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ADJUSTABLE RATE MORTGAGE (ARM)
A mortgage that has an interest rate that adjusts periodically. The interest rate
adjustment is based upon the movement of an underlying index. A predetermined margin is
added to the index to compute the interest rate.
AMORTIZATION
The gradual reduction of a mortgage debt through periodic payments according to a
schedule over a specified mortgage term.
AMOUNT FINANCED
The loan amount less the prepaid finance charges. Prepaid finance charges can be found on
the good faith estimate or settlement statement (HUD-1A). For example, if the
borrower’s note is for $100,000 and the prepaid finance charge is $2,500, the Amount
Financed would be $97,500. The Amount Financed is the figure on which the annual
percentage rate is based.
ANNUAL PERCENTAGE RATE (APR)
An interest rate reflecting the cost of mortgages as a yearly rate. This rate is
likely to be higher than the stated note rate or advertised rate on the mortgage, because
it takes into account points and other costs. The APR allows homebuyers to compare
different types of mortgages based on the annual cost for each loan. If interest was the
only finance charge, then the interest rate and the annual percentage rate would be the
same.
APPRAISAL
An professional appraiser's estimate of the value of a home at a given point in time.
Appraisers consider square footage, construction quality, design, floor plan,
neighborhood, and availability of transportation, shopping, and schools. Appraisers
also take lot size, topography, view, and landscaping into account. Most appraisals cost
about $350.
APPRAISER
A person who make an appraisal.
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BALLOON PAYMENT
Usually a short term fixed rate loan that allows small payments for a certain period
of time and one large payment for the remaining amount of the principal at a time
specified in the contract.
BUY-DOWN
A loan where a lender
is paid an up-front fee, or premium, to "buy down" the interest rate on a loan
for a specified length of time, usually one to three years. A buy-down is usually
expressed as two numbers. For example a 2/1 buy-down represents a 2% rate buy down the
first year and a 1% buydown the second year, the
third year the rate would revert to the note rate.
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CAPS (Interest)
Borrower safeguards that limit the amount the interest rate on an adjustable rate
mortgage may change per year and over the life of the loan.
CAPS (Payment)
Borrower safeguards that limit the amount monthly payments on an adjustable rate
mortgage may change. Payment Caps have the potential of creating negative amortization.
CASH-OUT REFINANCE
A refinance transaction that provides cash proceeds to the borrower in excess of 1% of
the mortgage amount.
CASH RESERVES
The amount of liquid assets the borrower has remaining after the mortgage loan
transaction is completed.
CLOSING COSTS
Money paid by buyers, sellers, and borrowers to effect the closing of a real estate
transaction. Typical closing costs include appraisal fees, credit report fees, title
insurance fees, escrow fees, and origination fees.
COMBINED LOAN-TO-VALUE RATIO (CLTV)
The ratio of the total mortgage liens against the subject property to the lesser of
either the appraised value or the sales price.
COMPARABLES
Properties used as comparisons to determine the value of a specific property.
COMPARATIVE MARKET ANALYSIS
A real estate broker's or agent's informal estimate of a home's market value,
based on sales of comparable homes in a neighborhood. Most agents will give you a
comparative market analysis for free.
COMPENSATING FACTORS
Borrower strengths that mitigate or compensate for a borrower’s weaknesses (i.e.
length of employment, considerable cash reserves, etc.)
CONFORMING LOANS
Loans that conform to FHLMC and FNMA guidelines and do not exceed the maximum loan
amount and LTV limitations established by FNMA or FHLMC:
| 1 UNIT |
$417,000 |
| 2 UNITS |
$533,850 |
| 3 UNITS |
$645,300 |
| 4 UNITS |
$801,950 |
as of
January 1, 2007 |
COST OF FUNDS INDEX (COFI)
An index used to determine interest rate changes for certain ARMS. It represents the
weighted average cost of savings, borrowing, and advances of the 11th District
members of the Federal Home Loan Bank of San Francisco.
CREDIT REPORT
A report documenting the credit history and current status of a borrower’s credit
standing.
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DEED OF TRUST
In certain states, a legal instrument that secures a note and perfects a security
interest upon real property.
DISCOUNT POINTS
One Discount Point is equal to 1% of the loan amount. Discount Points are payable to a
lender for the purpose of obtaining a below market interest rate.
DRIVE BY APPRAISAL
An appraisal that is based mainly on recent comparable sales.
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EQUAL CREDIT OPPORTUNITY ACT (ECOA)
Is a federal law that requires lenders and other creditors to make credit
equally available without discrimination based on race, color, religion,
national origin, age, sex, marital status or receipt of income from public
assistance programs.
EQUITY
The value an owner has in real estate over and above the obligations against
the property.
ESCROW
A neutral third party who carries out escrow instructions for borrowers,
buyers, sellers, and lenders to facilitate the closing of a real estate
transaction.
ESCROW ACCOUNT
Funds held by a lender on behalf of a borrower for the payment of taxes,
insurance, or special assessments. Also referred to as "Impound Account".
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FHA
Federal Housing Administration - A federal agency which insures mortgages enabling lenders
to make home loans with very low down payments.
FHLMC
The Federal Home Loan Mortgage Corporation was created by Congress to purchase
conventional mortgages in the secondary mortgage market. Also known as "Freddie
Mac".
FINANCE CHARGE
The amount of interest, prepaid finance charge and certain insurance premiums (if any)
which the borrower will be expected to pay over the life of the loan.
FIXED RATE MORTGAGE
A mortgage with one set interest rate for the entire term of the mortgage.
FNMA
The Federal National Mortgage Association was created by Congress to purchase
conventional mortgages in the secondary mortgage market. Also known as "Fannie
Mae". Fannie Mae is the largest single holder of home mortgages in the United States.
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GOOD FAITH ESTIMATE
A written estimate given to a prospective borrower by a Loan Officer or Realtor which
outlines the costs and expenses which will be paid in order to obtain a loan.
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HAZARD INSURANCE
Property insurance coverage that compensates for physical damage by fire, wind or
other natural disasters.
HOME INSPECTION
A third-party inspection of a home which is useful in determining the integrity of the
internal and external components of a dwelling. Some of the items included in the
final report are structural, electrical, plumbing, built-in appliances, safety hazards,
roof, and patio.
HOME INSPECTOR
Someone who performs a Home Inspection.
HOME WARRANTY
An insurance for buyer's protection against defects in a recently purchased home which
usually covers plumbing, heating, electrical, and kitchen appliances. Coverage
starts upon receipt of payment at close of escrow and continues for one year.
HOMEOWNERS ASSOCIATION (HOA)
A non-profit association whose directors and officers are elected by the unit
owners of a condominium or PUD project. Typical HOA responsibilities are to manage the
common area's expenses and services.
HOMEOWNERS ASSOCIATION DUES (HOA
DUES)
The amount that each homeowner in a condominium or PUD project pays the HOA for
their share of the common area’s expenses.
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IMPOUND ACCOUNT
See "ESCROW ACCOUNT"
INDEX
A published interest rate such as the Prime Rate, LIBOR, T-Bill, or the 11th
District COFI. Lenders use indexes to establish interest rates charged on mortgages
or to compare investment returns.
INSTALLMENT DEBT
Borrowed money that is repaid in regular payments.
INVESTMENT PROPERTY
A non-owner occupied residential property used to generate income.
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JUMBO LOAN
A loan that exceeds FNMA and FHLMC loan limits. Since jumbo loans cannot
be funded by these agencies, they usually carry a higher interest rate.
JUNIOR LIEN
Any lien that is subordinate or subsequent to the claims of a prior or senior
lien.
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LOAN-TO-VALUE RATIO (LTV)
The ratio of the amount of the mortgage loan and the lesser of either the
appraised value or the sales price. For example, if a property is appraised at
$100,000 and a buyer makes a down payment of 10%, then the loan-to-value is 90%.
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MARGIN
The amount that is added to the index to determine the interest rate for an ARM.
MARKET VALUE
The highest price that a buyer would pay and the lowest price a seller would accept on
a property.
MLS
Multiple Listing Service - A service provided by a real estate association for
Realtors for submitting property for sale so that all members of the association have an
opportunity to sell it.
MORTGAGE
In some states, a note or other evidence of real property being pledged as the
security for a debt. Sometimes referred to as a "Deed of Trust", "Trust
Deed", or "Security Instrument".
MORTGAGE INSURANCE (MI)
Insurance that protects a mortgage lender against loss in the event of default
by the borrower. This insurance allows lenders to make loans with low down payments.
MORTGAGEE
The lender.
MORTGAGOR
The borrower.
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NEGATIVE AMORTIZATION
A gradual increase in the mortgage balance caused by unpaid interest that is added to
the mortgage principal because the payments being made are not sufficient to cover the
full amount of interest due.
NET SHEET
A written estimate of the amount a seller will receive after all
selling expenses and costs are deducted from the sales price.
NON-CONFORMING LOANS
Loans that do not conform to FNMA or FHLMC guidelines.
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ORIGINATION FEE
A fee charged to the borrower by a lender or broker to originate a mortgage
loan. Usually expressed as a percentage.
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PAYMENT SCHEDULE
A table showing the payments scheduled to be made for a particular loan. The
dollar figures in the Payment Schedule represent principal, interest, and PMI (if
applicable) over the life of the loan. These figures will not reflect taxes, insurance, or
any temporary buydown payments.
PITI
Principal, Interest, Taxes, and Insurance. This is also referred to as monthly
housing expense.
PREPAID FINANCE CHARGES
Certain charges made in connection with a loan which must be paid upon closing
of the loan. Examples of Prepaid Finance Charges are loan origination fees, discount
points, PMI or FHA mortgage insurance and tax service fees. Some loan charges are
specifically excluded from the prepaid finance charge such as appraisal fees and credit
report fees.
PREPAID ITEMS
Items that generally must be paid for at the time of closing and are
generally recurring charges. Examples of Prepaid Items are taxes, first year premiums for
hazard, flood, and mortgage insurance, prorated interest, and any special assessments.
PRINCIPAL BALANCE
The amount of debt not counting interest left on a loan.
PROPERTY TAXES
Taxes collected by a municipality for real property which is based on the value of the
property. In Southern California it is usually estimated at 1.25% of the sales price
per year.
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QUALIFYING RATIOS
The percentage of payment-to-income and debt-to-income that is used to
measure the borrowers capacity to repay a mortgage debt.
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RATE & TERM REFINANCE
A refinance transaction in which the new mortgage amount is limited to the unpaid
principal balance of the existing liens plus any closing costs.
RECISSION
The cancellation of a contract. On most refinance transactions, the borrower's 3-day
right to cancel.
REFINANCE
To obtain a new mortgage loan on a property already owned. Often to
replace existing loans on the property for the purpose of reducing monthly payments.
RESPA
The Real Estate Settlement Procedures Act is a federal law that allows
consumers an opportunity to review information on known or estimated settlement costs
after a loan application and prior to settlement. The law requires lenders to furnish the
information after application only.
REVOLVING DEBT
A debt that does not have a fixed payment amount. The payment amount is
usually a percentage of the outstanding balance and made at regular intervals. Examples of
Revolving Debt are credit cards issued by banks and department stores.
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SECOND MORTGAGE
A mortgage made subsequent and subordinate to another mortgage.
Usually a debt consolidation or home improvement loan.
SECONDARY MORTGAGE MARKET
This is where primary mortgage lenders sell the mortgages they make to
obtain more funds to originate more new loans. It provides liquidity for lenders.
SERVICING
The steps and operations a lender performs to keep a loan in good
standing. Among other things, Servicing operations include the collection of payments,
payment of taxes, and insurance.
SINGLE FAMILY RESIDENCE (SFR)
A residential structure intended to provide housing for one family.
SUBORDINATE FINANCING
A mortgage made subsequent and subordinate to one or more other mortgages.
SUB-PRIME CREDIT
A credit rating or score that does not meet the quidelines of FNMA or
FHLMC.
SUPPLEMENTAL INCOME
Income derived from sources such as interest/dividends, capital gains, and
rental properties. To be allowed by lenders for qualifying purposes, Supplemental Income
must be reflected on tax returns.
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TAX SERVICE CONTRACT
A service lenders use to verify payment of property taxes.
TITLE
A document that evidences an individual’s ownership of property.
Usually a Grant Deed.
TITLE INSURANCE
A type of insurance that insures against defects in title that were not
listed in the title report or abstract.
TITLE SEARCH
An examination of municipal records to determine the legal ownership of
property.
TOTAL OF PAYMENTS
This figure represents the total of all payments made toward principal,
interest and mortgage insurance (if applicable) over the life of a loan.
TRUTH-IN-LENDING
A federal law requiring disclosure of the APR to borrowers shortly after
they apply for a mortgage loan.
TWO-STEP ARM
An ARM that has a fixed interest rate for the first three, five, seven, or
ten years of the mortgage term, then adjusts at the then current market rate plus a
predetermined margin, remaining fixed at that rate for the remainder of the term.
TWO-TO-FOUR FAMILY PROPERTIES
A residential structure that provides dwelling units for two, three or
four families. Ownership is evidenced by a single deed. Also referred to as Duplex,
Triplex, and Fourplex respectively.
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UNDERWRITER
An analyst who reviews a borrower's loan application and supporting documentation to
determine the risk associated with a loan request and subsequently makes a decision to
approve, suspend, or decline a loan request.
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VERIFICATION OF DEPOSIT (VOD)
A document signed by a borrower’s financial institution verifying
among other things, status and balance of financial accounts.
VERIFICATION OF EMPLOYMENT
(VOE)
A document signed by a borrower’s employer verifying among other
things, position and salary.
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X
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ZERO-POINT LOAN
A home loan in which the borrower pays no discount points in order to
minimize closing costs. The trade-off is a slightly higher interest rate on the
loan.
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