A-Credit
A consumer with the best credit rating, deserving of the lowest prices that
lenders offer. Most lenders require a FICO score above 720 (see Credit Issues).
There is seldom any payoff for being above the A-credit threshold (see Does the
Mortgage Market Reward Virtue?), but you pay a penalty for being below it.
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 violates one or more
clauses in the note. See Should I Lie About My Income?
Accrued interest
Interest that is earned but not paid, adding to the amount owed. Same as
Negative amortization.
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.
Adjustment interval
On an ARM, the time between changes in the interest rate or monthly payment. The
rate adjustment interval is often displayed in x/y format, where "x" is the
period until the first adjustment, and "y" is the adjustment period thereafter.
For example, a 5/1 ARM is one on which the initial rate holds for 5 years, after
which it is adjusted every year. The rate adjustment interval and the payment
adjustment interval are the same on a fully amortizing ARM, but may not be on a
negative amortization ARM.
Affordability
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. Read How Much House Can You
Afford? , How Much House Should You Buy? and Mortgage Affordability: Should
Government Require It?
Agency
The legal requirement that one party in a relationship has a fiduciary
obligation to the other. See Mortgage Brokers: Agents or Independent
Contractors? And Should Mortgage Brokers Be Required To Be Agents?
Agreement of sale
A contract signed by buyer and seller stating the terms and conditions under
which a property will be sold.
Alt-A
A mortgage risk categorization that falls between prime and sub-prime, but is
closer to prime. Also referred to as "A minus".
Alternative documentation
Expedited and simpler documentation requirements designed to speed up the loan
approval process. Instead of verifying employment with the applicant's employer
and bank deposits with the applicant's bank, the lender will accept paycheck
stubs, W-2s, and the borrower's original bank statements. Alternative
documentation remains “full documentation”, as opposed to the other
documentation options.
Amortization
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. For a detailed explanation, see Mortgage Amortization: How
Does It Work? If the payment is less than the interest due, the balance rises,
which is negative amortization.
Amortization schedule
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.
Amount financed
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.
A useless number. See Another Truth in Lending Lie.
Annual percentage rate
See APR.
Application
A request for a loan that includes the information about the potential borrower,
the property and the requested loan that the solicited lender needs to make a
decision. In a narrower sense, the application refers to a standardized
application form called the "1003" which the borrower is obliged to fill out.
Application fee
A fee that some lenders charge to accept an application. It may or may not cover
other costs such as a property appraisal or credit report, and it may or may not
be refundable if the lender declines the loan.
Appraisal
A written estimate of a property's current market value prepared by an
appraiser.
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.
Appraisal fee
A fee charged by an appraiser for the appraisal of a particular property.
APR
The Annual Percentage Rate, which must be reported by lenders under Truth in
Lending regulations. It is a comprehensive measure of credit cost to the
borrower that takes account of the interest rate, points, and flat dollar
charges. It is also adjusted for the time value of money, so that dollars paid
by the borrower up-front carry a heavier weight than dollars paid ten years down
the road. 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. Read Does the Annual Percentage Rate (APR) Help? Other articles about
the APR are cited under Mandatory Mortgage Disclosure. For a summary of the
differences between the APR and interest cost, see Annual Percentage Rate Versus
Interest Cost.
Approval
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. See Mortgage Concepts Home
Buyers Should Know.
ARM
An adjustable rate mortgage.
Assumption
A method of selling real estate where the buyer of the property agrees to become
responsible for the repayment of an existing loan on the property. Unless the
lender also agrees, however, the seller remains liable for the mortgage.
Assumable mortgage
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. See Are Mortgage Assumptions a Good Deal?
Auction site
See Lead-Generation site.
Authorized user
Someone authorized by the original credit card holder to use the holder’s card.
The card-holder is responsible for the charges of the authorized user, but the
authorized user is not responsible for paying any charges, including his own.
But sometimes authorized users are dunned for the unpaid bills of the card
holder. See Are Authorized Users At Risk?
Automated underwriting
A computer-driven process for informing the loan applicant very quickly,
sometimes within a few minutes, whether the applicant will be approved, or
whether the application will be forwarded to an underwriter. The quick decision
is based on information provided by the applicant, which is subject to later
verification, and other information retrieved electronically including
information about the borrower's credit history and the subject property.
Automated underwriting system
A particular computerized system for doing automated underwriting. Mortgage
insurers and some large lenders have developed such systems, but the most widely
used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.
Back-end fee or commission
Mortgage broker income paid by the lender, same as yield-spread premium and
Negative points.
"Bad-faith estimate"
The practice of low-balling figures for settlement costs on the Good Faith
Estimate to make them appear more attractive to mortgage shoppers. See A Bad
Faith Estimate: Any Recourse?
Balance
The amount of the original loan remaining to be paid. It is equal to the loan
amount less the sum of all prior payments of principal. See Mortgage
Amortization: How Does it Work?
Balloon mortgage
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. They are riskier than ARMs because there is no limit on the extent
of a rate increase at the end of the balloon period. See Balloon Mortgages.
Balloon
The loan balance remaining at the time the loan contract calls for full
repayment.
Bimonthly mortgage
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. See Alternative Early Payoff
Plans.
Biweekly mortgage
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. See Biweekly Mortgages.
Blemished borrower
A borrowers have one or more of the following risk factors: they can only make a
very small or no down payment; they cannot fully document their income and
assets; their property is something other than a single-family home; their loan
is intended to raise cash or to purchase an investment property; they have low
credit scores; their income is low relative to their expected total obligations;
and their mortgage carries an adjustable rate that will result in substantially
higher payments in a few years. See HR 3915 Would Stick it to Blemished
Borrowers.
Bridge loan
A short-term loan, usually from a bank, that "bridges" the period between the
closing date of a home purchase and the closing date of a home sale. Unsecured
bridge loans are available if the borrower has a firm contract to sell the
existing house. Secured bridge loans are available without such a contract. Read
Buying a New House Before Selling the Old One.
Builder-financed construction
Having the builder finance the construction. Read Should the Builder Finance
Construction?
Buy-down
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.
Buy-up
Paying a higher interest rate in exchange for a rebate by the lender which
reduces upfront costs. See Negative Points.
Cap
Same as Float-down.
Cash Flow Option Loan
Same as Flexible Payment ARM.
Cash-Out refi
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. For a
discussion of the relative merits of the two approaches, read Debt Consolidation
With a Cash-Out Refinance.
Closing
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.
Closing costs
Same as Settlement costs.
Closing date
The date on which the closing occurs. See Mortgage Closing Date: Does it Matter?
CMG plan
A technique for repaying a loan early that involves using the mortgage as a
substitute for a checking account. See The CMG Plan: Your Mortgage as a Checking
Account.
Co-Borrowers
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. See On Buying a House With a Domestic
Partner.
COFI
Cost of funds index. One of many interest rate indexes used to determine
interest rate adjustments on an adjustable rate mortgage. See What Is a Coffee
Loan? and Which Adjustable Rate Mortgage Index Is the Best?
Conforming mortgage
A loan eligible for purchase by the two major Federal agencies that buy
mortgages, Fannie Mae and Freddie Mac. See What Do Fannie Mae and Freddie Mac
Do?
Construction financing
The method of financing used when a borrower contracts to have a house built, as
opposed to purchasing a completed house. See Pitfalls in Financing Home
Construction .
Contract knavery
Inserting provisions into a loan contract that severely disadvantage the
borrower, without the borrower’s knowledge, and sometimes despite oral
assurances to the contrary. Prepayment penalties are perhaps the most frequently
cited subject of such abuse.
Conventional mortgage
A home mortgage that is neither FHA-insured nor VA-guaranteed.
Conversion option
The option to convert an ARM to an FRM at some point during its life. These
loans are likely to carry a higher rate or points than ARMs that do not have the
option. See Conversion Option on an Adjustable Rate Mortgage?
Correspondent
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. See What Is a Correspondent
Lender?
COSI
Cost of savings index. One of many interest rate indexes used to determine
interest rate adjustments on an adjustable rate mortgage. See Which Adjustable
Rate Mortgage Index Is the Best?
Co-signing a note
Assuming responsibility for someone else's loan in the event that that party
defaults. A risk not to be taken lightly. See The Hazards of Co-signing, and
Co-Signing a Mortgaage: How Much Help?
Credit report
A report from a credit bureau containing detailed information bearing on
credit-worthiness, including the individual's credit history. See What Is a
Credit Report? and Credit Reports and Credit Scores.
Credit score
A single numerical score, based on an individual's credit history, that measures
that individual's credit worthiness. Credit scores are as good as the algorithm
used to derive them. The most widely used credit score is called FICO for Fair
Issac Co. which developed it. Many of the columns in Mortgage Credit Issues
discuss factors that affect the FICO score, including Raise Credit Score by
Paying Delinquencies? and Do Credit Inquiries Hurt Your Credit Credit?
Cumulative interest
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. See Interest cost.
Current index value
The most recently published value of the index used to adjust the interest rate
on an indexed ARM.
Deadbeat
A borrower who doesn't pay. See When Good Credit Marries Bad Credit. And Can a
Deadbeat Pay Cash?
Debtaholic
A borrower who cannot handle debt except by complete abstinence. See Are Credit
Problems Cured by the Passage of Time?
Debt consolidation
Rolling short-term debt into a home mortgage loan, either at the time of home
purchase or later. For columns on the subject, see Debt Consolidation.
Debt elimination
Scams designed to relieve you of your money by promising to eliminate your
mortgage debt.
Deed in lieu of foreclosure
Deeding the property over to the lender as an alternative to having the lender
foreclose on the property. See Options When Equity in Your Home is Gone and
Mortgage Payment
Default
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.
Deferred interest
Same as negative amortization.
Delinquency
A mortgage payment that is more than 30 days late. For articles on payment
problems, see Payment Problems. Don't confuse with Late payment.
Demand clause
A clause in the note that allows the lender to demand repayment at any time for
any reason. See What Is a Demand Clause?
Direct lender
Same as lender.
Disaster Myopia
The tendency of lenders to ignore potential shocks that can cause them major
losses if a long period has elapsed since a shock has occurred. See Upheaval in
the Sub-Prime
Mortgage Market.
Discount mortgage broker
A mortgage broker who claims to be compensated entirely by the lender rather
than by the borrower. See Are Discount Mortgage Brokers Upfront?
Discount points
Same as points.
Discretionary ARM
An adjustable rate mortgage on which the lender has the right to change the
interest rate at any time subject only to advance notice. Discretionary ARMs are
found abroad, not in the US. See Can You Have Peace of Mind With an ARM?
Documentation requirements
The set of lender requirements that specify how information about a loan
applicant's income and assets must be provided, and how it will be used by the
lender. See What Are Mortgage Documentation Requirements?
Down payment
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%. To
read articles about the down payment, see Down Payment.
Dual apper
A borrower who submits applications through two loan providers, usually mortgage
brokers. See Is It OK to Submit Two Mortgage Loan Applications?
Dual index mortgage
A mortgage on which the interest rate is adjustable based on an interest rate
index, and the monthly payment adjusts based on a wage and salary index. See
Dual Index Mortgages.
Due-on-sale clause
A provision of a loan contract that stipulates that if the property is sold the
loan balance must be repaid. This bars the seller from transferring
responsibility for an existing loan to the buyer when the interest rate on the
old loan is below the current market. A mortgage containing a due-on-sale clause
is not an assumable mortgage.
Effective rate
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.
Equity
In connection with a home, the difference between the value of the home and the
balance of outstanding mortgage loans on the home.
Equity grabbing
A type of predatory lending where the lender intends for the borrower to default
so the lender can grab the borrower's equity. Read What Is Predatory Lending?
Escrow
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 adds 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. For articles on this subject, see Escrows.
Escrow abuse
The practice of using escrow accounts inappropriately to generate more income
from hapless borrowers. See Escrow Abuse and Manufactured Foreclosures.
Fallout
Loan applications that are withdrawn by borrowers, sometimes because they have
found a better deal. See Why Is Locking Unique to Mortgages?
Fannie Mae
One of two Federal agencies that purchase home loans from lenders. (The other is
Freddie 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. See What Do Fannie Mae and Freddie Mac Do?
Fees
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.
FHA mortgage
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. For articles on FHA, see FHA
Mortgages.
FICO Score
See Credit Score.
Final prices
The prices paid by the borrower, as opposed to posted prices. The distinction is
discussed in Why Do Minorities Pay More For Mortgages?
Financing points
Including points in the loan amount. Read Can Mortgage Points Be Financed?
First mortgage
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. See Fixed Rate Mortgages.
Fixed-Markup UML
An Upfront Mortgage Lender who discloses his wholesale price and markup. See A
New Approach to Selecting a Loan Provider.
Flexible payment ARM.
Same as Option ARM.
Float
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. See Is it Wise to Float?
Float-down
A rate lock, plus an option to reduce the rate if market interest rates decline
during the lock period. Also called a cap. A float-down costs the borrower more
than a lock because it is more costly to the lender. Float-downs vary widely in
terms of how often the borrower can exercise (usually only once), and exactly
when the borrower can exercise. See What Is a Float-Down? Do not confuse with
interest rate increase caps and payment increase caps.
Foreclosure
The legal process by which a lender acquires possession of the property securing
a mortgage loan when the borrower defaults. See Can a Mortgage Lender Profit
From Foreclosure?
Forbearance agreement
An agreement by the lender not to exercise the legal right to foreclose in
exchange for an agreement by the borrower to a payment plan that will cure the
borrower’s delinquency.
Freddie Mac
One of two Federal agencies that purchase home loans from lenders. The other is
Fannie Mae.
Front-end fee
Mortgage broker income paid by the borrower, as distinguished from the fee paid
by the lender, which is "back-end".
Fully amortizing payment
The monthly mortgage payment which, if maintained unchanged through the
remaining life of the loan at the then-existing interest rate, will pay off the
loan over the remaining life. See Mortgage Amortization: How Does It Work? On
FRMs the payment is always fully amortizing, provided the borrower has made no
prepayments. (If the borrower makes prepayments, the monthly payment is more
than fully amortizing). On GPMs, the payment in the early years is always less
than fully amortizing. On ARMs, the payment may or may not be fully amortizing,
depending on the type of ARM. See How Does Negative Amortization on a Mortgage
Work?
Fully indexed interest rate
The current index value plus the margin on an ARM. Usually, initial interest
rates on ARMs are below the fully indexed rate. If the index does not change
from its initial level, after the initial rate period ends the interest rate
will rise to the fully indexed rate after a period determined by the interest
rate increase cap. For example, if the initial rate is 4% for 1 year, the fully
indexed rate 7%, and the rate adjusts every year subject to a 1% rate increase
cap, the 7% rate will be reached at the end of the third year. See What Is an
Adjustable Rate Mortgage? and What Is the Real Price of an Adjustable Rate
Mortgage?
Generic prices
Prices that assume a more or less standardized set of transaction
characteristics that generally command the lowest prices. Generic prices are
distinguished from transaction specific prices, which pertain to the
characteristics of a specific transaction. See What Mortgage Market Niche Are
You In?
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. See Avoiding Taxes on a Gift of
Equity.
Good fairy syndrome
A belief that somewhere out there is a good fairy who will solve all our
financial (and other) problems. See Mortgage Fraud and Belief in a Good Fairy.
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. See Why Do Lenders Itemize Loan Charges? and
How to Shop Settlement Costs.
Government National Mortgage Association (GNMA)
A Federal agency that guarantees mortgage securities that are issued against
pools of FHA and VA mortgages.
Grace period
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. See What Are Simple Interest Mortgages?
Graduated payment mortgage (GPM)
A mortgage on which the payment rises by a constant percent for a specified
number of periods, after which it levels out over the remaining term and
amortizes fully. For example, the payment might increase by 7.5% every 12 months
for 60 months, after which it is constant for the remaining term at a fully
amortizing level. See What is a Graduated Payment Mortgage (GPM)?
Graduation period
The interval at which the payment rises on a GPM.
Graduation rate
The percentage increase in the payment on a GPM.
Guaranteed Mortgage Price Agreement
A proposal by HUD in 2002 to allow lenders and others to offer packages of loans
and settlement services at a single price. See HUD's Proposals For Reform.
Hazard insurance
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. See Questions About Home Owners
Insurance.
Historical scenario
The assumption that the index value to which the rate on an ARM is tied follows
the same pattern as in some prior historical period. In meeting their disclosure
obligations in connection with ARMs, some lenders show how the mortgage payment
would have changed on a mortgage originated some time in the past. That is not
very useful. Showing how a mortgage originated now would change if the index
followed a historical pattern would be useful, but nobody does it.
Homebuyer protection plan
A plan purporting to protect FHA homebuyers against property defects. See Is FHA
Responsible For the Leaky Roof?
Homeowner's equity
See Equity.
Homeowners insurance
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.
See Questions About Home Owners Insurance.
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. See What Is a HELOC and How Do You Shop For a HELOC?
Home Equity Conversion Mortgage (HECM)
A reverse mortgage program administered by FHA. See Reverse Mortgages.
Home equity line
Same as HELOC.
Home equity loan
Same as second mortgage.
Home Keeper
A reverse mortgage program administered by Fannie Mae. See Reverse Mortgages.
Home Owners Loan Corporation
A Federal Government agency established by Congress in 1933 to help families
avoid having their homes foreclosed. See Home Owners Loan Corporation II - a
Fable.
Housing bank
A government-owned or affiliated housing lender. With minor exceptions,
government in the US has never loaned directly to consumers, but housing banks
are widespread in many developing countries. Read Government as Mortgage Lender.
Housing bubble
A marked increase in house prices fueled partly by expectations that prices will
continue to rise. See A Look at Housing Bubbles.
Housing expense
The sum of mortgage payment, hazard insurance, property taxes, and homeowner
association fees. Same as PITI and "monthly housing expense."
Housing expense ratio
The ratio of housing expense to borrower income, which is used (along with the
total expense ratio and other factors) in qualifying borrowers. See Qualifying
for a Mortgage.
Housing investment
The amount invested in a house, equal to the sale price less the loan amount.
See How Much House Should You Buy?
HUD1 form
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.
Hybrid ARM
An ARM on which the initial rate holds for some period, during which it is
"fixed-rate", after which it becomes adjustable rate. Generally, the term is
applied to ARMs with initial rate periods of 3 years or longer.
Impounds
Same as Escrow.
Indexed ARM
An ARM on which the interest rate adjusts mechanically based on changes in an
interest rate index, as opposed to a "discretionary ARM" on which the lender can
change the rate at any time subject only to advance notice. All ARMs in the US
are indexed. See Peace of Mind With an Adjustable Rate Mortgage?
Initial interest rate
The interest rate that is fixed for some specified number of months at the
beginning of the life of a an ARM. The initial rate is sometimes referred to as
a "teaser" when it is below the fully indexed interest rate. See Information to
Evaluate an Adjustable Rate Mortgage.
Initial rate period
The number of months for which the initial rate holds, ranging from 1 month to
10 years. See Information to Evaluate an Adjustable Rate Mortgage.
Interest accrual period
The period over which the interest due the lender is calculated. If the interest
accrual period on a 6 % mortgage for $100,000 is a year, as it is on some loans
in the UK and India, the interest for the year is .06($100,000) = $6,000. If
interest accrues monthly, as it does on most mortgages in the US, the monthly
interest is .06/12($100,000) = $500. If interest accrues biweekly, as on a few
programs in the US, the biweekly interest is .06/26($100,000) = $230.77. And if
interest accrues daily, as HELOCs and some other mortgages in the US do, the
daily interest is .06/365($100,000) = $16 .44.
Interest cost
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 addition,
the cost items included in interest cost may be more or less inclusive than
those included in the APR. See Annual Percentage Rate Versus Interest Cost.
Interest due
The amount of interest, expressed in dollars, computed by multiplying the loan
balance at the end of the preceding period times the annual interest rate
divided by the interest accrual period. It is the same as interest payment
except when the scheduled mortgage payment is less than the interest due, in
which case the difference is added to the balance and constitutes negative
amortization.
Interest-only mortgage
A mortgage on which for some period the monthly mortgage payment consists of
interest only. During that period, the loan balance remains unchanged. See
Interest Only Mortgages.
Interest payment
The dollar amount of interest paid each month. It is the same as interest due so
long as the scheduled mortgage payment is equal to or greater than than the
interest due. Otherwise, the interest payment is equal to the scheduled payment.
Interest rate
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. See Mortgage Interest Rates.
Interest rate adjustment period
The frequency of rate adjustments on an ARM after the initial rate period is
over. The rate adjustment period is sometimes but not always the same as the
initial rate period. As an example, a 3/3 ARM is one in which both periods are 3
years while a 3/1 ARM has an initial rate period of 3 years after which the rate
adjusts every year. See Information to Evaluate an Adjustable Rate Mortgage.
Interest rate ceiling
The highest interest rate possible under an ARM contract; same as "lifetime
cap." It is often expressed as a specified number of percentage points above the
initial interest rate. See Information to Evaluate an Adjustable Rate Mortgage.
Interest rate floor
The lowest interest rate possible under an ARM contract. Floors are less common
than ceilings. See Information to Evaluate an Adjustable Rate Mortgage.
Interest rate increase cap
The maximum allowable increase in the interest rate on an ARM each time the rate
is adjusted. It is usually 1 or 2 percentage points, but may be 5 points if the
initial rate period is 5 years or longer. See Information to Evaluate an
Adjustable Rate Mortgage.
Interest rate decrease cap
The maximum allowable decrease in the interest rate on an ARM each time the rate
is adjusted. It is usually 1 or 2 percentage points. See Information to Evaluate
an Adjustable Rate Mortgage.
Interest rate index
The specific interest rate series to which the interest rate on an ARM is tied,
such as "Treasury Constant Maturities, 1-Year," or "Eleventh District Cost of
Funds." All the indices are published regularly in readily available sources.
For a listing and discussion of various indices, see Adjustable Rate Mortgage
Indexes and Which Adjustable Rate Mortgage Index Is the Best?
Interest rate risk premium
The rate premium above the rate on the least risky or "prime" loan. See Why the
System is Vulnerable to Crisis.
Interim refinance
An ill-advised scheme to avoid a prepayment penalty by refinancing twice instead
of once. Read The Interim Mortgage Refinance Scam.
Internet mortgages
Mortgages delivered using the internet as a major part of the communication
process between the borrower and the lender. See Using the Internet.
Investor
In real estate, a borrower who owns or purchases a property as an investment
rather than as a residence.
Jumbo mortgage
A mortgage larger than the maximum eligible for purchase by the two Federal
agencies, Fannie Mae and Freddie Mac, $333,700 in 2004 (see Non-conforming
mortgage). However, some lenders use the term to refer to programs for even
larger loans, such as, e.g., greater than $500,000.
Junk fees
A derogatory term for lender fees expressed in dollars rather than as a percent
of the loan amount. See What Are Junk Fees on a Mortgage?
Late fees
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. Read Are These Mortgage Late Fees Kosher?
Late payment
A payment received after the grace period stipulated in the note. Most mortgage
grace periods are 10 or 15 days.
Lead-Generation site
A mortgage web site designed to provide leads (potential customers) to lenders.
Where a referral site provides information about lenders to consumers, with
consumers contacting the lenders, a lead-generation site provides information
about the consumers to the lenders, and the lenders contact the consumers. They
are sometimes called "auction sites" because lenders post their prices directly
to the consumer. See Mortgage Auction (or Lead Generation) Sites .
Lease-to-own purchase
A transaction in which a hopeful home buyer leases a home with an option to buy
it within a specified period. See Lease-to-Own House Purchases.
Lender
See Mortgage lender.
Lien
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.
Loan amount
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.
Loan "churning"
The process of raising cash periodically through successive cash-out
refinancings. It is a scam initiated by mortgage brokers that victimizes
wholesale lenders, with the connivance of borrowers. See Periodic Mortgage
Refinacings: Who Gets Conned?
Loan discount fee
The term used to describe points on the Good Faith Estimate.
Loan modification
See Mortgage modification.
Loan officer
Employees of lenders or mortgage brokers who find borrowers, sell and counsel
them, and take applications. See Mortgage Lenders, Mortgage Brokers and Loan
Officers.
Loan provider
A lender or a mortgage broker.
Loan-to-value ratio
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. See What Is the Down Payment?
Lock
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. See Locking the Price of a Mortgage
Loan, and Mortgage Concepts Home Buyers Should Know.
Lock commitment letter
A written statement from a lender verifying that the price and other terms of a
loan have been locked. Borrowers who lock through a mortgage broker should
always demand to see the lock commitment letter. See Did You Pay For Insurance
You Didn't Get?
Lock failure
The inability or unwillingness of a lender to honor a mortgage price that a
borrower had believed was guaranteed. See Questions About the Failure of
Mortgage Locks.
Lock jumper
A borrower, usually refinancing rather than purchasing a home, who allows a lock
to expire when interest rates go down in order to lock again at the lower rate.
See Is the Borrower Committed by a Mortgage Lock?
Lock period
The number of days for which any lock or float-down holds. Ordinarily, the
longer the period, the higher the price to the borrower.
Mandatory disclosure
The array of laws and regulations dictating the information that must be
disclosed to mortgage borrowers, and the method and timing of disclosure. See
Mandatory Mortgage Disclosure.
Manufactured housing
A house built entirely in a factory, transported to a site and installed there.
They are usually built without knowing where they will be sited, and are subject
to a Federal building code administered by HUD. See Manufactured Housing: a
Messy Picture.
Margin
The amount added to the interest rate index, ranging generally from 2 to 3
percentage points, to obtain the fully indexed interest rate on an ARM. See
Information to Evaluate an Adjustable Rate Mortgage.
Market niche
A particular combination of loan, borrower and property characteristics that
lenders use in setting prices and underwriting requirements. These
characteristics are believed to affect the default risk or cost of the loan. As
examples, borrowers who don't intend to occupy the house they purchase pay more
than those who do, and borrowers who refinance only the balance on their
existing loan pay less than those who take "cash out". Read What Mortgage Market
Niche Are You In?
Maturity
The period until the last payment is due. This is usually but not always the
term, which is the period used to calculate the mortgage payment.
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 Freddy 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.
Maximum lock
The longest period for which the lender will lock the rate and points on any
program. The most common maximum lock period is 60 days, but on some programs
the maximum is 90 days; only a few go beyond 90 days. See Why Is Locking Unique
to Mortgages?
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. For articles
on down payment, see Down Payment.
Monthly housing expense
Same as Housing expense.
Monthly debt service
Monthly payments required on credit cards, installment loans, home equity loans,
and other debts but not including payments on the loan applied for.
Monthly total expenses
Same as Total housing expense.
Mortgage
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.
Mortgage auction site
See Lead generation site.
Mortgage bank
Same as mortgage company.
Mortgage broker
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.
For articles on mortgage brokers and how to deal with them, see Mortgage
Brokers.
Mortgage company
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.
Mortgage lead
A packet of information about a consumer who a loan provider might be able to
convert into a borrower. You become a lead when you fill out a questionnaire
about yourself on-line in response to a sexy ad. See Mortgage Leads: Are You
One?
Mortgage formulas
Equations used to derive common measures used in the mortgage market, such as
monthly payment, balance, and APR. See Mortgage Formulas.
Mortgage grader
A broker web site with many attractive features, and one not so attractive. See
Mortgage Grader: A Better Type of Web Site?
Mortgage insurance
Insurance against loss provided to a mortgage lender in the event of borrower
default. In most cases, the borrower pays the premiums. For articles on mortgage
insurance, see Mortgage Insurance.
Mortgage insurance disclosure
Read Disclosure Rules About Mortgage Insurance.
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. For a sample of
monthly premiums, see Sample Mortgage Insurance Premiums.
Mortgage insurance cancellation
Canceling a mortgage insurance policy. Read Canceling Private Mortgage Insurance
(I), and Canceling Private Mortgage Insurance (II).
Mortgage lender
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 modification
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. See See What If You Can't Pay? and Mortgage Loan Modifications.
Mortgage payment
The monthly payment of interest and principal made by the borrower. The formula
used to calculate it is shown in Mortgage Formulas.
Mortgage price
The interest rate, points and fees paid to the lender and/or mortgage broker. On
ARMs, the price also includes the fully indexed rate and the maximum rate. Read
What Is the "Price" of a Mortgage?
Mortgage program
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 Freddie Mac) or "non-conforming".
Mortgage referrals
Advice on where to go to get a mortgage. See Mortgage Referrals: Who Can You
Trust?
Mortgage scams
Deceptive and exploitative schemes by lenders, brokers, home sellers and
sometimes even borrowers. See Mortgage Scams.
Mortgage shopping
Trying to find the best deal on a mortgage. See How to Shop For a Mortgage.
Mortgage spam
Offers for great mortgage deals that appear unbidden in your email. See What
Should I Do With Mortgage Spam?
Mortgage suitability
The doctrine that mortgage lenders should be held liable for providing loans
that are not suitable for the borrower. See Mortgage Suitability.
Negative amortization
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. See Should You Fear Negative Amortization and Is a 3.95%
Adjustable Rate Mortgage a Good Deal?
Negative amortization cap
The maximum amount of negative amortization permitted on an ARM, usually
expressed as a percentage of the original loan amount (e.g., 110%). Reaching the
cap triggers an automatic increase in the payment, usually to the fully
amortizing payment level, overriding any payment increase cap.
Negative Homeowners Equity
The condition of owing more on the house than the house is worth. See The Curse
of Negative Equity: Is There an Escape?
Negative points
Points paid by a lender for a loan with a rate above the rate on a zero point
loan. For example, a wholesaler quotes the following prices to a mortgage
broker. 8%/0 points, 7.5%/3 points, 8.75%/-3 points. On mortgage web sites,
negative points are usually referred to as "rebates" because they are used to
reduce a borrower's settlement costs. When negative points are retained by a
mortgage broker, they are called a "yield spread premium". Read Can Mortgage
Points Be Negative? and Ignore Lender Payments to My Broker? On policy issues
connected to negative points, see HUD and Yield Spread Premiums, and A Better
Approach to YSPs?
Net branch
A facility offered by some lenders to mortgage brokers where de jure the brokers
become employees of the lender but de facto they retain their independence as
brokers. One of the advantages of this arrangement to brokers is that they need
not disclose yield spread premiums received from lenders. See Must Mortgage
Brokers Reveal All Their Charges?
Net jumping
Using a broker's time and expertise to become informed and creditworthy, then
jumping to the internet to get the loan. See How About Borrowers' Tricks?
Niche
See Market niche.
Nichification
Proliferation in the number of loan, borrower and property characteristics used
by lenders to set mortgage prices and underwriting requirements. Read What
Mortgage Market Niche Are You In?
No change scenario
On an ARM, the assumption that the value of the index to which the rate is tied
does not change from its initial level.
No-Cost mortgage
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. See Does "No-Cost" Mortgage Refinance Make Sense? and No-Cost Mortgages.
Non-conforming mortgage
A mortgage that does not meet the purchase requirements of the two Federal
agencies, Fannie Mae and Freddie Mac, because it is too large or for other
reasons such as poor credit or inadequate documentation.
Non-Permanent resident alien
A non-citizen without a green card who is employed in the US. As distinct from a
permanent resident alien, who has a green card and who lenders do not
distinguish from US citizens. Non-permanent resident aliens are subject to
somewhat more restrictive qualification requirements than US citizens.
No asset loan
A documentation requirement where the applicant's assets are not disclosed. See
What Are Mortgage Documentation Requirements?
No Fee Mortgage Plus
A Bank of America program for home purchasers that eliminates all lender fees
except points, and all third party fees. See No Fee Mortgage Plus.
No income loan
A documentation requirement where the applicant's income is not disclosed. See
What Are Mortgage Documentation Requirements?
Non-warrantable condo
A condominium that does not meet meet lender requirements, see Warrantable
condos.
No-Surprise adjustable rate mortgage
An ARM with a preset graduated payment combined with variable term. See The
No-Surprise Adjustable Rate Mortgage.
Nominal interest rate
A quoted interest rate that is not adjusted for either intra-year compounding,
or for inflation. A quoted rate of 6% on a mortgage, for example, is nominal.
Adjusted rates are called "effective" see Effective rate.
No ratio loan
A documentation requirement where the applicant's income is disclosed and
verified but not used in qualifying the borrower. The conventional maximum
ratios of expense to income are not applied. See What Are Mortgage Documentation
Requirements?
Note
A document that evidences a debt and a promise to repay. A mortgage loan
transaction always includes both a note evidencing the debt, and a mortgage
evidencing the lien on the property, usually in two documents.
Option ARM
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. See Option (Flexible Payment) ARMs.
Option fee
An upfront fee paid by the buyer under a lease-to-own purchase, usually 1% to 5%
of the price, which is credited to the purchase price when the option is
exercised but is lost if it is not. See Lease-to-Own House Purchases.
Origination fee
An upfront fee charged by some lenders, usually expressed as a percent of the
loan amount. It should be added 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.
Overage
The difference between the price posted to its loan officers by a lender or
mortgage broker, and the price charged the borrower. See What Is a Mortgage
Overage?
Partial prepayment
Making a payment larger than the scheduled payment as a way of paying off the
loan earlier. See Prepayment.
Paydown magic
Belief that there is a special way to pay down the balance of a home mortgage
faster, if you know the secret. See Are Some Mortgage Prepayment Methods Better?
and Save With a Large Payment at Closing?
Payment adjustment interval
The period between payment changes on an ARM, which may or may not be the same
as the interest rate adjustment period. Loans on which the payment adjusts less
frequently than the rate may generate negative amortization.
Payment increase cap
The maximum percentage increase in the payment on an ARM at a payment adjustment
date. A 7.5% cap is common.
Payment decrease cap
The maximum percentage decrease in the payment on an ARM at a payment adjustment
date.
Payment period
The period over which the borrower is obliged to make payments. On most
mortgages, the payment period is a month, but on some it is biweekly.
Payment power
A program begun by Fannie Mae in 2003-4 that allows a borrower to skip up to 2
mortgage payments in any 12 month period, and up to 10 over the life of a loan.
See Mortgage Payment Flexibility Under "Payment Power" and How Would a Truly
Flexible Mortgage Work?
Payment rate
The interest rate used to calculate the mortgage payment, which is usually but
not necessarily the interest rate.
Payment shock
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.
Payoff month
The month in which the loan balance is paid down to zero. It may or may not be
the term.
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. See Mortgage Closing Date: Does It Matter?
Periodic refinancing
An ill-advised scheme to tap into equity for cash advances through periodic
refinancings. See Periodic Mortgage Refinancing: Who Gets Conned?
Permanent buydown
Paying points as a way of reducing the interest rate.
Pick a Payment ARM
Same as Flexible Payment ARM.
Piggyback mortgage
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. See Piggyback Loans:
Two Mortgages Cost Less than One?
Pipeline risk
The lender's risk that between the time a lock commitment is given to the
borrower and the time the loan is closed, interest rates will rise and the
lender will take a loss on selling the loan. See Why Is Locking Unique to
Mortgages?
PITI
Shorthand for principal, interest, taxes and insurance, which are the components
of the monthly housing expense.
PMI
Private mortgage insurance, as distinguished from insurance provided by
government under FHA and VA. See Mortgage insurance.
Points
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. See Mortgage Points
and Rebates.
Portable mortgage
A mortgage that can be moved from one property to another. These were introduced
in the US by E*TRADE Mortgage in 2003. See Portable Mortgages: A Useful Option?
Portfolio lender
A lender that holds the loans it originates in its portfolio rather than selling
them, as a temporary lender does.
Posted prices
The mortgage prices delivered by lenders to loan officers and mortgage brokers,
as opposed to the final prices paid by borrowers. The distinction is discussed
in Why Do Minorities Pay More For Mortgages?
Pre-approval
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. See Mortgage Qualification Versus Mortgage Pre-Approval, and
Mortgage Pre-Approval: What Is It Good For?
Predatory lending
A variety of unsavory lender practices designed to take advantage of unwary
borrowers. See the articles on Predatory Mortgage Lending.
Prepayment
A payment made by the borrower over and above the scheduled mortgage payment. If
the additional payment pays off the entire balance it is a "prepayment in full";
otherwise, it is a "partial prepayment." For articles on prepayment, see
Mortgage Prepayment (Paying Off Early).
Prepayment penalty
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. Read Mortgage Prepayment
Penalties.
Pre-qualification
Same as qualification.
Price-gouging
Charging interest rates and/or fees that are excessive relative to what the same
borrowers could have found had they shopped the market. Read What Is Predatory
Lending? and Is This a Good Definition of Predatory Lending?
Primary residence
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. See What Is a "Primary"
Residence?
Principal
The portion of the monthly payment that is used to reduce the loan balance. See
Amortization.
Principal limit
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. See
Which Reverse Mortgage Plan Do I Choose?
Private mortgage insurance
Mortgage insurance provided by private mortgage insurance companies, or PMIs.
See Mortgage Insurance.
Processing
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.
Property flipping
Successive sham home sales at progressively higher prices as part of a scheme to
defraud FHA. See What Is Predatory Lending?
Purchase money mortgage
A mortgage offered by a house buyer as partial payment for the house. From the
seller's point of view, it is seller financing.
Qualification
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. For articles on qualification, see Qualifying For
a Mortgage. Also see Mortgage Concepts Home Buyers Should Know.
Qualification rate
The interest rate used in calculating the initial mortgage payment in qualifying
a borrower. The rate used in this calculation may or may not be the initial rate
on the mortgage. On ARMs, for example, the borrower may be qualified at the
fully indexed rate rather than the initial rate.
Qualification ratios
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 Freddie Mac; they may also vary with the
loan-value ratio and other factors. See Qualifying For a Mortgage.
Qualification requirements
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. See Qualifying
For a Mortgage.
Rate
See Interest Rate.
Rate caps
Limitations on the size of rate adjustments on an ARM, often expressed in a/b/c
fashion: "a" is the maximum rate change at the first rate adjustment, "b" is the
maximum at all subsequent adjustments, and "c" is the maximum increase over the
initial rate during the life of the contract.
Rate/point breakeven
The period you must retain a mortgage in order for it to be profitable to pay
points to reduce the rate. See The Break-Even Period For Paying Points on a
Mortgage
Rate/point options
All the combinations of interest rate and points that are offered on a
particular loan program. On an ARM, rates and points may also vary with the
margin and interest rate ceiling.
Rate protection
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. See Locking the Price of a
Mortgage Loan.
Rate sheets
Tables of interest rates and points that lenders distribute daily to their loan
officer employees or mortgage brokers. See Questions About Rate Sheets.
Rebate
Same as Negative points.
Recast payment
Raising the mortgage payment to the fully amortizing payment. Periodic recasts
are sometimes used on ARMs in lieu of or in addition to negative amortization
caps.
Referral fees
Payments made by service providers to other parties as quid pro quo for
referring customers. For example, a title company provides something of value to
a Realtor or lender for sending a customer who requires title insurance. See
Questions About Referral Fees.
Referral power
The ability to direct a client to a specific vendor. Referral power is based on
information and authority of the referrer, and ignorance of the client. See
Questions About Referral Fees.
Referral site
A mortgage web site that introduces potential borrowers to participating
lenders, in some cases to multiple hundreds of them. The principal lure to the
consumer is information on generic prices posted by the lenders. See Are Are
Mortgage Referral Sites on the Internet Useful?
Refinance
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. For articles on refinancing, see Mortgage Refinancing.
Rent premium
An increment above the rent paid on a lease-to-own home purchase, which is
credited to the purchase price if the purchase option is exercised, but which is
lost if the option is not exercised. See Lease-to-Own House Purchases.
Required cash
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.
RESPA
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.
Retail lender
A lender who offers mortgage loans directly to the public. As distinct from a
wholesale lender who operates through mortgage brokers and correspondents.
Reverse mortgage
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.
See Reverse Mortgages.
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. See Rescinding a
Mortgage Refinance.
Scenario analysis
Determining how the interest rate and payment on an ARM will change in response
to specified future changes in market interest rates, called "scenarios". See
Choosing Between Fixed and Adjustable Rate Mortgages.
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 (see Option (Flexible Payment) ARMs).
Second mortgage
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. For articles on second mortgages,
also known as "home equity loans," see Second Mortgages.
Secure option ARM
An option ARM on which the initial rate holds for 5 years rather than one month.
See A More Transparent Option ARM.
Secondary markets
Markets in which mortgages or mortgage-backed securities are bought and sold.
See Will My Mortgage Loan Be Sold?, and Do Secondary Mortgage Markets Help
Borrowers?
Self-employed borrower
A borrower who must document income using tax returns rather than information
provided by an employer. This complicates the process somewhat. See Difficult
For Self-employed To Qualify For a Mortgage?
Seller contribution
A contribution to a borrower's down payment or settlement costs made by a home
seller, as an alternative to a price reduction. See Are House Seller
Contributions Kosher?
Seller financing
Provision of a mortgage by the seller of a house, often a second mortgage, as a
condition of the sale.
Servicing
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. See articles on Mortgage Servicing Problems.
Servicing agent
The party who services a loan, who may or may not be the lender who originated
it. See Is There Recourse Against Bad Mortgage Servicing?
Servicing release premium
A payment made by the purchaser of a mortgage to the seller for the release of
the servicing on the mortgage. It has no direct relevance to borrowers.
Servicing transfer
When one servicing agent is replaced by another. Read When Your Mortgage Lender
Goes Bankrupt.
Settlement costs
Costs that the borrower must pay at the time of closing, in addition to the down
payment. For articles on settlement costs, see Settlement Costs.
Shared appreciation mortgage
A mortgage on which the borrower gives up a share in future price appreciation
in exchange for a lower interest rate and/or interest deferral. Read Is This
Shared Appreciation Mortgage a Good Deal?
Shopping site
A type of multi-lender web site that offers borrowers the capacity to shop among
multiple competing lenders. See Recent Developments in Mortgage Web Sites.
Short sale
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. See Options When
Equity in Your Home is Gone
Silent second
A second mortgage used to deceive the first mortgage lender, or to provide
preferential (subsidized) terms to qualified home buyers. See Silent Second
Mortgages.
Simple interest mortgage
A mortgage on which interest is calculated daily based on the balance at the
time of the last payment. The daily interest charge within the month is constant
-- interest is not charged on the interest charges of prior days. See What Are
Simple Interest Mortgages?
Simple interest biweekly mortgage
A biweekly mortgage on which the biweekly payment is applied to the balance
every two weeks, rather than held in an account as on a conventional biweekly.
See Alternative Early Payoff Plans. Also, The Simple Interest Biweekly Scam.
Single file mortgage insurance
A type of mortgage insurance on which the lender pays the premium and prices it
in the interest rate. See Single File Mortgage Insurance: An Advance?
Single-lender web site
A web site of an individual lender or mortgage broker who wants users to select
a loan from them. They are easy to identify because the name of the lender or
broker will be prominently displayed on the screens. Single-lender sites account
for the majority of all mortgage web sites. See Single-Lender Mortgage Web
Sites.
Stated assets
A documentation requirement where the borrower discloses her assets but they are
not verified by the lender. See What Are Mortgage Documentation Requirements?
Stated income
A documentation requirement where the lender verifies the source of the income
but not the amount. See What Are Mortgage Documentation Requirements? and Stated
Income Loans: Lie to Get a Better Rate?
Streamlined refinancing
Refinancing that omits some of the standard risk control measures, and is
therefore quicker and less costly.
Subordinate financing
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.
Subordination policy
The policy of a second mortgage lender for allowing a borrower to refinance the
first mortgage while leaving the second in place. See Subordination Policy of
Second Mortgage Lenders
Sub-prime borrower
A borrower with poor credit, who can borrow only from sub-prime lenders who
specialize in dealing with borrowers who have poor credit. Such borrowers pay
more than prime borrowers, and are sometimes taken advantage of. Not all
borrowers who deal with sub-prime lenders, however, are sub-prime borrowers.
Some could obtain loans from mainstream lenders if they properly shop the
market. Read Should Mortgage Borrowers With Poor Credit Shop?
Sub-prime lender
A lender who specializes in lending to sub-prime borrowers. See What Is a
Sub-Prime Mortgage Lender?
Sub-prime market
The network of sub-prime lenders, mortgage brokers, warehouse lenders and
investment bankers who make possible the delivery of loans to sub-prime
borrowers. See Upheaval in the Sub-Prime Market.
Swing loan
Same as Bridge loan.
Tangible net benefit
The net gain to a borrower from a refinancing, which some proposed legislation
would make the responsibility of lenders. See Are Lenders Responsible For a
"Tangible Net Benefit?"
Tax service fee
A fee charged by some lenders at closing to cover the cost of paying taxes on
the borrower's property when they come due, or (if the borrower is paying the
taxes), verifying that the payment has been made.
Teaser rate
The initial interest rate on an ARM, when it is below the fully indexed rate.
Temporary buydown
A reduction in the mortgage payment in the early years of the loan in exchange
for an upfront cash payment provided by the home buyer, the seller, or both. See
What Is a Temporary Buydown?
Temporary lender
A lender that sells the loans it originates, as opposed to a portfolio lender
who holds them.
Term
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. For articles on
the subject, see Mortgage Term.
Title insurance
Insurance against loss arising from problems connected to the title to property.
See Questions About Title Insurance.
Total housing expense
Housing expense plus Monthly debt service.
Total expense ratio
The ratio of Total housing expense to borrower income.
Total interest payments
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. See Effective rate.
Total expense ratio
The ratio of housing expense plus current debt service payments to borrower
income, which is used (along with the housing expense ratio and other factors)
in qualifying borrowers. See qualification requirements.
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. See Does Truth in Lending Help?
Underage
Fees collected from a borrower by a loan officer that are lower than the target
fees specified by the lender or mortgage broker who employs the loan officer.
See What Is a Mortgage Overage?
Underwriting
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.
Underwriting requirements
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.
Upfront Mortgage Broker (UMB)
A mortgage broker who charges a set fee for services provided, established in
writing at the outset of the transaction, and acts as the borrower's agent in
shopping for the best deal. For articles on UMBs, see Upfront Mortgage Brokers.
UMBs are listed at List of Upfront Mortgage Brokers.
Upfront Mortgage Lender
A lender offering loans on the internet who provides mortgage shoppers with the
information they need to make an informed decision before applying for a
mortgage; and guarantees them fair treatment during the period after they apply
through to closing. See Upfront Mortgage Lenders.
VA mortgage
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. See Are VA Mortgage Loans a Good Deal?
Waive escrows
Authorization by the lender for the borrower to pay taxes and insurance
directly. This is in contrast to the standard procedure where the lender adds 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. See
How Can I Avoid Escrows on My Mortgage?
Warehouse lender
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. See Upheaval
in the Sub-Prime Market.
Warrantable condos
A condominium project with features that lenders view as protections against
hazards that would threaten the value of condo units. These features include the
project being completed with most units sold rather than rented, no one party
owning more than 10% of them, adequate insurance coverage of common structures,
and an ownership association independent of the developer.
Wholesale lender
A lender who provides loans through mortgage brokers or correspondents. The
mortgage broker or correspondent initiates the transaction, takes the borrower's
application, and processes the loan. As distinct from a Retail lender.
Wholesale mortgage prices
The interest rate and points quoted by wholesale lenders to mortgage brokers and
correspondent lenders. See Wholesale Mortgage Prices.
Workout assumption
The assumption of a mortgage, with permission of the lender, from a borrower
unable to continue making the payments. See Mortgage Payment Problems:What If
You Can't Pay?
Worst case scenario
The assumption that the interest rate on an ARM rises to the maximum extent
permitted in the note. On a one-month ARM with no rate adjustment caps, for
example, the rate would jump to the maximum rate stipulated in the note in month
2.
Wrap-around mortgage
A mortgage on a property that already has a mortgage, where the new lender
assumes the payment obligation on the old mortgage. Wrap-around mortgages arise
when the current market rate is above the rate on the existing mortgage, and
home sellers are frequently the lender. A due-on-sale clause prevents a
wrap-around mortgage in connection with sale of a property except by violating
the clause. See What Is a Wrap-Around Mortgage?
Yield-Spread premium.
Same as Negative points.
Yield-Spread premium abuse
The practice by mortgage brokers of pocketing a rebate from the lender for
delivering a high-rate loan, without the knowledge of the borrower. See
Eliminating Yield Spread Premium Abuse.
Yield Curve
A graph that shows, at any given time, how the yield varies with the period to
maturity. Usually, the curve slopes upwards but occasionally it slopes down or
is flat. A flat yield curve means that yields on long-term bonds are not much
higher than those on short-term notes. See With a Flat Yield Curve, Which
Mortgages Are Best?
1 Month Option ARM
Same as Flexible Payment ARM.
3/2 Downpayment
Programs offered by some lenders under which a borrower who is able to secure a
grant or gift equal to 2% of the down payment will only have to provide a 3%
down payment from their own funds. This can be a good deal for a cash-short
borrower.
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. See Piggy Back Loans: Two
Mortgages Cost Less than One?
12 MTA
An interest rate index that is used on some ARMs. It is the average of the most
recent 12 monthly values of the Treasury One-Year Constant Maturity series. See
Which Adjustable Rate Mortgage Index Is the Best?
12 MTA Pay Option ARM
Same as Flexible Payment ARM.
3.95% ARM
A monthly ARM on which the initial rate is 3.95%. See Is a 3.95% Adjustable Rate
Mortgage a Good Deal?
100% loan
A loan with no down payment. The loan amount equals the property value. See 100%
Mortgage Loans: Blessing or Curse?
125% loan
A loan for 125% of property value.
40-Year Mortgage
A mortgage with a term of 40 years. See 40-Year Loan or Modify the 30 and 15?
