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, 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.
Accrued interest
Interest that is earned but not paid, adding to
the amount owed. Same as Negative Amortization.
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.
See
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 payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus
the amount of any extra payment. 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.
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.
The Annual Percentage Rate, which must be reported
by lenders under Truth in Lending regulations. It is a comprehensive measure of
credit cost to the borrower that takes account of the interest rate, points, and
flat dollar charges. It is also adjusted for the time value of money, so that dollars
paid by the borrower up-front carry a heavier weight than dollars paid ten years
down the road. However, the APR is calculated on the assumption that the loan runs
to term, and is therefore potentially deceptive for borrowers with short time horizons.
Other articles about the APR are cited
under. For a summary of the differences between the APR and interest cost.
Acceptance of the borrower's loan application.
Approval means that the borrower meets the lender's qualification requirements and also its underwriting
requirements. In some cases, especially where approval is provided quickly
as with automated underwriting systems, the
approval may be conditional on further verification of information provided by the
borrower.
ARM
An adjustable rate mortgage.
Assumption
A method
of selling real estate where the buyer of the property agrees to become responsible
for the repayment of an existing loan on the property.Unless the lender also agrees, however, the seller remains
liable for the mortgage.
A mortgage contract that allows, or does not prohibit,
a creditworthy buyer from assuming the mortgage contract of the seller. Assuming
a loan will save the buyer money if the rate on the existing loan is below the current
market rate, and closing costs are avoided as well. A loan with a "due-on-sale"
clause stipulating that the mortgage must be repaid upon sale of the property, is
not assumable.
Auction site
See Lead-Generation
site.
Authorized user
Someone authorized by the original credit card holder
to use the holder’s card. The card-holder is responsible for the charges of the
authorized user, but the authorized user is not responsible for paying any charges,
including his own. But sometimes authorized users are dunned for the unpaid bills
of the card holder.
A computer-driven process for informing the loan
applicant very quickly, sometimes within a few minutes, whether the applicant will
be approved, or whether the application will be forwarded to an underwriter. The
quick decision is based on information provided by the applicant, which is subject
to later verification, and other information retrieved electronically including
information about the borrower's credit history and the subject property.
Automated underwriting system
A particular computerized system for doing automated underwriting. Mortgage insurers
and some large lenders have developed such systems, but the most widely used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.
Back-end fee or commission
Mortgage broker income paid by the lender, same as yield-spread premium and Negative points.
Bad-faith estimate
The practice of low-balling figures for settlement costs on the Good Faith Estimate
to make them appear more attractive to mortgage shoppers.
Balance
The amount of the original loan remaining to be
paid. It is equal to the loan amount less the sum of all prior payments of principal.
Balloon mortgage
A mortgage which is payable in full after a period
that is shorter than the term. In most cases, the balance is refinanced with
the current or another lender. On a 7-year balloon loan, for example, the payment
is usually calculated over a 30-year period, and the balance at the end of the 7th
year must be repaid or refinanced at that time. Balloon mortgages are similar
to ARMs in that the borrower trades off a lower rate in the early years against
the risk of a higher rate later. They are riskier than ARMs because there
is no limit on the extent of a rate increase at the end of the balloon period.
Balloon
The loan balance remaining at the time the loan
contract calls for full repayment.
Bimonthly mortgage
A mortgage on which the borrower pays half the
monthly payment on the first day of the month, and the other half on the 15th.
A mortgage on which the borrower pays half the
monthly payment every two weeks. Because this results in 26 (rather than 24) payments
per year, the biweekly mortgage amortizes before term.
A short-term loan, usually from a bank, that "bridges"
the period between the closing date of a home purchase and the closing date of a
home sale. Unsecured bridge loans are available if the borrower has a firm contract
to sell the existing house. Secured bridge loans are available without such a contract.
Builder-financed construction
Having the builder finance the construction.
Buy-down
A permanent buy-down is the payment of points in exchange
for a lower interest rate. See Points. A temporary buy-down
concentrates the rate reduction in the early years. See Temporary Buy-Down.
Buy-up
Paying a higher interest rate in exchange for a rebate
by the lender which reduces upfront costs. See Negative Points.
Same as Float-down.
Cash Flow Option Loan
Same as Flexible
Payment ARM.
Refinancing for an amount in excess of the balance
on the old loan plus settlement costs. The borrower takes "cash-out" of the transaction.
This way of raising cash is usually an alternative to taking out a home equity loan.
For a discussion of the relative merits of the two approaches,
Closing
On a home purchase, the process of transferring ownership from the seller to the buyer, the
disbursement of funds from the buyer and the lender to the seller, and the execution
of all the documents associated with the sale and the loan. On a refinance,
there is no transfer of ownership, but the closing includes repayment of the old
lender.
Closing costs
Same as Settlement costs.
Closing date
The date on which the closing occurs.
CMG plan
A technique for repaying a loan early
that involves using the mortgage as a substitute for a checking account.
Co-Borrowers
One or more
persons who have signed the note, and are equally responsible for repaying the loan.
Unmarried co-borrowers who live together are advised to agree beforehand on what
happens if they split. .
COFI
Cost of funds index. One of many interest
rate indexes used to determine interest rate adjustments on an adjustable rate mortgage.
Conforming mortgage
A loan eligible for purchase by the two major Federal
agencies that buy mortgages, Fannie Mae and Freddie Mac.
Construction financing
The method of financing used when a borrower contracts
to have a house built, as opposed to purchasing a completed house.
Contract knavery
Inserting
provisions into a loan contract that severely disadvantage the borrower, without
the borrower’s knowledge, and sometimes despite oral assurances to the contrary. Prepayment penalties are perhaps the most frequently
cited subject of such abuse.
Conventional mortgage
A home mortgage that is neither FHA-insured nor
VA-guaranteed.
Conversion option
The option to convert an ARM to an FRM at some
point during its life. These loans are likely to carry a higher rate or points than
ARMs that do not have the option.
Correspondent
A lender who delivers loans to a (usually larger) wholesale lender against prior price commitments
the wholesaler has made to the correspondent. The commitment protects the correspondent
against pipeline risk.
COSI
Cost of savings index. One of many interest rate indexes used to determine interest rate adjustments
on an adjustable rate mortgage.
Co-signing a note
Assuming responsibility for someone else's loan in the event that that party
defaults. A risk not to be taken lightly.
Credit Report
A report from a credit bureau containing detailed information bearing on credit-worthiness,
including the individual's credit history.
Credit Score
A single numerical score, based on an individual's
credit history, that measures that individual's credit worthiness. Credit
scores are as good as the algorithm used to derive them. The most widely used
credit score is called FICO for Fair Issac Co. which developed it. Many of
the columns in discuss factors
that affect the FICO score.
Cumulative interest
The sum of all interest payments to date or over
the life of the loan. This is an incomplete measure of the cost of credit to the
borrower because it does not include up-front cash payments, and it is not adjusted
for the time value of money. See Interest cost.
The most recently published value of the index
used to adjust the interest rate on an indexed ARM.
Deadbeat
A borrower who doesn't pay.
Debtaholic
A borrower who cannot handle debt except by
complete abstinence.
Debt consolidation
Rolling short-term debt into a home mortgage loan,
either at the time of home purchase or later. For columns on the subject,
Debt elimination
Scams designed to relieve you of your money by promising
to eliminate your mortgage debt.
Deed in lieu of foreclosure
Deeding the property over to the lender as an alternative
to having the lender foreclose on the property.
Default
Failure of the borrower to honor the terms of the
loan agreement. Lenders (and the law) usually view borrowers delinquent 90
days or more as in default.
Deferred interest
Same as negative
amortization.
Delinquency
A mortgage payment that is more than 30 days late.
For articles on payment problems, Don't confuse with Late payment.
Demand clause
A clause in the note that allows the lender to
demand repayment at any time for any reason.
Direct lender
Same as lender.
Disaster Myopia
The tendency of lenders to ignore potential
shocks that can cause them major losses if a long period has elapsed since a shock
has occurred.
Discount mortgage broker
A mortgage broker who claims to be compensated
entirely by the lender rather than by the borrower.
Discount points
Same as points.
Discretionary ARM
An adjustable rate mortgage on which the lender
has the right to change the interest rate at any time subject only to advance notice.
Discretionary ARMs are found abroad, not in the US.
Documentation requirements
The set of lender requirements that specify how
information about a loan applicant's income and assets must be provided, and how
it will be used by the lender.
The difference between the value of the property
and the loan amount, expressed in dollars, or as a percentage of the price. For
example, if the house sells for $100,000 and the loan is for $80,000, the down payment
is $20,000 or 20%. To read articles about the down payment,
Dual apper
A borrower who submits applications through two
loan providers, usually mortgage brokers.
Dual index mortgage
A mortgage on which the interest rate is adjustable
based on an interest rate index, and the monthly payment adjusts based on a wage
and salary index. .
A provision of a loan contract that stipulates
that if the property is sold the loan balance must be repaid. This bars the seller
from transferring responsibility for an existing loan to the buyer when the interest
rate on the old loan is below the current market. A mortgage containing a due-on-sale
clause is not an assumable mortgage.
A term used in two ways. In one context it refers
to a measure of interest cost to the borrower that is identical to the APR except
that it is calculated over the time horizon specified by the borrower. The APR is
calculated on the assumption that the loan runs to term, which most loans do not.
In most texts on the mathematics of
finance, however, the "effective rate" is the quoted rate adjusted for intra-year
compounding. For example, a quoted 6% mortgage rate is actually a rate of .5% per
month, and if interest received in the early months is invested for the balance
of the year at .5%, it results in a return of 6.17% over the year. The 6.17% is
called the "effective rate" and 6% is the "nominal" rate.
In connection with a home, the difference between
the value of the home and the balance of outstanding mortgage loans on the home.
Equity grabbing
A type of predatory lending where the lender intends
for the borrower to default so the lender can grab the borrower's equity.
An agreement that money or other objects of value
be placed with a third party for safe keeping, pending the performance of some promised
act by one of the parties to the agreement. It is common for home mortgage
transactions to include an escrow agreement where the borrower adds a specified
amount for taxes and hazard insurance to the regular monthly mortgage payment.
The money goes into an escrow account out of which the lender pays the taxes and
insurance when they come due.
Escrow abuse
The practice of using escrow accounts
inappropriately to generate more income from hapless borrowers.
Fallout
Loan applications that are withdrawn by borrowers,
sometimes because they have found a better deal.
One of two Federal agencies that purchase home
loans from lenders. (The other is Freddie Mac). Both agencies finance their
purchases primarily by packaging mortgages into pools, then issuing securities against
the pools. The securities are guaranteed by the agencies. They also
raise funds by selling notes and other liabilities.
Fees
The sum of all upfront cash payments required by
the lender as part of the charge for the loan. Origination
fees and points are expressed as a percent of the
loan. Junk fees are expressed in dollars.
FHA mortgage
A mortgage on which the lender is insured against
loss by the Federal Housing Administration, with the borrower paying the mortgage
insurance premium. The major advantage of an FHA mortgage is that the required down
payment is very low, but the maximum loan amount is also low.
FICO Score
See Credit Score.
The prices paid by the borrower, as opposed
to posted prices.
Financing points
Including points in the loan amount.
First mortgage
A mortgage
that has a first-priority claim against the property in the event the borrower defaults
on the loan. For example, a borrower defaults
on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second
mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure
costs. The second mortgage lender can
collect only what is left of the $100,000.
A mortgage on which the interest rate and monthly
mortgage payment remain unchanged throughout the term of the mortgage.
Fixed-Markup UML
An Upfront Mortgage Lender who discloses
his wholesale price and markup.
Same as Option ARM.
Float
Allowing the rate and points to vary with changes
in market conditions. The borrower may elect to lock the rate
and points at any time but must do so a few days before the closing. Allowing
the rate to float exposes the borrower to market risk, and also to the risk of being
taken advantage of by the loan provider.
A rate
lock, plus an option to reduce the rate if market interest rates decline during
the lock period. Also called a
cap. A float-down costs the borrower more than a lock because it is more costly
to the lender. Float-downs vary widely in terms of how often the borrower
can exercise (usually only once), and exactly when the borrower can exercise. Do not confuse with interest rate increase caps and payment increase caps.
Foreclosure
The legal process by which a lender acquires possession
of the property securing a mortgage loan when the borrower defaults.
Forbearance agreement
An agreement by the lender not to exercise the legal right to foreclose in exchange
for an agreement by the borrower to a payment plan that will cure the borrower’s
delinquency.
Freddie Mac
One of two Federal agencies that purchase home loans
from lenders. The other is Fannie Mae.
Front-end fee
Mortgage broker income paid by the borrower, as distinguished from the fee paid
by the lender, which is "back-end".
The monthly mortgage payment which, if maintained
unchanged through the remaining life of the loan at the then-existing interest rate,
will pay off the loan over the remaining life. On FRMs the payment is always fully
amortizing, provided the borrower has made no prepayments. (If the borrower makes
prepayments, the monthly payment is more than fully amortizing). On GPMs,
the payment in the early years is always less than fully amortizing. On ARMs,
the payment may or may not be fully amortizing, depending on the type of ARM.
The current index
value plus the margin on an ARM. Usually, initial interest rates on ARMs are below the fully indexed rate. If
the index does not change from its initial level, after the initial rate period ends the interest rate will rise to the fully indexed rate after a period determined by the interest rate increase cap. For example, if the initial rate is 4% for 1
year, the fully indexed rate 7%, and the rate adjusts every year subject to a 1%
rate increase cap, the 7% rate will be reached at the end of the third year.
Prices that assume a more or less standardized
set of transaction characteristics that generally command the lowest prices.
Generic prices are distinguished from transaction specific prices, which pertain
to the characteristics of a specific transaction.
Gift of equity
A sale price below market value, where the difference
is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually
allow the gift to count as down payment. .
Good fairy syndrome
A belief that somewhere out there is a good fairy who
will solve all our financial (and other) problems.
The form that lists the settlement charges the borrower
must pay at closing, which the lender is obliged to provide the borrower within
three business days of receiving the loan application.
Government National Mortgage Association (GNMA)
A Federal
agency that guarantees mortgage securities that are issued against pools of FHA
and VA mortgages.
The period after the payment due date during which
the borrower can pay without being hit for late fees. Grace periods apply only to mortgages on which interest
is calculated monthly. Simple interest mortgages do not have a grace period because
interest accrues daily.
Graduated payment mortgage (GPM)
A mortgage on which the payment rises by a constant
percent for a specified number of periods, after which it levels out over the remaining
term and amortizes fully. For example, the payment might increase by 7.5% every
12 months for 60 months, after which it is constant for the remaining term at a
fully amortizing level.
Graduation period
The interval at which the payment rises on a GPM.
Graduation rate
The percentage increase in the payment on a GPM.
Guaranteed Mortgage Price Agreement
A proposal by HUD in 2002 to allow lenders and
others to offer packages of loans and settlement services at a single price.
Hazard insurance
Insurance purchased by the borrower, and required
by the lender, to protect the property against loss from fire and other hazards.
Also known as "homeowner insurance", it is the second "I" in PITI.
Historical scenario
The assumption that the index value to which the
rate on an ARM is tied follows the same pattern as in some prior historical period. In
meeting their disclosure obligations in connection with ARMs, some lenders show
how the mortgage payment would have changed on a mortgage originated some time in
the past. That is not very useful.
Showing how a mortgage originated now would change if the index followed a historical pattern would be useful, but nobody
does it.
Homebuyer protection plan
A plan purporting to protect FHA homebuyers against
property defects.
Homeowner's equity
See Equity.
Homeowners insurance
Insurance purchased by the borrower, and required
by the lender, to protect the property against loss from fire and other hazards.
It is the second "I" in PITI.
Home equity line of credit (HELOC)
A mortgage
set up as a line of credit against which a borrower can draw up to a maximum amount,
as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000,
which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $150,000, in an amount and at
a time of your choosing. You can draw
on the line by writing a check, using a special credit card, or in other ways.
Home Equity Conversion Mortgage (HECM)
A reverse mortgage program administered by FHA.
Home equity line
Same as HELOC.
Home equity loan
Same as second mortgage.
Home Keeper
A reverse mortgage program administered by Fannie
Mae.
Home Owners Loan Corporation
A Federal Government agency established by
Congress in 1933 to help families avoid having their homes foreclosed.
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.
The sum of mortgage payment, hazard insurance,
property taxes, and homeowner association fees. Same as PITI and "monthly housing expense."
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.
Hybrid ARM
An ARM on which the initial rate holds for some period,
during which it is "fixed-rate", after which it becomes adjustable rate. Generally,
the term is applied to ARMs with initial rate periods of 3 years or longer.
Impounds
Same as Escrow.
An ARM on which the interest rate adjusts mechanically
based on changes in an interest rate index, as opposed to a "discretionary ARM"
on which the lender can change the rate at any time subject only to advance notice.
All ARMs in the US are indexed.
The interest rate that is fixed for some specified
number of months at the beginning of the life of a an ARM. The initial rate
is sometimes referred to as a "teaser" when it is below the Information to Evaluate an Adjustable Rate Mortgage.
The number of months for which the initial rate
holds, ranging from 1 month to 10 years.
Interest accrual period
The period
over which the interest due the lender is calculated. If the interest accrual period
on a 6 % mortgage for $100,000 is a year, as it is on some loans in the UK
and India, the interest for the year is .06($100,000) = $6,000. If interest accrues monthly, as it does on most mortgages in the US, the
monthly interest is .06/12($100,000) = $500. If interest accrues biweekly, as on a few programs in the US, the biweekly interest
is .06/26($100,000) = $230.77. And
if interest accrues daily, as HELOCs and some other mortgages in the US do, the
daily interest is .06/365($100,000) = $16 .44.
A time-adjusted measure of cost to a mortgage borrower.
It is calculated in the same way as the APR except that the APR assumes that the
loan runs to term, and is always measured before taxes. The formula is shown
in Interest cost is measured
over the individual borrower's time horizon, and it may be measured after taxes
at the individual borrower's tax rate. In addition, the cost items included
in interest cost may be more or less inclusive than those included in the APR. .
The amount of interest, expressed in dollars, computed
by multiplying the loan balance at the end of the preceding period times the annual
interest rate divided by the interest accrual period. It is the same as interest
payment except when the scheduled mortgage payment is less than the interest due, in which case the difference is added to the balance
and constitutes negative amortization.
Interest-only mortgage
A mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains
unchanged.
Interest payment
The dollar amount of interest paid each month.
It is the same as interest due so long as the scheduled mortgage payment is equal to or greater than than the interest
due. Otherwise, the interest payment is equal to the scheduled payment.
The rate charged the borrower each period for the
loan of money, by custom quoted on an annual basis. A rate of 6%, for example, means
a rate of 1/2% per month. A mortgage interest rate is a rate on a loan secured
by a specific property.
The frequency of rate adjustments on an ARM after
the initial rate period is over. The rate adjustment
period is sometimes but not always the same as the initial rate period. As an example,
a 3/3 ARM is one in which both periods are 3 years while a 3/1 ARM has an initial
rate period of 3 years after which the rate adjusts every year. .
The highest interest rate possible under an ARM contract; same as "lifetime cap." It is often expressed as
a specified number of percentage points above the initial
interest rate. .
Interest rate floor
The lowest interest rate possible under an ARM
contract. Floors are less common than ceilings.
The maximum allowable increase in the interest
rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points,
but may be 5 points if the initial rate period is 5 years or longer.
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.
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.
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.
Investor
In real estate, a borrower who owns or purchases
a property as an investment rather than as a residence.
Jumbo mortgage
A mortgage larger than the maximum eligible for
purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $333,700 in 2004
(see Non-conforming mortgage). However, some
lenders use the term to refer to programs for even larger loans, such as, e.g.,
greater than $500,000.
A derogatory term for lender fees expressed in
dollars rather than as a percent of the loan amount.
Fees that lenders are entitled to collect from
borrowers who don't pay within the grace period. Most mortgage notes offer
borrowers a 10 or 15-day grace period, with a late charge of about 5% on payments
received on the 16th or later.
Late payment
A payment received after the grace period stipulated
in the note. Most mortgage grace periods are 10 or 15 days.
A mortgage web site designed to provide
leads (potential customers) to lenders. Where a referral site provides information
about lenders to consumers, with consumers contacting the lenders, a lead-generation
site provides information about the consumers to the lenders, and the lenders
contact the consumers. They are sometimes called "auction sites" because lenders
post their prices directly to the consumer. .
Lease-to-own purchase
A transaction in which a hopeful home buyer leases
a home with an option to buy it within a specified period.
See Mortgage lender.
Lien
The lender’s right to claim the borrower’s property
in the event the borrower defaults. If there is more than one lien, the claim of
the lender holding the first lien will be satisfied before the claim of the lender
holding the second lien, which in turn will be satisfied before the claim of a lender
holding a third lien, etc.
Loan amount
The amount the borrower promises to repay, as set
forth in the mortgage contract. It differs from the amount of cash disbursed by
the lender by the amount of points and other upfront costs included in the loan.
Loan "churning"
The process of raising cash periodically through successive
cash-out refinancings. It is a scam initiated by mortgage brokers
that victimizes wholesale lenders, with the connivance of borrowers.Loan discount fee
Loan modification
A change in the terms of a loan, usually
the interest rate and/or term, in response to the borrower's inability to make the
payments under the existing term.
Loan officer
Employees
of lenders or mortgage brokers who find borrowers, sell and counsel them, and take
applications.
Loan provider
A lender or a mortgage broker.
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.
An option exercised by the borrower, at the time
of the loan application or later, to "lock in" the rates and points prevailing in
the market at that time. The lender and borrower are committed to those terms,
regardless of what happens between that point and the closing date. Locking the Price of a Mortgage Loan.
Lock commitment letter
A written statement from a lender verifying that
the price and other terms of a loan have been locked. Borrowers who lock through
a mortgage broker should always demand to see the lock commitment letter.
Lock failure
The inability or unwillingness of a lender to honor
a mortgage price that a borrower had believed was guaranteed.
Lock jumper
A borrower, usually refinancing rather than purchasing
a home, who allows a lock to expire when interest rates go down in order to lock
again at the lower rate.
Lock period
The number of days for which any lock or float-down
holds. Ordinarily, the longer the period, the higher the price to the borrower.
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.
Manufactured housing
A house built entirely in a factory, transported
to a site and installed there. They are usually built without knowing where
they will be sited, and are subject to a Federal building code administered by HUD.
The amount added to the interest rate index, ranging generally from 2 to 3 percentage points, to obtain
the fully indexed interest rate on an
ARM.
A particular combination of loan, borrower and property characteristics that
lenders use in setting prices and underwriting requirements. These characteristics
are believed to affect the default risk or cost of the loan. As examples,
borrowers who don't intend to occupy the house they purchase pay more than those
who do, and borrowers who refinance only the balance on their existing loan pay
less than those who take "cash out".
The period until the last payment is due.
This is usually but not always the term, which is the period used to calculate the
mortgage payment.
Maximum loan amount
The largest loan size permitted on a particular
loan program. For programs where the loan is targeted for sale to Fannie Mae or
Freddy Mac, the maximum will be the largest loan eligible for purchase by these
agencies. On FHA loans, the maximums are set by the Federal Housing Administration,
and vary somewhat by geographical area. On other loans, maximums are set by
lenders.
Maximum loan to value ratio
The maximum allowable loan-to-value ratio on the selected loan program.
Maximum lock
The longest period for which the lender will lock
the rate and points on any program. The most common maximum lock period is 60 days,
but on some programs the maximum is 90 days; only a few go beyond 90 days.
Minimum down payment
The minimum allowable ratio of down payment to
sale price on any program. If the minimum is 10%, for example, it means that you
must make a down payment of at least $10,000 on a $100,000 house, or $20,000 on
a $200,000 house. Same as Housing expense.
Monthly payments required on credit cards, installment
loans, home equity loans, and other debts but not including payments on the loan
applied for.
Monthly total expenses
Same as Total
housing expense.
A written document evidencing the lien on a property
taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien
and the loan. In most cases, they are
defined in two separate documents: a mortgage and a note.
Mortgage auction site
See Lead generation
site.
Mortgage bank
Same as mortgage
company.
An independent contractor who offers the loan products
of multiple lenders, termed wholesalers. A mortgage
broker counsels on the loans available from different wholesalers, takes the application, and usually processes the loan. When the
file is complete, but sometimes sooner, the lender underwrites the loan. In contrast to a correspondent, a mortgage
broker does not fund a loan.
A mortgage lender who sells all loans in the secondary
market. As distinguished from a portfolio lender,
who retains loans in its portfolio. Mortgage companies may or may not service
the loans they originate.
Mortgage lead
A packet of information
about a consumer who a loan provider might be able to convert into a borrower. You
become a lead when you fill out a questionnaire about yourself on-line in response
to a sexy ad.
Mortgage formulas
Equations used to derive common measures used in the mortgage market, such as monthly
payment, balance, and APR.
Insurance against loss provided to a mortgage lender
in the event of borrower default. In most cases, the borrower pays the premiums.
Mortgage insurance premium
The up-front and/or periodic charges that the borrower
pays for mortgage insurance. There are different mortgage insurance plans with differing
combinations of up-front, monthly and annual premiums. The most widely used
premium plan is a monthly charge with no upfront premium. For a sample of monthly
premiums,
Mortgage insurance cancellation
Canceling a mortgage insurance policy.
Mortgage lender
The party who disburses funds to the borrower at
the closing table. The lender receives the note evidencing the borrower's
indebtedness and obligation to repay, and the mortgage which is the lien on the
subject property.
The monthly payment of interest and principal made
by the borrower. The formula used to calculate it is shown in.
Mortgage price
The interest rate, points and fees paid to the
lender and/or mortgage broker. On ARMs, the price also includes the fully indexed rate and the maximum rate.
Mortgage program
A bundle of mortgage characteristics that lenders
see fit to distinguish as a distinct instrument. These include whether it
is an FRM, ARM, or Balloon; the term; the initial rate period on an ARM; whether
it is FHA-insured or VA-guaranteed; and if is not FHA or VA, whether it is "conforming"
(eligible for purchase by Fannie Mae or Freddie Mac) or "non-conforming".
Mortgage referrals
Advice on where to go to get a mortgage.
Mortgage scams
Deceptive and exploitative schemes by lenders,
brokers, home sellers and sometimes even borrowers.
Mortgage shopping
Trying to find the best deal on a mortgage.
Mortgage spam
Offers for great mortgage deals that appear unbidden
in your email.
Mortgage suitability
The doctrine that mortgage lenders should be
held liable for providing loans that are not suitable for the borrower.
A rise in the loan balance when the mortgage payment
is less than the interest due. Sometimes called
"deferred interest." It is explained in detail in Negative amortization
arises most frequently on ARMs.
The maximum amount of negative amortization permitted
on an ARM, usually expressed as a percentage of the original loan amount (e.g.,
110%). Reaching the cap triggers an automatic increase in the payment, usually to
the fully amortizing payment level, overriding
any payment increase cap.
Negative Homeowners Equity
The condition of owing more on the house
than the house is worth.
Points paid by a lender for a loan with a rate above the rate on
a zero point loan. For example, a wholesaler quotes the following prices to a mortgage
broker. 8%/0 points, 7.5%/3 points, 8.75%/-3 points. On mortgage web
sites, negative points are usually referred to as "rebates" because they are used
to reduce a borrower's settlement costs. When negative points are retained
by a mortgage broker, they are called a "yield spread premium".
Net branch
A facility offered by some lenders
to mortgage brokers where de jure the brokers become employees of the lender but
de facto they retain their independence as brokers. One of the advantages
of this arrangement to brokers is that they need not disclose yield spread premiums
received from lenders.
Net jumping
Using
a broker's time and expertise to become informed and creditworthy, then jumping
to the internet to get the loan.
Niche
See Market niche.
Nichification
Proliferation in the number of loan, borrower and
property characteristics used by lenders to set mortgage prices and underwriting
requirements.
No change scenario
On an ARM, the assumption that the value of the
index to which the rate is tied does not change from its initial level.
No-Cost mortgage
A mortgage
on which all settlement costs except per diem interest, escrows, homeowners insurance
and transfer taxes are paid by the lender and/or the home seller.
A mortgage that does not meet the purchase requirements
of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large
or for other reasons such as poor credit or inadequate documentation.
Non-Permanent resident alien
A non-citizen without a green card who is employed
in the US. As distinct from a permanent resident alien, who has a green card and
who lenders do not distinguish from US citizens. Non-permanent resident aliens are
subject to somewhat more restrictive qualification requirements than US citizens.
No asset loan
A documentation requirement where the
applicant's assets are not disclosed.
No Fee Mortgage Plus
A Bank of America program for home purchasers
that eliminates all lender fees except points, and all third party fees.
No income loan
A documentation requirement where the
applicant's income is not disclosed.
Non-warrantable condo
A condominium that does not meet meet
lender requirements, see Warrantable condos.
No-Surprise adjustable rate mortgage
An ARM with a preset graduated payment combined
with variable term.
Nominal interest rate
A quoted interest rate that is not adjusted for
either intra-year compounding, or for inflation. A quoted rate of 6% on a mortgage,
for example, is nominal. Adjusted rates are called "effective" see Effective rate.
No ratio loan
A documentation requirement where the applicant's
income is disclosed and verified but not used in qualifying the borrower.
The conventional maximum ratios of expense to income are not applied.
A document that evidences a debt and a promise
to repay. A mortgage loan transaction always includes both a note evidencing
the debt, and a mortgage evidencing the lien on the property,
usually in two documents.
An adjustable rate mortgage with flexible payment
options, monthly interest rate adjustments, and very low minimum payments in the
early years. They carry a risk of very large payments in later years.
Option fee
An upfront fee paid by the buyer under a lease-to-own
purchase, usually 1% to 5% of the price, which is credited to the purchase price
when the option is exercised but is lost if it is not.
An upfront fee charged by some lenders, usually
expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed
as a percent of the loan amount. Unlike points, however, an origination fee
does not vary with the interest rate.
Overage
The difference between the price posted to its loan officers by a lender or mortgage broker, and
the price charged the borrower.
Partial prepayment
Making a payment larger than the scheduled
payment as a way of paying off the loan earlier. See Prepayment.
Paydown magic
Belief that there is a special way to pay down
the balance of a home mortgage faster, if you know the secret.
Payment adjustment interval
The period between payment changes on an ARM, which
may or may not be the same as the interest
rate adjustment period. Loans on which the payment adjusts less frequently
than the rate may generate negative amortization.
The maximum percentage increase in the payment
on an ARM at a payment adjustment date. A 7.5% cap is common.
Payment decrease cap
The maximum percentage decrease in the payment
on an ARM at a payment adjustment date.
Payment period
The period over which the borrower is obliged to
make payments. On most mortgages, the payment period is a month, but on some
it is biweekly.
Payment power
A program begun by Fannie Mae in 2003-4
that allows a borrower to skip up to
2 mortgage payments in any 12 month period, and up to 10 over the life of a loan.
Payment rate
The interest rate used to calculate the mortgage payment, which is usually but not necessarily the interest rate.
Payment shock
A very large increase in the payment on an ARM
that may surprise the borrower. Also used to refer to a large difference between
the rent being paid by a first-time home buyer, and the monthly housing expense
on the purchased home.
Payoff month
The month in which the loan balance is paid down
to zero. It may or may not be the term.
Per diem interest
Interest from the day of closing to the first day
of the following month. In some cases, however, the borrower can get a credit at
closing by making the first payment a month earlier.
Periodic refinancing
An ill-advised scheme to tap into equity for cash
advances through periodic refinancings.
Permanent buydown
Paying points as a way of
reducing the interest rate.
Pick a Payment ARM
Same as Flexible
Payment ARM.
Piggyback mortgage
A combination of a first mortgage for 80% of
property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations
are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks
are a substitute for mortgage insurance for borrowers who cannot put 20% down.
The lender's risk that between the time a lock
commitment is given to the borrower and the time the loan is closed, interest rates
will rise and the lender will take a loss on selling the loan.
Shorthand for principal, interest, taxes and insurance,
which are the components of the monthly housing expense.
PMI
Private mortgage insurance, as distinguished from
insurance provided by government under FHA and VA. See Mortgage insurance.
An upfront cash payment required by the lender
as part of the charge for the loan, expressed as a percent of the loan amount; e.g.,
"3 points" means a charge equal to 3% of the loan balance. It is common today for
lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations with negative points. On a negative point loan the lender contributes cash
toward meeting closing costs. Positive and negative points are sometimes termed
"discounts" and "premiums," respectively. .
Portable mortgage
A mortgage that can be moved from one property
to another. These were introduced in the US by E*TRADE Mortgage in 2003.
A lender that holds the loans it originates in
its portfolio rather than selling them, as a temporary lender does.
The mortgage prices delivered by lenders to
loan officers and mortgage brokers, as opposed to the final
prices paid by borrowers.
Pre-approval
A commitment by a lender to make a mortgage loan
to a specified borrower, prior to the identification of a specific property.
It is designed to make it easier to shop for a house. Unlike a pre-qualification,
the lender checks the applicant's credit.
Predatory lending
A variety of unsavory lender practices designed
to take advantage of unwary borrowers.
A payment made by the borrower over and above the scheduled mortgage payment. If the additional
payment pays off the entire balance it is a "prepayment in full"; otherwise, it
is a "partial prepayment."
Prepayment penalty
A charge imposed by the lender if the borrower
pays off the loan early. The charge is usually expressed as a percent of the loan
balance at the time of prepayment, or a specified number of months interest.
Pre-qualification
Same as qualification.
Price-gouging
Charging interest rates and/or fees that are excessive relative to what the same
borrowers could have found had they shopped the market.
Primary residence
The house in which the borrower will live most
of the time, as distinct from a second home or an investor property that will be
rented.
Principal
The portion of the monthly payment that
is used to reduce the loan balance. See Amortization.
Principal limit
The present value of a house, given the elderly
owner's right to live there until death or voluntary move-out, under the FHA reverse
mortgage program.
Private mortgage insurance
Mortgage insurance provided by private mortgage
insurance companies, or PMIs.
Compiling and maintaining the file of information
about a mortgage transaction, including the credit report, appraisal, verification
of employment and assets, and so on. The processing file is handed off to underwriting for the loan decision.
Property flipping
Successive sham home sales at progressively higher
prices as part of a scheme to defraud FHA.
Purchase money mortgage
A mortgage offered by a house buyer as partial payment
for the house. From the seller's point of view, it is seller
financing.
The process of determining whether a prospective
borrower has the ability, meaning sufficient assets and income, to repay a loan.
Qualification is sometimes referred to as "pre-qualification" because it is subject
to verification of the information provided by the applicant. Qualification is short
of approval because it does not take account of the credit
history of the borrower. Qualified borrowers may ultimately be turned down because,
while they have demonstrated the capacity to repay, a poor credit history suggests
that they may be unwilling to pay. For articles on qualification.
Qualification rate
The interest rate used in calculating the initial
mortgage payment in qualifying a borrower. The rate used in this calculation may
or may not be the initial rate on the mortgage. On ARMs, for example, the
borrower may be qualified at the fully indexed
rate rather than the initial rate.
Qualification ratios
Requirements stipulated by the lender
that the ratio of housing expense to borrower income, and housing expense plus other
debt service to borrower income, cannot exceed specified maximums, e.g., 28% and
35%. These may reflect the maximums specified by Fannie Mae and Freddie Mac; they
may also vary with the loan-value ratio and other factors.
Standards imposed by lenders as conditions for granting
loans, including maximum ratios of housing expense and total expense to income,
maximum loan amounts, maximum loan-to-value ratios, and so on. Less comprehensive
than underwriting requirements, which
take account of the borrower's credit record.
Rate
See Interest Rate.
Rate caps
Limitations on the size of rate adjustments
on an ARM, often expressed in a/b/c fashion: "a" is the maximum rate change at the
first rate adjustment, "b" is the maximum at all subsequent adjustments, and "c"
is the maximum increase over the initial rate during the life of the contract.
Rate/point breakeven
The period you must retain a mortgage in order
for it to be profitable to pay points to reduce the rate.
Rate/point options
All the combinations of interest rate and points that are offered on a particular loan program. On an ARM,
rates and points may also vary with the margin and interest rate ceiling.
Rate protection
Protection for a borrower against the danger that
rates will rise between the time the borrower applies for a loan and the time the
loan closes. This protection can take the form of a "lock" where
the rate and points are frozen at their initial levels until the loan closes; or
a "float-down" where the rates and points cannot rise
from their initial levels but they can decline if market rates decline. In either
case, the protection only runs for a specified period. If the loan is not closed
within that period, the protection expires and the borrower will either have to
accept the terms quoted by the lender on new loans at that time, or start the shopping
process anew.
Rate sheets
Tables of interest rates and points that
lenders distribute daily to their loan officer employees or mortgage brokers.
Rebate
Same as Negative points.
Recast payment
Raising the mortgage
payment to the fully amortizing payment.
Periodic recasts are sometimes used on ARMs in lieu of or in addition to negative amortization caps.
Referral fees
Payments made by service providers to other
parties as quid pro quo for referring customers. For example, a title company provides
something of value to a Realtor or lender for sending a customer who requires title
insurance.
Referral power
The ability to direct a client to a specific
vendor. Referral power is based on information and authority of the
referrer, and ignorance of the client.
Referral site
A mortgage web site that introduces potential borrowers to participating lenders, in some cases
to multiple hundreds of them. The principal lure to the consumer is information
on generic prices posted by the lenders.
Paying off an old loan while simultaneously taking
a new one. This may be done to reduce borrowing costs under conditions where the
borrower can obtain a new loan at an interest rate below the rate on the existing
loan. It may be done to raise cash, as an alternative to a home equity loan. Or it may be done to reduce the monthly payment.
Rent premium
An increment above the rent paid on a lease-to-own home
purchase, which is credited to the purchase price if the purchase option is exercised,
but which is lost if the option is not exercised.
Required cash
The total cash required of the home buyer to close
the transaction, including down payment, points and fixed dollar charges paid to
the lender, any portion of the mortgage insurance premium that is paid up-front,
and other settlement charges associated with the transaction such as title insurance,
taxes, etc. The total required cash is shown on the Good
Faith Estimate of Settlement that every borrower receives.
RESPA
The Real Estate Settlement Procedures Act, a Federal
consumer protection statute first enacted in 1974. RESPA was designed to protect
home purchasers and owners shopping for settlement services by mandating certain
disclosures, and prohibiting referral fees and kickbacks.
A lender who offers mortgage loans directly to
the public. As distinct from a wholesale lender who operates through mortgage brokers and correspondents.
Reverse mortgage
A loan to an elderly home owner on which the balance
rises over time, and which is not repaid until the owner dies, sells the house,
or moves out permanently.
Right of rescission
The right of refinancing borrowers, under the Truth
in Lending Act, to cancel the deal at no cost to themselves within 3 days of closing.
Scenario analysis
Determining how the interest rate and payment on
an ARM will change in response to specified future changes in market interest rates,
called "scenarios.
The amount the borrower is obliged to pay each
period, including interest, principal, and mortgage insurance, under the terms of
the mortgage contract. Paying
less than the scheduled amount results in delinquency. On most mortgages, the scheduled
payment is the fully amortizing payment throughout the life of the loan. On some mortgages, however, the scheduled payment for the first 5 or 10 years is the interest payment. And on option (flexible payment) ARMs, it can be the "minimum" payment as defined by the program option (Flexible Payment) ARMs.
A loan with a second-priority claim against a property
in the event that the borrower defaults. The lender who holds the second mortgage
gets paid only after the lender holding the first mortgage is paid. For articles
on second mortgages, also known as "home
equity loans,"
Secure option ARM
An option ARM on which the initial rate holds
for 5 years rather than one month.
Secondary markets
Markets in which mortgages or mortgage-backed
securities are bought and sold.
Self-employed borrower
A borrower who must document income using
tax returns rather than information provided by an employer. This complicates
the process somewhat.
Seller contribution
A contribution to a borrower's down payment
or settlement costs made by a home seller, as an alternative to a price reduction.
Provision of a mortgage by the seller of a house, often
a second mortgage, as a condition of the sale.
Servicing
Administering loans between the time of
disbursement and the time the loan is fully paid off. This includes collecting monthly
payments from the borrower, maintaining records of loan progress, assuring payments
of taxes and insurance, and pursuing delinquent accounts.
Servicing agent
The party who services a loan, who may
or may not be the lender who originated it.
Servicing release premium
A payment made by the purchaser of a mortgage to the
seller for the release of the servicing on the mortgage. It has no direct relevance
to borrowers.
Servicing transfer
When one servicing agent is replaced by
another.
Costs that the borrower must pay at the
time of closing, in addition to the down payment.
Shared appreciation mortgage
A mortgage on which the borrower gives up a share
in future price appreciation in exchange for a lower interest rate and/or
interest deferral.
Shopping site
A type of multi-lender web site that offers borrowers the capacity to shop among
multiple competing lenders.
Short sale
An agreement between a mortgage borrower
in distress and the lender that allows the borrower to sell the house and remit
the proceeds to the lender. It is an alternative to foreclosure, or a deed
in lieu of foreclosure.
Silent second
A second mortgage used to deceive the first mortgage
lender, or to provide preferential (subsidized) terms to qualified home buyers.
Simple interest mortgage
A mortgage on which interest is calculated daily
based on the balance at the time of the last payment. The daily interest
charge within the month is constant -- interest is not charged on the interest charges
of prior days.
Simple interest biweekly mortgage
A biweekly mortgage on which the biweekly payment
is applied to the balance every two weeks, rather than held in an account as on
a conventional biweekly.
Single file mortgage insurance
A type of mortgage insurance on which the lender pays
the premium and prices it in the interest rate.
Single-lender web site
A web site of an individual lender or
mortgage broker who wants users to select a loan from them. They are easy to identify
because the name of the lender or broker will be prominently displayed on the screens.
Single-lender sites account for the majority of all mortgage web sites.
Stated assets
A documentation requirement where the
borrower discloses her assets but they are not verified by the lender.
Stated income
A documentation requirement where the lender verifies
the source of the income but not the amount.
Streamlined refinancing
Refinancing that omits some of the standard risk
control measures, and is therefore quicker and less costly.
Subordinate financing
A second mortgage on the property which is not
paid off when a new loan is taken out. The second mortgage lender must allow
subordination of the second to the new first mortgage.
Subordination policy
The policy of a second mortgage lender for allowing
a borrower to refinance the first mortgage while leaving the second in place.
Sub-prime borrower
A borrower with poor credit, who can borrow only
from sub-prime lenders who specialize in dealing with borrowers who have poor credit.
Such borrowers pay more than prime borrowers, and are sometimes taken advantage
of. Not all borrowers who deal with sub-prime lenders, however, are sub-prime
borrowers. Some could obtain loans from mainstream lenders if they properly shop
the market.
Sub-prime lender
A lender who specializes in lending to sub-prime
borrowers.
Sub-prime market
The network of sub-prime lenders, mortgage
brokers, warehouse lenders and investment bankers who make possible the delivery
of loans to sub-prime borrowers.
Swing loan
Same as Bridge loan.
Tangible net benefit
The net gain to a borrower from a refinancing,
which some proposed legislation would make the responsibility of lenders.
Tax service fee
A fee charged by some lenders at closing
to cover the cost of paying taxes on the borrower's property when they come due,
or (if the borrower is paying the taxes), verifying that the payment has been made.
The initial interest rate on an ARM, when it is
below the fully indexed rate.
A reduction in the mortgage payment in the early
years of the loan in exchange for an upfront cash payment provided by the home buyer,
the seller, or both.
A lender that sells the loans it originates, as
opposed to a portfolio lender who holds them.
The period used to calculate the monthly mortgage
payment. The term is usually but not always the same as the maturity.
On a 7-year balloon loan, for example, the maturity is 7 years but the term in most
cases is 30 years.
Title insurance
Insurance against loss arising from problems connected
to the title to property.
Housing expense plus Monthly debt service.
Total expense ratio
The ratio of Total
housing expense to borrower income.
Total interest payments
The sum of all interest payments to date or over
the life of the loan. This is an incomplete measure of the cost of credit to the
borrower because it does not include up-front cash payments, and it is not adjusted
for the time value of money. See Effective rate.
The ratio of housing expense plus current debt
service payments to borrower income, which is used (along with the housing expense ratio and other factors) in qualifying borrowers. See qualification requirements.
Truth in Lending (TIL)
The Federal law that specifies the information
that must be provided to borrowers on different types of loans. Also, the
form used to disclose this information.
Underage
Fees collected from a borrower by a loan
officer that are lower than the target fees specified by the lender or mortgage
broker who employs the loan officer.
The process of examining all the data about a borrower's
property and transaction to determine whether the mortgage applied for by the borrower
should be issued. The person who does this is called an underwriter.
The standards imposed by lenders in determining
whether a borrower qualifies for a loan. These standards are more comprehensive
than qualification requirements in that they include an evaluation of the borrower’s
creditworthiness.
Upfront Mortgage Broker (UMB)
A mortgage broker who charges a set fee for services
provided, established in writing at the outset of the transaction, and acts as the
borrower's agent in shopping for the best deal.
Upfront Mortgage Lender
A lender offering loans on the internet who provides
mortgage shoppers with the information they need to make an informed decision before
applying for a mortgage; and guarantees them fair treatment during the period after
they apply through to closing.
VA mortgage
A mortgage with no down payment requirement, available
only to ex-servicemen and women as well as those on active duty, on which the lender
is insured against loss by the Veterans Administration.
Waive escrows
Authorization by the lender for the borrower to
pay taxes and insurance directly. This is in contrast to the standard procedure
where the lender adds a charge to the monthly mortgage payment that is deposited
in an escrow account, from which the lender pays the borrower’s taxes and insurance
when they are due. On some loans lenders will not waive escrows, and on loans where
waiver is permitted lenders are likely either to charge for it in the form of a
small increase in points, or restrict it to borrowers making a large down payment.
Warehouse lender
A firm that lends to temporary lenders against the collateral of closed mortgage loans prior to the
sale of the loans in the secondary market. Warehouse lenders can call the loans
if the loans "in the warehouse" drop in value.
A condominium project with features that lenders
view as protections against hazards that would threaten the value of condo units.
These features include the project being completed with most units sold rather than
rented, no one party owning more than 10% of them, adequate insurance coverage of
common structures, and an ownership association independent of the developer.
A lender who provides loans through mortgage brokers or correspondents. The
mortgage broker or correspondent initiates the transaction, takes the borrower's
application, and processes the loan. As distinct from a Retail lender.
Wholesale mortgage prices
The interest rate and points quoted by wholesale
lenders to mortgage brokers and correspondent lenders.
Workout assumption
The assumption of a mortgage, with permission of
the lender, from a borrower unable to continue making the payments.
Worst case scenario
The assumption that the interest rate on an ARM
rises to the maximum extent permitted in the note. On a one-month ARM with no rate
adjustment caps, for example, the rate would jump to the maximum rate stipulated
in the note in month 2.
Wrap-around mortgage
A mortgage on a property that already has a mortgage,
where the new lender assumes the payment obligation on the old mortgage. Wrap-around
mortgages arise when the current market rate is above the rate on the existing mortgage,
and home sellers are frequently the lender. A due-on-sale
clause prevents a wrap-around mortgage in connection with sale of a property
except by violating the clause.
Yield-Spread premium.
Same as Negative points.
Yield Curve
A graph that shows, at any given time, how
the yield varies with the period to maturity. Usually, the curve slopes upwards
but occasionally it slopes down or is flat. A flat yield curve means that yields
on long-term bonds are not much higher than those on short-term notes.
1 Month Option ARM
Same as Flexible Payment ARM.
3/2 Down payment
Programs offered by some lenders under which a
borrower who is able to secure a grant or gift equal to 2% of the down payment will only have to provide a 3% down payment from their own funds. This can be a good deal for a cash-short borrower.
80/10/10, 80/15/5, and 80/20/0 loan plans
Combination first mortgages for 80% of sale price
or value and second mortgages for 10%, 15%, or 20%. The purpose is to avoid
mortgage insurance, which is required on first mortgages that exceed 80% of value.
12 MTA
An interest rate index that is used on some ARMs.
It is the average of the most recent
12 monthly values of the Treasury One-Year Constant
Maturity series.
12 MTA Pay Option ARM
Same as Flexible Payment ARM.
3.95% ARM
A monthly ARM on which the initial rate is 3.95%.
100% loan
A loan with no down payment. The loan amount
equals the property value.
125% loan
A loan for 125% of property value.
40-Year Mortgage
A mortgage with a term of 40 years.
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