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Acceleration
The right of the mortgagee (lender)
to demand the immediate repayment of the mortgage loan balance
upon the default of the mortgagor (borrower), or by using the
right vested in the Due-on-Sale Clause.
Adjustable-Rate Mortgage
(ARM)
A mortgage where the interest rate
is not fixed, but changes during the life of the loan in line
with movements in an index rate. You may also see ARMs referred
to as AMLs (adjustable mortgage loans) or VRMs (variable-rate
mortgages).
Adjustment interval
On an adjustable rate mortgage, the
time between changes in the interest rate and/or monthly payment,
typically one, three or five years, depending on the index.
Amortization
Means loan payment by equal periodic
payment calculated to pay off the debt at the end of a fixed period,
including accrued interest on the outstanding balance.
Annual Percentage Rate (APR)
A measure of the cost of credit, expressed
as a yearly rate. It includes interest as well as other charges.
Because all lenders follow the same rules to ensure the accuracy
of the annual percentage rate, it provides consumers with a good
basis for comparing the cost of loans, including mortgage plans.
Appraisal
An estimate of the value of property,
made by a qualified professional called an "appraiser".
Assessment
A local tax levied against a property
for a specific purpose, such as a sewer or street lights.
Assumability
When a home is sold, the seller may
be able to transfer the mortgage to the new buyer. This means
the mortgage is assumable. Lenders generally require a credit
review of the new borrower and may charge a fee for the assumption.
Some mortgages contain a due-on-sale clause, which means that
the mortgage may not be transferable to a new buyer. Instead,
the lender may make you pay the entire balance that is due when
you sell the home. Assumability can help you attract buyers if
you sell your home.
Balloon (payment) mortgage
Usually a short-term fixed-rate loan
which involves small payments for a certain period of time and
one large payment for the remaining amount of the principal at
a time specified in the contract.
Blanket Mortgage
A mortgage covering at least two pieces
of real estate as security for the same mortgage.
Borrower (Mortgagor)
One who applies for and receives a
loan in the form of a mortgage with the intention of repaying
the loan in full
Broker
An individual in the business of assisting
in arranging funding or negotiating contracts for a client buy
who does not loan the money himself. Brokers usually charge a
fee or receive a commission for their services.
Buydown
With a buydown, the seller pays an
amount to the lender so that the lender can give you a lower rate
and lower payments, usually for an early period in an ARM. The
seller may increase the sales price to cover the cost of the buydown.
Buydowns can occur in all types of mortgages, not just ARMs.
Cash Flow
The amount of cash derived over a certain
period of time from an income-producing property. The cash flow
should be large enough to pay the expenses of the income producing
property (mortgage payment, maintenance, utilities, etc.)
Cap
A limit on how much the interest rate
or the monthly payment can change, either at each adjustment or
during the life of the mortgage. Payment caps don't limit the
amount of interest the lender is earning, so they may cause negative
amortization.
Certificate of Eligibility
The document given to qualified veterans
which entitles them to VA guaranteed loans for homes, business,
and mobile homes. certificates of eligibility may be obtained
by sending DD-214 (Separation Paper) to the local VA office with
VA form 1880 (request for Certificate of Eligibility)
Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans
Administration showing the property's current market value
Certificate of veteran status
The document given to veterans or reservists
who have served 90 days of continuous active duty (including training
time) It may be obtained by sending DD 214 to the local VA office
with form 26-8261a (request for certificate of veteran status.
This document enables veterans to obtain lower down payments on
certain FHA insured loans).
Closing
The meeting between the buyer, seller
and lender or their agents where the property and funds legally
change hands. Also called settlement. closing costs usually include
an origination fee, discount points, appraisal fee, title search
and insurance, survey, taxes, deed recording fee, credit report
charge and other costs assessed at settlement. The cost of closing
usually are about 3 percent to 6 percent of the mortgage amount.
Commitment
A promise by a lender to make a loan
on specific terms or conditions to a borrower or builder. A promise
by an investor to purchase mortgages from a lender with specific
terms or conditions. an agreement, often inwriting, between a
lender and a borrower to loan money at a future date subject to
the completion of paperwork or compliance with stated conditions.
Construction loan
A short term interim loan to pay for
the construction of buildings or homes. These are usually designed
to provide periodic disbursements to the builder as he progresses.
Contract sale or deed
A contract between purchaser and a
seller of real estate to convey title after certain conditions
have been met. It is a form of installment sale.
Conventional loan
A mortgage not insured by FHA or guaranteed
by the VA.
Conversion Clause
A provision in some ARMs that allows
you to change the ARM to a fixed-rate loan at some point during
the term. Usually conversion is allowed at the end of the first
adjustment period. At the time of the conversion, the new fixed
rate is generally set at one of the rates then prevailing for
fixed rate mortgages. The conversion feature may be available
at extra cost.
Credit Report
A report documenting the credit history
and current status of a borrower's credit standing.
Debt-to-Income Ratio
The ratio, expressed as a percentage,
which results when a borrower's monthly payment obligation on
long-term debts is divided by his or her gross monthly income.
See housing expenses-to-income ratio.
Deed of trust
In many states, this document is used
in place of a mortgage to secure the payment of a note.
Default
Failure to meet legal obligations in
a contract, specifically, failure to make the monthly payments
on a mortgage.
Deferred interest
When a mortgage is written with a monthly
payment that is less than required to satisfy the note rate, the
unpaid interest is deferred by adding it to the loan balance.Seenegative
amortization
Delinquency
Failure to make payments on time. this
can lead to foreclosure.
Department of Veterans Affairs
(VA) An independent agency of the federal
government which guarantees long-term, low-or no-down payment
mortgages to eligible veterans.
Discount
In an ARM with an initial rate discount,
the lender gives up a number of percentage points in interest
to give you a lower rate and lower payments for part of the mortgage
term (usually for one year or less). After the discount period,
the ARM rate will probably go up depending on the index rate.
Down Payment
Money paid to make up the difference
between the purchase price and the mortgage amount.
Due-on-Sale-Clause
A provision in a mortgage or deed of
trust that allows the lender to demand immediate payment of the
balance of the mortgage if the mortgage holder sells the home.
Earnest Money
Money given by a buyer to a seller
as part of the purchase price to bind a transaction or assure
payment.
Entitlement
The VA home loan benefit is called
entitlement. Entitlement for a VA guaranteed home loan. This is
also known as eligibility.
Equal Credit Opportunity Act
(ECOA) Is a federal law that requires
lenders and other creditors to make credit equally available without
discrimination based on race, color, religion, national origin,
age, sex, marital status or receipt of income from public assistance
programs.
Equity
The difference between the fair market
value and current indebtedness, also referred to as the owner's
interest. The value an owner has in real estate over and above
the obligation against the property.
Escrow
An account held by the lender into
which the home buyer pays money for tax or insurance payments.
Also earnest deposits held pending loan closing.
Fannie Mae
seeFederal National Mortgage Association.
Farmers Home Administration
(FmHA) provides financing to farmers
and other qualified borrowers who are unable to obtain loans elsewhere.
Federal Home Loan Bank Board
(FHLBB) The former name for the regulatory
and supervisory agency for federally chartered savings institutions.
Agency is now called the Office of Thrift Supervision
Federal Home Loan Mortgage Corporation
(FHLMC) also called "Freddie Mac",
is a quasi-governmental agency that purchases conventional mortgage
from insured depository institutions and HUD-approved mortgage
bankers
Federal Housing Administration
(FHA) A division of the Department
of Housing and Urban Development. Its main activity is the insuring
of residential mortgage loans made by private lenders. FHA also
sets standards for underwriting mortgages.
Federal National Mortgage Association
(FNMA) also know as "Fannie Mae"
A tax-paying corporation created by Congress that purchases and
sells conventional residential mortgages as well as those insured
by FHA or guaranteed by VA. This institution, which provides funds
for one in seven mortgages, makes mortgage money more available
and more affordable.
FHA loan
a loan insured by the Federal Housing
Administration open to all qualified home purchasers. While there
are limits to the size of FHA loans ($155,250 as of 1/1/96), they
are generous enough to handle moderately-priced homes almost anywhere
in the country.
FHA mortgage insurance
Requires a fee (up to 2.25 percent
of the loan amount) paid at closing to insure the loan with FHA.
In addition, FHA mortgage insurance requires an annual fee of
up to 0.5 percent of the current loan amount, paid in monthly
installments. The lower the down payment, the more years the fee
must be paid.
FHLMC
The Federal Home Loan Mortgage Corporation
provides a secondary market for savings and loans by purchasing
their conventional loans. Also known as "Freddie Mac."
Firm Commitment
A promise by FHA to insure a mortgage
loam for a specified property and borrower. A promise from a lender
to make a mortgage loan.
Fixed Rate Mortgage
The mortgage interest rate will remain
the same on these mortgages throughout the term of the mortgage
for the original borrower.
FNMA
The Federal National Mortgage Association
is a secondary mortgage institution which is the largest single
holder of home mortgages in the United States. FNMA buys VA, FHA,
and conventional mortgages from primary lenders. Also known as
"Fannie Mae."
Foreclosure
A legal process by which the lender
or the seller forces a sale of a mortgaged property because the
borrower has not met the terms of the mortgage. Also known as
a repossession of property.
Freddie Mac
see Federal Home Loan Mortgage Corporation
Ginnie Mae
see Government National Mortgage
Association.
Government National Mortgage Association (GNMA)
also known as "Ginnie Mae",provides
sources of funds for residential mortgages, insured or guaranteed
by FHA or VA
Graduated Payment Mortgage
(GPM) A type of flexible-payment mortgage
where the payments increase for a specified period of time and
then level off. This type of mortgage has negative amortization
built into it.
Guaranty
Apromise by one party to pay a debt
or perform an obligation contracted by another if the original
party fails to pay or perform according to a contract
Hazard Insurance
A form of insurance in which the insurance
company protects the insured from specified losses, such as fire,
windstorm and the like.
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage,
which results when a borrower's housing expenses are divided by
his/her gross monthly income. See debt-to-income ratio.
Impound
That portion of a borrower's monthly
payments held by the lender or servicer to pay for taxes, hazard
insurance, mortgage insurance, lease payments, and other items
as they become due. Also known as reserves.
Index
The index is the measure of interest
rate changes that the lender uses to decide how much the interest
rate on an ARM will change over time. No one can be sure when
an index rate will go up or down. To help you get an idea of how
to compare different indexes, the following chart shows a few
common indexes over a ten-year period (1977-87). As you can see,
some index rates tend to be higher than others, and some more
volatile. (But if a lender bases interest rate adjustments on
the average value of an index over time, your interest rate would
not be as volatile.) You should ask your lender how the index
for any ARM you are considering has changed in recent years, and
where it is reported.
Interim Financing
A construction loam made during completion
of a building or a project. A permanent loan usually replaces
this loan after completion.
Investor
A money source for a lender.
Jumbo Loan
A loan which is larger (more than $214,600
as of 1/1/97) than the limits set by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation.
Because jumbo loans cannot be funded by these two agencies,
they usually carry a higher interest rate.
Lien
A claim upon a piece of property for
the payment or satisfaction of a debt or obligation.
Loan-to-Value Ratio
The relationship between the amount
of the mortgage loan and the appraised value of the property expressed
as a percentage.
Margin
The number of percentage points the
lender adds to the index rate to calculate the ARM interest rate
at each adjustment.
Market Value
The highest price that a buyer would
pay and the lowest price a seller would accept on a property.
Market value may be different from the price a property could
actually be sold for at a given time.
MIP (Mortgage Insurance Premium)
It is insurance from FHA to the lender
against incurring a loss on account of the borrower's default.
Mortgage Insurance
Money paid to insure the mortgage when
the down payment is less than 20 percent. See private mortgage
insurance, FHA mortgage insurance.
Mortgagee
The lender
Mortgagor
The borrower or homeowner
Negative Amortization
Amortization means that monthly payments
are large enough to pay the interest and reduce the principal
on your mortgage. Negative amortization occurs when the monthly
payments do not cover all of the interest cost. The interest cost
that isn't covered is added to the unpaid principal balance. This
means that even after making many payments, you could owe more
than you did at the beginning of the loan. Negative amortization
can occur when an ARM has a payment cap that results in monthly
payments not high enough to cover the interest due.
Net Effective Income
The borrower's gross income minus federal
income tax.
Non Assumption Clause
A statement in a mortgage contract
forbidding the assumption of the mortgage without the prior approval
of the lender. Note: The signed obligation to pay a debt, as a
mortgage note.
Office of Thrift Supervision (OTS)
The regulatory and supervisory agency
for federally chartered savings institutions. Formally known as
Federal Home Loan Bank Board
Origination Fee
The fee charged by a lender to prepare
loan documents, make credit checks, inspect and sometimes appraise
a property; usually computed as a percentage of the face value
of the loan.
Permanent Loan
A long term mortgage, usually ten years
or more. Also called an "end loan."
PITI
Principal, Interest, Taxes and Insurance.
Also called monthly housing expense.
Pledged account Mortgage (PAM)
Money is placed in a pledged savings
account and this fund plus earned interest is gradually used to
reduce mortgage payments.
Points
A point is equal to one percent of
the principal amount of your mortgage. For example, if you get
a mortgage for $65,000, one point means you pay $650 to the lender.
Lenders frequently charge points in both fixed-rate and adjustable-rate
mortgages in order to increase the yield on the mortgage and to
cover loan closing costs. These points usually are collected at
closing and may be paid by the borrower or the home seller, or
may be split between them.
Power of Attorney
A legal document authorizing one person
to act on behalf of another.
Prepaid Expenses
Necessary to create an escrow account
or to adjust the seller's existing escrow account. Can include
taxes, hazard insurance, private mortgage insurance and special
assessments.
Prepayment
A privilege in a mortgage permitting
the borrower to make payments in advance of their due date.
Prepayment Penalty
Money charged for an early repayment
of debt. Prepayment penalties are allowed in some form (but not
necessarily imposed) in many states.
Primary Mortgage Market
Lenders making mortgage loans directly
to borrower's such as savings and loan associations, commercial
banks, and mortgage companies. These lenders sometimes sell their
mortgages into the secondary mortgage markets such as to FNMA
or GNMA, etc.
Principal
The amount of debt, not counting interest,
left on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a
20 percent down payment, lenders will allow a smaller down payment
- as low as 5 percent in some cases. With the smaller down payment
loans, however, borrowers are usually required to carry private
mortgage insurance. Private mortgage insurance will usually require
an initial premium payment and may require an additional monthly
fee depending on you loan's structure.
Realtor
A real estate broker or an associate
holding active membership in a local real estate board affiliated
with the National Association of Realtors.
Recision
The cancellation of a contract. With
respect to mortgage refinancing, the law that gives the homeowner
three days to cancel a contract in some cases once it is signed
if the transaction uses equity in the home as security.
Recording Fees
Money paid to the lender for recording
a home sale with the local authorities, thereby making it part
of the public records.
Refinance
Obtaining a new mortgage loan on a
property already owned. Often to replace existing loans on the
property.
Renegotiable Rate Mortgage
A loan in which the interest rate is
adjusted periodically. See adjustable rate mortgage.
RESPA
Short for the Real Estate Settlement
Procedures Act. RESPA is a federal law that allows consumers to
review information on known or estimated settlement cost once
after application and once prior to or at a settlement. The law
requires lenders to furnish the information after application
only.
Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender
makes periodic payments to the borrower using the borrower's equity
in the home asSatisfaction of Mortgage: The document issued by
the mortgagee when the mortgage loam is paid in full. Also called
a "release of mortgage."
Second Mortgage
A mortgage made subsequent to another
mortgage and subordinate to the first one.
Secondary Mortgage Market
The place where primary mortgage lenders
sell the mortgages they make to obtain more funds to originate
more new loans. It provides liquidity for the lenders. security.
Servicing
All the steps and operations a lender
performs to keep a loan in good standing, such as collection of
payments, payment of taxes, insurance, property inspections and
the like.
Settlement/Settlement Costs
see closing/closing costs
Shared Appreciation Mortgage (SAM)
A mortgage in which a borrower receives
a below-market interest rate in return for which the lender (or
another investor such as a family member or other partner) receives
a portion of the future appreciation in the value of the property.
May also apply to mortgage where the borrowers shares the monthly
principal and interest payments with another party in exchange
for part of the appreciation.
Simple Interest
Interest which is computed only on
the principle balance.
Survey
A measurement of land, prepared by
a registered land surveyor, showing the location of the land with
reference to know points, its dimensions, and the location and
dimensions of any buildings.
Sweat Equity
Equity created by a purchaser performing
work on a property being purchased.
Title
A document that gives evidence of an
individual's ownership of property.
Title Insurance
A policy, usually issued by a title
insurance company, which insures a home buyer against errors in
the title search. The cost of the policy is usually a function
of the value of the property, and is often borne by the purchaser
and/or seller. Policies are also available to protect the lender's
interests.
Title Search
An examination of municipal records
to determine the legal ownership of property. Usually is performed
by a title company.
Truth-In-Lending
A federal law requiring disclosure
of the Annual Percentage Rate to home buyers shortly after they
apply for the loan. Also known as Regulation Z.
Two-Step Mortgage
A mortgage in which the borrower receives
a below-market interest rate for a specified number of years (most
often seven or 10), and then receives a new interest rate adjusted
(within certain limits) to market conditions at that time. the
lender sometimes has the option to call the loan due with 30 days
notice at the end of seven or 10 years. also called "Super
Seven" or "Premier" mortgage.
Underwriting
The decision whether to make a loan
to a potential home buyer based on credit, employment, assets,
and other factors and the matching of this risk to an appropriate
rate and term or loan amount.
USURY
Interest charged in excess of the legal
rate established by law.
VA Loan
A long-term, low-or no-down payment
loan guaranteed by the Department of Veterans Affairs. Restricted
to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee
A premium of up to 1-7/8 percent (depending
on the size of the down payment) paid on a VA-backed loan. On
a $75,000 fixed-rate mortgage with no down payment, this would
amount to $1,406 either paid at closing or added to the amount
financed.
Variable Rate Mortgage (VRM)
see adjustable rate mortgage
Verification of Deposit (VOD)
A document signed by the borrower's
financial institution verifying the status and balance of his/her
financial accounts.
Verification of Employment (VOE)
A document signed by the borrower's
employer verifying his/her position and salary.
Warehouse Fee
Many mortgage firms must borrow funds
on a short term basis in order to originate loans which are to
be sold later in the secondary mortgage market (or to investors).
When the prime rate of interest is higher on short term loans
than on mortgage loans, the mortgage firm has an economic loss
which is offset by charging a warehouse fee.
Wraparound mortgage
Results when an existing assumable
loan is combined with a new loan, resulting in an interest rate
somewhere between the old rate and the current market rate. The
payments are made to a second lender or the previous homeowner,
who then forwards the payments to the first lender after taking
the additional amount off the top.
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