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Type of credit

Glossary

A

A-Credit

A consumer with the best credit rating, deserving of the lowest prices that lenders offer. Most lenders require a FICO score above 720. There is seldom any payoff for being above the A-credit threshold but you pay a penalty for being below it.

Acceleration Clause

A contractual provision that gives the lender the right to demand repayment of the entire loan balance in the event that the borrower violates one or more clauses in the note.

Adjustable Rate Mortgage (ARM)

A mortgage on which the interest rate, after an initial period, can be changed by the lender. While ARMs in many countries abroad allow rate changes at the lender’s discretion (“discretionary ARMs”), in the US most ARMs base rate changes on a pre-selected interest rate index over which the lender has no control. These are “indexed ARMs”. There is no discretion associated with rate changes on indexed ARMs.

Adjustment Interval

On an ARM, the time between changes in the interest rate or monthly payment. The rate adjustment interval is often displayed in x/y format, where “x” is the period until the first adjustment, and “y” is the adjustment period thereafter. For example, a 5/1 ARM is one on which the initial rate holds for 5 years, after which it is adjusted every year. The rate adjustment interval and the payment adjustment interval are the same on a fully amortizing ARM, but may not be on a negative amortization ARM.

Affordability

A consumer’s capacity to afford a house. Affordability is usually expressed in terms of the maximum price the consumer could pay for a house, and be approved for the mortgage required to pay that amount.

Agency

The legal requirement that one party in a relationship has a fiduciary obligation to the other.

Agreement of Sale

A contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Alt-A

A mortgage risk categorization that falls between prime and sub-prime, but is closer to prime. Also referred to as “A minus”.

Alternative Documentation

Expedited and simpler documentation requirements designed to speed up the loan approval process. Instead of verifying employment with the applicant’s employer and bank deposits with the applicant’s bank, the lender will accept paycheck stubs, W-2s, and the borrower’s original bank statements. Alternative documentation remains “full documentation”, as opposed to the other documentation options.

Amortization

The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled paymentless the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment. For a detailed explanation. If the payment is less than the interest due, the balance rises, which is negative amortization.

Amortization schedule

A table showing the mortgage payment, broken down by interest and amortization, the loan balance, tax and insurance payments if made by the lender, and the balance of the tax/insurance escrow account.

Amount financed

On the Truth in Lending form, the loan amount less “prepaid finance charges”, which are lender fees paid at closing. For example, if the loan is for $100,000 and the borrower pays the lender $4,000 in fees, the amount financed is $96,000. A useless number.

Annual percentage rate

See APR

Application

A request for a loan that includes the information about the potential borrower, the property and the requested loan that the solicited lender needs to make a decision. In a narrower sense, the application refers to a standardized application form called the “1003” which the borrower is obliged to fill out.

Application fee

A fee that some lenders charge to accept an application. It may or may not cover other costs such as a property appraisal or credit report, and it may or may not be refundable if the lender declines the loan.

Appraisal

A written estimate of a property’s current market value prepared by an appraiser.

Appraiser

A professional with knowledge of real estate markets and skilled in the practice of appraisal. When a property is appraised in connection with a loan, the appraiser is selected by the lender, but the appraisal fee is usually paid by the borrower.

Appraisal fee

A fee charged by an appraiser for the appraisal of a particular property.

B

Balloon mortgage

A real estate loan in which some portion of the debt will remain unpaid at the end of the term of the loan. A balloon will usually result in a single large payment due when the loan ends.

D

Debt-to-income ratio

A ratio used by lending institutions to determine whether a person is qualified for a mortgage. Debt-to-income is the total amount of debt, including credit cards and other loans, divided by total gross monthly income.

Default

Failure to pay mortgage payments over a specified period of time.

Delinquency

Being late with loan payments

Discount points

A percentage of the mortgage paid to the lender to lower the interest rate on a loan. One point equals one percent.

Down payment

The amount of money required up front by a lending institution in order to get a mortgage. This can be as low as 3 percent, depending on the type of loan.

C

Credit Loan

A credit loan is a mortgage that is issued on only the financial strength of a borrower, without great regard for collateral.

Credit-Loss Ratio

The ratio of credit-related losses to the dollar amount of MBS outstanding and total mortgages owned by the corporation.

Credit Rating

Borrowers are rated by lenders according to the borrower’s credit-worthiness or risk profile. Credit ratings are expressed as letter grades such as A-, B, or C+. These ratings are based on various factors such as a borrower’s payment history, foreclosures, bankruptcies and charge-offs. There is no exact science to rating a borrower’s credit, and different lenders may assign different grades to the same borrower.

Credit-Related Expenses

The sum of foreclosed property expenses plus the provision for losses.

Credit Report

A report to a prospective lender on the credit standing of a prospective borrower. Used to help determine creditworthiness. Information regarding late payments, defaults, or bankruptcies will appear here.

F

Federal Housing Administration (FHA)

An agency under the U.S. Department of Housing and Urban Development (HUD), it insures loans made by approved lenders to qualified borrowers, in accordance with its regulations.

FHA Loan

An agency under the U.S. Department of Housing and Urban Development (HUD), it insures loans made by approved lenders to qualified borrowers, in accordance with its regulations.

Foreclosure

A legal procedure in which real estate is sold by the lender to pay a defaulting borrower’s debt.

H

Home equity line of credit

A mortgage loan in second position that allows a borrower to obtain cash drawn against home equity, up to a certain amount.

Home Equity Conversion Mortgage (HECM)

A reverse mortgage program administered by FHA.

Home Valuation Code of Conduct

A rule issued by Fannie Mae and Freddie Mac, effective May 1, 2009, that the agencies thenceforth would only purchase mortgages that were supported by an “independent” appraisal. The rule had some very bad though unintended side effects.

Housing bank

A government-owned or affiliated housing lender. With minor exceptions, government in the US has never loaned directly to consumers, but housing banks are widespread in many developing countries.

Housing bubble

A marked increase in house prices fueled partly by expectations that prices will continue to rise.

Housing expense

The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees. Same as PITI and “monthly housing expense.”

Housing expense ratio

The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers.

Housing investment

The amount invested in a house, equal to the sale price less the loan amount.

HUD1 form

The form a borrower receives at closing that details all the payments and receipts among the parties in a real estate transaction, including borrower, lender, home seller, mortgage broker and various other service providers.

I

Interest rate decrease cap

The maximum allowable decrease in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points.

Interest rate index

The specific interest rate series to which the interest rate on an ARM is tied, such as “Treasury Constant Maturities, 1-Year,” or “Eleventh District Cost of Funds.” All the indices are published regularly in readily available sources. For a listing and discussion of various indices.

Interest rate risk premium

The rate premium above the rate on the least risky or “prime” loan.

Interim refinance

An ill-advised scheme to avoid a prepayment penalty by refinancing twice instead of once.

Internet mortgages

Mortgages delivered using the internet as a major part of the communication process between the borrower and the lender.

Internet mortgages

In real estate, a borrower who owns or purchases a property as an investment rather than as a residence.

J

Jumbo mortgage

A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $417,000 in 2008. However, in that year, the agencies were given limited authority to purchase jumbos.

Junk fees

A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount.

L

Loan-to-value ratio

The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts.

M

Mandatory disclosure

The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure.

Margin

The amount a lender adds to the quoted index rate for an adjustable rate loan to determine the new interest rate.

Maturity

The “Due Date” of a loan.

Merged Credit Report

A credit report that reports data from two or more major credit repositories.

Minimum Credit

This field on the table refers to the minimum credit rating a borrower must have in order to qualify for the listed loan.

Modification

Any change to the original terms of a mortgage.

Monthly Housing Expense

Total principal, interest, taxes, and insurance paid by the borrower on a monthly basis. Used with gross income to determine affordability.

Mortgage

A legal document that pledges property to a creditor for the repayment of the loan, and is the term used to describe the loan itself. Some states use the term First Trust Deeds to refer to mortgage loans.

Mortgagee

The lender in a mortgage agreement.

Mortgage Banker

A financial intermediary that originates or funds loans, collects payments, inspects the property, and forecloses if necessary. The main difference between a mortgage banker and a loan officer is a banker funds their own loans and sell them on the secondary market, usually to Fannie Mae, Freddie Mac, or Ginny Mae.

Mortgage Broker

A mortgage company that originates loans, joining the borrower and lender for a real estate loan, earning a placement fee.

Mortgage Constant

The factor used for rapid computation of the annual payment needed to amortize a loan.

Mortgage Insurance

Insurance that covers the lender against losses incurred as a result of a default on a home loan. This is usually required on all loans that have a loan-to-value higher than eighty percent. Mortgages that have an 80% LTV that do not require mortgage insurance have higher interest rates. The lenders then pay the mortgage insurance themselves. In addition, FHA loans and some first-time homebuyer programs require mortgage insurance regardless of the loan-to-value.

Mortgagor

The borrower in a mortgage agreement.

Multidwelling Units

Properties that provide separate housing units for more than one family, although only a single mortgage is secured.

N

Negative Amortization

Essentially occurs when a borrower makes a minimum payment that may not cover the interest that is due. Loan balance then increases as a result.

Net Effective Income

Gross income less federal income tax.

No Cash-out Refinance

A refinance transaction that is not intended to put cash in the hand of the borrower, but instead calculates a new balance to cover the balance due on a current loan and any costs with obtaining a new mortgage.

No-Cost Loan

A no-cost loan can either be: 1) a loan that has no “lender costs” associated with it or, 2) a loan that also covers purchases or refinancing costs, which may be incurred in buying a home, obtaining and/or refinancing a loan, but are not directly charged by the lender. The interest rate on this type of loan is higher.

Note

A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Note Rate

The stated interest rate on a mortgage note.

O

Origination Fee

The fee imposed by a lender to cover certain processing expenses in connection with making a loan. Usually a percentage of the amount loaned.

Owner Financing

A property purchase that is partly or wholly financed by the seller.

Owner’s Title Policy

A policy protecting the buyer for the amount of the purchase price in the event of a future title dispute.

P

Package Mortgage

A mortgage that /includes equipment and appliances located on the premises in addition to the real property itself.

Partial Entitlement

Under VA loans, the amount of guarantee still available to an eligible veteran who has used his previous entitlement.

Partial payment

A payment that is not sufficient enough to cover the month payment. During times of economic hardship, a borrower can make this request of the loan servicing collection department.

Participation Financing

A loan in which more than one mortgagee or more than one mortgagor harbors an interest. It can also be a loan in which the mortgagee receives partial ownership of the property being financed.

Payment Change Date

The date when a new monthly payment amount takes effect on an adjustable rate mortgage (ARM) or a graduated payment mortgage (GPM). The payment change date occurs the month immediately after the interest rate adjustment date.

Periodic Payment Cap

The limit on the amount that payments can increase or decrease during any one adjustment period for an adjustable-rate mortgage (ARM) where the interest rate and principal fluctuate independently of one another.

Periodic Rate Cap

The limit on the amount that payments can increase or decrease during any one adjustment period in an ARM (adjustable rate mortgage), regardless of how high or low the index fluctuates.

Personal Property

Movable property that does not fit the definition of realty.

PITI

PITI stands for principal, interest, taxes, and insurance. An “impounded” loan means that the monthly payment covers all of these, and perhaps mortgage insurance, if your loan so calls for it. If one does not have an “impounded” account, then the lender still calculates these amounts separately and uses it as part of determining one’s debt-to-income ratio.

PITI Reserves

PITI stands for principal, interest, taxes, and insurance. An “impounded” loan means that the monthly payment covers all of these, and perhaps mortgage insurance, if your loan so calls for it. If one does not have an “impounded” account, then the lender still calculates these amounts separately and uses it as part of determining one’s debt-to-income ratio.

Planned Unit Development (PUD)

A type of ownership where individuals actually own the building or unit they reside in, but shared areas are owned jointly with the other members of the development or established association.

Pledge Account Mortgage (PAM)

Combines GPM (graduated payment mortgage) with a subsidizing savings account to provide the borrower with a low payment plan, the lender with amortizing payments and the seller with cash.
The site allows lenders to post rates via point ranges. Points are broken out on the site for Discount and Origination. The definitions for each are as follows:
·
Discount Points = Interest Charges paid up-front when a borrower closes a loan. A point is equal to 1 percent of the loan amount (e.g. 1.5 points on a $100,000 mortgage would cost the borrower $1,500). Generally, by paying more points at closing, the borrower reduces the interest rate of his loan and thus future monthly payments.
·
Origination Points = A fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan. Usually a percentage of the amount loaned, such as one percent.

Pre-Approval

A term used to mean that a borrower has completed a loan application and provided debt, income, and savings information that has been reviewed and pre-approved by an underwriter.

Pre-Foreclosure Sale

A procedure in which the borrower is allowed to sell his or her property for an amount less that what is owed on it to avoid foreclosure, fully satisfying the borrower’s debt.

Pre-Paids

Expenses such as taxes, insurance, and assessments, which are paid in advance of their due date, and on a prorated basis at closing.

Pre-Payment

Any amount paid so as to reduce the principal before the due date.

Prepayment Penalty

Lenders who impose prepayment penalties will charge borrowers a fee if they wish to repay part or all of their loan in advance of the regular schedule.

Pre-Qualification

After a loan officer has made inquiries about a borrower’s debt, income, and savings, he or she can write a written statement (pre-qualification) about the borrower’s chances for qualifying for a home loan.

Prime Rate

Interest charged by financial institutions to top-rate borrowers.

Principal

The amount of debt, not counting interest, left on a loan.

Private Mortgage Insurance (PMI)

Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan-to-Value Ratio is greater than 80%.

Prorations

The allocation of charges and credits to the appropriate parties at a real estate sale and/or loan closing at a real-estate sale and/or loan closing.

Promissory Note

A written promise to repay a specified amount over a specified period of time.

Purchase Agreement

A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Purchase-Money Mortgage

Mortgage given by a borrower to the seller as part of the purchase price of the property.

Purchase-Money Transaction

The acquisition of property through the payment of money or its equivalent.

Q

Qualifying Ratio

The ratio of the borrower’s fixed monthly expenses to his gross monthly income. Ratios are expressed as two numbers like 28/36 where 28 would be the Front-End Ratio and 36 would be the Back-End Ratio.
The Front-End Ratio is the percentage of a borrower’s gross monthly income (before income taxes) that would cover the cost of PITI (Mortgage Principal Payment + Mortgage Interest Payment + PropertyTaxes + Homeowners Insurance). In the case of a 28% Front-End Ratio a borrower could qualify if the proposed monthly PITI payments were 28% or less than the borrower’s gross monthly income.

The Back-End Ratio is the percentage of a borrower’s gross monthly income that would cover the cost of PITI plus any other monthly debt payments like car or personal loans and credit card debt.
Please note that qualifying ratios are only a rough guideline in determining a potential borrower’s credit-worthiness. Many factors such as excellent or poor credit history, amount of down payment, and size of loan will influence the decision to approve or disapprove a particular loan. Moving.com urges all borrowers to discuss their particular situation with a qualified lender regardless of the outcome of any self-qualification exercise.

Quitclaim Deed

A deed that transfers, without warranty, whatever interest or title a grantor may have at the time the conveyance is made.

R

Rate Lock

A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time at a specific cost.

Real Estate

A portion of the earth’s surface extending downward to the center to the earth and upward into space, including all things permanently attached thereto by nature or man and all legal rights therein.

Real Estate Agent

A person licensed to negotiate and transact the sale of real estate.

Real Estate Settlement Procedures Act (RESPA)

An act requiring the revelation of all costs involved in a real estate closing to all participants.

Real property

See real estate.

Realtor

A real estate agent, broker, or associate that holds an active membership in a local real estate board that is affiliated with the National Association of Realtors.

Recast

To redesign an existing loan balance into a new loan for the same period or longer, to reduce payments and help a distressed borrower.

Reconciliation

Determining the final estimate of value by weighing the results of the various approaches in an appraisal.

Reconveyance Clause

The clause in a trust deed that gives the title back to the borrower when the loan is paid in full.

Recording

The formal filing of documents affecting a property’s title.

Regulation Z

A truth-in-lending provision that requires lenders to reveal the actual costs of borrowing.

Refinancing

The process of paying off one loan with the proceeds from a new loan, using the same property as security.

Rent-Loss Insurance

Insurance that protects a landlord against loss of rent or rental value due to fire or other casualty, resulting in the tenant being excused from paying rent.

Repayment Plan

An agreement between a lender and a delinquent borrower regarding mortgage payments, in which the borrower agrees to make additional payments to pay down past due amounts while still making scheduled payments.

Residual Qualifying

Under a VA loan, using specified housing expenses to qualify for a loan payment.

Restrictions

Rules imposed on the use of real estate in an effort to preserve property values.

Reverse Annuity Mortgage (RAM)

A system developed for an elderly property owner in which regular monthly payments can be received from a lender. When the total reaches a pre-determined amount, the owner begins repaying the loan or sells the property.

Revolving Debt

A credit arrangement that allows a customer to borrow against a pre-approved line of credit used to purchase goods and services. The borrower is responsible for the actual amount borrowed plus any interest due.

Right-of-First Refusal

A provision that states that a property to be first offered to a specific person before it can be offered for sale or lease to other parties.

Rollover Loan

A loan that /includes a call date earlier than its normal amortization period.

Rule of 78

Calculates proportionate amount of interest due on a loan being paid in full before its maturity.

S

Sale-Buyback

A financing arrangement in which an investor buys property from a developer and immediately sells it back under a long-term sales agreement, wherein the investor retains legal title.

Sale-Leaseback

A financing arrangement whereby an investor purchases real estate owned and used by a business corporation, then leases the property back to the business.

Secondary Mortgage Market

A market where mortgage originators may sell them, freeing up funds for continued lending and distributes mortgage funds nationally from money-rich to money poor areas.

Second Mortgage

A mortgage that has a lien position subordinate to the first mortgage.

Secured Loan

A loan that is backed by collateral.

Security

Something given, deposited, or pledged to make secure the fulfillment of an obligation, usually the repayment of a debt.

Seller Carry-Back

An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage.

Senior Loan

A real estate loan in first priority position.

Servicer

An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Servicing

The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.

Settlement Costs

See Closing Costs.

Sinking Fund

Monies deposited in advance in anticipation of satisfying a debt in the future.

Stop Date

Date on a term loan when the balloon payment is due.

Subordinate Financing

Any mortgage or other lien that has a priority lower than that of the first mortgage, or senior loan. See second mortgage.

Survey

A drawing or map the shows the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.

Sweat Equity

Increase in property value due to improvement by owners.

T

Takeout Mortgage

A permanent mortgage, obtained by pre-arrangement between a builder and a financial institution, to repay the interim mortgagee at the completion of construction.

Tax Lien

A claim against real estate for the amount of its unpaid taxes.

Third-Party Origination

A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

Title

A legal document showing a person’s right to or ownership of a property.

Title Company

A company that specializes in examining and insuring titles to real estate.

Title Insurance

Title Insurance policies typically insure a homebuyer against any title-search errors or mistakes, and against loss due to disputes over property ownership. Title Insurance can additionally offer protection to the lender under similar circumstances. The cost of title insurance is usually a set value per thousand of dollars of the total loan amount.

Title Search

A check of the title records to make sure that the seller is the actual legal owner of the property, and that there are no liens or other claims outstanding.

Total Debt Ratio

Monthly debt and housing payments divided by gross monthly income. Also known as Back-End Ratio.

Transfer of Ownership

The means by which the ownership of a property changes hands. Examples of such include the purchase of a property “subject to” the mortgage, the assumption of the mortgage debt by the property purchases, and any exchange of possession of the property under a land sales contract or any other land trust device.

Transfer Tax

State or local tax payable when the title passes from one owner to another.

Truth-in-Lending Law

Provision that requires lenders to reveal the actual costs of borrowing.

Two-Step Mortgage

A loan where the interest rate is fixed for the first seven years and then is adjusted one time for the balance of the loan period.

V

VA Loan

A government-backed mortgage loan supported by the US Veterans Administration.

Variable Rate Mortgage

See Adjustable Rate Mortgage.

Vested

Means that one has a right to use a portion of a fund, such as an individual’s retirement fund.

Z

Zero Percent Financing

A loan with no interest in the contract. The IRS imputes 10 percent for both borrower and lender.

Zoning

The right of a community, under its police power, to dictate the use of property within its boundaries.

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