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Glossary

Abstract of title. A document used in certain parts of the country when determining if there are any previous claims on the property in question. The abstract is a written record of the historical ownership of the property and helps to determine whether the property can in fact be transferred from one party to another without any previous claims.

Acceleration. Paying off a loan early, usually at the request or demand of the lender. This is usually associated with an acceleration clause within a loan document that states what must happen when a loan must be paid immediately, but it most usually applies when payments are late or missed or there has been a transfer of the property without the lender's permission.

Adjustable-rate mortgage. A loan program where the interest rate may change throughout the life of the loan. The rate is adjusted based on terms that have been agreed upon by the lender and the borrower, but typically it will change only once or twice a year.

Amortization. The length of time it takes for a loan to be fully paid off, with repayment through equal payments made at regular intervals. Sometimes called a "fully amortized loan." Amortization terms vary, but generally accepted terms run in 5-year increments from 10 to 40 years.

Appraisal. A report that helps to determine the market value of a property. This report can be prepared in various ways as required by a lender, from simply driving by the property in a car to a full-blown inspection complete with photographs of the real estate with full-color pictures. Appraisals compare similar homes in the area to substantiate the value of the property in question.

APR. Annual percentage rate. The APR is the cost of money borrowed, expressed as an annual rate. It is a useful consumer tool for comparing different lenders, but unfortunately it often is not used correctly. The APR is useful only when the same exact loan type is being compared from one lender to another. It doesn't work as well when comparing different types of mortgage programs with different down payments, terms, and so on.

Assumable mortgage. A mortgage that lets buyers take over the terms of the loan along with the house being sold. Assumable loans may be fully qualifying or nonqualifying. With nonqualifying assumable loans, buyers can take over the loan without having to be qualified or otherwise evaluated by the original lender. With qualifying assumable loans, while buyers may assume the terms of the existing note, they must qualify all over again as if they were applying for a brand new loan.

Automated valuation model. An electronic method of evaluating a property's appraised value by scanning public records for recent home sales and other data in the subject property's neighborhood. This is not yet widely accepted as a replacement for full-blown appraisals, but many people expect to see AVMs replacing traditional appraisals altogether.

Balloon mortgage. A type of mortgage where the remaining balance must be paid in full at the end of a preset term. A 5-year balloon mortgage might be amortized over a 30-year period but have the remaining balance be due, in full, at the end of 5 years.

Banker. A lender who uses its own funds to lend money. Historically, these funds would have come from the savings accounts of other bank customers. But with the evolution of mortgage banking, that's the old way of doing business. Even though bankers use their own money, it may come from other sources, such as lines of credit, or from selling loans to other institutions.

Basis point, 1/100 of 1 percent. 25 basis points is 1/4 discount point. 100 basis points is 1 discount point.

Bridge loan. A short-term loan that is primarily used to pull equity out of one property for a down payment on another. This loan is paid off when the original property is sold. Since these are short-term loans, sometimes just for a few weeks, only retail banks generally offer them. Usually the borrower doesn't make any monthly payments and pays off the loan when the property is sold.

Brokers. Mortgage companies that set up a home loan between a banker and a borrower, similar to the way an independent insurance agent operates. Brokers don't have money to lend directly, but have experience in finding various loan programs that can suit the borrower. Brokers don't work for the borrower, but instead provide mortgage loan choices from other mortgage lenders.

Bundling. The act of putting together several real estate or mortgage services in one package. Instead of paying for an appraisal here and an inspection there, some or all of the buyer's services are packaged together. Usually this allows the service provider to offer discounts on all services, although when the services are bundled, it's hard to look at all of them to see whether you're getting a good deal or not.

Buydown. Paying more money to get a lower interest rate. This is called a permanent buydown, and it is used in conjunction with discount points—the more points, the lower the rate. A temporary buydown is a fixed-rate mortgage that starts at a reduced rate for the first period, and then gradually increases to its final note rate. A temporary buydown for two years is called a 2-1 buydown. A buydown for three years is called a 3-2-1 buydown.

Cash-out. Taking equity out of a home in the form of cash during a refinance. Instead of just reducing your interest rate during a refinance and financing your closing costs, you finance even more, putting the money in your pocket.

Closing costs. The various fees involved when buying a home or obtaining a mortgage. The fees can come directly from the lender or may come from others in the transactions that provide services that are required to issue a good loan.

Collateral. Property owned by the borrower that is pledged to the lender in case the loan goes bad. A lender makes a mortgage with the house as collateral.

Comparable sales. The part of an appraisal report that lists recent transfers of similar properties in the immediate area of the house being bought. Also called "comps."

Conforming loan. A Fannie Mae or Freddie Mac loan that is equal to or less than the maximum allowable loan limits established by these organizations. These limits are changed annually.

Conventional loan. A mortgage using guidelines established by Fannie Mae or Freddie Mac and issued and guaranteed by a lender.

Credit report. A report showing a consumer's payment history along with the consumer's property addresses and any public records.

Debt consolidation. Paying off all or part of one's consumer debt with equity from a home. This can be part of a refinanced mortgage or a separate equity loan.

Debt ratio. Gross monthly payments divided by gross monthly income, expressed as a percentage. There are typically two debt ratios to be considered: The housing ratio (sometimes called the front ratio) is the total monthly house payment plus any monthly tax, insurance, PMI, or homeowners' association dues divided by gross monthly income, and the total debt ratio (also called the back ratio) is the total housing payment plus other monthly consumer installment or revolving debt, also expressed as a percentage. Loan debt ratio guidelines are usually denoted as 32/38, with 32 being the front ratio and 38 being the back ratio. Ratio guidelines can vary from loan to loan and lender to lender.

Deed. A written document evidencing each transfer of ownership in a property.

Deed of trust. A written document giving an interest in the home being bought to a third party, usually the lender, as security.

Delinquent. Being behind on a mortgage payment. Delinquencies typically are recognized as 30+ days delinquent, 60+ days delinquent, and 90 + days delinquent.

Discount points. Percentages of a loan amount; 1 point equals 1 percent of a loan balance. Borrowers pay discount points to reduce the interest rate on a mortgage, typically lowering the interest rate by 1/4 percent for each discount point paid. It is a form of prepaid interest to a lender. Discount points are supposed to lower the rate. Also called "points."

Document stamp. Evidence of how much tax was paid—usually with a literal ink stamp—upon transfer of ownership of property. Called a "doc stamp" in certain states. Doc stamp tax rates can vary based upon locale. Some states don't have doc stamps; others do.

Down payment. The amount of money initially given by the borrower to close a mortgage; it equals the sales price less financing. It's the very first bit of equity you'll have in the home.

Easement. A right of way previously established by a third party. Easement types can vary, but they typically involve the right of a public utility to cross your land—for example, to access an electrical line.

Equity. The difference between the appraised value of a home and any outstanding loans recorded against the property.

Escrow. A term with two meanings, depending upon where you live. On the West Coast, there are escrow agents whose job it is to oversee the closing of a home loan. In other parts of the country, an escrow is a financial account set up by a lender to collect monthly installments for annual tax bills and/or hazard insurance policy renewals.

Escrow agent. On the West Coast, the person or company that handles the home closing, ensuring that documents are assigned correctly and property transfer has taken place legitimately.

Fannie Mae. Federal National Mortgage Association. Originally established in 1938 by the U.S. government to buy FHA mortgages and provide liquidity in the mortgage marketplace. Similar in function to Freddie Mac. In 1968, its charter was changed, and it now purchases conventional mortgages as well as government ones.

Fed. The Federal Reserve Board. The Fed, among other things, sets overnight lending rates for banking institutions. It doesn't set mortgage rates.

Fee income. Closing costs received by a lender or broker that are neither interest nor discount points. Fee income can be in the form of loan processing charges, underwriting fees, and the like.

FHA. Federal Housing Agency. Formed in 1934 and now a division of the Department of Housing and Urban Development (HUD), it provides loan guarantees to lenders who make loans following FHA guidelines.

Final inspection. The last inspection of a property, showing that a new home that is being built is 100 percent complete or that a home improve merit is 100 percent complete. This lets the lender know that its collateral and its loan are exactly where they should be.

Fixed-rate mortgage. A mortgage with an interest rate that does not change throughout the term of the loan.

Float. An active decision not to "lock" or guarantee an interest rate while a loan is being processed. This is usually done because the borrower believes that rates will go down.

Float down. A mortgage loan rate that can drop as mortgage rates drop. There are usually two types of float, one being used during the construction of a home and the other during the period of an interest-rate lock.

Foreclosure. The bad thing that happens when the mortgage isn't repaid. Lenders begin the process of forcefully recovering their collateral when borrowers fail to make loan payments. The lender takes your house away.

Freddie Mac. Federal Home Loan Mortgage Corporation (FHLMC). A corporation established by the U.S. government in 1968 to buy mortgages made in accordance with Freddie Mac guidelines from lenders.

Fully indexed rate. The number reached when a loan's index and its margin are added together. This is the rate on which an adjustable-rate note is determined.

Funding. The actual transfer of money from a lender to a borrower.

Gift. When buying a home, a situation in which the down payment and closing costs come from someone other than the borrower instead of coming from the borrower's own accounts. Usually such gifts can come only from family members or from foundations established to help new homeowners.

Ginnie Mae. Government National Mortgage Association (GNMA). A corporation formed by the U.S. government to purchase government loans like VA and FHA loans from banks and mortgage lenders. Think of it as Fannie or Freddie, only it buys government loans.

Good Faith Estimate. A list of estimated closing costs on a particular mortgage transaction. This estimate must be provided to the loan applicant within 72 hours after the receipt of a mortgage application by the lender or broker.

Hazard insurance. A specific type of insurance that covers homeowners against certain destructive elements, such as fire, wind, and hail. It is usually an addition to homeowner's insurance, but every home loan has a hazard rider.

HELOC. Home equity line of credit. A credit line using a home as collateral. The customer writes a check on the line whenever he needs it and pays only on the balances withdrawn. It is much like a credit card, but secured by the property.

Homeowner's insurance. An insurance policy covering not just hazard items, but also other things such as liability and personal property.

Impound accounts. Accounts set up by a lender to receive the monthly portion of annual property taxes or hazard insurance. As taxes or insurance comes up for renewal, the lender pays the bill using these funds. Also called "escrow accounts."

Index. The basis for establishing an interest rate, usually with a margin added. Almost anything can be an index, but the most common are U.S. Treasuries or similar instruments. See fully indexed rate.

Inspection. A structural review of the house that looks for defects in workmanship, damage to the property, or required maintenance. It does not determine the value of the property. A pest inspection looks for things such as termites, wood ants, and so on.

Intangible tax. A state tax levied on personal property. An intangible asset is an asset not in itself but because of what it represents. A publicly traded stock is an intangible asset. It's not the stock itself that has the value, but what the stock represents in terms of income.

Interest rate. The amount charged to borrow money over a specified period of time.

Jumbo loan. A mortgage that exceeds current conforming loan limits.

Junior lien. A second mortgage or one that is subordinate to another loan. This term is not as common as it used to be. You're likely to hear simply "second mortgage" or "piggyback."

Land contract. An arrangement whereby the buyer makes monthly payments to the seller, but the ownership of the property does not change hands until the loan is paid in full. This is similar to the way an automobile loan works: When you pay off the loan, you get the title.

Land to value. An appraisal term that calculates the value of the land as a percentage of the total value of the home. If the value of the land exceeds the value of the home, it's more difficult to find financing without good comparable sales. Also called "lot to value."

Lender policy. Title insurance that protects a mortgagee from defects or previous claims of ownership.

Liability. An obligation on the part of the borrower. Liabilities can be those that show up on a credit report, such as student loans or car payments, but they can also be anything else that one is obligated to pay. It's the ones on the credit report that are used to determine debt ratios.

Loan. Money granted to one party with the expectation of its being repaid.

Loan officer. The person typically responsible for helping mortgage applicants get qualified; he or she assists in loan selection and loan application.

Loan officers can work at banks, credit unions, or mortgage brokerage houses or for bankers.

Loan processor. The person who gathers the required documentation of a loan application for loan submission. Along with your loan officer, you'll work with this person quite a bit during your mortgage process.

Lock. The act of guaranteeing an interest rate for a predetermined period of time. Loan locks are not loan approvals; they're simply the rate your lender has agreed to give you at loan closing.

Margin. A number, expressed as a percentage, that is added to a mortgage's index to determine the rate the borrower pays on the note. For example, suppose the index is a six-month CD at 4.00 percent and the margin is 2.00 percent. The interest rate that the borrower pays is 4 + 2, or 6.00 percent. A fully indexed rate is the index plus the margin.

Market value. In an open market, the value of a property that is both the most that the buyer was willing to pay and the least that the seller was willing to accept at the time of contract. Property appraisals help justify market value by comparing similar home sales in the subject property's neighborhood.

Mortgage. A loan on property where the property is pledged as collateral. The mortgage is retired when the loan is paid in full.

Mortgage-backed securities. Investment securities issued by Wall Street firms that are guaranteed, or collateralized, by home mortgages taken out by consumers. These securities can then be bought and sold on Wall Street.

Mortgage insurance (Ml). An insurance policy, paid for by the borrower with benefits paid to the lender, that covers the difference between the borrower's down payment and 20 percent of the sales price. If the borrower defaults on the mortgage, this difference is paid to the lender. MI, also called "private mortgage insurance" (PMI), is typically required on all mortgage loans with less than 20 percent down.

Mortgagee. The person or business making the loan.

Mortgagor. The person(s) getting the loan; the borrower.

Multiple Listing Service (MLS). A central repository where real estate brokers and agents show homes and search for homes that are for sale.

Negative amortization (neg-am). An adjustable-rate mortgage that can have two interest rates, the contract rate or the fully indexed rate. The contract rate is the minimum agreed-upon rate that the consumer may pay; it is usually lower than the fully indexed rate. The borrower has a choice of which rate to pay, but if the contract rate is lower than the fully indexed rate, the difference between the two payments is added back to the loan. If your contract payment is only $500 but the payment at the fully indexed rate is $700 and you pay only the contract rate, $200 is added to your original loan amount. This is not for the faint of heart or for those with little money down.

Nonconforming. A mortgage loan in an amount above the current Fannie Mae or Freddie Mac limits. Also called "jumbo mortgages."

Note. A promise to repay. There may or may not be property involved, and it may or may not be a mortgage.

Origination fee. A fee charged to cover costs associated with finding, documenting, and preparing a mortgage application; usually expressed as a percentage of the loan amount.

Owner's policy. Title insurance for the benefit of the homeowner.

PITI. Principal, interest, taxes, and insurance. These figures are used to help determine front debt ratios.

PMI. Private mortgage insurance. See mortgage insurance (MI).

Points. See discount points.

Prepaid interest. Daily interest from the day of the loan closing to the first of the following month.

Prepayment penalty. A monetary penalty paid to the lender if the loan is paid off before its maturity or if extra payments are made on the loan. Prepayment penalties are sometimes divided into "hard" and "soft" penalties. A hard penalty is an automatic penalty if the loan is paid off early or if extra payments are made at any time or for any amount whatsoever. A soft penalty lasts for only a couple of years and may allow extra payments on the loan, as long as they do not exceed a certain amount.

Principal. The outstanding amount owed on a loan, not including any interest due.

Realtor. A member of the National Association of Realtors. This is a registered trademark; not all real estate agents are Realtors.

Refinance. Obtaining a new mortgage to replace an existing one.

Sales contract. The written agreement, signed by both the seller and the buyer, to buy or sell a home.

Second mortgage. A mortgage that assumes a subordinate position behind a first mortgage. If the home goes into foreclosure, the first mortgage must be settled before the second can lay claim. Sometimes called a "piggyback" mortgage.

Secondary market. A financial arena where mortgages are bought and sold, either individually or grouped together into securities backed by those mortgages. Fannie Mae and Freddie Mac are the backbone of the conventional secondary market. Other secondary markets exist for nonconforming loans, subprime loans, and other types of loans.

Seller. The person transferring ownership of and all rights in a home in exchange for cash or trade.

Settlement statement. A document that shows all financial entries during the home sale, including sales price, closing costs, loan amounts, and property taxes. Your initial Good Faith Estimate will be your first glimpse of your settlement statement. This statement is one of the final documents put together before you go to closing and is prepared by your attorney or settlement agent. Also called the Final HUD-1.

Survey. A map that shows the physical location of all structures and where they sit on the property. It also designates any easements that run across or through the property.

Title. Ownership in a property.

Title exam/title search. The process by which public records are reviewed to uncover any previous liens on the property.

Title insurance. An insurance policy that protects the lender, the seller, and/or the borrower against any defects in title for or previous claims to the property being transferred or sold.

 
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