Adjustable Rate Mortgage (ARM)
A mortgage on which the interest rate, after an initial period, can be changed by the lender. While ARMs in many countries abroad allow rate changes at the lender’s discretion (“discretionary ARMs”), in the US most ARMs base rate changes on a pre-selected interest rate index over which the lender has no control. These are “indexed ARMs”. There is no discretion associated with rate changes on indexed ARMs.
A consumer’s capacity to afford a house. Affordability is usually expressed in terms of the maximum price the consumer could pay for a house, and be approved for the mortgage required to pay that amount.
Agreement of Sale
A contract signed by buyer and seller stating the terms and conditions under which a property will be sold.
The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment.
A table showing the mortgage payment, broken down by interest and amortization, the loan balance, tax and insurance payments if made by the lender, and the balance of the tax/insurance escrow account.
On the Truth in Lending form, the loan amount less “prepaid finance charges”, which are lender fees paid at closing. For example, if the loan is for $100,000 and the borrower pays the lender $4,000 in fees, the amount financed is $96,000.
Annual percentage Rate (ApR)
The Annual percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges by the lender. The charges covered by the ApR also include mortgage insurance premiums, but not other payments to third parties, such as payments to title insurers or appraisers. The ApR is adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid in the future. However, the ApR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons.
A written estimate of a property’s current market value prepared by an appraiser.
A professional with knowledge of real estate markets and skilled in the practice of appraisal. When a property is appraised in connection with a loan, the appraiser is selected by the lender, but the appraisal fee is usually paid by the borrower.
A fee charged by an appraiser for the appraisal of a particular property.
Acceptance of the borrower’s loan application. Approval means that the borrower meets the lender’s qualification requirements and also its underwriting requirements. In some cases, especially where approval is provided quickly as with automated underwriting systems, the approval may be conditional on further verification of information provided by the borrower.
A mortgage contract that allows, or does not prohibit, a creditworthy buyer from assuming the mortgage contract of the seller. Assuming a loan will save the buyer money if the rate on the existing loan is below the current market rate, and closing costs are avoided as well. A loan with a “due-on-sale” clause stipulating that the mortgage must be repaid upon sale of the property, is not assumable.
A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher rate later.
The loan balance remaining at the time the loan contract calls for full repayment.
A mortgage on which the borrower pays half the monthly payment on the first day of the month, and the other half on the 15th.
A mortgage on which the borrower pays half the monthly payment every two weeks. Because this results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term.
A permanent buy-down is the payment of points in exchange for a lower interest rate. See points. A temporary buy-down concentrates the rate reduction in the early years.
Refinancing for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes “cash-out” of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan.
On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.
One or more persons who have signed the note, and are equally responsible for repaying the loan. Unmarried co-borrowers who live together are advised to agree beforehand on what happens if they split.
A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Frepie Mac.
A home mortgage that is neither FHA-insured nor VA-guaranteed.
A lender who delivers loans to a (usually larger) wholesale lender against prior price commitments the wholesaler has made to the correspondent. The commitment protects the correspondent against pipeline risk.
A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual’s credit history.
The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money.
Rolling short-term debt into a home mortgage loan, either at the time of home purchase or later.
Deed in lieu of foreclosure
Deeding the property over to the lender as an alternative to having the lender foreclose on the property.
Failure of the borrower to honor the terms of the loan agreement. Lenders (and the law) usually view borrowers delinquent 90 days or more as in default.
A mortgage payment that is more than 30 days late.
The difference between the value of the property and the loan amount, expressed in dollars, or as a percentage of the price. For example, if the house sells for $100,000 and the loan is for $80,000, the down payment is $20,000 or 20%.
A term used in two ways. In one context it refers to a measure of interest cost to the borrower that is identical to the ApR except that it is calculated over the time horizon specified by the borrower. The ApR is calculated on the assumption that the loan runs to term, which most loans do not. (See Does the Annual percentage Rate (ApR) Help?). In most texts on the mathematics of finance, however, the “effective rate” is the quoted rate adjusted for intra-year compounding. For example, a quoted 6% mortgage rate is actually a rate of .5% per month, and if interest received in the early months is invested for the balance of the year at .5%, it results in a return of 6.17% over the year. The 6.17% is called the “effective rate” and 6% is the “nominal” rate.
In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home.
An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower aps a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.
One of two Federal agencies that purchase home loans from lenders. (The other is Frepie Mac). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities.
The sum of all upfront cash payments required by the lender as part of the charge for the loan. Origination fees and points are expressed as a percent of the loan. Junk fees are expressed in dollars.
A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low.
A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan. For example, a borrower defaults on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only what is left of the $100,000.
Fixed rate mortgage (FRM)
A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage.
Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing. Allowing the rate to float exposes the borrower to market risk, and also to the risk of being taken advantage of by the loan provider.
The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults.
One of two Federal agencies that purchase home loans from lenders. The other is Fannie Mae
Gift of equity
A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as down payment.
Good faith estimate
The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application.
The period after the payment due date during which the borrower can pay without being hit for late fees. Grace periods apply only to mortgages on which interest is calculated monthly. Simple interest mortgages do not have a grace period because interest accrues daily.
The Home Affordability Refinance program (HARp) was started by Fannie Mae and Frepie Mac in 2010 to provide refinancing to borrowers with loan-to-value ratios too high to be eligible for their standard programs.
Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as “homeowner insurance”, it is the second “I” in pITI.
Stands for Home Equity Conversion Mortgage, a reverse mortgage program authorized by Congress in 1988. On a HECM, FHA insures the lender against loss in the event the loan balance at termination exceeds the value of the property, and insures the borrower that any payments due from the lender will be made, even if the lender fails.
Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. It is the second “I” in pITI.
Home equity line of credit (HELOC)
A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $150,000, in an amount and at a time of your choosing. You can draw on the line by writing a check, using a special credit card, or in other ways.
The form a borrower receives at closing that details all the payments and receipts among the parties in a real estate transaction, including borrower, lender, home seller, mortgage broker and various other service providers.
A time-adjusted measure of cost to a mortgage borrower. It is calculated in the same way as the ApR except that the ApR assumes that the loan runs to term, and is always measured before taxes. The formula is shown in Mortgage Formulas. Interest cost is measured over the individual borrower’s time horizon, and it may be measured after taxes at the individual borrower’s tax rate. In apition, the cost items included in interest cost may be more or less inclusive than those included in the ApR.
A mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged.
The rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A rate of 6%, for example, means a rate of 1/2% per month. A mortgage interest rate is a rate on a loan secured by a specific property.
A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Frepie Mac, $417,000 in 2008 (see Non-conforming mortgage). However, in that year, the agencies were given limited authority to purchase jumbos.
A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount.
Fees that lenders are entitled to collect from borrowers who don’t pay within the grace period. Most mortgage notes offer borrowers a 10 or 15-day grace period, with a late charge of about 5% on payments received on the 16th or later.
The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.
The amount the borrower promises to repay, as set forth in the mortgage contract. It differs from the amount of cash disbursed by the lender by the amount of points and other upfront costs included in the loan.
Employees of lenders or mortgage brokers who find borrowers, sell and counsel them, and take applications.
The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts.
An option exercised by the borrower, at the time of the loan application or later, to “lock in” the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.
The number of days for which any lock or float-down holds. Ordinarily, the longer the period, the higher the price to the borrower.
The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure.
Maximum loan amount
The largest loan size permitted on a particular loan program. For programs where the loan is targeted for sale to Fannie Mae or Frepy Mac, the maximum will be the largest loan eligible for purchase by these agencies. On FHA loans, the maximums are set by the Federal Housing Administration, and vary somewhat by geographical area. On other loans, maximums are set by lenders.
Maximum loan to value ratio
The maximum allowable loan-to-value ratio on the selected loan program.
Minimum down payment
The minimum allowable ratio of down payment to sale price on any program. If the minimum is 10%, for example, it means that you must make a down payment of at least $10,000 on a $100,000 house, or $20,000 on a $200,000 house.
A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.
An independent contractor who offers the loan products of multiple lenders, termed wholesalers. A mortgage broker counsels on the loans available from different wholesalers, takes the application, and usually processes the loan. When the file is complete, but sometimes sooner, the lender underwrites the loan. In contrast to a correspondent, a mortgage broker does not fund a loan.
A mortgage lender who sells all loans in the secondary market. As distinguished from a portfolio lender, who retains loans in its portfolio. Mortgage companies may or may not service the loans they originate.
Insurance against loss provided to a mortgage lender in the event of borrower default. In most cases, the borrower pays the premiums.
The party who disburses funds to the borrower at the closing table. The lender receives the note evidencing the borrower’s indebtedness and obligation to repay, and the mortgage which is the lien on the subject property.
Mortgage insurance premium
The up-front and/or periodic charges that the borrower pays for mortgage insurance. There are different mortgage insurance plans with differing combinations of up-front, monthly and annual premiums. The most widely used premium plan is a monthly charge with no upfront premium.
A change in the terms of a loan, usually the interest rate and/or term, in response to the borrower’s inability to make the payments under the existing contract.
The monthly payment of interest and principal made by the borrower.
A bundle of mortgage characteristics that lenders see fit to distinguish as a distinct instrument. These include whether it is an FRM, ARM, or Balloon; the term; the initial rate period on an ARM; whether it is FHA-insured or VA-guaranteed; and if is not FHA or VA, whether it is “conforming” (eligible for purchase by Fannie Mae or Frepie Mac) or “non-conforming”.
A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called “deferred interest.” It is explained in detail in How Does Negative Amortization on a Mortgage Work? Negative amortization arises most frequently on ARMs.
A mortgage on which all settlement costs except per diem interest, escrows, homeowners insurance and transfer taxes are paid by the lender and/or the home seller.
A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Frepie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.
An adjustable rate mortgage with flexible payment options, monthly interest rate adjustments, and very low minimum payments in the early years. They carry a risk of very large payments in later years.
An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be aped to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate.
A very large increase in the payment on an ARM that may surprise the borrower. Also used to refer to a large difference between the rent being paid by a first-time home buyer, and the monthly housing expense on the purchased home.
Per diem interest
Interest from the day of closing to the first day of the following month. In some cases, however, the borrower can get a credit at closing by making the first payment a month earlier.
A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down.
Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.
private mortgage insurance, as distinguished from insurance provided by government under FHA and VA.
An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., “3 points” means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations with negative points. On a negative point loan the lender contributes cash toward meeting closing costs. positive and negative points are sometimes termed “discounts” and “premiums,” respectively.
A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Unlike a pre-qualification, the lender checks the applicant’s credit.
A variety of unsavory lender practices designed to take advantage of unwary borrowers.
A Payment made by the borrower over and above the scheduled mortgage payment. If the apitional payment pays off the entire balance it is a “prepayment in full”; otherwise, it is a “partial prepayment.”
A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest.
The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented.
The portion of the monthly payment that is used to reduce the loan balance.
The present value of a house, given the elderly owner’s right to live there until death or voluntary move-out, under the FHA reverse mortgage program.
Private mortgage insurance
Mortgage insurance provided by private mortgage insurance companies, or PMIs.
Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. The processing file is handed off to underwriting for the loan decision.
The process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay a loan. Qualification is sometimes referred to as “pre-qualification” because it is subject to verification of the information provided by the applicant. Qualification is short of approval because it does not take account of the credit history of the borrower. Qualified borrowers may ultimately be turned down because, while they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay.
Requirements stipulated by the lender that the ratio of housing expense to borrower income, and housing expense plus other debt service to borrower income, cannot exceed specified maximums, e.g., 28% and 35%. These may reflect the maximums specified by Fannie Mae and Frepie Mac; they may also vary with the loan-value ratio and other factors.
Standards imposed by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum loan-to-value ratios, and so on. Less comprehensive than underwriting requirements, which take account of the borrower’s credit record.
protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. This protection can take the form of a “lock” where the rate and points are frozen at their initial levels until the loan closes; or a “float-down” where the rates and points cannot rise from their initial levels but they can decline if market rates decline. In either case, the protection only runs for a specified period. If the loan is not closed within that period, the protection expires and the borrower will either have to accept the terms quoted by the lender on new loans at that time, or start the shopping process anew.
paying off an old loan while simultaneously taking a new one. This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan. It may be done to raise cash, as an alternative to a home equity loan. Or it may be done to reduce the monthly payment.
The total cash required of the home buyer to close the transaction, including down payment, points and fixed dollar charges paid to the lender, any portion of the mortgage insurance premium that is paid up-front, and other settlement charges associated with the transaction such as title insurance, taxes, etc. The total required cash is shown on the Good Faith Estimate of Settlement that every borrower receives.
The Real Estate Settlement procedures Act, a Federal consumer protection statute first enacted in 1974. RESpA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.
A loan to an elderly home owner on which the balance rises over time, and which is not repaid until the owner dies, sells the house, or moves out permanently.
Right of rescission
The right of refinancing borrowers, under the Truth in Lending Act, to cancel the deal at no cost to themselves within 3 days of closing.
Scheduled mortgage payment
The amount the borrower is obliged to pay each period, including interest, principal, and mortgage insurance, under the terms of the mortgage contract. paying less than the scheduled amount results in delinquency. On most mortgages, the scheduled payment is the fully amortizing payment throughout the life of the loan. On some mortgages, however, the scheduled payment for the first 5 or 10 years is the interest payment (see Interest Only Mortgages). And on option (flexible payment) ARMs, it can be the “minimum” payment as defined by the program.
A loan with a second-priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.
A borrower who must document income using tax returns rather than information provided by an employer. This complicates the process somewhat.
A contribution to a borrower’s down payment or settlement costs made by a home seller, as an alternative to a price reduction.
Administering loans between the time of disbursement and the time the loan is fully paid off. This includes collecting monthly payments from the borrower, maintaining records of loan progress, assuring payments of taxes and insurance, and pursuing delinquent accounts.
Costs that the borrower must pay at the time of closing, in apition to the down payment.
An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure.
A documentation requirement where the borrower discloses her assets but they are not verified by the lender.
Refinancing that omits some of the standard risk control measures, and is therefore quicker and less costly.
A second mortgage on the property which is not paid off when a new loan is taken out. The second mortgage lender must allow subordination of the second to the new first mortgage.
The policy of a second mortgage lender for allowing a borrower to refinance the first mortgage while leaving the second in place.
The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity. On a 7-year balloon loan, for example, the maturity is 7 years but the term in most cases is 30 years.
Insurance against loss arising from problems connected to the title to property.
Truth in Lending (TIL)
The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information.
The process of examining all the data about a borrower’s property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.
The standards imposed by lenders in determining whether a borrower qualifies for a loan. These standards are more comprehensive than qualification requirements in that they include an evaluation of the borrower’s creditworthiness.
A mortgage with no down payment requirement, available only to ex-servicemen and women as well as those on active duty, on which the lender is insured against loss by the Veterans Administration.
Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure where the lender aps a charge to the monthly mortgage payment that is deposited in an escrow account, from which the lender pays the borrower’s taxes and insurance when they are due. On some loans lenders will not waive escrows, and on loans where waiver is permitted lenders are likely either to charge for it in the form of a small increase in points, or restrict it to borrowers making a large down payment.
A firm that lends to temporary lenders against the collateral of closed mortgage loans prior to the sale of the loans in the secondary market. Warehouse lenders can call the loans if the loans “in the warehouse” drop in value.
80/10/10, 80/15/5, and 80/20/0 loan plans
Combination first mortgages for 80% of sale price or value and second mortgages for 10%, 15%, or 20%. The purpose is to avoid mortgage insurance, which is required on first mortgages that exceed 80% of value.
A mortgage with a term of 40 years.