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Addendum
A supplemental document for borrowers
advising them of the characteristics of the mortgage loan they are
applying for. This document is often required when applying for
a government loan program. |
Adjustable
Rate Mortgage (ARM)
A type of mortgage rate loan whose interest rate changes periodically
up or down, usually once or twice a year. |
Adjustment
Period
The time between changes in your interest rate and/or monthly payment
with a variable rate loan. These intervals will vary depending on
the type of loan. |
Amortization
The means by which a home loan is scheduled to be paid off, including
interest and principal, by a series of regular installment payments.
Loans are typically amortized over 30 years. |
Application
Fee
A fee charged to cover the lender's out of pocket costs of processing
your loan. |
Appraisal
A formal, written estimation by a qualified appraiser of the current
value of a home. |
Appraiser
A licensed professional who determines the market value for property
values. They offer an unbiased opinion based on current market data
and the replacement value of the property. |
| Annual
Percentage Rate (APR)
The cost of your credit expressed as a yearly rate. It takes into
account interest, points, and origination fees. Since all lenders
are required to use the same guidelines in determining APR, this
is a good basis for comparing the cost of various loan programs.
For more information see about APR
Information. |
Assumability/Assumption
A feature of the loan which permits you to transfer your mortgage
and its specified terms to the person(s) purchasing your home. Having
an assumable loan could make it easier for you to sell your home,
since assumption of a loan usually involves lower fees and/or qualifying
standards for the new borrower than a new loan. |
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Balloon
A short-term loan which has a fixed rate and smaller payments for
short-term period which is followed by one large payment for the
balance of the principal. |
Bankruptcy
The legal process in which a person or firm declares the inability
to pay debts. Upon a court declaration of bankruptcy, a person or
firm surrenders assets to a court-appointed trustee, and is relieved
from the payment of previous debts. |
Broker
An individual or company who does not fund loans himself, but facilitates
the processing or approval procedures for a customer. A broker generally
uses a lender to approve and close loans for customers rather than
close and fund the loan himself or itself. |
Buy-Downs
Obtaining a lower interest rate (buying down the rate) by paying
additional points to the lender. The lower rate may apply to the
full duration of the loan or just the first few years. A buydown
may be used to qualify a borrower who would not otherwise qualify.
This is because a buydown results in lower payments which are easier
to qualify for. |
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Caps
(interest)
A limit to the rise and fall of the interest rate on an adjustable
rate mortgage (ARM). A consumer safeguard. |
Caps
(payment)
A limit to the amount the monthly payment can grow on an adjustable
rate mortgage (ARM). A consumer safeguard. |
Certificate
of Eligibility
A document which verifies the eligibility of veterans for a VA
guaranteed loan. This certificate is obtained through a local VA
office. |
Certificate
of Title
A document showing ownership of record as reflected in public records. |
| Closing
Costs
One-time costs that must be paid before the loan can be "closed"
or funded. These costs may include such things as property taxes,
insurance, broker's fees, escrow fees, title
insurance premium, deed recording fee, title transfer tax, etc.
Escrow instructions will stipulate which portion
of the fees are to be paid by buyer or seller. An estimate of closing
costs will be given to you by the lender within a few days after
receiving your loan application and is called a Good
Faith Estimate. All or a portion of your closing costs may be
financed with some loan programs. |
Co-operative
Cooperative Housing is an apartment building or a group of dwellings
owned by a corporation, the stockholders of which are the residents
of the dwellings. It is operated for their benefit by their elected
board of directors. In a cooperative, the corporation or association
owns title to the real estate. A resident purchases stock in the
corporation which entitles him to occupy a unit in the building
or property owned by the cooperative. While the resident does not
own his unit, he has an absolute right to occupy his unit for as
long as he owns the stock. |
Collateral
The property pledged to secure a loan. |
Condominium
A single dwelling unit in a multi-unit structure in which each unit
is individually owned. The owner holds legal title to his or her
unit and owns the common areas and land jointly with other unit
owners. An owner may sell, lease and encumber his unit. |
Conforming
The loan program guidelines meet Fannie Mae and or Freddie Mac underwriting
requirements. This means the income, credit, and property requirements
must meet nationally standardized guidelines. |
Contributions
This is the amount other parties may contribute towards allowable
closing costs, repairs, and prepaid items for a borrower. Other
lender restrictions may apply. |
Conventional
financing
Home loans made by a lender without government backing provided
on FHA and VA loans. |
Covenant
A written agreement which defines or restricts the use of a given
property. This may include, architectural restrictions or maintenance
requirements. |
Credit
Report
A report made by a private agency which states a borrower's credit
history, current accounts, and account balances. |
Creditors
Companies or individuals who loan money. |
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Deed
A written document recorded with the state or local government office
which conveys real property. |
Default
Failure to legal obligations in a contract. In mortgage terms this
generally means to fail to make the required monthly payments. |
Disclosure
A document that discloses to the customer either all or one of the
following: terms, costs, adjustment
period, and/or other characteristics of the mortgage. |
Discount
Points
Fees paid to a lender to reduce the interest rate. |
Down
Payment
Usually between 10 and 20 percent, the down payment often demonstrates
the borrower's commitment to the property and to "make good" on
the mortgage. A downpayment is the difference between the purchase
price of real estate property and the amount that is financed by
the mortgage. |
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Earnest
Money
A deposit made by a buyer of real estate towards the down payment
to evidence good faith. A buyer gives "earnest money" to the seller
as part of the purchase price to secure the transaction. This money
is typically held by the real estate broker or escrow company. |
Escrow
In the sale of property, a neutral third party "the escrow agent"
is appointed to act as custodian for documents and funds during
the transfer from seller to buyer. The funds can include taxes and
mortgage insurance. |
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Fannie
Mae or FNMA (Federal National Mortgage Association)
A secondary mortgage institution which holds the majority of home
mortgages in the U.S. FNMA buys conventional mortgages from lenders
when they meet conforming guidelines.
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Federal
Housing Administration (FHA)
A government agency within the Department of Housing and Urban Development
(HUD) that administers many programs including housing subsidies
and mortgage insurance. |
Fixed
Rate Mortgage (FRM)
A loan where the rate of interest is fixed over the life of the
loan. Payments on a fully amortized fixed rate loan will not change.
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Foreclosure
Repossession of the Property
A legal proceeding by which a mortgage lender may claim title to
mortgaged property if the borrower fails to repay the loan. |
Federal
Home Loan Mortgage Corporation (Freddie Mac or FHLMC)
A private corporation chartered by Congress to make funds from the
capital markets available for home financing. It does this by operating
a secondary market for home mortgage loans, buying such mortgages
from lenders and selling securities backed by those mortgages. |
Free
and Clear
This is a term used for a property which does not have any liens
or debts recorded on title. That means the owner does not have a
mortgage. |
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Government
National Mortgage Association (Ginnie Mae or GNMA)
The source of funds for FHA or VA
residential mortgages. |
Good
Faith Estimate (GFE)
A written estimate of closing costs associated with the financing
transaction which is to be provided by the lender within three days
of application. |
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Hazard
Insurance
A form of insurance in which the insurance company protects the
insured from specified losses, for example fire, flood, or windstorm
damage. |
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Impound/Escrow
Account
This is an account set up by the lender to collect monies monthly
for property tax, hazard insurance, mortgage insurance, and paid
on the borrowers behalf when the applicable charge becomes due.
Any unused funds are returned to the borrower upon payoff of the
loan. |
Index
Used by lenders to calculate the interest adjustments on variable
rate loans. Most programs use either the 11th District Cost of Funds
or the 1-year Treasury Rate as the index. Some indexes are more
volatile than others. This can affect the adjustments in interest
rates and subsequently monthly payments. |
Initial
rate
A fixed interest rate charged for the first six or twelve months
of a variable rate loan. Normally this rate will be lower than prevailing
market rates. |
Interest
Rate Cap
A safeguard built into a variable rate loan to protect the consumer
against dramatic increases in the rate of interest and, consequently,
in the monthly payment. For example, a variable rate loan may have
a two percentage point limit per year on the amount of increase
or decrease, as well as a five percentage point limit (increase
or decrease) over the life of the loan. |
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Jumbo
Loan
A loan that is larger than the conforming limits established by
Fannie Mae or Freddie Mac. |
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Lien
A claim against the property for the payment of a debt, judgment,
mortgage or taxes. |
Loan
to Value (LTV)
This is expressed as a percentage figure of the lower of the sales
price or appraisal divided by the loan amount. If a purchase loan
reflects 80% LTV that means the borrower paid a 20% down payment. |
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Margin
(spread)
An amount expressed as a percentage which is added to an index to
determine the interest rate on a variable rate loan (e.g. index
rate + 2% margin). Different loan programs may use different margins
and indexes. With a variable rate loan, this margin (spread) generally
does not change once it is established in your documents. |
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Negative
Amortization
A situation may occur on variable rate loans which have the "payment
cap" features. Because your monthly payment is capped, your adjusted
payment amount may, at times, be insufficient to pay the actual
amount of interest due. The unpaid (deferred) interest would the
be added to your loan balance. This increase in your loan balance
is known as "negative amortization." A borrower usually has the
option of increasing the monthly payment in any given month to avoid
negative amortization or making a lump sum payment to pay off any
accrued negative amortization. |
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Origination
Fee or Points
The charge by a lender or broker connected with originating a loan.
This is different from discount points which are used to buy down
the rate of interest. |
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Payment
Cap
Limits the amount by which the payment on a variable rate loan can
increase or decrease at each payment adjustment interval (typically
one year). A payment cap ensures that the payment changes occur
at a gradual pace. |
Principal
The amount borrowed or the remaining unpaid balance on a loan. It
may also be used to describe the part of a monthly payment that
reduces the remaining balance of a mortgage. |
Principal-Interest-Taxes-Insurance
(PITI)
The total of your monthly home payment, including taxes and insurance.
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Private
Mortgage Insurance (PMI)
Insurance which guarantees the lender payment of the balance of
the loan not covered by the sale of the property in the event of
foreclosure. PMI is normally required on conventional loans where
the LTV is greater than 80% and will be included
as part of your monthly payment. |
Points
and Fees
A point is a loan charge equal to one percent of the principal amount
of the loan. Points are payable at the close of escrow and may be
paid by the buyer or seller, or split between them. (E.g. Two points
charged on a $100,000 loan would equal $2,000.) In addition, a flat
dollar amount fee may also be charged. Under some lending programs,
a buyer may be allowed to include these points and fees as part
of the total amount financed. |
Prepayment
Penalty
A fee for paying off the principal amount of the loan prior to the
pre-agreed term. |
Planned
Unit Development (PUD)
A type of development that provides more planning flexibility than
traditional zoning. Buildings are often clustered on smaller lots,
permitting the presence of natural features in common areas or park
areas. Individual properties are owned in fee with the common areas
owned jointly or deeded to the local government. |
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Rate
Lock
Assures that the rate in effect on the date you submit your loan
application, during loan processing, or at the time of final approval
will be the final rate on your loan when funded. This assurance
usually expires after a specified period of time. |
Ratios
A ratio used as an underwriting guideline to determine the amount
of debt a borrower may have compared to their income (e.g. Borrower's
house payment divided by gross income). A ratio may be used to calculate
the total allowable debt or the monthly housing portion. It is expressed
as a percent. |
Refinance
Negotiation of a new loan in order to pay off an existing loan.
Homes are usually refinanced in order to (a) take advantage of lower
interest rates, (b) switch from one loan type to another (e.g. from
variable to fixed), or (c) generate cash from built-up equity. Since
refinancing generally involves new loans costs, these costs must
be weighed against the benefits to be gained. |
