A

Appreciated Depreciation – Depreciation in which deductions start at their highest annual value in the first year and steadily diminish in later years.

Adjustable Rate Mortgage (ARM) – A mortgage in which the interest rate is adjusted periodically according to a pre-selected index. The terms, adjustment schedule and index to be used vary by lender.

Adjusted Basis - The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.

Adjustment Date -The date that the interest rate changes on an adjustable-rate mortgage (ARM).

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.

Adjustment Period -The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).

Amortization – The process by which a loan is repaid over time. Most loan programs provide for full repayment of the borrowed amount over the term of the loan. These loans are know as fully amortizing.

Amortization Term - The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

Annual Percentage Rate (APR) – The effective cost of borrowing money which takes into account costs of borrowing including interest, prepaid interest, points, escrow fees, and private mortgage insurance.

Appraisal – A report made by a qualified person setting forth an opinion or estimate of value of real property.

Assessment - A local tax levied against a property for a specific purpose, such as a sewer or street lights.

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B

Balloon Mortgage– A mortgage with periodic installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at a specified date in the future, usually at the end of the term.

Balloon Payment - The final lump sum paid at the maturity date of a balloon mortgage.

Blanket Mortgage - A mortgage covering at least two pieces of real estate as security for the same mortgage.

Bridge Loan - A second trust that is collateralized by the borrower's present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as "swing loan."

Broker - An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers have access to the wholesale prices of many lenders and offer a wide variety of programs that may be unavailable to individuals.

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C

Caps (interest) - Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage which may change per year and/or the life of the loan
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Caps (payment) - Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.

Closing Costs – These are expenses - over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.

Conforming Loan – Loan programs, which ‘conform’ to income, credit and property guidelines established by Fannie Mae (FNMA) and Freddie Mac (FHLMC).

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 or she progresses.

Contingency – A condition put on an offer to buy a hone; such as the an offer that is contingent on the sale of an existing home.

Conventional Mortgage – A type of mortgage not insured by either the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA).

Credit Risk Score -A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.

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D

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. See negative amortization.

Delinquency - Failure to make payments on time. This can lead to foreclosure.

Discount Point - see point

Down Payment – Money paid to make up the difference between the purchase price and the mortgage amount. The down payment is often expressing en percentage terms, e.g. 20% down payment.

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.

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E

Earnest Money – Funds submitted with an offer to show ‘good faith’ to follow through with the purchase. Earnest money is placed by the broker into an escrow account until closing when it becomes part of the down payment or closing costs.

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 – In a purchase transaction, this is the third party company which facilities the transfer of title and funds between the seller and the buyer. In a refinance transaction, the escrow company facilitates the payoff of the existing loan(s) and the recording of the new mortgage.

Escrow Account – An account in which the lender holds the borrower’s monthly payments for property taxes and insurance until such time as those obligations need to be paid by the lender on behalf of the borrower.

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F

Fannie Mae - see Federal 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.

FHLMC – See Federal Home Loan Mortgage Corporation.

First Mortgage - The primary lien against a property.

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 – See Federal National Mortgage Association

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.

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G

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.

Gross Monthly Income – For salaried borrowers, it is their monthly earnings prior to any deductions fro income taxed or any other employee deductions. For self-employed borrowers, this is the monthly earnings after all business expenses are deducted. Gross monthly income for self employed borrowers is usually averaged over the prior two years.

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H

Hazard Insurance (Homeowners) – This insurance protects the homeowner from losses or damage to their home or personal property and against personal liability. This is required by the lender and usually is included in the monthly mortgage payment.

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.

HUD-1 statement - A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing.

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I

Impounds – Many lenders require borrowers to include monthly installments for their property taxed and homeowner’s insurance with their monthly mortgage payment. The lender holds or impounds these funds until the property tax payment or the annual insurance premium is due. Then the lender pays those obligations on behalf of the borrower. Impound accounts for taxes and insurance may also be called ‘escrow’ accounts.

Index - A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Indexed rate - The sum of the published index plus the margin. For example if the index were 9% and the margin 2.75%, the indexed rate would be 11.75%. Often, lenders charge less than the indexed rate the first year of an adjustable-rate mortgage.

Initial Interest Rate - This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It's also known as "start rate" or "teaser."

Interest Rate – The rate used to determine the monthly payment on the loan. May also be known as ‘rate’ or ‘note rate’.

Interest Rate Ceiling - For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.

Interest Rate Floor - For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.

Interim Financing - A construction loan 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.

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J

Jumbo Loan – Loans in excess ($417,000 as of 1/1/06) of FNMA/FHLMC limits. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

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L

Liabilities - A person's financial obligations. Liabilities include long-term and short-term debt.

Lien - A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

Lifetime Rate Cap - For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.

Loan Amount – The actual amount of money borrowed.

Loan Origination Fee – A fee charged by the lender for evaluating, preparing and submitting a proposed mortgage loan.

Loan-to-Value Ratio - The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

Lock – Depending on the loan programs, the borrower may ask the lender to guarantee the interest rate quoted for the loan for a specific period of time.

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M

Margin - The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

Maturity - The date on which the principal balance of a loan becomes due and payable.

Monthly Payment – Usually used to describe the monthly principal and interest payment on the loan without including monthly payments for taxes and insurance. May also be express as ‘P & I’.

Mortgage - A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Banker - A company that originates mortgages exclusively for resale in the secondary mortgage market.

Mortgage Broker - An individual or company that charges a service fee to bring borrowers and lenders together for the purpose of loan origination.

Mortgagee - The lender.

Mortgage Insurance Premium (MIP) – A charge paid by the borrower (usually as part of the closing costs) to obtain financing, especially when making a down payment of less than 20 % of the purchase price.

Mortgagor - The borrower or homeowner.

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N

Negative Amortization - Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.

Non-conforming Loan – A loan amount in excess of FNMA/FHLMC loan limits. May also refer to those loan programs, which allow for income, credit and property characteristics, which do not conform to FNMA/FHLMC guidelines.

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

Note Rate – The contact rate, which is used to determine the interest payment on the loan. It is the interest rate, which appears on the loan contract, also known as the ‘note’.

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O

Office of Thrift Supervision (OTS) - The regulatory and supervisory agency for federally chartered savings institutions. Formally known as Federal Home Loan Bank Board

One-year adjustable - Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.

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.

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P

P & I – Abbreviation for ‘principal and interest’, which is the payment on the loan. Each loan payment for a fully amortizing loan is part interest and part principal (repayment of the money) borrowed.

PITI – Abbreviation for ‘principal, interest, taxes and insurance’. Usually means the total monthly cost of owning the home and is used for qualification purposes.

PMI – Abbreviation for ‘private mortgage insurance’, which insures the lender against any loss arising from the borrower’s default (non-payment) on the loan. PMI is usually required when the borrower’s down payment or equity is less than 20%. PMI is the private sector equivalent of FHA insurance on government loans.

Point – An amount equal to 1% of the principal amount being borrowed. The lender may charge the borrower several ‘points’ in order to provide the loan.

Pre-Approval - The process of determining how much money you will be eligible to borrow before you apply for a loan.

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.

Principal – The amount of money borrowed. Also that portion of the monthly payment which repays the money borrowed.

Property Taxes – Taxes based on the assessed value of the home paid by the homeowner for community services such as schools, public works, and other costs of local government. May be paid as a part of the monthly mortgage payment.

Purchase Price – The price agreed upon by the buyer and seller.

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Q

Qualifying Ratios - Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

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R

Real Estate Settlement Procedures Act (RESPA) - A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Recission - 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 as collateral for and repayment of the loan.

Revolving Liability - A credit arrangement, such as a credit card, that allows a customer to borrow against a pre approved line of credit when purchasing goods and services.

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S

Second Mortgage - A mortgage made subsequent to another mortgage and subordinate to the first one.

Security -The property that will be pledged as collateral for a loan.

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

Servicing - 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 Costs - see closing/closing costs

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T

Title - A document that gives evidence of an individual's ownership of property.

Title Insurance – Protects lenders and homeowners against loss of their interest in property due to legal defects in the title.

Title Search - An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Total Expense Ratio - Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Total Monthly Debt – The total of all debt to be paid monthly be the borrower. Includes the monthly payment on the proposed real estate loan and other monthly housing costs as well as payments on all other borrower revolving and installment debts.

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.

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U

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.

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V

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.

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W

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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