This common mortgage provision accelerates loan payments and requires immediate repayment of the outstanding loan balance, excluding interest. Acceleration clauses are usually triggered when a borrower misses too many payments; defaults on the mortgage; or otherwise breaches the contract.
Adjustable-rate mortgage (ARM)
With an ARM, the interest rate changes at a certain point, typically after three to five years. The interest rate is typically fixed for the first several years of the mortgage, often a low rate, and then changes on a monthly, annual or other set interval basis. When the interest rate changes, so does the interest portion of the borrower’s monthly payment. The interest rate will change based on a specified index, such as the one-year Treasury bill or LIBOR. Example: A 5/1 ARM is a mortgage in which the fixed-rate period lasts for five years. After five years, the interest rate becomes adjustable and is calculated annually for the remaining term of the mortgage. If the new interest rate is calculated based on the one-year Treasury bill, for example, the lender takes the Treasury bill rate and adds the margin specified in the mortgage loan note. See Interest, Margin, Treasury bill and LIBOR.
Short for Alternative-A paper, this loan category is assigned to borrowers who are higher risk than A-paper but less risky than subprime. Alt-A borrowers often have good credit, but their loans may have higher LTV or DTI ratios, or the borrowers might have inadequate or limited documentation supporting their incomes. Fannie Mae and Freddie Mac do not purchase Alt-A loans. Compare A-Paper and Subprime.
The payment of principal and interest in regular intervals over a period to pay off a debt.
In this example the loan is amortized over 30 years.
|Interest rate:||4.5 percent|
|Mortgage term:||30 years|
|Number of payments:||360|
|Total interest paid:||$206,016.78|
Annual percentage rate (APR)
The actual cost of a loan’s interest rate is its annual percentage rate. The APR takes into account the annual loan amount; interest payments; and the costs of acquiring the loan — such as points and private mortgage insurance premiums, if applicable. As a result, the APR is usually higher than the interest rate shown on the borrower’s loan note. Consumer protection regulations require lenders to provide the APR to borrowers in the Truth in Lending disclosure (or Loan Estimate after August 1, 2015).
This law prevents a lender from suing a borrower for the remaining loan balance that was not satisfied from a foreclosure sale of the borrower’s primary residence. Anti-deficiency laws are enacted on the state level and usually do not protect a borrower of a second mortgage or home equity line.
Borrowers who meet specific criteria, such as a minimum credit score of 680, likely earn a place in this loan category. Other criteria include a minimum reserve equal to two months of mortgage payments; no late mortgage, rent or car payments in the past two years; no collections or judgments in the past two years; and no more than two credit card payments made more than 30 days late. A-paper is also called prime. Compare Alt-A Paper and Subprime.
Borrowers complete loan applications, usually with the lender’s assistance. Applications contain personal and financial information including assets, debt, income, expenses and employment details. The application is the borrower’s formal request for financing. The lender uses the information in the application to make a loan approval decision. A standardized form, the Uniform Residential Loan Application or Form 1003, is used for mortgage loans involving single-family loans that are to be secured or guaranteed by Fannie Mae or Freddie Mac. See Uniform Residential Loan Application.
A professional appraiser evaluates each property during the loan approval process to assign a dollar value to the property for confirming a suitable loan-value ratio. The appraised value can affect the amount of money the lender is willing to lend to the borrower for that purchase.
Not to be confused with an appraisal, assessed value is calculated by the property assessor in the town, city or municipality where the property is located. Property taxes are based on the assessed value. Assessed value includes numerous factors, including recent sale price, improvements to the property, and local market conditions.
An underwriter’s tool to calculate a borrower’s DTI ratio in situations where the borrower owns significant assets but insufficient income to qualify for a loan. To qualify for asset depletion, the present value of the asset must be determinable (such as a retirement account) the assets must be liquid, such as cash, bonds, or stock, and the borrower is not already receiving income from the assets. The underwriter assumes the borrower would repay the loan by withdrawing funds from their liquid assets over the term of the loan, and calculates the borrower’s DTI ration on the assumption he or she repays the loan from those assets only. Also called asset dissipation.
With an assumable mortgage, the original borrower can transfer the loan to a new owner of that same property. The buyer can assume the remaining debt of the mortgage without having to qualify for a new mortgage. An assumable mortgage is attractive to a buyer who may have trouble qualifying for a conventional mortgage or a buyer who wants to take advantage of the mortgage’s low interest rate in a market of rising or high interest rates.
Lenders make this payment to mortgage brokers involved in the transaction.
This ratio compares the borrower’s monthly expenses, or debt, to his or her monthly gross income. It is used to assess approval of a borrower’s loan application. Lenders generally look for back-end ratios below 36 percent. See DTI ratio and front-end ratio.
The balance is the portion of a loan that remains unpaid.
With this type of mortgage, the total amount is not paid off over the specified term of the mortgage. When the payments end, there is still a large amount due on the loan in a lump sum. A typical balloon mortgage term is five years. The mortgage can be an interest-only mortgage. Often, buyers expect that they will refinance a balloon mortgage before the lump sum is due.
Bankruptcy, chapter 7
One of the federal judicial processes used by an eligible borrower whose total debt burden is too large to stay current with payment obligations and who would otherwise default. Chapter 7 bankruptcy typically involves liquidation of some of the borrower’s assets to distribute to creditors, with a result of discharge of most if not all debt. Chapter 7 bankruptcy remains on a borrower’s credit history for up to 10 years and affects the borrower’s ability to take out credit. Compare with Bankruptcy, chapter 13.
Bankruptcy, chapter 13
One of the federal judicial processes used by an eligible borrower whose total debt burden is too large to stay current with payment obligations and who would otherwise default. Chapter 13 bankruptcy involves a repayment plan typically spread out over a three to five years of regular payments, after which any remaining debt is discharged. Chapter 13 bankruptcy offers the best chance for borrowers who want to avoid foreclosure. The bankruptcy remains on borrower’s credit history for up to seven years and affects the borrower’s ability to take out credit. Compare with Bankruptcy, chapter 7.
See par rate.
The person who takes out a loan, complete with a contract, a loan note, and a commitment to the lender to repay the loan with a defined interest rate and payment period. In the context of a mortgage, a borrower who defaults on the note may face foreclosure of the subject property.
A short-term loan, typically lasting for several months, enabling a borrower to finance the purchase of a new property. A frequent use of a bridge loan occurs when a borrower purchases a new house before selling off the current house. Once the borrower sells the current property, the proceeds from its sale are used to pay off the bridge loan.
The seller or homebuilder might buy down the mortgage for the borrower by paying a fee to the mortgage lender to get a lower rate for a specified period. The lower interest rate typically lasts from one to five years, after which mortgage payments increase. A seller who pays the fee will usually increase the purchase price to offset the buy-down cost.
When a borrower refinances his or her mortgage for more than the current balance, and gets money back, he or she has completed a cash-out refinance. The borrower essentially takes out equity in the property to pay off other debt or to pay for improvements to the property.
The Consumer Financial Protection Bureau, established in 2010 by the U.S. Congress, carries out consumer financial laws. The CFPB’s primary mission is to provide consumers with essential information so they can understand financial agreements they enter. The CFPB requires lenders to provide certain disclosures to all borrowers at specified points during the financing process.
In this final step of a real estate transaction, the seller delivers the deed transferring title of the property to the buyer, the mortgage lender releases the loan funds enabling the purchase and the buyer signs all necessary loan documents, including the loan note and mortgage, which officially confirms the property as collateral.
Fees and ancillary expenses involved in the lending process are paid at the closing. Closing costs are also known as settlement costs. Examples of closing costs include the origination fee, appraisal fee, title insurance premium, recording fees and points.
As of August 1, 2015, the Consumer Financial Protection Bureau requires standard disclosures that lenders must provide to borrower before the closing.
Property a borrower uses to secure a loan by granting the lender the right to seize the property in the event the borrower defaults on the loan repayment obligation. For example, a borrower uses real estate property as collateral for the loan it takes out from a lender to purchase the property.
The Consumer Financial Protection Bureau created this underwriting standard to enable loan approvals for borrowers who may not meet certain underwriting standards for FHA, VA, Fannie Mae or Freddie Mac loan approval. For example, a borrower whose debt to income ratio exceeds 43 percent, the threshold for these loans, might still obtain approval by citing a compensating factor such as a larger down payment percentage than typically required.
The FHA sets this amount — currently capped at six percent of the sales price —that allows a seller to contribute to a borrower’s prepaid expenses, discount points and closing costs, such as mortgage insurance premium and buy-down fees. Concession amounts cannot be used to pay condo fees or mortgage interest.
See HOA fees.
Mortgage loans that meet all Fannie Mae and Freddie Mac guidelines conform to those guidelines, and therefore are eligible for purchase by them. One of the most well-known conforming guidelines is the maximum loan amount, currently $417,000 in most counties.
Consumer Financial Protection Bureau
Consumer reporting agency
Also known as CRAs or credit bureaus, these companies collect financial information about a borrower, produce a credit score from a complex mathematical formula as an indicator of the borrower’s creditworthiness and sell the information or credit report detailing the borrower’s financial history. The three major CRAs are Experian, Equifax and TransUnion.
Any mortgage loan that is not made or guaranteed by the U.S. government is a conventional mortgage. Therefore, FHA, VA and USDA loans are not conventional mortgages.
This comprehensive record of a borrower’s financial activity includes details about timely or late payments, credit card records and any negative history, such as bankruptcies, foreclosures or short sales.
Under the Fair Credit Reporting Act, consumers have the right to dispute inaccurate information appearing on their credit report or reports at no cost. Credit repair companies charge consumers a fee to handle this task. Unscrupulous credit repair companies promise to remove accurate derogatory information from credit reports.
A detailed rundown of a borrower’s financial holdings, behaviors and history, a credit report is compiled by a credit reporting agency. A credit report is used by lenders to examine the assets, debts, defaults and financial health and habits of a borrower, as a way to assess the risk of lending to a borrower. Consumers are entitled under federal law to obtain one free credit report per year. The three main credit reporting agencies made the report easy to obtain through AnnualCreditReport.com.
Credit reporting agencies assign credit scores to borrowers, summarizing each borrower’s risk. Lenders consider a borrower’s credit score as a critical indicator to creditworthiness and look at the score to decide whether to approve a loan and, to a large degree, the interest rate it will charge. Various companies calculate borrowers’ credit scores, the most popular being FICO. See credit report, consumer reporting agency, FICO and FICO score.
An estimation by an underwriter of the borrower’s likelihood of repaying or defaulting on a loan. An underwriter will look at a borrower’s income history, amount of existing debt, and history of repaying previous loans. One factor when measuring credit worthiness is the borrower’s credit score.
Borrowers pay off several debts with a single large loan. Debt consolidation is often accomplished through a cash-out refinance, which is usually unsecured. The interest rate charged for the single loan is often significantly lower than the interest rates charged on the various other debts.
See DTI ratio.
This formal document executed by the seller transfers the seller’s ownership in a property to a buyer. A deed must typically contain the name of the seller (grantor), the buyer (grantee), the consideration (sales price), the property and its description. See quitclaim deed and warranty deed.
Deed in lieu of foreclosure
Borrowers transfer ownership of the property to the mortgage lender to avoid foreclosure and to fully satisfy the borrower’s debt obligation to the lender. A deed in lieu of foreclosure constitutes one step away from foreclosure because the borrower would more than likely default otherwise. A deed in lieu of foreclosure saves the lender the hassle of filing for foreclosure.
Deed of Trust
In some states, a deed of trust is used as an alternative to a mortgage document. It is signed by the borrower at closing and gives a trustee, who is not the lender, an interest in the property and the right to take control of the property if the borrower defaults on the loan obligations. The trustee is typically a title insurance company and acts as the lender’s agent in a non-judicial foreclosure.
Borrowers default when they fail to stay current on payment obligations, resulting in a breach of contract of the loan note. A default usually triggers an acceleration of the balance and the creditor’s right to foreclose, seize collateral or take other corrective action.
When the remaining loan balance is not satisfied through the proceeds of a foreclosure sale, the lender is left with a deficiency.
Borrowers who fail to submit timely payment on a loan obligation, they are in default. Protracted delinquency usually results in a borrower’s default of a loan, which usually triggers an acceleration of a loan balance and a creditor’s right to demand repayment of the entire loan obligation.
Lenders have the right to demand that the borrower repay a loan at any point in time, and that right is spelled out in the demand clause of the mortgage contract. Borrowers need not default on loan for lender to demand repayment. Compare with acceleration clause.
Negative, or derogatory, items on a borrower’s credit report damages the borrower’s credit score. Derogatories include foreclosure, bankruptcy, short sale, deed in lieu of foreclosure and late credit card payments.
This is the lender that receives a borrower’s loan application, reviews borrower qualifications, underwrites the loan and funds it. Compare withmortgage broker.
Borrowers pay an upfront cost, or discount point, to secure an interest rate lower than the par rate. One discount point is equal to 1 percent of the loan amount. Seepar rate.
Borrowers provide all the required paperwork and information that the lender requires to document the facts in the application and make a loan approval decision.
Borrowers provide a sum of money to anchor the property purchase. Conventional mortgage lenders require a borrower to contribute a 20 percent down payment to avoid paying private mortgage insurance.
|$100,000||Borrower’s 20 percent down payment|
|$400,000||Loan amount from mortgage lender|
The debt-to-income ratio represents the proportion of outstanding debt a borrower carries compared with the borrower’s gross income.
For example, a DTI ratio of 50 percent looks like this:
$2,500 monthly debt $5,000 monthly income = .5 or 50 percent
The amount of ownership a borrower actually has in his property is his equity. Equity is calculated by taking the market value of the property and subtracting the remaining mortgage loan balance.
|$500,000||Market value of house|
|-$200,000||Mortgage loan balance|
Mortgage servicers set up and manage escrow accounts to handle payments for a borrower’s homeowners insurance, property taxes and private mortgage insurance, if any. A portion of the borrower’s monthly mortgage payment is deposited into the account. Mortgage lenders usually require escrow accounts, but may waive the requirement for a fee.
Also known as FNMA or the Federal National Mortgage Association, this government-sponsored enterprise owns or guarantees an overwhelming proportion of home loans in the United States. Together, Fannie Mae and a parallel government-sponsored enterprise, Freddie Mac, limit the maximum sized loan they guarantee, known as the conforming loan limit. See conforming mortgage.
Federal Housing Administration
The Federal Housing Administration is a government agency that insures loans to encourage approved lenders to grant mortgage loans to borrowers who may have difficulty obtaining conventional loans.
The Federal Housing Authority insures loans issued by lenders it approves, resulting in FHA loans. FHA loans are attractive to borrowers who may lack sufficient funds for a 20 percent down payment required for a conventional loan. FHA loans generally allow a 3.5 percent down payment, but require borrowers to meet specified requirements for eligibility. Most FHA loans also require borrowers to pay a mortgage insurance premium.
The acronym for the Federal Housing Finance Agency. It is the federal agency responsible for setting up the Home Affordable Refinance Program (see HARP). The FHFA oversees Fannie Mae and Freddie Mac.
Short for Fair Isaac Corp., this company created the most popular credit scoring system (FICO scores) used by lenders and creditors to assess the creditworthiness of a borrower.
Fair Isaac Corp. (FICO) calculates credit scores, which are nicknamed FICO scores. These credit score are widely used by lenders to gauge a borrower’s creditworthiness. They are calculated using Fair Isaac Corp.’s mathematical formula that takes into account five weighted factors about a borrower’s credit: payment history, credit utilization, credit history length, diversity of credit and new credit accounts.
FICO scores range from 300 to 850 — a higher number indicates a better risk for lenders. There is no agreed-upon set of ranges for FICO credit scores.
However, here is an example of how FICO scores might be interpreted:
Not all credit scores are FICO scores, in the same way that not all smartphones are iPhones.
That’s the legal right of a creditor to seize and sell collateral and use the proceeds to pay off a borrower’s loan balance. The creditor has a priority to use the proceeds before other creditors to satisfy the outstanding loan amount. Compare junior lien.
Interest rates on fixed-rate loans are set at the start of the loan and do not change over time. Contrast this type of loan to an adjustable-rate loan.
This common term describes mortgages with interest rates fixed for the entirety of the loans’ terms. A typical fixed-rate mortgage term is 30 years.
A borrower submits a loan application. Then, later, the borrower locks in the rate. The time in between is the float. Interest rates fluctuate depending on the market, particularly certain indexes tied to the market. A borrower can let the rate float if he thinks the interest rate will go down further, at which point the borrower can lock in the rate for the borrower’s mortgage loan. Compare with lock.
Lenders foreclose on a property when the borrower fails to make monthly payments, defaulting on the mortgage. The lender typically files for foreclosure and goes through the judicial process to sever the borrower’s title to the property. However, the borrower may have agreed to give the lender the right to a non-judicial foreclosure, which allows the lender to seize the property without filing a claim in court.
This is the nickname for the Federal Home Loan Mortgage Corporation. Freddie Mac owns or guarantees home loans in the United States. With its sibling Fannie Mae, Freddie Mac limits the maximum sized dollar amount of loans the agencies guarantee, called the conforming loan limit. See Fannie Mae and conforming mortgage.
Borrowers pay these fees to the lender at the start of the loan approval process. Front-end fee may also mean borrower’s payment to a mortgage broker. Compare with back-end fee.
This debt-to-income ratio takes into consideration only the borrower’s monthly mortgage payment — loan principal, interest, property taxes and homeowners insurance — as part of the debt factor. The debt factor does not include other monthly expenses, such as credit card, car loan payments or tuition. Many lenders calculate the front-end ratio and back-end ratio and use both as part of their assessment of a borrower’s creditworthiness. See back-end ratio and DTI ratio.
Borrowers pay this required fee for VA loans, with a few exemptions. The fee is a percentage of the loan amount and varies, depending on the down payment amount, the veteran’s service record and the use of a previous VA loan. The funding fee can be rolled into the loan amount or paid upfront at the closing.
See Good Faith Estimate.
Good Faith Estimate
Also known as the GFE, this is the federal disclosure that a mortgage lender must provide to a borrower within three days after the submission of a loan application. The Good Faith Estimate details the expected closing costs and fees associated with the home loan.
FHA, VA and USDA mortgage loans are all government mortgages.
Graduated payment mortgage
Underwriters may “gross-up” the value of non-taxable income — such as Social Security benefits, Roth IRA income, disability payments, or an employer’s insurance premiums paid on your behalf — by 25 percent to reflect the fact that the borrower will not pay income tax on that income. For example, if a borrower receives a monthly payment of $1,000 from a non-taxable source, the income is counted at $1,250 when calculating the borrower’s DTI ratio.
The Home Affordable Modification Program is a federal program introduced in 2009 aimed at helping borrowers who are using more than 31 percent of their gross income to pay their mortgage payments. HAMP enables eligible borrowers to modify their current loans, through adjustments to the loan principal or interest rate. The program expires December 31, 2016.
This is the acronym for Home Affordable Refinance Program, a federal program introduced in 2009 that is aimed at helping homeowners who are underwater or near underwater to refinance to a more affordable or stable mortgage. Submit HARP applications by Sept. 30, 2017.
A home equity line of credit is an open line of credit with a set time limit, and uses the borrower’s home as collateral. Rather than a fixed amount that the homeowner receives all at once, such as in a cash-out refinance or a home equity loan, a HELOC allows a borrower to draw out money as needed. A HELOC is not the same as a home equity loan. See home equity loan.
These homeowner’s associations or organizations are made up of appointed homeowners within a condominium or planned community. HOAs make and enforce rules for the condominium or community and manage the repair and maintenance of common areas.
Homeowners’ associations collect fees from member owners to cover the costs of maintenance, landscaping and other expenses involving common areas of a condominium building or planned community. Fees are usually collected monthly or annually.
Home Equity Conversion Mortgage
Senior citizens at least 62 years old can obtain FHA- insured reverse mortgages that enable them to spend down equity in their primary residences. See reverse mortgage.
Home equity line of credit
Home equity loan
A borrower takes out a lump-sum loan based on her home equity and repays it monthly, typically based on a fixed interest rate over the loan’s term, usually of five to 15 years. Unlike a HELOC, the borrower receives the loan in a lump sum. See HELOC.
This insurance policy protects homeowners against damage to their houses and possessions as well as liability against accidents occurring on the property. As a condition of extending a loan, mortgage lender will require a borrower to purchase homeowners insurance. Often, homeowners’ insurance policies are integrated into the monthly mortgage payment. See escrow account.
Home Valuation Code of Conduct
A property’s market worth is its home value. For purposes of loan underwriting, the home value is expressed as the appraised value, which is conducted by a professional inspector chosen by the lender. For purposes of taxes, the home value is expressed as the assessed value. See “appraisal” and assessed value.
This is the U.S. Department of Housing and Urban Development, which includes the Federal Housing Administration (FHA) and Ginnie Mae.
HUD-1 Settlement Statement
At closing, this standard form itemizes the actual costs and fees of the mortgage lender, mortgage broker, real estate agent, seller, buyer and other parties to the refinance or real estate property purchase.
This is the acronym for Home Valuation Code of Conduct, based on federal rules implemented in 2009 setting forth restrictions on the interaction between home appraisers and mortgage lenders. The overarching purpose is to ensure independent appraisals. Fannie Mae and Freddie Mac purchase only those mortgages whose underwriting process included an independent appraisal. HVCC rules do not apply to FHA or VA loans.
Permanent structures on a real estate property presumably increase the property’s utility and value, thus comprising an improvement.
A market index is an indicator of current market conditions and is used to calculate a borrower’s adjustable interest rate. A commonly used index is the one-year Treasury bill.
Lenders charge fees for borrowing money. Those fees are called interest. For a mortgage, interest payments are included in the monthly mortgage payment.
Monthly payments for these types of mortgage loans include only interest for a specified amount of time, usually from three to 10 years. After that, monthly payments include interest and principal amounts. An interest-only mortgage defers payment of the principal but does not eliminate it.
Creditors with junior liens are second in line for being paid back if the borrower cannot repay the loan and the first-in-line lender takes over the property. The creditor with a junior lien must yield to lien holders that hold a superior position before it can use the proceeds, if any remain, to satisfy the debt. Compare first lien.
Many lenders tie their rates to the London InterBank Offered Rate, or LIBOR. Lenders use this index to calculate a borrower’s interest rate on ARMs. If the LIBOR index rises, a borrower’s adjustable interest rate will also rise. Large banks use LIBOR as the rate for short-term loans between each other.
Lenders have the legal right to take over, or foreclose, a property if the owner doesn’t repay his or her mortgage. That legal right to foreclose is found in the lien.
See mortgage broker.
The Consumer Financial Protection Bureau requires lender to provide loan estimates that combine the Good Faith Estimate and Truth in Lending disclosures. The loan estimate rule goes into effect August 1, 2015. See Good Faith Estimate and TILA.
A lender modifies a loan when it agrees to change the original terms of a loan note to a more affordable payment structure for the borrower to avoid default. Common loan modifications include a reduction in the loan amount, interest rate or loan term.
This is the proper term for the legally binding instrument, a promissory note, signed by the borrower at closing that defines the loan amount, interest rate, loan term and other rights and obligations of the loan arrangement between the borrower and lender.
This employee or representative of a mortgage lender assists borrowers through the loan approval and underwriting process, ultimately helping them secure financing for a home purchase. Loan officer is usually used interchangeably with loan originator.
These lender staff assist borrowers through the loan approval and underwriting process, including the loan application, verifications and file submission for underwriting. Loan originator and loan officer are usually used interchangeably.
See LTV ratio.
Borrowers ask their loan officer to lock favorable interest rates for a loan in process. Locking in a mortgage rate guarantees the borrower the interest rate for the loan. The borrower cannot backtrack and take advantage of lower interest rates that might become available after the lock but before the borrower’s closing. Compare with float.
Long term capital gains tax
Homeowners pay this form of income tax to the government on the proceeds of the sale of property. Usually, capital gains taxes are triggered by the difference between the sales price and original purchase price the homeowner paid, that the homeowner has owned more than one year. The tax rate is typically lower than the tax a borrower pays on regular income.
Also known as loan-to-value ratio, this is the ratio of the borrower’s loan amount and the value of the property, usually measured by the purchase price or appraised value. Lenders use the LTV ratio in its assessment whether to approve a borrower’s loan. The higher the ratio, the higher the risk to the lender. For an LTV ratio above 80 percent, lenders of conventional loans will require private mortgage insurance (PMI), to be paid by the borrower. See PMI.LTV ratio = Mortgage Loan Amount ÷ Appraised Value
Lenders add percentage points to an index, such as the one-year Treasury bill, that they use to calculate the adjustable rate of a mortgage.Adjustable interest rate = Index + Margin
Under normal market conditions, a property would sell within a reasonable amount of time for a generally accepted market value, assuming the homeowner voluntarily sells it and a buyer voluntarily purchases it.
A loan is mature when it reaches its final payment date, which means any remaining principal or accrued interest must be paid.
Loans for buying property that are secured by that same property are mortgages. If a borrower defaults on the loan obligation, the mortgage gives the lender the right to foreclosure on the property the borrower originally offered up as collateral through the mortgage.
Originates and sell home loans in pools on the secondary market to investors such as Freddie Mac and Fannie Mae. Typically, mortgage bankers finance the loans with warehouse lines of credit extended by lenders, then sell the loans on the secondary market. Compare to a portfolio lender.
Mortgage brokers match borrowers with lenders, and originate the loan for a chosen lender. Mortgage brokers are paid from origination costs charged to the borrower or from a yield spread premium paid by the mortgage lender.
The lender that extends a loan to a borrower who uses it to purchase real estate property is the mortgagee. The property is collateral for the loan’s repayment.
Borrowers pay mortgage insurance to compensate the lender from loss in the event of a borrower default of the loan. See also private mortgage insurance.
Mortgage insurance premium
Also known as MIP, this is the upfront premium and the annual premium a borrower of an FHA loan must pay to insure an FHA-approved lender against the loss incurred from a borrower default of the mortgage loan.
The borrower of a loan that is used to purchase real estate property is the mortgagor. The property is collateral to the lender, the mortgagee, for the loan’s repayment.
When monthly payments do not cover the interest and principal that would be due if the loan were being paid off, the loan is in negative amortization. The outstanding amount of interest is added to the loan’s principal, increasing the principal balance over the loan’s term.
A property that is worth less than the mortgage outstanding on it is in negative equity, also known as being underwater.
Non-conforming mortgage loan
Such a loan does not meet Fannie Mae and Freddie Mac guidelines, one of which sets a maximum loan amount of $417,000 in most areas of the country. Additionally, a non-conforming mortgage loan may fail to meet DTI ratio guidelines and documentation requirements. A non-conforming mortgage is never owned or guaranteed by Fannie Mae or Freddie Mac, and it typically has higher interest rates than conforming mortgage loans.
See Loan note.
Notice of Value
The NOV is document used in VA loans, created by a VA appraiser, that discloses the estimated value of a property to the lender and borrower. When a borrower has a NOV, and then changes lenders, the second lender is required to use the same appraisal value as long as it is within the NOV’s expiration date.
A borrower pays this fee to cover the lender’s cost of processing a loan application. Origination fees are typically expressed as a percentage of the loan amount.
The lender, mortgage broker or other party that works with a borrower to complete the loan application process is the loan originator. Originating a loan typically requires submitting the loan application, gathering documentation, sending the loan to underwriting and completing the transaction with a closing.
An overlay is a requirement or condition loan originators add to the minimum standard required by the mortgage insurer (such as the FHA, VA, or USDA) or the loan buyer (usually Freddie Mac or Fannie Mae). A common overlay is credit score. For example, the FHA requires borrowers to have a 500 FICO score or higher, but in practice, FHA lenders deny applications with FICO scores below 680 unless the borrower has significant compensating factors.
Shorthand for the classification of mortgage loans that lenders use to describe varying levels of borrower default risk, paper is usually expressed in terms of A-paper or Alt-a paper. See A-paper and Alt-a paper.
This is the interest rate that a borrower can qualify for with a mortgage lender. The par rate doesn’t require a mortgage lender to pay a yield spread premium nor does it require the borrower to pay any discount points to secure that interest rate. A par rate is based on factors such as the borrower’s loan amount, credit score and LTV ratio.
Payment option ARM
This acronym summarizes the components of a borrower’s mortgage payment: principal, interest, taxes, insurance.
Short for private mortgage insurance, PMI is insurance paid by a borrower of a conventional loan that protects a lender against a loss incurred by a borrower default. A loan-to-value ratio above 80 percent for a conventional loan usually triggers a PMI requirement.
A home loan lender that originates, funds, and services a home loan for the life of the loan. Compare to a mortgage banker.
A conditional commitment from a lender stating that a borrower can secure financing for a specified loan amount, pre-approval is based on the borrower’s personal and financial information that the lender has verified to be true. In a pre-approval, the borrower completes a loan application and the lender verifies the information. Often used by borrower in a hot market to assure seller that a deal will not fall through because of the buyer’s failure to obtain financing. A pre-approval carries more weight than a pre-qualification. See pre-qualification.
Borrowers gain this label when a lender has verified that they will be able to obtain financing for a specified loan amount. See pre-approval.
Paying off the mortgage early — either in part or whole — is called prepayment.
Borrowers who prepay often must pay fees to the lender. Prepayment penalty clauses in the loan note determine whether a prepayment penalty applies to a borrower’s mortgage.
Lenders issue pre-qualification statements to spell out the maximum loan amount a borrower can secure financing for based on personal and financial information the borrower has supplied to the lender. The borrower does not submit a loan application and the lender does not verify the information. Often used by a borrower in a hot market to make an offer more enticing to a seller. Compare with pre-approval.
Borrowers gain this label when a lender has stated that they will be able to obtain financing for a specified loan amount, assuming the personal and financial information the borrower supplied to the lender is true and accurate. See pre-qualification.
The amount of the loan balance is the principal. Typically, principal is included in the monthly mortgage payment paid by the borrower. For a 30-year fixed-rate mortgage, for instance, principal is paid monthly so that by the end of the 30-year term, the entire loan amount will have been paid back to the lender.
Principal limit factor
In FHA reverse mortgages, the principal limit factor (PLF) is expressed as a percentage of the maximum amount the borrower can draw. The PLF is varies with the expected interest rate and the age of the youngest borrower. The younger the borrower, the lower the principal limiting factor, and the less available for the homeowner to borrower.
Private mortgage insurance
Lenders complete these steps to move the a borrower’s loan application submission to the final closing. Processing includes gathering and collecting of all documentation — including financial, employment or property information — necessary for the underwriting of the loan.
Purchase money mortgage
This is the mortgage loan a borrower takes out to finance the purchase of real estate property.
When a seller transfers legal ownership of a property to a buyer, the quitclaim deed documents the conclusion of the seller’s ownership. The quitclaim deed does not specify the interest the seller has in the property; it contains no warranties of the seller’s interests or rights — including whether the seller has valid ownership — in the property. Compare with warranty deed.
This is the interest charged to borrower by the lender for extending the loan the borrower uses to refinance or purchase property.
Counties or other government agencies charge this fee to file and put on record certain documents and instruments as to the ownership interest and liens on a property. Filing the documents make them public record.
In the refinance process, a borrower pays off a current loan and replaces it with a new mortgage loan, often with the purpose of obtaining a lower interest rate or different loan term or to cash out equity in the property.
The Real Estate Settlement Procedures Act is a federal law intended to make clear to borrowers the apparent and hidden fees lenders charge in home loans. Before RESPA came into law in 1974, it was common for mortgage lenders to pay secret kickbacks to real estate agents who steered business to certain lenders, offer bait-and-switch loan rates, and hide fees. The Consumer Financial Protection Bureau (CFPB) enforces this law. See also Loan Estimate and the Closing Disclosure.
A homeowner takes money out of his property through a reverse mortgage. The real estate is collateral and the homeowner is not required to repay the loan, including principal and interest, until the he dies or sells the home. Reverse mortgages are highly regulated and typically are available only to senior citizens.
Return on investment
Also known as ROI, this is the benefit or “return” an investor receives from an investment.
Right of rescission
Borrowers have the federally mandated right for three days beginning on the closing date, to cancel certain real estate financing loans — a home equity loan, line of credit and refinance with a new lender — and receive a refund of all costs of the loan.
Financial companies structure investments to sell, buy and trade portfolios of mortgages in the secondary market. This process is called securitization. Typically, similar mortgages are packaged together into a product called mortgage-backed security, or MBS. Commonly held opinion points to mortgage securitization as one of the major contributors to the financial crisis of 2008.
See seller contribution.
A seller pays these agreed-upon costs on behalf of the buyer to expedite the buyer’s financing. For example, a seller contribution could go toward the buyer’s buy-down, discount points, title insurance or origination fees.
Mortgage Lenders or service companies, handle the collection of monthly mortgage payments and the day-to-day handling of the mortgage, including record-keeping of principal and interest payments, management of escrow accounts and interaction with borrowers. The owner of the borrower’s mortgage may not necessarily be the servicer; sometimes the owner of the mortgage hires the services of another company to act as the servicer. See servicing.
Daily management of the mortgage account is also known as mortgage servicing. Servicing involves recordkeeping, disbursals out of the escrow account to pay property taxes and homeowners insurance, and other routine tasks. The company that owns the mortgage may not necessarily be the entity servicing the mortgage. See servicer.
See closing costs.
When a property is sold for less than the outstanding mortgage, and the lender agrees to take a loss on the sale, it is a short sale. The lender agrees to a short sale because it prefers to recover some of the loan balance rather than the alternative, which is a borrower default of the loan and subsequent foreclosure. The borrower is then released from the mortgage.
This is a refinance whose process is faster and more affordable to borrowers because of the omission of certain steps taken in a traditional refinance process. This refinance type is more common for loans that a lender originated and still owns at the time of refinance. The lender is already familiar with the borrower’s financial information, including credit risk and verifications.
This category of loan is extended to the riskiest category of borrowers. Subprime borrowers, for various reasons, have limited credit history and are less likely to repay loans. Some borrowers choose not to provide income or asset verification. Borrowers of subprime loans pay higher interest rates than prime borrowers. The Federal Reserve has defined subprime as loans with interest rates at least three percent higher than the rate for a same-term U.S. Treasury bond.
A survey confirms the boundaries and location of a property and the improvements on the property. It is conducted by a professional surveyor. If used for purposes of title insurance, the survey confirms that the improvements on the property do not encroach on any easements, neighboring property or right of ways that are on record.
Tangible net benefit
When it is worth it to refinance a loan, the borrower captures a tangible net benefit: the better terms and rates outweigh the costs of the refinance. For example, a borrower might determine that the long-term savings of refinancing to a lower interest rate outweigh the upfront closing costs of the refinance.
A short-term, introductory interest rate designed to entice borrowers to take a particular type of loan is a teaser rate. This marketing tactic is often used for adjustable-rate mortgages. The teaser rate is usually below the market rate and applies to the first few months of the loan term.
The amount of time it will take to repay the loan is the term. For instance, a typical fixed-rate mortgage term is 30 years.
Short for Truth in Lending Act, TILA was enacted into federal law in 1968 to protect consumers during dealings with lenders and creditors. TILA requires lenders to disclose the annual percentage rate (APR) to the borrower through the Truth in Lending disclosure. See annual percentage rate.
This insurance is taken out to cover the potential loss of interest in property as a result of a legal defect. Title insurance covers the lender, and is usually required for a mortgage. The borrower pays for the title insurance policy. The borrower can also take out an owner’s title insurance policy at the borrower’s or seller’s cost.
Title companies research the history of property ownership to ensure that no other person or entity claims to own it or have a claim against it. Mortgage lenders want to know if there are any outstanding liens, restrictions, taxes or other claims on the property from the current owner and lien holders to previous owners and lien holders. The lender usually engages the services of a professional title search company or attorney as part of the loan processing and underwriting requirements.
Sometimes called T-bill, this is the index used in many adjustable-rate mortgages to periodically calculate a borrower’s interest rate. The Treasury bill is the short-term debt back by the United States federal government.
Truth in Lending Act
See negative equity.
Underwriters evaluate a borrower’s creditworthiness for a loan. The underwriter’s evaluation is based on the property appraisal, the borrower’s loan application — which includes verifications and other financial documentation — to determine whether to approve the loan. A mortgage lender may use an underwriter within the company or outsource the evaluation to an outside underwriter.
As a loan application is being processed, the underwriting stage is the evaluation of a borrower’s loan application to determine whether to extend loan approval for the borrower’s purchase. The evaluation includes scrutiny of the property appraisal and the borrower’s financial information.
Uniform Residential Loan Application
Also known as Form 1003, this standardized application a borrower completes to apply for a mortgage loan for a single-family property that Fannie Mae or Freddie Mac will guarantee or secure. See Application.
This one-time funding fee is paid by the borrower to the VA on VA loans (exemption is available for some borrowers with service-connected disabilities). Borrowers can choose to pay the fee upfront or roll it into the loan amount.
Here’s the acronym for the U.S. Department of Agriculture, also known as the Agriculture Department. Part of its mission is to help rural communities thrive.
USDA-insured mortgages are available to finance the purchase of property in a suburban or rural area—typically an area with a population no larger than 20,000. If eligible, a borrower can obtain no-down payment financing with low interest rates.
This is the acronym for the U.S. Department of Veterans Affairs, a cabinet-level executive department, whose mission is to serve and honor veterans. See VA mortgage.
The Veterans’ Administration offers a home mortgage loan guarantee program, resulting in VA mortgages. A VA mortgage is available to eligible veterans and surviving spouses to help them obtain affordable mortgages for the purchase of a home.
Interest rates that changes and fluctuate, usually depending on the rise or fall of a market index, are variable. These are also known as floating or adjustable rates.
Lenders verify, or confirm, the information a borrower has provided in a loan application to be sure it is true and accurate. The lender may verify a borrower’s income, employment and assets as well as the subject property’s appraisal value. For example, in a verification of employment, the lender will request that a borrower’s employer fill out an official form confirming the borrower’s income. The lender secures verifications as part of its documentation used in deciding whether to extend a loan to a borrower.
This legal instrument transfers a seller’s interest in a property to the buyer. The seller warrants that the seller is the valid owner of the property, no other party has a claim on the property and it can legally transfer the property.
Mortgage brokers are compensated with yield-spread premiums. The borrower pays an interest rate above the market rate the borrower can qualify for with the mortgage lender. The borrower often receives in return lower upfront costs, or origination fees. Also known as YSP, the premium is paid by the mortgage lender.