Great real estate finance learning
Acceleration Clause Allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should you default on your loan or violate the Due on Sale Clause.
Adjustable Rate Mortgage (ARM) A mortgage in which the interest rate is adjusted periodically according to the movement in a pre-selected index. Technically, ARM's do not include mortgages where the payments change for other reasons, such as buydowns, although the term is often used in this broader sense. Adjustable rate mortgages are also sometimes known as the renegotiable rate mortgage, the variable rate mortgage, or the Canadian rollover mortgage.
ALT-A Loan programs that offer borrowers "alternative documentation" choices such as Stated Income (income is stated, not proven; job and liquid assets are verified), No Doc loans (both income and assets are stated without proof), NINJA loans (no proof of income, job or assets; sections are left blank on the application. The borrower only needs a high credit score to qualify) and No Doc loans are rarely available. The closest you can get to these loans now is with Non-QM Loans.
AmortizationThe repayment of a mortgage loan over a fixed period of time by installments of regular payments to cover the principal and interest.
Annual Percentage Rate (APR) A figure which reflects the cost of a mortgage as a yearly rate. This rate is likely to be higher than the interest rate stated on the note or the advertised rate on the mortgage, because it takes into account other costs (such as borrower paid origination fees, mortgage insurance, interim interest and other credit costs.) The APR is intended to help homebuyers compare different types of mortgages based on the annual cost for each loan.
Appraisal an estimate of the value of property, made by a qualified professional appraiser. The appraisal is an important factor in determining the interest rate, and whether Mortgage Insurance will be required on the loan.
Appreciation An increase in the value of a house due to changes in the market conditions or other causes.
Assessment A local tax levied against a property for a specific purpose, such as a sewer or a street light.
Assessed Value the valuation placed upon a property by a public tax assessor for the purpose of taxation.
Assumption The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming the loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing costs and a new, possibly higher, market rate interest charge will apply.
Bi-Weekly Mortgage A mortgage payment plan, which allows the borrower to make 1/2 the monthly payment every two weeks, effectively reducing the total interest, paid over the term of the loan.
There's nothing to lose-you can return to monthly payments anytime, without penalty. If you try the Bi-Weekly Mortgage Plan and decide it's not for you, no problem. Just notify us, and we'll cancel your enrollment with no penalties. (Please allow 30 days for automatic payments to be discontinued.)
Blanket Mortgage A mortgage covering at least two pieces of real estate as security for the same mortgage.
Borrower (Mortgagor) A person who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.
Bridge Loan A form of second mortgage that is collateralized by a borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold.
Broker A licensed individual in the business of assisting in the arrangement of funding or negotiating contracts for a client, but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
Buydown(Temporary Buydown) A payment to the lender from the seller, buyer, or a third party, causing the lender to reduce the interest rate during the initial one, two, or three years of the loan.
Caps (Interest) Consumer safeguards which limit the amount the interest rate may change per year and/or during the life of the loan on an adjustable rate mortgage.
Caps (Payment) Consumer safeguards, which limit the amount monthly payments, may change on an adjustable rate mortgage.
Cash Flow The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.).
Cash Out A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.
Certificate of Eligibility (DD Form 214) A document issued by the federal government certifying a veteran's eligibility for a Veterans Administration (VA) mortgage guarantee.
Certificate of Reasonable Value (CRV) An Appraisal issued by the Veterans Administration showing the property's current market value.
Certificate of Veteran Status The document given to veterans or reservists who have served 90 days of continuous active duty (including training time). It may be obtained by sending 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.
Clear Title A title that is free of liens or legal questions as to the ownership of the property.
Closing the conclusion of the loan transaction, which includes delivery of a deed, financial adjustments, the signing of the notes and the disbursement of funds necessary to finalize the sale or loan transaction.
Closing Agent (Escrow/Title Company) An impartial third party who oversees the closing of the loan transaction.
Closing Costs Money paid by the borrower or the seller for various services provided with the closing of a mortgage loan. This generally involves an origination fee, discount points, appraisal, credit report, title insurance, settlement agent fee and recording costs. Closing costs will vary according to the loan type.
Closing Documents the documents that are signed at closing. These include the Deed of Trust or Mortgage, with attachments, Promissory Note, Truth-In-Lending Disclosure, and other documents related to the transaction as required by the lender.
Closing Statement The final statement of closing costs incurred to close on a loan or to purchase a home. This is also referred to as the HUD1.
COFI An adjustable rate mortgage that adjusts based on a cost of funds index, often the 11th District Cost of Funds.
Community Property A form of ownership under which property acquired during a marriage is presumed to be owned jointly, unless acquired as separate property of either spouse. California real estate falls under community property laws.
Comparables(Comps) An abbreviation for comparable properties used for comparative purposes in the appraisal process; properties of reasonably the same size and location with similar amenities; properties which have been recently sold, which have characteristics similar to the property under consideration, thereby indicating the approximate fair market value of the subject property.
Conforming Loan Limit The maximum loan size on which a FNMA or FHLMC loan will be granted. The current single family home loan maximum within the contiguous 48 states is $647,200. In 2012 it was $322,700.
Construction Loan A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.
Conventional Mortgage A mortgage loan not insured or guaranteed by a federally insured program (such as FHA, VA or Farmers Home Administration).
Contingency A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.
Convertible ARM A type of adjustable rate mortgage that allows the borrower to change from an ARM to a fixed rate loan. The conversion feature usually involves paying a one-time fee and may be limited to a certain time frame.
Co-signer Someone who is willing to sign a mortgage loan obligation with you in case you default on your monthly payments. Normally, the cosigner is required to go through the same application and approval process as the original signer of the loan.
Credit Report A report of an individual's credit history as it appears in the credit bureaus, used by a lender in determining a loan applicant's creditworthiness.
Debt Ratio One of several financial calculations performed by your lender to determine if you can afford a particular monthly payment. The debt ratio is the sum of all your monthly debt payments including your total monthly mortgage payment divided by your total monthly income. Typically acceptable debt ratios for Conventional Loans are 36-38%. FHA Loans are 41-43%, and VA loans are 41%.
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 make mortgage payments on a timely basis or to comply with other conditions of a mortgage.
Deferred Interest 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 a loan with the ability to incur deferred interest is that the homebuyer may end up owing more than the original amount of the loan.
Deficiency Judgment A court order to pay the balance owed on a loan if the proceeds from the sale of the security are insufficient to pay off the loan. Deficiency judgments are not allowed in all states.
Delinquency Failure to make payments on time. This can lead to foreclosure.
Department of Veterans Affairs (VA) An independent agency of the federal government which guarantees long-term low or no down payment mortgages to eligible veterans.
Depreciation A decline in the value of property. The opposite of "appreciation".
Discount Points A charge calculated as a percentage of the loan, to compensate the lender for the difference between the interest rate of the loan and the current market interest rate.
Discount Rate Many lenders may offer a lower "teaser" rate on an adjustable rate mortgage for the first adjustment period. After this period is over, the lender will adjust the loan to the normal lender's margin rate.
Down Payment The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
Due on Sale Clause A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
Earnest Money A deposit made by the potential homebuyer to show that he or she is serious about buying the house.
Encumbrance Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions.
Entitlement the VA guaranteed home loan benefit is called entitlement. This is also known as eligibility.
Equal Credit Opportunity Act (ECOA) A Federal law that requires lenders and other creditors to make credit 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 of a property and the current indebtedness on the property also referred to as owner's interest.
Escrow Refers to a neutral third party that carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing".
Escrow Account an account held by the lender into which the homebuyer pays money on a monthly basis for tax or insurance payments, rather than paying them in lump sums themselves. The term "escrow account" is also used in referring to the account, in which the buyer's earnest money deposit is held pending loan closing.
Fannie Mae (FNMA) (Federal National Mortgage Association) A congressionally chartered shareholder-owned company that is the nation's largest supplier of home mortgage funds. It was created to provide support to the secondary market for conventional, FHA and VA loans.
Farmers Home Administration (FmHA) Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
Federal Housing Administration (FHA) An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting, but does not lend money or plan or construct housing.
FHA Mortgage Insurance A required fee (up to 2.25% of the loan amount) paid at closing to insure a FHA loan. FHA mortgage insurance also requires an annual fee of up to .55% of the current loan amount, paid in monthly installments.
FICO - Fair Isaac Credit Reporting A credit score based on payment history, amount of outstanding debt, length of credit history from the 3 credit bureaus Experian, Trans Union, and Equifax.
First Mortgage A mortgage that is the primary lien against a property.
Fixed Rate Mortgage A type of mortgage loan, usually with a 30 or 15-year loan term, where the interest rate remains constant throughout the life of the loan. The advantage of a fixed rate loan is the security for the borrower that the rate will not increase. The disadvantage of a fixed rate loan occurs when interest rates substantially decline below the interest rate of the loan.
Foreclosure A legal procedure in which property securing debt is sold by the lender to pay a defaulting borrower's debt.
Freddie Mac (FHLMC) (Federal Home Loan Mortgage Corporation) A private corporation authorized by Congress, which became an independent, stockholder-owned government corporation with the passage of FIRREA. Freddie Mac promotes the flow of funds into housing markets by purchasing conventional mortgages in the secondary market and selling securities backed by those mortgages in the capital market.
Gift Letter A written explanation signed by an individual giving a gift, stating that the gift is a bona fide gift and there is no obligation expressed or implied to repay the sum at any time.
Ginnie Mae (GNMA) (Government National Mortgage Association) A source of funds for residential mortgages insured or guaranteed by FHA or VA.
Good Faith Estimate an estimate of the charges which a borrower is likely to incur in connection with the settlement of a mortgage loan.
Government Loans An FHA loan, VA loan, or USDA loan. These loans are partially backed by the government and can help veterans and low to moderate-income families afford homes. These loans are often easier to qualify for, have lower down-payment requirements than most conventional loans, and can be assumed by someone else if the home is sold.
Graduated Payment Mortgage (GPM) A mortgage where the monthly payments start low but increase by a fixed amount each year for the first five years. The payment shortfall is added to the principal balance due on the loan. The advantage of this type of loan is a lower monthly payment at the beginning of the loan term. The disadvantages are typically a slightly higher rate than traditional fixed rate mortgage loans and usually a larger required down payment. In addition, the deferred interest increases the balance due on the total loan, which can be a problem if the value of the home declines. GPM's can be used with either a fixed or adjustable rate, and usually have a 30 year term.
Gross Monthly Income The total amount the borrower earns per month, before any expenses are deducted.
Growing Equity Mortgage A mortgage where the monthly payments start low but increase by a fixed amount each year for the entire life of the loan, as compared to five years with a Graduated Payment Mortgage. The advantage of this type of loan is that the loan can usually be paid off in a shorter duration than a traditional fixed rate loan. The disadvantage of this loan is that the payment continues to go up, regardless of the income of the borrower.
Guarantee A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
Hazard Insurance Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism, or other hazards.
Home Equity Line A line of credit, which is secured by a residential property. The borrower has access to the line of credit for a determined number of years. The loan is similar to a second mortgage, except the borrower has access to the funds of the line over and over again as needed for the duration of the loan.
Housing Ratio one of several financial calculations performed by a lender when you apply for a conventional loan, to determine if you can afford a particular monthly payment. The housing ratio is the total monthly payment, including taxes and insurance, divided by your total monthly income. Typically acceptable housing ratios for conventional loans are 28-33%, and for FHA loans are 29-31%.
HUD (Housing and Urban Development) A Cabinet department responsible for the implementation and administration of government housing and urban development programs. The broad range of programs includes community planning and development, low-rent public housing, mortgage insurance for residential mortgages (FHA), equal opportunity in housing, and research and technology.
Impound The portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
Index A nationally published interest rate against which lenders measure the difference between the current rate on an adjustable rate mortgage and that earned by other investments (such as one, three and five year US Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average cost of funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable rate mortgage - up or down.
Indexed Rate The sum of the published index plus the margin. For example, if the index were 5% and the margin 2.75%, the indexed rate would be 7.75%. Often lenders charge less than the indexed rate for the initial period of an adjustable rate mortgage.
Initial Borrower Interest Rate The rate on which the borrower's first payment is calculated. If the loan is discounted or bought down, it may be lower than the Fully Indexed Rate.
Investor A money source for a lender.
Jumbo Loan A loan, which is larger than the limits set by FNMA and FHLMC for conforming loans. As of 1/1/2022, this will include any loan in excess of $647,200 for a single family home in the 48 contiguous states. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Lien A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Lifetime Cap A provision of an ARM that limits the total increase in interest rates over the life of the loan.
Liquid Assets *** Assets such as Cash, Checking, Savings /Money Market Accounts, CDs, Stock Brokerage Accounts,Mutual Funds, and IRAs (although only 70% of retirement acounts can be used if under 59 1/2 years old). Also any asset easily transferable to cash within hours. Real Estate is considered a hard asset, not liquid.
Loan to Value Ratio (LTV) The ratio of the amount of your loan to the appraised value of the home. The LTV will affect programs available to the borrower. Generally, the lower the LTV, the more favorable the terms of the programs offered by lenders
Lock A lender's guarantee that the mortgage rate quoted will be good for a specific number of days from the day a loan is locked. A locked loan will not be impacted by future of impending economic changes to interest rates.
Margin The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate
Market Value The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
MIP (Mortgage Insurance Premium) The fee paid to FHA for mortgage insurance on an FHA loan.
Mortgage A legal instrument that pledges a property to the lender as security for payment of a debt.
Mortgage Banker A company that originates, funds, and services mortgages exclusively for resale in the secondary market.
Mortgage Broker A company or person that matches borrowers with wholesale funding sources of loans. A mortgage broker is advantageous over banks because they offer a much wider variety of loan programs.
Mortgage Insurance Insurance which protects the lender against loss which could result from mortgage default. Mortgage Insurance is generally required when the down payment on a property is less than 20% of the value of the home. It is also called PMI.
Mortgagee The lender.
Mortgagor The borrower or homeowner.
Mortgage Reduction Programs A type of accelerated payment program whereby payments are made more frequently, usually bi-weekly or weekly, rather than the traditional monthly payment. The more frequent payments reduce the principal more quickly and are an effective tool for saving on the total interest paid on the loan.
Negative Amortization See deferred interest.
Net Effective Income the borrower's gross income minus federal income taxes.
Non Assumption Clause A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.
Non Recourse Loan A Loan which is not personally guaranteed by borrower but rather by the property's operating income. It is advantageous for investors because it is not treated as a liability on personal financial statements. The lending guidelines are conservative as long as the operating income and expenses are in order.
Note A written agreement containing a promise of the signer to pay to a named person, or order, or bearer, a definite sum of money at a specified date or on demand.
Origination Fee The amount charged for services performed by the company (lender) handling the initial application and processing of the loan. This fee is usually computed as a percentage of the loan amount.
Owner Occupied An owner occupied property is the owner's primary residence.
Permanent Loan A long-term mortgage, usually ten years or more. Also called an "end loan".
PITI Principal, Interest, taxes and insurance - the components of a monthly mortgage payment.
Pledged Asset Mortgage (PAM) A mortgage that allows the funds, which would normally be used as all or part of a down payment to be placed in a pledged savings account. This fund plus its earned interest can then be used to gradually reduce mortgage payments.
PMI (Private Mortgage Insurance) In the event a borrower does not have a 20% down payment, lenders will allow a smaller down payment (as little as zero in some cases). With a smaller down payment, borrowers are usually required to carry private mortgage insurance or use PMI alternatives. The premium is graduated, with a higher premium being charged for the lowest down payments. PMI protects lenders against loss if a borrower defaults on a loan. Calculate PMI.
Points Charges levied by the mortgage lender and usually payable at closing. One point represents 1% of the mortgage loan amount.
Power of Attorney A legal document authorizing one person to act on behalf of another.
Pre-paids Those funds necessary to create an escrow (impound) account or which will be prorated upon sale. Pre-paids can include taxes, insurance, private mortgage insurance, special assessments, rent, and interim interest.
Prepayment A privilege in a mortgage permitting the borrower to make payments in advance of their due date.
Prepayment PenaltyA fee charged by a lender for paying off a mortgage early.
Pre-Qualification the process of determining how much money a prospective homebuyer will be eligible to borrow before formal application for a loan.
Principal The amount remaining unpaid on a loan. It is also the part of the monthly payment that reduces the outstanding balance of a mortgage.
Qualifying Ratios Guidelines applied by lenders to determine how large a loan to grant a homebuyer.
Realtor 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 Owned (REO) A term frequently used by lending institutions as applied to ownership of real property acquired for investment or as a result of a foreclosure.
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.
Reconveyance of Deed of Trust The process by which the Trustee for a Deed of Trust releases the lenders interest in the property secured upon the payment in full of the Note.
Recourse Loan A loan which is personally guaranteed by the borrower's financial qualifications such as income & debts and treated as a liability.
Recording Fees Money paid for the recording of a home sale or the recording of a mortgage or deed of trust with the local authorities, thereby making it part of the public record.
Refinance the process of paying off one loan with the proceeds from a new loan, using the same property as security.
Renegotiable Rate Mortgage (RRM) A mortgage in which the interest rate is adjusted periodically. See Adjustable Rate Mortgage.
Residual Income The amount of money left over after a borrower has paid all of his/her ordinary and necessary debts, including the mortgage. This calculation is typically used with VA loans.
RESPA (Real Estate Settlement Procedures Act) A federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs. It also establishes guidelines for escrow balances and the disclosure of settlement costs.
Reverse Mortgage A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as collateral and for repayment of the loan.
Satisfaction of Mortgage The document issued by the mortgagee when the mortgage loan is paid in full.
Seasoned Loans Any loan more than one year old. Unseasoned loans are any loans less than one year old. Many conforming lenders will not allow unseasoned loans to be paid off with a refinance
Second Mortgage A mortgage made subsequent to another mortgage and subordinate to the first one.
Secondary Mortgage Market The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.
Servicing All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections, and the like.
Settlement/Settlement Costs See Closing/Closing Costs
Shared Appreciation Mortgage (SAM) A mortgage in which a borrower receives a below market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. This may also apply to a mortgage where the borrowers share the monthly principal and interest payments with another party in exchange for part of the appreciation.
Simple Interest Interest which is computed only on the principal balance.
Stated Income A loan that falls into the ALT-A category whereby the borrower states their income on the loan application. Also, it is commonly called a "liar loan", "no doc loan", " no income verification loan", or "low doc loan".
Survey A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.
Title A document that gives evidence of an individual's ownership of property.
Title Insurance an insurance policy usually issued by a title insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or the seller. Policies are also purchased to protect the lender's interest. (more info )
Title Search an examination of the municipal records to determine the legal ownership of property. A title company usually performs the title search.
Truth in Lending A federal law requiring disclosure of the Annual Percentage Rate (APR) to home buyers shortly after they apply for a loan. It is intended to facilitate comparisons between the lending terms of different financial institutions. Also known as Regulation Z.
Two Step Mortgage A mortgage in which the borrower receives a below market interest rate for a specified number of years (most often seven or ten years) and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan, due within 30 days notice at the end of seven or ten years.
Underwriting the decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
Usury Interest charged in excess of the legal rate established by law.
VA Loan A long term, low or no down payment loan guaranteed by the Department of Veterans Affairs. A VA loan is restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee A premium of up to 2% (depending on the size of the down payment) paid on a VA backed loan. This fee can be either paid at closing, or financed into the loan.
Variable Rate Mortgage See Adjustable Rate Mortgage.
Verification of Deposit A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
Verification of Employment A document signed by the borrower's employer verifying his/her position and salary.
Wraparound Mortgage A 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.