Acceleration Clause: A contractual provision that gives the lender the right to demand repayment of the entire loan balance in the event that the borrower misses a payment or violates one or more other clauses in the note.
ARM: Adjustable Rate Mortgage. A mortgage loan that is subject to periodic changes in interest rate. These changes can occur monthly, every 6 months or annually. Many ARM’s are fixed for a certain period and then subject to periodic changes. The most common fixed periods are 1 year, 3 years, 5 years, 7 years and 10 years. ARM’s in the United States are based on a financial index plus a margin. The margin always stays the same, but the index changes with market conditions. Common indexes are the LIBOR (London Interbank Offered Rate), COFI (Cost of Funds Index) and MTA (Monthly Treasury Average).
Amortization: The paying off of the mortgage loan in regular installments over a period of time.
APR: Annual Percentage Rate. The total cost of your mortgage loan expressed as an annual interest rate. This includes the base interest rate, mortgage insurance, origination fees, and some other related fees. Traditionally APR is calculated from fees that are related to a financing transaction that may not be related to a cash transaction. APR is meant to express the “true cost” of financing since it represents the interest rate based on what it costs the borrower to attain the loan and can be used to shop loans from different lenders using just one single number.
Appraisal: An opinion of a property’s fair market value by a licensed real estate appraiser. Appraisals are usually ordered by the lender but are paid for by the borrower.
Assumable Mortgage: A mortgage that can be transferred by the seller to a buyer upon the buyer’s qualification. VA and FHA loans are assumable but because the seller forfeits any equity in the home most do not exercise the assumability clause of the mortgage note, preferring to sell the home at fair market value and realizing the profit from the sell.
Automated Underwriting: A computer-driven process for quickly pre-approving a borrower based on credit scores collected from the three major credit bureaus and the income and asset information provided by the borrower. Although an automated underwriting approval is a good indication of the borrower’s qualification for a mortgage loan, final decision is still rendered by human underwriters who verify all documented income and asset information against what was used for the automated pre-approval.
Back-end Ratio: Also known as DTI, or Debt-to-Income Ratio. This is the ratio of all debts (mortgage and consumer) to the total income of the borrower(s). The back end ratio is usually equal to or less than 45% of a borrower’s gross income.
Balloon Mortgage: A mortgage loan that typically offers low rates for an initial period of time (usually up to 10 years) and after that time period elapses the balance is due in full or the loan is refinanced by the borrower.
Bimonthly Payment: A mortgage payment schedule where half of the monthly payment is paid on the 1st of each month and half again on the 15th.
Biweekly Payment: A mortgage payment schedule where half of the monthly payment is paid every two weeks. With this type of a payment schedule the borrower makes 13 payments a year thus paying-off the loan several years sooner saving tens of thousands of dollars in interest over the life of the loan.
Bridge Loan: A short-term loan taken-out as a “bridge” between quickly acquiring a property and obtaining long-term financing.
Buy Down: The seller pays an percentage of the loan amount to the lender so the lender provides a lower rate and lower payments for the buyer, thus making the home more affordable.
Cap: A limit in adjustable rate mortgages on how much a monthly payment or interest rate can increase or decrease at each adjustment period.
Capital Gain: The profit received upon selling a home based on the difference of the original purchase price and the total sale price.
Closing
Co-Borrower: A person in addition to the borrower that is responsible for the repayment of the mortgage loan and is listed on title.
Co-Signer: A person that signs a credit application with another person agreeing to be equally responsible for the repayment of the loan but may not be listed on title.
Commission: An amount, usually a percentage of the property sales price, that is earned by a real estate professional as a fee for negotiating the transaction. Traditionally the home seller pays the commission.
Comparative Market Analysis (COMPS): A property evaluation that determines property value by comparing similar properties sold within a stated period of time and distance from the subject property. COMPS will be used both by a real estate agent to determine a fair selling price as well as by a professional appraiser to determine the fair market value of a home.
Concessions: An amount the home that the seller agrees upon (usually paid from the equity in a home) in order to facilitate the sell through payment of the buyer’s closing costs on a mortgage loan. Concessions are also used to determine fair market value when appraising a home, i.e. Sales price – concessions = actual sales price.
Conforming loan: A loan that does not exceed Fannie Mae’s and Freddie Mac’s loan limits. Fannie Mae and Freddie Mac loans are often referred to as “conforming loans”.
Conventional Mortgage: Any mortgage that is not insured or guaranteed by the federal government.
Credit Bureau: An agency that provides financial information and payment history to lenders about potential borrowers.
Credit Report: A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s credit worthiness.
Credit Score: A score calculated by using a person’s credit report to determine the likelihood of a loan being repaid as agreed. Scores range from about 300 – 850 with a higher score being safer for the lender and lower score being riskier.
Debt-to-Income Ratio: A formula used to qualify borrowers. The ratio expresses, as a percent, the amount of monthly debt payments in relation to the amount of monthly income of the borrower(s).
Discount Points: A one time charge by the lender as part of the charge for the loan expressed as a percentage of the loan amount. For instance, 1 discount point equals 1% of the loan amount. Positive discounts points are paid to reduce the interest rate of the loan while negative discount points result in a higher interest rate in exchange for lower closing costs.
FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans. FHA assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur if a borrower defaults. This encourages lenders to make loans at favorable terms to borrowers that may not qualify for conventional mortgages.
FICO Score: FICO is an abbreviation for Fair Isaac Corporation and refers to a person’s credit score based on credit history.
Foreclosure: A legal process in which a mortgaged property is acquired by the lender and is sold to pay the loan of the defaulting borrower.
Front End Ratio: a percentage comparing a borrower’s total monthly cost to buy a house (mortgage principal and interest, mortgage insurance, hazard insurance, and real estate taxes) to gross monthly income. Also known as Housing Ratio. The front end ratio is usually equal to or less than 33% of a borrower’s gross income.
Good Faith Estimate: Also known as a GFE, it is an estimate of all closing costs including pre-paid fees, escrow items and lender charges. A GFE must be given to the borrower within three days after submission of a loan application.
Government Mortgage: A loan insured or guaranteed by a government entity such as FHA (Federal Housing Administration) or VA (Department of Veteran’s Affairs).
Homeowner’s Insurance: An insurance policy, also called hazard insurance, that combines protection against damage to a home and its contents from fire, storms or other damages with protection against claims of negligence or inappropriate action that result in someone’s injury or property damage. Homeowner’s policies do not usually include flood or earthquake insurance unless such riders are requested by the homeowner or required by the lender.
Housing Ratio: A percentage comparing a borrower’s total monthly cost to buy a house (mortgage principal and interest, mortgage insurance, hazard insurance, and real estate taxes) to gross monthly income. The front end ratio is usually equal to or less than 33% of a borrower’s gross income.
HUD: the U.S. Department of Housing and Urban Development. Established in 1965, HUD works to create a decent home and suitable living environment for all Americans. HUD does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
HUD1 Statement: Also known as the “settlement statement,” it itemizes all closing costs including real estate commissions, loan fees, points, and escrow amounts.
Joint Tenancy (with Rights of Survivorship): two or more owners share equal ownership and rights to the property. If a joint owner dies, their share of the property passes to the other owners.
Jumbo Loan: A loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate. Jumbo loans are sometimes referred to as non-conforming loans.
Lease Purchase or Lease Option: Assists home buyers in purchasing a home by allowing them to lease a home with an option to buy at the end of the lease period. The rent payment is made up of the monthly rental payment plus an additional amount that is credited to an escrow account for use as a down payment at the lease’s end.
Lien: A legal claim against a property that must be paid off when the property is sold.
Loan to Value (LTV) Ratio: a percentage calculated by dividing the amount borrowed by the sales price or appraised value (whichever is less) of the home to be purchased.
VA Mortgage: A mortgage loan available to military veterans that is guaranteed by the Department of Veterans Affairs (VA).
