3/1, 5/1, 7/1 and 10/1 ARMs
These are adjustable rate mortgages that have a fixed rate for three-year, five-year, seven-year and 10-year periods. Note, they may adjust annually after that.
This is the right of the mortgagee (also known as the lender) to request immediate repayment of the loan balance when the mortgagor (borrower) defaults, or by the right vested in the Due on Sale Clause.
Adjustable Rate Mortgage (ARM)
These are mortgages where the interest rate adjusts at set intervals based on a pre-selected index. Sometimes known as a renegotiable rate mortgage, variable rate mortgage, or even a Canadian rollover mortgage.
The property cost in addition to the value of capital expenditures for home improvements minus any depreciation taken.
This means the date the interest rate changes on an adjustable rate mortgage (ARM).
With an adjustable rate mortgage, the period between changes in the interest rate and/or monthly payment, typically one, three or five years, but this depends on the index.
The time elapsing between adjustment dates for an adjustable rate mortgage (ARM).
This is an analysis of the buyer’s ability to fund the purchase of a home. An affordability analysis includes income, liabilities, available funds. It also considers the type of mortgage they plan to use, the area where they want to purchase a home, and the likely closing costs.
The loan payment divided into equal payments over time calculated to pay off the debt of the loan at the end of a fixed period. This includes accrued interest on the outstanding balance.
This defines the length of time required to amortize the mortgage loan expressed by a certain number of months. For example, 360 months is the amortization term for a 30-year fixed rate mortgage (12 months x 30 years).
Annual Percentage Rate (APR)
This calculates the full cost of a loan, including the interest and loan fees, expressed as a percentage over a year. Because the rules in calculating the annual percentage rate are the same for all lenders, APR provides a good basis for comparing costs of loans.
The estimated value of a property made by a professional called an “appraiser.”
Based on an appraiser’s knowledge and analysis of the property, this is the opinion of a property’s fair market value.
Assessments are local taxes levied against a property for a certain purpose, like a sewer or street lights.
Transferring a mortgage from one person to another.
An assumable mortgage is capable of being transferred from seller to a new buyer. It usually requires a credit review of the new borrower, and lenders may charge a fee for the assumption. If a mortgage contains a due on sale clause, however, it cannot be assumed by a new buyer.
An agreement between buyer and seller where the buyer takes responsibility for the payments on an existing mortgage for the seller. A loan assumption can typically save the buyer money in the form of closing costs and new (possibly higher) market rate interest charges.
This is the fee paid to a lender (by the homebuyer) when an assumption happens.
A loan which is amortized for a longer period than the term of the loan. This typically refers to a 30-year amortization and a five- or seven-year term. At the end of the loan, the remaining principal on the loan is due. This final payment is called a balloon payment.
On a balloon mortgage, this is the final lump sum paid at the maturity date.
Biweekly Payment Mortgage
A way to reduce debt every two weeks instead of a standard monthly payment schedule. The 26 (or sometimes 27) biweekly payments are each equal to half of the monthly payment if the loan was a standard 30-year fixed rate mortgage. This result in a substantial savings in interest for the borrower.
A mortgage that covers at least two items of real estate as security for the same mortgage.
The person who receives a loan in the form of a mortgage with intention of repaying the loan in total.
A second trust that is collateralized by the borrower’s current home, allowing the proceeds to help in closing a new house before the current home is sold. Sometimes known as “swing loan.”
A person in the business of helping arrange funding or negotiating contracts for a client, but who does not actually loan the money himself. Brokers charge a fee or receive a commission for service.
When the lender (and/or the home builder) subsidize the mortgage by lowering the interest rate during the first couple years of the loan. Even though the payments are low at first, they increase when the subsidy expires.
The cash derived from a certain period of time from an income-producing property such as a rental. The cash flow should be enough to pay the expenses of the income-producing property like the monthly mortgage payment, maintenance, utilities, and so forth.
These are consumer safeguards that limit the amount of change possible to the interest rate for an adjustable rate mortgage (ARM).
These are consumer safeguards which limit the amount of change possible to the monthly payments for an adjustable rate mortgage (ARM).
Certificate of Eligibility
A document given to qualified veterans which entitles them to VA loans for homes, business and mobile homes. These certificates of eligibility can be obtained by sending the DADAform (Separation Paper) to a local VA office with VA form 1880 (Request for Certificate of Eligibility).
Certificate of Reasonable Value (CRV)
This is the appraisal issued by the Veterans Administration (VA) showing a 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 DD214 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.
The frequency (measured in months) of payments and interest rate changes in adjustable rate mortgages (ARM).
A meeting between a buyer, seller and lender (or their agents) where the house or property and funds legally change hands, sometimes called settlement. The closing costs usually include an origination fee, discount points, appraisal fee, title search, insurance, survey, taxes, deed recording fee, credit report charge, and occasionally other costs assessed at settlement. The cost of closing is usually about 3 to 6 percent of the total mortgage amount.
Expenses that are above the price of the home incurred by buyers and sellers when transferring ownership of a property. They normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs vary depending on the area and the lenders used.
Commonly referred to as the “CD”, the Closing Disclosure is the form that provides the final details about the mortgage loan selected. It includes the loan terms, your projected monthly payments, and how much the consumer will pay in fees and other costs to get your mortgage.
This is an adjustable-rate mortgage with a rate that adjusts based on cost-of-funds index, sometimes the 11th District Cost of Funds.
A short-term, interim loan to pay for the actual construction of buildings and homes. These are designed to provide periodic disbursements to the builder as progress is made.
Consumer Reporting Agency (or Bureau)
The organization which handles the reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from credit repositories, among other sources.
Contract Sale (Deed)
A contract between purchaser and a seller of a home to convey title after certain conditions are met. It’s a form of installment sale.
This is a mortgage that’s not insured by FHA or guaranteed by VA.
A provision in an adjustable rate mortgage that allows the loan to be converted to a fixed-rate at a point during the term. Typically, a conversion is allowed at the end of the first adjustment period, but the conversion feature may cost extra.
A report that documents credit history and current status of a borrower’s credit standing.
Credit Risk Score
A credit risk score is a summary compiled with statistics of the information in a consumer’s credit report. The most popular type of credit risk score is the Fair Isaac (FICO) score. This credit scoring is a mathematical summary that assigns a numerical value to various pieces of info in a credit report. The total credit risk score is significant in the credit underwriting process for a mortgage loan.
Expressed as a percentage, it’s the ratio which results when a borrower’s monthly payment on long-term debts is divided by gross monthly income.
Deed of Trust
Depending on the state, this document is used in place of a mortgage to secure the payment of a loan.
When a buyer fails to meet the legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
Failure to make monthly payments on time, which can lead to foreclosure.
Department of Veterans Affairs (VA)
An independent agency of the federal government that guarantees long-term, low-or-no-down payment mortgages to eligible veterans of the armed forces.
See the definition for “point.”
This is the money paid up front to account for the difference between the purchase price and the mortgage amount.
A provision in a mortgage (or deed of trust) that allows a lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
Money given from a buyer to a seller as part of the purchase price to legally bind a transaction and assure payment.
The VA home loan benefit is called an entitlement, also known as eligibility.
Equal Credit Opportunity Act (ECOA)
This is federal law that requires lenders and creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or income from public assistance programs.
This is the difference between the fair market value and current debt, also called the owner’s interest. The value an owner has in real estate above the obligation against the property.
An account held by a lender which the homebuyer pays money into for tax, insurance payments, or earnest deposits held pending the closing of the loan.
Use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, or other property expenses.
This is part of a mortgagor’s monthly payment held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, or other items.
See “Federal National Mortgage Association.”
Farmers Home Administration (FmHA)
This provides financing to farmers and other qualified borrowers who are unable to obtain loans somewhere else.
Federal Home Loan Mortgage Corporation (FHLMC) also called “Freddie Mac”
A government-sponsored entity that buys 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. The main activity of the FHA is insuring residential mortgages made by private lenders. FHA also creates standards for underwriting mortgages.
Federal National Mortgage Association (FNMA) also known as “Fannie Mae”
A government-sponsored entity that buys and sells conventional residential mortgages, as well as those insured by FHA or guaranteed by VA.
This is a loan insured by the Federal Housing Administration (FHA) that’s open to all qualified homebuyers. While there are limits to the size of FHA loans, they are usually large enough to handle moderate-priced homes anywhere in the country.
FHA Mortgage Insurance
A fee (up to 1.75 percent of the loan amount) for FHA loans paid at closing to insure the loan with FHA. Additionally, FHA mortgage insurance requires an annual fee up to .85 percent of the loan amount, which is paid in monthly installments. A lower down payment means more years the fee must be paid.
Federal Home Loan Mortgage Corporation (FHLMC)
The Federal Home Loan Mortgage Corporation is a secondary market for savings and loans by buying their conventional loans. Also known as “Freddie Mac.”
This is a promise from the FHA that insures a mortgage loan for a specified home and borrower.
The primary lien against a home.
This is the monthly payment due for a mortgage, including payment of both principal and interest.
Fixed Rate Mortgage
As opposed to an adjustable rate mortgage, the mortgage interest rate will not change throughout the term of the mortgage for the original borrower.
Fully Amortized ARM
An adjustable rate mortgage (ARM) with a monthly payment that’s enough to amortize the balance, at the interest accrual rate, over the amortization term.
Federal National Mortgage Association (FNMA)
As a secondary mortgage institution, FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as “Fannie Mae.”
The legal process in which a lender (or the seller) forces the sale of a mortgaged home because the borrower has not met the terms of the mortgage.
See Federal Home Loan Mortgage Corporation
See Government National Mortgage Association.
Government National Mortgage Association (GNMA)
Sometimes known as “Ginnie Mae,” it provides a source of funds for residential mortgages that are insured or guaranteed by the FHA or VA.
A promise by one party to pay the debt, or perform an obligation contracted by another party if the original party fails to pay according to the contract.
A mortgage that is guaranteed by a third party.
This is a type of insurance where the insurance company protects the insured from specific losses such as fire, windstorm, etc.
Housing Expenses-to-Income Ratio
Expressed as a percentage, it’s the ratio which results when a borrower’s housing expenses are divided by gross monthly income. See “debt-to-income ratio.”
A document that provides an itemized list of funds payable at the closing of the loan. Typical items on the statement include real estate commissions, loan fees, points and initial escrow amounts. Each item 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 as well as the buyer’s net payment at closing.
A portion of a borrower’s monthly payments that are held by a lender (or servicer) to pay for taxes, hazard insurance, mortgage insurance, lease payments, among other things. Also known as reserves.
The published interest rate which lenders measure the difference between the current interest rate on an ARM and 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 used to adjust interest rates on an adjustable mortgages.
The sum of the published index plus margin. If the index is 4% and the margin is 2.75%, the indexed rate would be 6.75%. Lenders often charge less than the indexed rate the first year of an ARM.
Initial Interest Rate
This is the original interest rate of a mortgage at time of closing. This rate will change for an ARM. It’s also known as “start rate” or “teaser rate.”
The regular payments that a borrower agrees to make to the lender.
For mortgages that are protected by the Federal Housing Administration (FHA) or by private mortgage insurance (PMI).
A fee charged by a lender for borrowing money.
Interest Accrual Rate
A percentage rate at which interest accrues on a mortgage. Most of the time, it’s also the rate used to calculate monthly payments.
Interest Rate Ceiling
For an ARM, this is the maximum interest rate as specified in the mortgage.
Interest Rate Floor
For an ARM, this is the minimum interest rate as specified in the mortgage.
These are construction loans made during construction of a project or building. A permanent loan typically replaces this loan after completion.
The money source for a lender.
This is a loan that is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to be considered “conforming loans.” They can require larger down payments and more stringent qualification standards.
A penalty the borrower pays when a payment is made after the due date by a certain amount of days.
Lease-Purchase Mortgage Loan
These are alternative financing options that allow for low and moderate income homebuyers to lease a home with an option to buy later. Each month’s rent payment consists of principal, interest, taxes, and insurance payments on the first mortgage, but they also contain an extra amount which accumulates in a savings account for a down payment.
These are a person’s financial obligations, including long-term and short-term debt.
A claim upon a home or property for payment or satisfaction of a debt or obligation.
Lifetime Payment Cap
For an ARM, this is a limit on the amount that payments can increase or decrease throughout the life of the mortgage.
Lifetime Rate Cap
For an ARM, this is a limit on the amount that the interest rate can increase or decrease throughout the life of the loan.
A total of borrowed money (principal) that is repaid with interest.
Loan to Value Ratio
The relationship between the total amount of the mortgage and the appraised value of the property; expressed as a percentage.
Commonly referred to as the “LE”, the Loan Estimate is the form that the consumer receives after applying for a mortgage. The form provides important information, including the estimated interest rate, monthly payment, and total closing costs for the loan.
This is a lender’s guarantee the mortgage rate quoted will be good for a certain number of days from the day of application.
The amount a lender adds to the index on an ARM to establish an adjusted interest rate.
This is the highest price a buyer would pay, and the lowest price a seller would accept on a home. Market value can be different from the price a property can actually be sold for.
The date which the principal balance of a loan is due.
Mortgage Insurance Premium (MIP)
Insurance from FHA to the lender to protect against incurring a loss in case of borrower default.
A legal document which pledges a home to a lender as security for payment of the debt.
This is a company that originates mortgages for resale in the secondary mortgage loan market.
A company that charges a service fee to connect borrowers and lenders for the purpose of loan origination.
This is money paid to insure the mortgage when the down payment is less than 20% or other conditions. See PMI, FHA mortgage insurance.
Mortgage Life Insurance
A type of term life insurance for the event that a borrower dies while the policy is in force, the mortgage debt is paid by insurance proceeds.
The borrower or homeowner.
Non Assumption Clause
A statement in a mortgage loan contract that forbids an assumption of the mortgage without the prior approval of a lender.
A legal document which obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Office of Thrift Supervision (OTS)
This is the regulatory and supervisory agency for federally chartered savings institutions. It used to be known as Federal Home Loan Bank Board.
A fee the lender charges to prepare loan documents, make credit checks, inspect and appraise a property; it’s usually computed as a percentage of the face value of the loan.
Payment Change Date
The date in which a new monthly payment takes effect on an ARM or a graduated-payment mortgage (GPM). Usually, the payment change date occurs in the month immediately following the adjustment date.
Periodic Payment Cap
The limit on an amount that payments can increase or decrease during any one adjustment time period.
Periodic Rate Cap
A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
A long-term mortgage, typically ten years or more. Also called an “end loan.”
Principal, interest, taxes and insurance. Also referred to as monthly housing expense.
Points (Loan Discount Points)
This is prepaid interest assessed at the closing by a lender. Each point equals 1% of the loan amount.
Power of Attorney
A legal document that authorizes one person to act on behalf of another.
The process that determines how much money you will be allowed to borrow before you apply for a loan.
This is necessary to create an escrow account or to adjust a seller’s existing escrow account. It can include taxes, hazard insurance, private mortgage insurance, and other special assessments.
This is a privilege in a mortgage that permits the borrower to make payments in advance of their due date.
This is a fee charged for an early repayment of debt. Prepayment penalties are allowed in some form in many states.
Primary Mortgage Market
Lenders, commercial banks, and mortgage companies who make mortgage loans directly to borrowers. They sometimes sell their mortgages to the secondary mortgage markets such as FNMA or GNMA.
The amount that has been borrowed or remains unpaid. This is the portion of the monthly payment that reduces the remaining balance of a mortgage.
Outstanding balance of principal on a mortgage, which doesn’t include interest or other charges.
Private Mortgage Insurance (PMI)
If you do not have a 20% down payment, lenders will usually allow a smaller down payment, sometimes as low as 3%. When you use a smaller down payment, you are usually required to carry private mortgage insurance. Private mortgage insurance requires an initial premium payment and may require an additional monthly fee depending on the structure of your loan.
These are calculations used to determine if a borrower qualifies for a mortgage. They consist of two calculations—a housing expense as a percent of income ratio, and the total debt obligations as a percent of income ratio.
A commitment by a lender to a borrower (or another mortgage originator) that guarantees a specified interest rate and lender costs for a specified period of time.
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
Real Estate Agent
A person who is licensed to negotiate and transact the sale of real estate on behalf of a property owner.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that ensures lenders give borrowers advance notice of closing costs.
Cancellation of a contract. In regard to mortgage refinancing, the law that gives a homeowner three days to cancel a contract—in some cases, once it’s signed the transaction uses equity in the home as security.
This is money paid to a lender for recording a home sale with the local authorities, hence making it part of public record.
The process of getting a new mortgage loan on a home already owned, often to replace an existing mortgage on the home.
Real Estate Settlement Procedures Act (RESPA)
RESPA is a federal law that allows consumers to review info on known or estimated settlement costs for one time after application and once prior to (or at) settlement. The law requires lenders to provide the info after application only.
Reverse Annuity Mortgage (RAM)
This is a form of mortgage where a lender makes periodic payments to the borrower using the borrower’s equity in the home as collateral for and repayment of the loan.
A credit arrangement (like as a credit card) that allows a customer to borrow against a preapproved line of credit to buying goods and services.
Satisfaction of Mortgage
This is the document given by the mortgagee when the mortgage is paid in full. Also called a “release of mortgage.”
A mortgage made following another mortgage and subordinate to the first one.
Secondary Mortgage Market
Where primary mortgage lenders sell mortgages they issue to obtain more funds to originate new loans, providing liquidity for the lenders.
The property that will is pledged as collateral for loans.
Seller Carry Back
The agreement in which the homeowner provides financing, sometimes in combination with an assumable mortgage. See “owner financing.”
An organization that collects principal and interest payments from borrowers and manages their escrow accounts. A servicer typically services mortgages which have been purchased by an investor in a secondary mortgage market.
The total steps and operations a lender performs to keep loans in good standing. This includes collection of payments, payment of taxes, insurance, property inspections, etc.
See “closing” and “closing costs.”
Interest that is computed only on the principle balance.
Standard Payment Calculation
A method used to determine the monthly payment required to repay the balance of a mortgage in equal installments over the term of the mortgage at current interest rate.
A measurement of land prepared by a land surveyor. It shows the location of the land in reference to known points, dimensions, and the location of any buildings.
This is equity created by a buyer by performing work on a home being bought.
Third Party Origination
This is when a lender uses a separate party to completely (or partially) originate, process, underwrite, close, fund, or package the mortgages it delivers to the secondary mortgage market.
The document that gives evidence of a person’s ownership of a home.
A policy typically issued by the title insurance company that insures a homebuyer against errors in title search. The cost of the policy is calculated by the value of the property and is often carried by the buyer and/or seller. Additional policies are available to protect the lender’s interests.
The examination of public records to determine the legal ownership of a home. It is typically performed by a title company.
Total Expense Ratio
This is the total obligations expressed as a percentage of gross monthly income and includes monthly housing expenses, plus additional any monthly debts.
The decision to make a loan to a applying homebuyer based on financial info like credit score, employment, assets, and the matching of this risk to an appropriate rate and term or loan amount.
Interest charged in excess of the legal rate established by law.
A long-term, low-or-no down payment loan guaranteed by the Department of Veterans Affairs that is designed for qualified applicants who are veterans of the armed forces.
VA Mortgage Funding Fee
A premium of up to 1-⅞% (which depends on the size of the down payment) paid on a fixed-rate mortgage.
Variable Rate Mortgage (VRM)
See adjustable rate mortgage.
Verification of Deposit (VOD)
A document that is signed by a borrower’s financial institution which verifies the status and balance of the borrower’s financial accounts.
Verification of Employment (VOE)
A document that’s signed by the borrower’s employer verifying position and salary.
Some mortgage firms have to borrow funds on a short term basis in order to originate loans which will later be sold in the secondary mortgage market. When the prime rate of interest is higher on short-term loans than mortgage loans, the mortgage firm offsets their economic loss by charging a warehouse fee.