage is repaid or the property is sold.
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.
Sub-Prime Borrower A borrower with poor credit. Such borrowers pay more than prime borrowers, and are sometimes taken advantage of.
Truth in Lending (TIL) The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information.
Underwriting The process of examining all the data about a borrowers property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.
VA Mortgage A mortgage with no down payment requirement, available only to ex-servicemen and women, on which the lender is insured against loss by the Veterans Administration.
Waive Escrows(Waive of Impound Account) Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure where the lender adds a charge to the monthly mortgage payment that is deposited in an escrow account, from which the lender pays the borrower’s taxes and insurance when they are due. On some loans lenders will not waive escrows, and on loans where waiver is permitted lenders are likely either to charge for it in the form of a small increase in points, or restrict it to borrowers making a large down payment.
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