definitions
Below you will find a list of terms, and their definitions, that will be used regularly during the home-buying process. Review the list and let us know if you have any questions!
AMORTIZATION
A payment plan that enables you to reduce your debt gradually through monthly payments. The payments may be principal and interest, or interest-only. The monthly amount is based on the schedule for the entire term or length of the loan.
ANNUAL PERCENTAGE RATE (APR)
A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is a higher rate than the simple interest of the mortgage.
APPRAISAL
A document from a professional that gives an estimate of a property’s fair market value based on the sales of comparable homes in the area and the features of a property; 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.
ASSUMPTION
A provision in the terms of a loan that allows the buyer to take legal responsibility for the mortgage from the seller.
BALLOON MORTGAGE
A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years. After that time period elapses, the balance is due or is 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; this usually occurs when someone owes more than they have the ability to repay.
BROKER
A licensed individual or firm that charges a fee to serve as the mediator between the buyer and seller. Mortgage brokers are individuals in the business of arranging funding or negotiating contracts for a client, but who does not loan the money. A real estate broker is someone who helps find a house.
BUY DOWN
The seller pays an amount to the lender so the lender provides a lower rate and lower payments many times for an ARM. The seller may increase the sales price to cover the cost of the buy down.
CAP
A limit, such as one placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage. Payment caps do not limit the amount of interest the lender is earning, so they may cause negative amortization.
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 should be clear and free of all liens or other claims.
CLOSING
The final step in property purchase where the title is transferred from the seller to the buyer. Closing occurs at a meeting between the buyer, seller, settlement agent, and other agents. At the closing the seller receives payment for the property. Also known as settlement.
CLOSING COSTS
Fees for final property transfer not included in the price of the property. Typical closing costs include charges for the mortgage loan such as origination fees, discount points, appraisal fee, survey, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes. A common estimate of a Buyer’s closing costs is 2 to 4 percent of the purchase price of the home. A common estimate for Seller’s closing costs is 3 to 9 percent.
COLLATERAL
Security in the form of money or property pledged for the payment of a loan. For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made.
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. Traditionally the home seller pays the commission. The amount of commission is determined by the real estate professional and the seller and can be as much as 6% of the sales price.
CREDIT REPORT
A report generated by the credit bureau that contains the borrower’s credit history for the past seven years. Lenders use this information to determine if a loan will be granted.
DEBT-TO-INCOME RATIO
A comparison or ratio 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
A document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description and the owner’s signature. Also known as the title.
DEFAULT
The inability to make timely monthly mortgage payments or otherwise comply with mortgage terms. A loan is considered in default when payment has not been paid after 60 to 90 days. Once in default the lender can exercise legal rights defined in the contract to begin foreclosure proceedings.
DEFERRED INTEREST
A mortgage loan that allows the borrower to make minimum payments that are less than the entire amount of interest owed. The remaining interest is added to the amount of loan to be paid off. This is considered to be a negative amortization. The homeowner will let interest accrue, and will ultimately owe more than the original value of the loan. An adjustable rate mortgage (ARM) might offer this sort of payment structure.
DELINQUENCY
Failure of a borrower to make timely mortgage payments under a loan agreement. Generally after fifteen days a late fee may be assessed.
DEPRECIATION
A decrease in the value or price of a property due to changes in market conditions, wear and tear on the property, or other factors.
DISCOUNT POINT (or 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. In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to give you a lower rate and lower payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate will probably go up depending on the index rate.
DOWN PAYMENT
The portion of a home’s purchase price that is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual mortgage loan amount. Mortgage insurance is required when a down payment less than 20 percent is made.
EARNEST MONEY
Money put down by a potential buyer to show that they are 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. During the contingency period the money may be returned to the buyer if the contingencies are not met to the buyer’s satisfaction.
EASEMENTS
The legal rights that give someone other than the owner access to use property for a specific purpose. Easements may affect property values and are sometimes a part of the deed.
ENCROACHMENTS
A structure that extends over the legal property line on to another individual’s property. The property surveyor will note any encroachment on the lot survey done before property transfer. The person who owns the structure will be asked to remove it to prevent future problems.
EQUITY
An owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.
ESCROW
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.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)
The corporation authorized by Congress to provide a secondary market for residential mortgages.
FEDERAL HOUSING ADMINISTRATION (FHA)
Established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers 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.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)
A government-sponsored enterprise (GSE) that was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market. Fannie Mae is a publicly traded company which operates under a congressional charter that directs Fannie Mae to channel its efforts into increasing the availability and affordability of homeownership for low-, moderate- and middle-income Americans.
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.
FORECLOSURE
A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower. Foreclosure laws are based on the statutes of each state.
GOOD FAITH ESTIMATE
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.
GUARANTY
Payment to Fannie Mae from a lender for the assurance of timely principal and interest payments to MBS (Mortgage Backed Security) security holders.
HAZARD INSURANCE
Protection against a specific loss, such as fire, wind etc., over a period of time that is secured by the payment of a regularly scheduled premium.
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.
TYPES OF LOANS
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.
FIXED-PERIOD ADJUSTABLE-RATE MORTGAGE (ARM)
Adjustable Rate Mortgage; 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, however, is usually subject to a cap.
FEDERAL HOUSING ADMINISTRATION (FHA) LOANS
An FHA insured loan is a U.S. Federal Housing Administration mortgage insurance backed mortgage loan that is provided by a FHA-approved lender.
VETERANS ADMINISTRATION (VA) LOANS
A mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA). The loan may be issued by qualified lenders.
JUMBO LOANS
Or non-conforming loan, is a loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans.
CONSTRUCTION LOAN
A short-term loan, to finance the cost of building a new home. The lender pays the builder based on milestones accomplished during the building process. For example, once a sub-contractor pours the foundation and it is approved by inspectors, the lender will pay for their service.
CONVENTIONAL LOAN
A private sector loan, one that is not guaranteed or insured by the U.S. government.
INDEX
The measure of interest rate changes that the lender uses to decide how much the interest rate of an ARM will change over time. No one can be sure when an index rate will go up or down. If a lender bases interest rate adjustments on the average value of an index over time, your interest rate would not be as volatile. You should ask your lender how the index for any ARM you are considering has changed in recent years, and where it is reported.
LIEN
A legal claim against property that must be satisfied when the property is sold. A claim of money against a property, wherein the value of the property is used as security in repayment of a debt. Examples include a mechanic’s lien, which might be for the unpaid cost of building supplies, or a tax lien for unpaid property taxes. A lien is a defect on the title and needs to be settled before transfer of ownership. A lien release is a written report of the settlement of a lien and is recorded in the public record as evidence of payment.
LIFETIME CAP
A limit on the range interest rates can increase or decrease over the life of an adjustable-rate mortgage (ARM).
LOAN ORIGINATION FEE
A charge by the lender to cover the administrative costs of making the mortgage. This charge is paid at the closing and varies with the lender and type of loan. A loan origination fee of 1 to 2 percent of the mortgage amount is common.
LOAN-TO VALUE RATIO (or 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.
LOCK-IN PERIOD
The length of time that the lender has guaranteed a specific interest rate to a borrower.
MARGIN
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
MARKET VALUE
The amount a willing buyer would pay a willing seller for a home. An appraised value is an estimate of the current fair market value.
MORTGAGE
A lien on the property that secures the Promise to repay a loan. A security agreement between the lender and the buyer in which the property is collateral for the loan. The mortgage gives the lender the right to collect payment on the loan and to foreclose if the loan obligations are not met.
MORTGAGE BANKER
A company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.
MORTGAGE BROKER
A firm that originates and processes loans for a number of lenders.
MORTGAGE INSURANCE (MI)
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. Insurance purchased by the buyer to protect the lender in the event of default. Typically purchased for loans with less than 20 percent down payment. The cost of mortgage insurance is usually added to the monthly payment. Mortgage insurance is maintained on conventional loans until the outstanding amount of the loan is less than 80 percent of the value of the house or for a set period of time (7 years is common). Mortgage insurance also is available through a government agency, such as the Federal Housing Administration (FHA) or through companies (Private Mortgage Insurance or PMI).
MORTGAGE INSURANCE PREMIUM (MIP)
A monthly payment, usually part of the mortgage payment, paid by a borrower for mortgage insurance.
NEGATIVE AMORTIZATION
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.
NET EFFECTIVE INCOME
Your take-home pay, the amount of money that you receive in your paycheck after taxes and deductions.
NON-ASSUMPTION CLAUSE
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.
ORIGINATION FEE
The charge for originating a loan; is usually calculated in the form of points and paid at closing. One point equals one percent of the loan amount. On a conventional loan, the loan origination fee is the number of points a borrower pays.
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.
POINT
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $95,000, one point means you pay $950 to the lender. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to increase the yield on the mortgage and to cover loan closing costs. These points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.
PRE-PAYMENT
Any amount paid to reduce the principal balance of a loan before the due date or payment in full of a mortgage. This can occur with the sale of the property, the pay off the loan in full, or a foreclosure. In each case, full payment occurs before the loan has been fully amortized.
PRE-PAYMENT PENALTY
A fee charged to a homeowner who pays one or more monthly payments before the due date. It can also apply to principal reduction payments.
PREQUALIFICATION
A lender informally determines the maximum amount an individual is eligible to borrow. This is not a guaranty of a loan.
PRINCIPAL
The amount of money borrowed to buy a house or the amount of the loan that has not been paid back to the lender. This does not include the interest paid to borrow that money. The principal balance is the amount owed on a loan at any given time. It is the original loan amount minus the total repayments of principal made.
PRIVATE MORTGAGE INSURANCE (PMI)
Insurance purchased by a buyer to protect the lender in the event of default. The cost of mortgage insurance is usually added to the monthly payment. Mortgage insurance is generally maintained until over 20 Percent of the outstanding amount of the loan is paid or for a set period of time, seven years is normal. Mortgage insurance may be available through a government agency, such as the Federal Housing Administration (FHA) or the Veterans Administration (VA), or through private mortgage insurance companies (PMI).
RECORDING FEES
Charges for recording a deed with the appropriate government agency.
REFINANCE
Paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
SECOND MORTGAGE
An additional mortgage on property. In case of a default the first mortgage must be paid before the second mortgage. Second loans are more risky for the lender and usually carry a higher interest rate.
SIMPLE INTEREST
Interest paid on the principal alone.
SURVEY
A property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc. Surveys are conducted by licensed surveyors and are normally required by the lender in order to confirm that the property boundaries and features such as buildings, and easements are correctly described in the legal description of the property.
TITLE
A legal document establishing the right of ownership and is recorded to make it part of the public record. Also known as a Deed.
TITLE INSURANCE
Insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers. An insurance policy guaranteeing the accuracy of a title search protecting against errors. Most lenders require the buyer to purchase title insurance protecting the lender against loss in the event of a title defect. This charge is included in the closing costs. A policy that protects the buyer from title defects is known as an owner’s policy and requires an additional charge.
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 ACT
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.
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.
VERIFICATION OF DEPOSITS (VOD)
Document signed by the borrower’s financial institution verifying the status and balance of his/her financial accounts.
VERIFICATION OF EMPLOYMENT (VOE)
Verification of Employment is a process used by banks and mortgage lenders in the United States to review the employment history of a borrower, to determine the borrower’s job stability and cross-reference income history with that stated on the Uniform Residential Loan Application.
