A
Adjustable-rate mortgage (ARM):
A mortgage with an interest rate and payment that change periodically over the life of the loan based on changes in a specified index.
Amenity: a feature of a home or property that is desirable, like location, acreage, a swimming pool or garden.
Amortization: repayment of a mortgage loan through monthly installments of principal and interest that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years).
Annual Percentage Rate (APR): calculated by using a standard formula, the APR shows the cost of a loan. It includes the interest, points, mortgage insurance, and other fees associated with the loan.
Application: the first step in the official loan approval process; used to record important information about the potential borrower and required for the underwriting process.
Appraisal: a document that estimates a property’s fair market value. An appraisal is generally required by a Lender before loan approval to ensure that the mortgage amount is not more than the value of the property.
Appreciation: a rise in the appraised value of a property, based on increasing market value.
ARM: Adjustable Rate Mortgages (ARM) are subject to changes in interest rates. When rates change, payments increase or decrease as determined by the Lender. The change in monthly payments is usually limited by a cap.
Assessor: a government official who determines the value of a property for the purpose of taxation.
Assumable mortgage: a mortgage that can be transferred from a seller to a buyer. Once the loan is assumed by the buyer, the seller is no longer responsible for repaying it. There may be a fee and/or a credit package involved in the transfer of an assumable mortgage.
B
Balloon Mortgage: a mortgage that offers low rates for an initial period of time, usually five, seven, or 10 years; after that time period elapses, the balance is due or refinanced by the borrower.
Bankruptcy: a federal law whereby a person’s assets are turned over to a trustee and used to pay off outstanding debts.
Borrower: a person who has been approved to receive a loan and is then obligated to repay it according to the loan terms.
C
Cap: a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
Cash reserves: a cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the Lender.
Certificate of title: a document provided by a qualified source (such as a title company) that shows the property legally belongs to the current owner. Before the title is transferred at closing, it must be clear and free of all liens and claims.
Charge-off:
The portion of principal and interest due on a loan that is written off when deemed to be uncollectible.
Closing: also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer. At this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.
Closing costs: customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed for the borrower after submission of a loan application.
Commission: a percentage of the property sales price that is collected by a real estate professional as a fee for negotiating the transaction.
Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex. The owners share financial responsibility for common areas.
Contingency A contingency is a provision in a real estate contract that specifies the contract would cease to exist upon the occurrence of a certain event.
Conventional loan: a private sector loan that is not guaranteed or insured by the U.S. government.
Credit enhancement:
A method to reduce credit risk by requiring collateral, letters of credit, mortgage insurance, corporate guarantees, or other agreements to provide an entity with some assurance that it will be recompensed to some degree in the event of a financial loss.
Credit loss ratio:
The ratio of credit-related losses to the dollar amount of MBS outstanding and total mortgages owned by the corporation.
Credit history: history of an individual’s debt payment. Lenders use this information to gauge a potential borrower’s ability to repay a loan.
Credit report: a record that lists all past and present debts and the timeliness of their repayment.
Credit agency score: a number representing the possibility that a borrower may default. It is based upon credit history and is used to determine ability to qualify for a mortgage loan.
D
Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses; per the Federal Housing Administration (FHA), the monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
Deed: the document that transfers ownership of a property.
Default: the inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.
Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.
Discount point: normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount. Discount points are paid to reduce the interest rate on a loan.
Down payment: the portion of a home’s purchase price that is paid in cash and is not part of the mortgage loan.
E
Earnest money: money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.
EEM (Energy Efficient Mortgage): A Federal Housing Administration (FHA) program that helps home buyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase
Equity: an owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.
Escrow account: a separate account into which the Lender puts a portion of each monthly mortgage payment. An escrow account provides the funds needed for property taxes, homeowners insurance, mortgage insurance, etc. Having an escrow account is optional but recommended.
F
Fair Housing Act: a law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.
Fair market value: the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
Fannie Mae Federal National Mortgage Association (FNMA): a federally chartered enterprise owned by private stockholders that buys residential mortgages and converts them into securities for sale to investors. By purchasing mortgages, Fannie Mae supplies funds that Lenders may loan to potential home buyers.
FHA (Federal Housing Administration): Established in 1934 to advance homeownership opportunities for all Americans, the FHA assists home buyers by providing mortgage insurance to Lenders to cover most losses that may occur when a borrower defaults. This encourages Lenders to make loans to borrowers who might not qualify for conventional mortgages.
Fixed-rate mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Flood insurance: insurance that protects homeowners against losses from a flood. If a home is located in a flood plain, the Lender will require flood insurance before approving a loan.
Foreclosure: a legal process in which mortgaged property is sold to pay off the loan of the defaulting borrower.
Freddie Mac Federal Home Loan Mortgage Corporation (FHLM): a federally chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors. This provides Lenders with funds for new home buyers.
G
Ginnie Mae Government National Mortgage Association (GNMA): A government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as with Fannie Mae and Freddie Mac, the investment income provides funding that may then be loaned to eligible borrowers by Lenders.
Good faith estimate: an estimate of all closing fees including pre-paid and escrow items as well as Lender charges, which must be given to the borrower within three days after submission of a loan application.
Guaranty fee:
Compensation paid by a lender to Fannie Mae for the guarantee of timely payments of principal and interest to MBS security holders.
H
Home inspection: an examination of the structure and mechanical systems to determine a home’s safety; makes the potential home buyer aware of necessary and desirable repairs.
Home warranty: offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner’s insurance. Coverage extends over a specific time period and does not cover the home’s structure.
Homeowner’s insurance: an insurance policy that combines protection against damage to a dwelling and its contents with protection against claims of negligence or inappropriate action that result in someone’s injury or property damage.
HUD: the U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans. It does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
HUD1 Statement: also known as the “settlement sheet,” it itemizes all closing costs; must be given to the borrower at or before closing.
HVAC: Heating, Ventilation and Air Conditioning; a home’s heating and cooling system.
I
Index: a measurement used by Lenders to determine changes to the interest rate charged on an Adjustable Rate Mortgage.
Inflation: An economic condition in which the number of dollars in circulation exceeds the amount of goods and services available for purchase. Inflation results in a decrease in the dollar’s value.
Interest: a fee charged for the use of money.
Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage.
Insurance: protection against a specific loss over a period of time that is obtained by the payment of a regularly scheduled premium.
L
Lease purchase: assists low- to moderate-income home buyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.
Lien: a legal claim against property that must be satisfied when the property is sold.
Loan: money borrowed that is usually repaid with interest.
Loan fraud: purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.
Loan servicing:
The tasks a lender performs to protect a mortgage investment, including collecting monthly payments from borrowers and dealing with delinquencies.
Loan-to-value (LTV) ratio: a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased. The higher the LTV, the less cash a borrower is required to pay as down payment.
Lock-in: since interest rates can change frequently, many Lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specified time.
Loss mitigation: a process to avoid foreclosure. The Lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.
M
Margin: an amount the lender adds to an index to determine the interest rate on an Adjustable Rate Mortgage.
Modification:
Any change to the original terms of a mortgage.
Mortgage: a lien on the property that secures a promise to repay a loan.
Mortgage-Backed Security (MBS):
A Fannie Mae security that represents an undivided interest in a group of mortgages. Principal and interest payments from the individual mortgage loans are grouped and paid out to the MBS holders.
Mortgage banker: a company that originates loans and resells them to secondary mortgage Lenders like Fannie Mae and Freddie Mac.
Mortgage broker: a firm that originates and processes loans for a number of Lenders.
Mortgage insurance: a policy that protects Lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price.
Mortgage insurance premium (MIP): a monthly payment – usually part of the mortgage payment – paid by a borrower for mortgage insurance.
Mortgage Modification: a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.
Multifamily housing:
A building with more than four residential rental units.
N
NOD
Abbreviation for Notice Of Default.
Notice of Default
An official notice filed and recorded by a designated trustee at the request of a lender indicating lender has commenced foreclosure action.
Nonperforming asset:
An asset such as a mortgage that is not currently accruing interest or on which interest is not being paid.
O
Offer: a written document completed by a potential buyer who wants to purchase a home at a specific price.
Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.
Origination fee: the charge for originating a loan, calculated in the form of points and paid at closing.
P
PITI (Principal, Interest, Taxes, and Insurance): the four elements of a monthly mortgage payment. Principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
Points: a point is one percent of the value of the property.
PMI: Private Mortgage Insurance; privately owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
Pre-approve: a Lender’s commitment to lend money to a potential borrower. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
Preforeclosure sale:
A procedure in which the borrower is allowed to sell his or her property for an amount less than what is owed on it to avoid a foreclosure. This sale fully satisfies the borrower’s debt.
Pre-qualify: a Lender’s informal determination of the maximum amount an individual is eligible to borrow. This is not the same as a pre-approval.
Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage.
Prepayment: payment of the mortgage loan before the scheduled due date; may be subject to a prepayment penalty.
Prime mortgage: the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). The rate is almost always the same among major banks. Adjustments to the prime lending rate are made by banks at the same time, although the prime rate does not adjust on any regular basis. The reported rates are based upon the prime rates on the first day of each respective month.
Principal: the amount borrowed from a Lender; doesn’t include interest or additional fees.
R
Real estate agent: an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.
Real Estate Mortgage Investment Conduit (REMIC):
A security that represents a beneficial interest in a trust having multiple classes of securities. The securities of each class entitle investors to cash flows structured differently from the payments on the underlying mortgages.
Realtor: a real estate agent or broker who is a member of the National Association of Realtors, and its local and state associations.
Refinancing: paying off one loan by obtaining another. Refinancing is generally done to secure better loan terms (such as a lower interest rate).
Rehabilitation mortgage: a mortgage that covers the costs of rehabilitating (repairing or improving) a property; some rehabilitation mortgages – like the FHA’s 203(k) – allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.
Repayment plan:
An agreement between a lender and a borrower who is delinquent on his or her mortgage payments, in which the borrower agrees to make additional payments to pay down past due amounts while still making regularly scheduled payments.
RESPA Real Estate Settlement Procedures Act: a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring Lenders to disclose all settlement costs, practices, and relationships.
Reverse mortgage:
A financial tool which provides seniors with funds from the equity in their homes. Generally, no payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed to not exceed the proceeds from the sale of the home.
S
Secondary mortgage market:
The market in which residential mortgages or mortgage securities are bought and sold.
Security:
A financial instrument showing ownership of equity (such as common stock), indebtedness (such as a debt security), a group of mortgages (such as MBS), or potential ownership (such as an option).
Serious delinquency:
A single-family mortgage that is 90 days or more past due, or a multifamily mortgage that is two months or more past due.
Settlement: another name for closing.
Short Refinance:
Short refinance is the replacement of a mortgage, usually with a reduced mortgage, when the borrower is already in default. This is done to transition the borrower to a more affordable payment structure. The lender has to write off the difference between the old mortgage and the new mortgage, but in some cases this may be preferable to foreclosure.
Short Sale:
To sell a home through negotiation with the bank or lender, who agrees to accept less than the full amount owed to satisfy the debt allowing the debt to be ‘paid off’, short. Short sales are subject to bank approval and are often used as options in lieu of foreclosure.
Stockholders’ equity:
The sum of proceeds from the issuance of stock and retained earnings less amounts paid to repurchase common shares.
Stripped MBS (SMBS):
Securities created by “stripping” or separating the principal and interest payments from the underlying pool of mortgages into two classes of securities, with each receiving a different proportion of the principal and interest payments.
Sub-prime lending: Lending to borrowers who have less than ideal credit. Such borrowers will pay a higher interest rate due to their increased risk of not repaying loans, based on credit history, low income, or other criteria used by Lenders. During economic booms, sub-prime borrowers can often borrow more easily than they can at other times, as many Lenders prefer higher yields in search of higher profit margins. When the boom is over, these loans tend to default at much higher rates than prime loans, and Lenders again become wary of lending to sub-prime borrowers.
Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
T – U – V
Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title 1 loans less than $7,500 don’t require a property lien.
Title insurance: insurance that protects the Lender against any claims that arise from disputes about ownership of the property; also available for home buyers.
Title search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.
Transfer agent:
A bank or trust company charged with keeping a record of a company’s stockholders and canceling and issuing certificates as shares are bought and sold.
Truth-in-Lending: a federal law obligating a Lender to give full written disclosure of all fees, terms, and conditions associated with the loan’s initial period, which then adjusts to another rate that lasts for the term of the loan.
Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan. It includes a review of the potential borrower’s credit history and a judgment of the property value.
VA (Department of Veterans Affairs): a federal agency which guarantees loans made to veterans. Similar to mortgage insurance, this loan guarantee protects Lenders against loss that may result from a borrower default.
