Adjustable Rate Mortgage (ARM)A mortgage that typically includes a fixed introductory rate followed by a period when the rate can vary within a pre-determined range. The monthly payment, after the initial fixed period, can change as the interest rate increases or decreases over time. ARMs typically begin with a fixed rate for a period of 3, 5, 7 or 10 years. The start rate can be lower by as much as 1% compared to their 30-year fixed counterparts. Changes to the interest rate during the adjustment period for an ARM are typically linked to an index such as the London Inter-Bank Offer Rate (LIBOR). Adjustment limitations on an annual and a lifetime basis are controlled by predetermined movement caps. It is typical that these caps will limit the interest rate movement to 2% annually and 5% over the life of the loan.
AmortizationThe gradual reduction of a debt by way of regularly scheduled payments including the interest due and a portion of the remaining principal balance.
Amortization ScheduleA table of data that includes specific details of each monthly payment over the term of a loan. Details include the amount of interest and principal being paid each period as well as the total payment amount.
Annual Percentage Rate (APR)Typically referred to as “the cost of credit,” APR is expressed as an interest rate and aims to provide a single point of reference for consumers who would like to understand the total expense associated with a mortgage loan. APR is different than the actual loan interest rate (which determines monthly payment) because it includes certain up-front costs and mortgage insurance (if applicable). The APR calculation assumes that the referenced loan will be held until maturity (end of the term). Accordingly, those borrowers who plan to hold a loan for a period shorter than the full term may want to compare up front transaction costs more closely.
AppraisalA standardized written report detailing a property’s value, neighborhood and other relevant information. Values are typically determined based on an analysis that includes recent sale transactions of similar-styled and sized homes in an area that would be considered comparable. Neighborhood and community trends such as vacancy rates and the amount of time a home is typically listed for sale are also factored into the analysis. A state-licensed appraiser will typically complete an appraisal report after thorough review of property public records, the property itself and the surrounding community’s real estate transactions in MLS (multiple listing service).
AssetsAssets can be cash or cash-equivalent accounts, provided that the origin of the funds can be documented. The process of documenting assets during a mortgage transaction typically involves identifying the origin of the funds and verifying the funds have been available for at least the most recent 60-day period. Examples of assets used in mortgage transactions include cash in a checking or savings account, stocks and bonds, and those funds held in retirement accounts. Cash on hand, or funds which have recently been deposited into an account without a valid explanation are typically not considered as assets for the purpose of mortgage transactions.
Balloon MortgageA mortgage that typically includes a low fixed introductory rate followed by a one-time payment to satisfy the entire remainder of the loan balance. Balloon mortgages will typically begin with a fixed rate for a period of 3, 5, 7 or 10 years.
Cash-Out RefinanceA refinance loan that exceeds the total amount required to pay off all outstanding debts on a property and any applicable closing costs associated with the loan. Funds in excess of the outstanding debt and applicable closing costs are received as cash by the homeowner.
Closing CostsFees incurred, directly or indirectly, during the course of a mortgage transaction. Closing costs can include charges directly from the lender or broker as well as the title company, an appraiser, and other service providers. Certain states may also charge a transfer tax in purchase transactions.
Closing DisclosureA document that discloses the finalized loan terms, projected monthly payments and total of fees and costs associated with a mortgage loan. This five-page document was implemented industry-wide in October of 2015 and is meant to replace both the HUD-1 (commonly referred to as a “settlement statement”) and Truth In Lending (TIL) for the vast majority of mortgage transactions. This document is provided, by law, three days prior to settlement and allows mortgage borrowers the ability to compare the initially estimated loan terms with the actual loan terms they will be receiving.
Combined Loan-To-Value (CLTV)A number, represented as a percentage, which summarizes the ratio of all mortgages and liens compared to the home value or purchase price.
CommitmentA formal offer made by a lender to provide a loan based on the income & assets provided, credit profile, and a property appraisal review. Typically, a loan commitment is issued once the property appraisal is accepted and all major qualifying factors have been satisfied. A loan commitment will often detail a few remaining minor conditions or verifications, such as re-verification of employment, which are intentionally obtained just prior to a closing date.
Conforming MortgageA mortgage that adheres to the criteria set forth by Fannie Mae and Freddie Mac, the two largest buyers of loans in the United States. The most well-known criteria for a conforming loan is the upper loan limit of $484,350 based on a single-family, one-unit property (in most areas). Other criteria include debt-to-income ratio standards and certain documentation requirements that support information entered on the loan application.
Conventional MortgageA mortgage that is not insured or guaranteed by a government agency such as the Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA). Conventional loans can be either conforming or non-conforming.
Cooperative Housing (Co-op)An ownership structure where a building resident maintains an absolute right to occupy their unit, only after completing the purchase of stock in a corporation or association that owns the property. In a Co-op, a resident does not own their unit directly, but rather, is entitled to occupy the unit in the building which is owned by the cooperative.
Credit ReportA document which provides details regarding an individual’s past and current credit accounts as well as a summarization of public records and, in some cases, past employment and residential addresses. Items such as credit cards, auto loans, mortgages and student loans are typically detailed including information such as the account open date, the account closed date (if applicable) and any outstanding loan balances with the required monthly payment. Lenders typically review a credit report when considering a borrower’s overall creditworthiness.
Credit ScoreA single number that is meant to summarize and provide insight into the creditworthiness and risk rating associated with a borrower. Credit scores can range from 300 (worst) to 850 (best). Factors impacting an individual’s credit score include, but are not limited to, the total amount of debt an individual may be carrying, the length of time which various accounts have been open and active, and if any credit-related public records have been recorded recently. Credit scores are typically a major factor in determining the available loan programs for a borrower as well as the available interest rates for the borrower relative to others in the market.
Debt ConsolidationA process where an individual will replace several loans, credit card balances, or other debts with a single new loan. The process of debt consolidation will typically result in a lower overall monthly payment and relatively longer repayment schedule.
Debt-To-Income RatioA number, expressed as a percentage, which summarizes the total of an individual’s monthly debt obligations compared to their documentable monthly income. A debt-to-income ratio of 0% would indicate that a borrower has no monthly debt obligations where a debt-to-income ratio of 50% would indicate that half of a borrower’s monthly income is required to pay debts on a monthly basis.
Discount Points (Points)A cash payment made to the lender at closing in exchange for a reduced interest rate over the term of the loan. “Paying points,” as it is commonly referred to, is electing to pay a portion of the loan interest immediately at closing in exchange for a lower interest expense (through a lower interest rate) during the loan. One “point” refers to 1% of the loan balance.
Down PaymentAn amount of money, equal to the purchase price of a home minus the total of any loan amounts, which a borrower will bring to closing. Down payments vary by loan program and must be disclosed well in advance of closing so that the lender can validate the source of the funds. With certain loan programs, “gift funds” and other sources of funds will be considered valid down payment sources.
EquityAn amount, typically expressed as a dollar figure, equal to the portion of a home that is free of liens and mortgages. As a home’s value increases or as a mortgage balance is paid down, a homeowner’s equity in a property will increase.
EscrowDuring purchase transactions, escrow is a neutral third party tasked with carrying out instructions from the buyer and/or seller regarding the holding and disbursement of funds in a real estate transaction. Certain deposit amounts and other funds are typically held “in escrow” which protects the funds from improper use. For homeowners who have completed their real estate purchase, an escrow account can be used to collect and maintain funds for paying items such as homeowners insurance, flood insurance, real estate taxes and other predictable recurring property related expenses.
Fannie MaeA company operating under a congressional charter that buys mortgages from thousands of banks and lenders. Banks and lenders rely on Fannie Mae as a predictable purchaser of those loans that conform to the agency’s guidelines – thereby creating a channel to free up cash and make additional loans. Fannie Mae was started by the federal government in 1938 under the original name Federal National Mortgage Association (FNMA).
Federal Housing Administration (FHA)A division of the Department of Housing and Urban Development, which provides mortgage insurance on loans made by FHA-approved lenders. The FHA was established to improve homeownership opportunities for all Americans. By insuring loans, which meet their criteria, the FHA reduces the risk level associated with the loans issued by a lender. This provides lenders the opportunity to offer competitive rates despite the increased flexibility provided by FHA mortgages.
FHA MortgageA loan that is provided by an FHA-approved lender and is insured by the Federal Housing Administration. FHA mortgages include mortgage insurance premiums (MIP), which are paid for by the borrowers and decrease the associated risk level.
FICOThe current name of the Fair Isaac Corporation, the company that developed the most commonly used credit scoring system in the world. As an analytics company, FICO collects past information regarding an individual’s credit behavior and uses this information in an attempt to predict the future risk of extending additional credit to a borrower.
Fixed Rate MortgageA mortgage with an interest rate that will not change during the term of the loan. Fixed rate mortgages provide borrowers with the stability of a fixed payment on the principal and interest portion (PI of PITI) of their monthly obligation. With a fixed rate mortgage, yearly property taxes and the associated homeowners insurance requirements can still change over time.
ForeclosureA legal process where the mortgage lender will take possession of a property, typically due to a homeowner’s failure to maintain timely payments. The lender will typically attempt to sell the home to recover the secured debt remaining on the property. Foreclosure regulations vary by state and impact both the timing and actions available for parties involved in the process.
Freddie MacA company operating under a congressional charter that buys mortgages from thousands of banks and lenders. Banks and lenders rely on Freddie Mac as a predictable purchaser of those loans that conform to the agency’s guidelines – thereby creating a channel to free up cash and make additional loans. Freddie Mac was started by the federal government in 1970 under the original name Federal Home Loan Mortgage Corporation. Freddie Mac is regulated by the Federal Housing Financing Agency.
Ginnie MaeA government-owned corporation that guarantees investors the timely payment of principal and interest on mortgage backed securities that include federally insured loans, such as FHA loans, and federally backed loans, such as VA loans. Ginnie Mae was created in 1968 after Fannie Mae was split into two separate corporations. One corporation retained the name Fannie Mae and focused on conventional loans. The other corporation was named the Government National Mortgage Association (GNMA), otherwise known as Ginnie Mae, and focused on government insured and backed loans.
Good Faith Estimate (GFE)A multi-paged disclosure document, included with other important documents as part of an initial disclosure package, which details costs and other terms associated with a reverse mortgage (and other loan types prior to October 3, 2015).
HARP ProgramA program, launched in 2009 by the Federal Housing Finance Agency, that enables borrowers with little or no equity in their property to refinance into a more affordable mortgage without new or additional mortgage insurance requirements.
Home Equity Conversion Mortgage (HECM)A reverse mortgage that is insured by the Federal Housing Administration (FHA). FHA insurance protects the lender making the loan as well as the borrowers receiving the loan. Lenders are insured against situations where a homeowner’s ending loan balance could surpass the home’s current value. Borrowers are insured against instances where the reverse mortgage lender can no longer make promised payments or meet the servicing obligations. HECMs are available for borrowers who are 62 years old or older and can be obtained to refinance an existing loan or purchase a new home.
Home Equity Line Of Credit (HELOC)A type of loan, secured by a borrower’s home, where a lender agrees to loan up to a certain amount of money over a period of time. A HELOC (pronounced “He-lock”) typically provides an initial draw period where the borrower can obtain funds up to an amount equal to the limit of the line of credit. During this draw period, borrowers will make interest-only payments based on the outstanding loan balance. After the initial draw period, which can last up to ten years, it is common for a HELOC to enter a payback period. During this time, the outstanding loan balance is typically repaid through a 15-year amortizing loan.
Home Equity LoanA loan that is extended to a borrower in a lump sum and secured as a lien on a property. Also referred to as second mortgages, home equity loans are repaid with equal monthly payments over a fixed term, typically equal to 10 or 15 years.
Homeowner's Association Fees (HOA fees)Money collected from property owners, in certain types of residential property types, for use by the association to maintain amenities and services. Typically, HOA fees are collected to cover recurring expenses for a community such as garbage collection, insurance, landscaping and general maintenance of community buildings and property.
Homeowners insuranceA type of insurance which typically provides coverage for a homeowner in the event of fire, burglary, storms and other unexpected or unplanned events. Homeowners insurance may also permit the protection of certain personal items located within the property. If a mortgage exists on a property, the associated lender will require coverage in an amount that ensures the home can be rebuilt in the event of a total loss.
HUDA department in the Executive branch of the United States federal government focused on developing and executing housing policies. The U.S. Department of Housing and Urban Development was founded as part of the “Great Society” program of President Lyndon Johnson in 1965.
HUD-1 StatementA detailed closing document, included with other important forms as part of a loan closing package, which lists all charges and credits associated with a mortgage transaction. As of October 2015, the HUD-1 was replaced in most mortgage transactions by a document called the Closing Disclosure.
IndexA benchmark rate which, when combined with a margin, determines the potential future interest rate on an adjustable rate mortgage (ARM). Commonly used indexes in the mortgage industry include the one year Constant Maturity Treasury (CMT) and the London Inter Bank Offering Rate (LIBOR).
Interest RateA periodic charge, expressed as a percentage, which the borrower pays in exchange for a loan. The mortgage interest rate, or “rate”, is expressed in annual terms and with the additional information regarding the type and term of the loan, will determine the monthly payment required by the borrower.
Investment PropertyA property that has been purchased with a primary goal of making profit. Typical methods for profiting from investment properties include earning rental income or improving the property and reselling shortly after purchase.
Jumbo MortgageA mortgage with an initial loan balance in excess of the conforming loan limits set forth by Fannie Mae and Freddie Mac. Jumbo mortgages are available with fixed or adjustable interest rates on primary, second or investment properties.
LienA public record filed with a county records office that ensures a creditor can protect and collect their interest in a property. A mortgage is one type of lien that lenders place on a property to ensure they will be repaid.
Loan Estimate DisclosureA form, included as part of an initial disclosure package, which provides important loan details including the expected interest rate, monthly payment, and total of closing costs. While most loans will include a Loan Estimate disclosure, certain loans such as reverse mortgages still use a Good Faith Estimate and a Truth in Lending disclosure.
Loan-To-Value ratio (LTV)A number, represented as a percentage, indicating the relationship of a first mortgage compared to the home value or purchase price.
MarginA number which is expressed in percentage points that, when combined with an index, determines the potential future interest rate on an adjustable rate mortgage (ARM).
MortgageA legal document that creates a lien on a property after an agreement is reached between a lender and a borrower. The mortgage is recorded as a public record document at the local county’s office and secures the subject property as the collateral in consideration for a loan.
Mortgage BankerA licensed individual or company that originates, processes and funds mortgage loans with their own funds or an established line of credit, also called a warehouse line.
Mortgage BrokerA licensed individual or company that originates and processes loans. Mortgage brokers do not directly fund mortgage loans. Rather, through established relationships with mortgage bankers and other lenders, they work with borrowers to arrange loan terms in exchange for compensation.
Mortgage Insurance (MI)A specific type of insurance that compensates lenders in the event a borrower defaults on a mortgage loan. This insurance, which protects the lender, is paid for by the borrower and provides for increased flexibility in loan terms, such as lower required down payment amounts on purchase transactions. MI can be private or public depending on the type of loan issued. Additionally, MI may be collected at the time of closing, on a recurring monthly basis, or both at the time of closing and at recurring intervals.
Mortgage Insurance Premium (MIP)An amount of money, which can be collected at closing or at recurring intervals during a loan term, which is used to pay the mortgage insurance costs associated with FHA loans.
Mortgage LenderA licensed individual or company that provides funds for mortgage loans using their own cash or an established line of credit, also called a warehouse line. Mortgage lenders can also act as mortgage bankers, conducting origination and processing activities in addition to funding mortgage loans.
Negative AmortizationThe gradual increasing of a debt by way of regularly scheduled payments that are intentionally less than the associated interest accumulation during the same loan period. The unpaid interest from each period is added to the outstanding loan balance.
Non-Conforming MortgageA mortgage that does not adhere to the criteria set forth by Fannie Mae and Freddie Mac, the two largest buyers of loans in the United States.
NoteA document signed at closing which provides evidence of a mortgage debt and the promise to repay. A note will include specific details associated with a mortgage loan, such as borrower names, property address, interest rate, starting loan balance, loan term and the amount charged if payments are late.
OriginationThe process of beginning and creating a mortgage loan. Origination activities include collecting documents, recording verbal and other factual information, and evaluating credit reports for the purposes of identifying those programs for which a borrower may qualify.
Origination FeeA fee charged to the mortgage borrower and collected at the time of loan closing. An origination fee can be expressed as a flat fee or as a percentage of the initial loan balance. Unlike points which, when paid, will lower the interest rate of a mortgage loan, an origination fee is direct compensation to the mortgage originator and will not affect the interest rate.
PITIAs an acronym for “Principal, Interest, Taxes and Insurance”, PITI (“pity”) represents the core components of a mortgage payment. While principal and interest (a.k.a. “PI”) will be affected by the loan interest rate, term and initial loan balance, the taxes and insurance (a.k.a. “TI”) are more directly related to the physical property. For certain properties, particularly those that require HOA dues or flood insurance, PITI will not be representative of the entire housing payment.
Pre-ApprovalA document issued to a prospective borrower after a loan officer has verified the buyer’s income, credit score, debts and down payment sources. Pre-approvals are more valuable than pre-qualifications because they involve a full credit review and may also involve a submission to an automated underwriting service.
Pre-QualificationAn informal process in which a prospective borrower will interact with a lender to preliminarily determine if and for how much, they may qualify for when it comes to a home purchase transaction. Information shared during the pre-qualification process is typically limited to income, assets and credit profile. The process may not involve obtaining a written credit report.
PrepaymentA payment that is more than the minimum required monthly payment set forth in the note. Prepayments can be as small as a penny and as large as the entire remaining balance on a mortgage loan.
Prepayment PenaltyA charge imposed by a mortgage lender when a borrower pays a mortgage in advance by an amount that violates the terms of their agreement. Prepayment penalties typically last no longer then three years and are increasingly disallowed due to ongoing mortgage reform.
Primary ResidenceA dwelling in which a borrower will spend the majority of their time each year.
PrincipalThe remaining balance of a mortgage or, in the case of PITI, the portion of a monthly mortgage payment that is applied to, and reduces, the outstanding mortgage balance.
Private Mortgage Insurance (PMI)Mortgage insurance, provided by private insurance companies, intended to protect lenders who make conventional loans in excess of 80% loan-to-value.
Purchase AgreementA binding contract between a buyer and a seller of real estate that includes the terms of the sale such as settlement date and purchase price. A purchase agreement may also be called an agreement of sale.
Rate And Term RefinanceA refinance transaction where the interest rate an/or term of the mortgage is modified without extending additional cash to the borrower.
Rate CapsAdjustment limitations that govern the yearly and lifetime movement of an interest rate following the initial fixed period of an ARM loan.
Rate LockA guarantee provided by a mortgage lender that a specific rate will be available for a specified time period. A rate lock will also detail if, and how many, points are required to provide the specified rate. Typical rate lock periods are 30, 60 or 90 days.
RefinanceThe process of obtaining a new mortgage to pay off an existing mortgage or obtain cash out from a property. Refinance transactions can be any type of new mortgage obtained on property that is currently owned by a borrower as compared to purchases that are completed on properties being transitioned from a seller to a buyer.
Reverse MortgageA type of mortgage which is available exclusively for homeowners who are 62 years of age or older. Reverse mortgages allow homeowners to obtain cash out of their home in a lump sum, recurring monthly payments, or through a line of credit. Additionally, since no payments are required when a reverse mortgage is in place, these loans can be used to eliminate the burden of existing mortgage payments for those who meet the age requirement.
Second HomeA dwelling in which a borrower will spend a portion of their time each year. Second homes are typically located in vacation or resort areas.
Second MortgageA mortgage that is obtained after and in addition to a first mortgage on a property. Similar to a first mortgage, second mortgages are also liens on a property but hold a second level of priority. This means that, in the event of a default or foreclosure by the borrower, a second mortgage lien holder will be paid back only after the first mortgage lien holder has been paid in full. Due to this higher risk, second mortgages typically have higher interest rates. Terms for second mortgages can range from 10 years to 20 years and in many cases, are considered by homeowners who may also be considering a HELOC.
SettlementA meeting between the seller and buyer in a real estate transaction where the property ownership is legally exchanged according to the terms of the purchase agreement.
Tax LienA lien against a property for unpaid taxes.
TermThe period of time used to calculate the monthly mortgage payment required by a borrower. The loan term is, in most cases, equal to the amount of time that a loan will be in repayment. Typical loan terms are 30 years, 20 years and 15 years. Exceptions to this rule can include balloon mortgages where, although the term for purposes of calculation may be 20 or 30 years long, the loan will be due in full in a shorter period of time.
TILA-RESPA Integrated Disclosure rule (TRID)A rule that created a new set of documents which, as part of a loan transaction, aim to provide mortgage applicants and borrowers with clear and easy to understand information. TRID documents have replaced, for most mortgage transactions, the GFE, TIL, HUD-1 and final TIL with consolidated documents called the Loan Estimate and Closing Disclosure. The TRID rule went into effect in October of 2015.
TitleA document that provides a property owner with the legal rights to own and use a property. The title will also provide a property history that includes past owners and uses. In order to transfer or sell a property, the property title must be free of liens at time of transfer.
Title InsuranceInsurance that protects both the lender’s interest in a property, if a mortgage or lien exists, and the owner’s right to a property in the event of any future ownership disputes.
Truth-in-Lending (TIL)A document, provided with other disclosures at the time of origination and loan closing, which details terms specific to the cost of a loan. The TIL includes important terms such as the APR and interest rate. For most mortgages originated after October 2015, the Loan Estimate and Closing Disclosure have replaced the initial and final TIL.
UnderwritingThe process of evaluating and verifying data for the purpose of providing a mortgage loan. The underwriting process includes a thorough review of information provided by a borrower, the borrower’s employer, the credit reporting agency, the property appraiser and the title company.
VA Home LoanA mortgage provided by a private company, such as a broker, banker or lender, which is guaranteed by the U.S. Department of Veterans Affairs (VA). By guaranteeing a portion of each loan, the VA reduces the associated risk level for the lender. This provides lenders the opportunity to offer competitive rates to veterans, active military personnel, and military spouses who qualify for the program.