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A
Adjustable Rate Mortgage
(ARM): A mortgage loan subject to changes in interest
rates; when rates change, ARM monthly payments increase or
decrease at intervals determined by the lender; the change
in monthly payment amount is usually subject to a Cap.
Alternative Documentation:
The use of pay stubs, W-2 forms, and bank statements in lieu
of Verifications of Employment (VOE) and Verifications of
Deposit (VOD) to qualify a borrower for a mortgage.
Amenity: A feature of the home or property
that serves as a benefit to the buyer but that is not necessary
to its use; may be natural or man-made
Amortization: Repayment of a mortgage loan
through monthly installments of principal and interest; the
monthly payment amount is based on a schedule that will allow
you to own your home at the end of a specific time period
Annual Percentage Rate (APR): A term used
in the Truth-in-Lending Act to present the percentage relationship
of the total finance charge to the amount of the loan. The
APR reflects the cost of the mortgage loan as a yearly rate.
It could be higher than the interest rate stated on the Note
because it includes, in addition to the interest rate, loan
discount points, miscellaneous fees and mortgage insurance.
Application: The first step in the official
loan approval process; this form is used to record important
information about the potential borrower necessary to the
underwriting process.
Appraisal: A document that gives an estimate
of a property's fair market value; an appraisal is generally
required by a lender before loan approval to ensure that the
mortgage loan amount is not more than the value of the property.
Appraiser: A qualified individual who uses
his or her experience and knowledge to prepare the appraisal
estimate.
Appreciation:
An increase in the value of a property due to market conditions
or other causes. The opposite is depreciation.
Assessor: A government
official who is responsible for determining 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 fixed-rate mortgage for a set number of years and then must
be paid off in full in a single "balloon" payment.
Balloon loans are popular with borrowers expecting to sell
or refinance their property within a definite period of time.
Bankruptcy: Legal
relief from the payment of all debts after the surrender of
all assets to a court-appointed trustee. Assets are distributed
to creditors as full satisfaction of debts, with certain priorities
and exemptions. A person, firm or corporation may declare
bankruptcy under one of several chapters of the U. S. Bankruptcy
Code: Chapter 7 covers liquidation of the debtor's assets;
Chapter 11 covers reorganization of bankrupt businesses; Chapter
13 covers payment of debts by individuals through a bankruptcy
plan.
Borrower: A person
who has been approved to receive a loan and is then obligated
to repay it and any additional fees according to the loan
terms.
Building code:
Based on agreed upon safety standards within a specific area,
a building code is a regulation that determines the design,
construction, and materials used in building.
Budget: A detailed
record of all income earned and spent during a specific period
of time.
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 or a law firm) that shows the property legally belongs
to the current owner; before the title is transferred at closing,
it should be clear and free of all liens or other claims.
Closing: Also
known as settlement, this is the time at which the property
is formally sold and transferred from the seller to the buyer;
it is 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 to the borrower after submission of a loan
application.
Co-Borrower: A
party who signs the mortgage note along with the primary borrower,
and who also shares title to the subject real estate.
Collateral: Property
pledged as security for a debt. For example, real estate that
secures a mortgage.
Combined Loan-to-Value:
The mathematical relationship between the total of all loan
amounts (first mortgage plus subordinate liens) and the value
of the subject property.
Commission: An
amount, usually 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 property ownership in which the homeowner holds title
to an individual dwelling unit, an undivided interest in common
areas of a multi-unit project, and sometimes the exclusive
use of certain limited common areas.
Conventional loan:
A private sector loan, one that is not guaranteed or insured
by the U.S. government.
Cooperative (Co-op):
Residents purchase stock in a cooperative corporation that
owns a structure; each stockholder is then entitled to live
in a specific unit of the structure and is responsible for
paying a portion of the loan.
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 rating:
A rating given a person or company to establish credit-worthiness
based upon present financial condition, experience and past
credit history.
Credit report:
A record that lists all past and present debts and the timeliness
of their repayment; it documents an individual's credit history.
Credit bureau score:
A number representing the possibility a borrower may default;
it is based upon credit history and is used to determine ability
to qualify for a mortgage loan.
D
Deal Structure: An
Underwriters review of certain aspects of a loan application
that do not meet standard guidelines.
Debt-to-income ratio:
A comparison of gross income to housing and non-housing expenses;
With the 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.
Deed-in-lieu:
To avoid foreclosure ("in lieu" of foreclosure),
a deed is given to the lender to fulfill the obligation to
repay the debt; this process doesn't allow the borrower to
remain in the house but helps avoid the costs, time, and effort
associated with foreclosure.
Default: Term
generally used in connection with a mortgage obligation to
refer to the failure to comply with the terms of the Promissory
Note. Most often this default is a failure to make payments,
however, there are other means by which a borrower may default,
such as the failure to pay real estate taxes.
Delinquency: Failure
of a borrower to make timely mortgage payments under a loan
agreement.
Depreciation:
A decline in the value of property. The opposite of appreciation.
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; an 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
Equal Credit Opportunity
Act (EQOA): Also known as Regulation B. A federal
law that prohibits a lender from discriminating in mortgage
lending on the basis of race, color, religion, national origin,
sex, marital status, age, income derived from public assistance
programs, or previous exercise of Consumer Credit Protection
Act rights.
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 such expenses as property taxes, homeowners insurance,
mortgage insurance, etc.
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 purchases 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 home ownership
opportunities for all Americans; 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.
FICO Score: A
credit score given to a person that establishes creditworthiness
based on present financial condition, experience and past
credit history.
Financial Statement: A
summary of facts showing an individual's or company's financial
condition. For individuals, it states their assets and liabilities
as of a given date. For a company it should include a Profit
and Loss Statement (P&L) for a certain period of time
and balance sheet, stating assets and liabilities as of a
given date.
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.
Floating: The
term used when a purchaser elects not to lock-in an interest
rate at the time of application.
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 the
loan of the defaulting borrower.
Freddie Mac: Federal
Home Loan Mortgage Corporation (FHLM); a federally chartered
corporation that purchases residential mortgages, securities
them, and sells them to investors; this provides lenders With
funds for new home buyers.
G
Gift Letter: A
letter or affidavit that indicates that part of a borrower's
down payment is supplied by relatives or friends in the form
of a gift and that the gift does not have to be repaid.
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 lent to eligible borrowers by lenders.
Good faith estimate (GFE):
An estimate of all closing fees including pre-paid and escrow
items as well as lender charges; must be given to the borrower
within three days after submission of a loan application.
Gross Income: The
total before subtractions; when subtractions are taken the
result is NET.
H
Hazard Insurance: Insurance against losses caused
by perils which are commonly covered in policies described
as a "Homeowner Policy".
HELP: Home buyer
Education Learning Program; an educational program from the
FHA that counsels people about the home buying process.
Home inspection:
An examination of the structure and mechanical systems to
determine a home's safety; makes the potential home buyer
aware of any repairs that may be needed.
Home warranty:
Offers protection for mechanical systems and attached appliances
against unexpected repairs not covered by homeowner's insurance;
overage 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 it's contents with protection against
claims of negligence and liability.
Housing counseling agency:
provides counseling and assistance to individuals on a variety
of issues, including loan default, fair housing, and home
buying.
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.
I
Index: A measurement
used by lenders to determine changes to the Interest rate
charged on an adjustable rate mortgage.
Inflation: 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 secured
by the payment of a regularly scheduled premium.
J
Judgment: A legal
decision; when requiring debt repayment, a judgment may include
a property lien that secures the creditor's claim by providing
a collateral source.
Jumbo Loan: Loan
above the limit set by the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac). Also referred to as a non-conforming loan.
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.
LIBOR: An abbreviation
for the "London Interbank Offered Rate," and is
the interest rate offered by a specific group of London banks
for U.S. dollar deposits of a stated maturity. LIBOR is used
as a base index for setting rates of some adjustable rate
financial instruments, including Interest only loans and other
adjustable rate mortgage programs.
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-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 specific 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.
Mortgage: A lien
on the property that secures the promise to repay a loan.
Mortgage banker: A
company that originates loans and resells them to secondary
mortgage lenders such as Fannie Mae or 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.
N
Net income: T
he difference between effective gross income and expense including
taxes and insurance. The term is qualified as net income before
depreciation and debt.
Non-Owner Occupied Property:
Property purchased by a borrower not for a primary residence
but as an investment with the intent of generating rental
income, tax benefits, and profitable resale.
Note: A written
promise by one party to pay a specific sum of money to a second
party under conditions agreed upon mutually. Also called "promissory
note."
O
Offer: Indication
by a potential buyer of a willingness to purchase a home at
a specific price; generally put forth in writing.
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; is usually calculated in
the form of points and paid at closing.
P
Partial Claim: A loss mitigation option offered
by the FHA that allows a borrower, with help from a lender,
to get an interest-free loan from HUD to bring their mortgage
payments up to date.
PITI: Principal,
Interest, Taxes, and Insurance - the four elements of a monthly
mortgage payment; payments of 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.
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: Lender
commits to lend to a potential borrower; commitment remains
as long as the borrower still meets the qualification requirements
at the time of purchase.
Pre-foreclosure sale:
Allows a defaulting borrower to sell the mortgaged property
to satisfy the loan and avoid foreclosure.
Pre-qualify: A
lender informally determines the maximum amount an individual
is eligible to borrow.
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.
Principal: The
amount borrowed from a lender; doesn't include interest or
additional fees.
R
Radon: A radioactive
gas found in some homes that, if occurring in strong enough
concentrations, can cause health problems.
Real estate agent:
An individual who is licensed to negotiate and arrange real
estate sales; works for a real estate broker.
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 (like 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.
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
S
Settlement: Another
name for closing .
Special Forbearance:
A loss mitigation option where the lender arranges a revised
repayment plan for the borrower that may include a temporary
reduction or suspension of monthly loan payments.
Subordinate: To
place in a rank of lesser importance or to make one claim
secondary to another.
Survey: A property
diagram that indicates legal boundaries, easements, encroachments,
rights of way, improvement locations, etc.
Sweat equity:
Using labor to build or improve a property as part of the
down payment
T
Title 1: An FHA-insured loan that allows
a borrower to make non-luxury improvements (like renovations
or repairs) to their home; Title I loans less than $7,500
don't require a property lien.
Title insurance:
Insurance that protects the lender against any claims that
arise from arguments 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.
Truth-in-Lending: A
federal law obligating a lender to give full written disclosure
of all fees, terms, and conditions associated with the loan
initial period and then adjusts to another rate that lasts
for the term of the loan.
U
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.
V
VA: Department
of Veterans Affairs: a federal agency which guarantees loans
made to veterans; similar to mortgage insurance, a loan guarantee
protects lenders against loss that may result from a borrower
default.
Verification of Deposit
(VOD): Form used in mortgage lending to verify the
deposits or assets of a prospective borrower when monthly
statements are unavailable or unusable.
Verification of Employment
(VOE): Form used in mortgage lending to verify the
employment and income of a prospective borrower when pay stubs
and W2 forms are unavailable or unusable.
Verification of Mortgage
(VOM): Form used in mortgage lending to verify the
existing mortgage balance, monthly payments and late payments,
if any.
Verification of Rent:
Form used in mortgage lending to verify monthly rents paid
and late payments, if any.
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