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Below you will find a list of terms relating to home
loans along with their definitions.
203(b): FHA program Which provides mortgage
insurance to protect lenders from default; used to finance the
purchase of new or existing one- to four family housing;
characterized by low down payment, flexible qualifying guidelines,
limited fees, and a limit on maximum loan amount.
203(k):
this FHA mortgage insurance program enables home buyers to finance
both the purchase of a house and the cost of its rehabilitation
through a single mortgage loan.
[A]
Amenity:
a feature of the home or property that serves as a benefit to the
buyer but that is not necessary to its use; may be natural (like
location, Woods, water) or man-made (like a swimming pool or
garden).
Amortization:
repayment of a mortgage loan through monthly installments of
principal and interest; the monthly payment amount is based on a
schedule that will allow you to own your home at the end of a
specific time period (for example, 15 or 30 years)
Annual
Percentage Rate (APR): calculated by using a standard
formula, the APR shows the cost of a loan; expressed as a yearly
interest rate, it includes the interest, points, mortgage
insurance, and other fees associated with the loan.
Application:
the first step in the official loan approval process; this form is
used to record important information about the potential borrower
necessary to the underwriting process.
Appraisal:
a document that gives an estimate of a property's fair market
value; an appraisal is generally required by a lender before loan
approval to ensure that the mortgage loan amount is not more than
the value of the property.
Appraiser:
a qualified individual who uses his or her experience and
knowledge to prepare the appraisal estimate.
ARM:
Adjustable Rate Mortgage; a mortgage loan subject to changes in
interest rates; when rates change, ARM monthly payments increase
or decrease at intervals determined by the lender; the Change in
monthly -payment amount, however, is usually subject to a Cap.
Assessor:
a government official who is responsible for determining the value
of a property for the purpose of taxation.
Assumable
mortgage: a mortgage that can be transferred from a seller
to a buyer; once the loan is assumed by the buyer the seller is no
longer responsible for repaying it; there may be a fee and/or a
credit package involved in the transfer of an assumable mortgage.
[B]
Balloon
Mortgage: a mortgage that typically offers low rates for an
initial period of time (usually 5, 7, or 10) years; after that
time period elapses, the balance is due or is refinanced by the
borrower.
Bankruptcy:
a federal law Whereby a person's assets are turned over to a
trustee and used to pay off outstanding debts; this usually occurs
when someone owes more than they have the ability to repay.
Borrower:
a person who has been approved to receive a loan and is then
obligated to repay it and any additional fees according to the
loan terms.
Bridal
Registry: a program supported by the FHA that allows
couples to open ('register" for) a bridal registry account
into which family and friends can deposit gifts of cash; the funds
in this account may then be used for a down payment on a house.
Building
code: based on agreed upon safety standards within a
specific area, a building code is a regulation that determines the
design, construction, and materials used in building.
Budget:
a detailed record of all income earned and spent during a specific
period of time.
[C]
Cap:
a limit, such as that placed on an adjustable rate mortgage, on
how much a monthly payment or interest rate can increase or
decrease.
Cash
reserves: a cash amount sometimes required to be held in
reserve in addition to the down payment and closing costs; the
amount is determined by the lender.
Certificate
of title: a document provided by a qualified source (such
as a title company) that shows the property legally belongs to the
current owner; before the title is transferred at closing, it
should be clear andfree of all liens or other claims.
Closing:
also known as settlement, this is the time at which the property
is formally sold and transferred from the seller to the buyer; it
is at this time that the borrower takes on the loan obligation,
pays all closing costs, and receives title from the seller.
Closing
costs: customary costs above and beyond the sale price of
the property that must be paid to cover the transfer of ownership
at closing; these costs generally vary by geographic location and
are typically detailed to the borrower after submission of a loan
application.
Commission:
an amount, usually a percentage of the property sales price, that
is collected by a real estate professional as a fee for
negotiating the transaction..
Condominium:
a form of ownership in which individuals purchase and own a unit
of housing in a multi-unit complex; the owner also shares
financial responsibility for common areas.
Conventional
loan: a private sector loan, one that is not guaranteed or
insured by the U.S. government.
Cooperative
(Co-op): residents purchase stock in a cooperative
corporation that owns a structure; each stockholder is then
entitled to live in a specific unit of the structure and is
responsible for paying a portion of the loan.
Credit
history: history of an individual's debt payment; lenders
use this information to gouge a potential borrower's ability to
repay a loan.
Credit
report: a record that lists all past and present debts and
the timeliness of their repayment; it documents an individual's
credit history.
Credit
bureau score: a number representing the possibility a
borrower may default; it is based upon credit history and is used
to determine ability to qualify for a mortgage loan.
[D]
Debt-to-income
ratio: a comparison of gross income to housing and
non-housing expenses; With the FHA, the-monthly mortgage payment
should be no more than 29% of monthly gross income (before taxes)
and the mortgage payment combined with non-housing debts should
not exceed 41% of income.
Deed:
the document that transfers ownership of a property.
Deed-in-lieu:
to avoid foreclosure ("in lieu" of foreclosure), a deed
is given to the lender to fulfill the obligation to repay the
debt; this process doesn't allow the borrower to remain in the
house but helps avoid the costs, time, and effort associated with
foreclosure.
Default:
the inability to pay monthly mortgage payments in a timely manner
or to otherwise meet the mortgage terms.
Delinquency:
failure of a borrower to make timely mortgage payments under a
loan agreement.
Discount
point: normally paid at closing and generally calculated to
be equivalent to 1% of the total loan amount, discount points are
paid to reduce the interest rate on a loan.
Down
payment: the portion of a home's purchase price that is
paid in cash and is not part of the mortgage loan.
[E]
Earnest
money: money put down by a potential buyer to show that he
or she is serious about purchasing the home; it becomes part of
the down payment if the offer is accepted, is returned if the
offer is rejected, or is forfeited if the buyer pulls out of the
deal.
EEM:
Energy Efficient Mortgage; an FHA program that helps home buyers
save money on utility bills by enabling them to finance the cost
of adding energy efficiency features to a new or existing home as
part of the home purchase
Equity:
an owner's financial interest in a property; calculated by
subtracting the amount still owed on the mortgage loon(s)from the
fair market value of the property.
Escrow
account: a separate account into which the lender puts a
portion of each monthly mortgage payment; an escrow account
provides the funds needed for such expenses as property taxes,
homeowners insurance, mortgage insurance, etc.
[F]
Fair
Housing Act: a law that prohibits discrimination in all
facets of the home buying process on the basis of race, color,
national origin, religion, sex, familial status, or disability.
Fair
market value: the hypothetical price that a willing buyer
and seller will agree upon when they are acting freely, carefully,
and with complete knowledge of the situation.
Fannie
Mae: Federal National Mortgage Association (FNMA); a
federally-chartered enterprise owned by private stockholders that
purchases residential mortgages and converts them into securities
for sale to investors; by purchasing mortgages, Fannie Mae
supplies funds that lenders may loan to potential home buyers
FHA:
Federal Housing Administration; established in 1934 to advance
home ownership opportunities for all Americans; assists home
buyers by providing mortgage insurance to lenders to cover most
losses that may occur when a borrower defaults; this encourages
lenders to make loans to borrowers who might not qualify for
conventional mortgages.
Fixed-rate
mortgage: a mortgage with payments that remain the same
throughout the life of the loan because the interest rate and
other terms are fixed and do not change.
Flood
insurance: insurance that protects homeowners against
losses from a flood; if a home is located in a flood plain, the
lender will require flood insurance before approving a loan.
Foreclosure:
a legal process in which mortgaged property is sold to pay the
loan of the defaulting borrower.
Freddie
Mac: Federal Home Loan Mortgage Corporation (FHLM); a
federally-chartered corporation that purchases residential
mortgages, securitizes them, and sells them to investors; this
provides lenders With funds for new home buyers
[G]
Ginnie
Mae: Government National Mortgage Association (GNMA); a
government-owned corporation overseen by the US Department of
Housing and Urban Development, Ginnie Mae pools FHA-insured and
VA-guaranteed loans to back securities for private investment; as
With Fannie Mae and Freddie Mac, the investment income provides
funding that may then be lent to eligible borrowers by lenders.
Good
faith estimate: an estimate of all closing fees including
prepaid and escrow items as well as lender charges; must be given
to the borrower within three days after submission of a loan
application.
[H]
HELP:
Home buyer Education Learning Program; an educational program from
the FHA that counsels people about the home buying process; HELP
covers topics like budgeting, finding a home, getting a loan, and
home maintenance; in most cases, completion of the program may
entitle the home buyer to a reduced initial FHA mortgage insurance
premium-from 2.25% to 1.75% of the home purchase price.
Home
inspection: an examination of the structure and mechanical
systems to determine a home's safety; makes the potential home
buyer aware of any repairs that may be needed.
Home
warranty: offers protection for mechanical systems and
attached appliances against unexpected repairs not covered by
homeowner's insurance; ,overage extends over a specific time
period and does not cover the home's structure.
Homeowner's
insurance: an insurance policy that combines protection
against damage to a dwelling and Is contents with protection
against claims of negligence )r inappropriate action that result
in someone's injury or )property damage.
Housing
counseling agency- provides counseling and assistance to
individuals on a variety of issues, including loan default, fair
housing, and home buying
HUD:
the US Department of Housing and Urban Development; established in
1965, HUD works to create a decent home and suitable living
environment for all Americans; it does this by addressing housing
needs, improving and developing American communities, and
enforcing fair housing laws.
HUD1
Statement: also known as the "settlement sheet,"
it itemizes all closing costs; must be given to the borrower at or
before closing.
HVAC:
Heating, Ventilation and Air Conditioning; a home's heating and
cooling system.
[I]
Index:
a measurement used by lenders to determine changes to the Interest
rate charged on an adjustable rate mortgage.
Inflation:
the number of dollars in circulation exceeds the amount of goods
and services available for purchase; inflation results in a
decrease in the dollar's value.
Interest:
a fee charged for the use of money .
Interest
rate: the amount of interest charged on a monthly loan
payment; usually expressed as a percentage.
Insurance:
protection against a specific loss over a period of time that is
secured by the payment of a regularly scheduled premium.
[J]
Judgment:
a legal decision; when requiring debt repayment, a judgment may
include a property lien that secures the creditor's claim by
providing a collateral source.
[L]
Lease
purchase: assists low- to moderate-income home buyers in
purchasing a home by allowing them to lease a home with an option
to buy; the rent payment is made up of the monthly rental payment
plus an additional amount that is credited to an account for use
as a down payment.
Lien:
a legal claim against property that must be satisfied When the
property is sold
Loan:
money borrowed that is usually repaid with interest.
Loan
fraud: purposely giving incorrect information on a loan
application in order to better qualify for a loan; may result in
civil liability or criminal penalties.
Loan-to-value
(LTV) ratio: a percentage calculated by dividing the amount
borrowed by the price or appraised value of the home to be
purchased; the higher the LTV, the less cash a borrower is
required to pay as down payment.
Lock-in:
since interest rates can change frequently, many lenders offer an
interest rate lock-in that guarantees a specific interest rate if
the loan is closed within a specific time.
Loss
mitigation: a process to avoid foreclosure; the lender
tries to help a borrower who has been unable to make loan payments
and is in danger of defaulting on his or her loan
[M]
Margin:
an amount the lender adds to an index to determine the interest
rate on an adjustable rate mortgage.
Mortgage:
a lien on the property that secures the Promise to repay a loan.
Mortgage
banker: a company that originates loans and resells them to
secondary mortgage lenders like :Fannie Mae or Freddie Mac.
Mortgage
broker: a firm that originates and processes loans for a
number of lenders.
Mortgage
insurance: a policy that protects lenders against some or
most of the losses that can occur when a borrower defaults on a
mortgage loan; mortgage insurance is required primarily for
borrowers with a down payment of less than 20% of the home's
purchase price.
Mortgage
insurance premium (MIP): a monthly payment -usually part of
the mortgage payment - paid by a borrower for mortgage insurance.
Mortgage
Modification: a loss mitigation option that allows a
borrower to refinance and/or extend the term of the mortgage loan
and thus reduce the monthly payments.
[O]
Offer:
indication by a potential buyer of a willingness to purchase a
home at a specific price; generally put forth in writing.
Origination:
the process of preparing, submitting, and evaluating a loan
application; generally includes a credit check, verification of
employment, and a property appraisal.
Origination
fee: the charge for originating a loan; is usually
calculated in the form of points and paid at closing.
[P]
Partial
Claim: a loss mitigation option offered by the FHA that
allows a borrower, with help from a lender, to get an
interest-free loan from HUD to bring their mortgage payments up to
date.
PITI:
Principal, Interest, Taxes, and Insurance - the four elements of a
monthly mortgage payment; payments of principal and interest go
directly towards repaying the loan while the portion that covers
taxes and insurance (homeowner's and mortgage, if applicable) goes
into an escrow account to cover the fees when they are due.
PMI:
Private Mortgage Insurance; privately-owned companies that offer
standard and special affordable mortgage insurance programs for
qualified borrowers with down payments of less than 20% of a
purchase price.
Pre-approve:
lender commits to lend to a potential borrower; commitment remains
as long as the borrower still meets the qualification requirements
at the time of purchase.
Pre-foreclosure
sale: allows a defaulting borrower to sell the mortgaged
property to satisfy the loan and avoid foreclosure.
Pre-qualify:
a lender informally determines the maximum amount an individual is
eligible to borrow.
Premium:
an amount paid on a regular schedule by a policyholder that
maintains insurance coverage.
Prepayment:
payment of the mortgage loan before the scheduled due date; may be
Subject to a prepayment penalty.
Principal:
the amount borrowed from a lender; doesn't include interest or
additional fees.
[R]
Radon:
a radioactive gas found in some homes that, if occurring in strong
enough concentrations, can cause health problems.
Real
estate agent: an individual who is licensed to negotiate
and arrange real estate sales; works for a real estate broker.
REALTOR:
a real estate agent or broker who is a member of the NATIONAL
ASSOCIATION OF REALTORS, and its local and state associations.
Refinancing:
paying off one loan by obtaining another; refinancing is generally
done to secure better loan terms (like a lower interest rate).
Rehabilitation
mortgage: a mortgage that covers the costs of
rehabilitating (repairing or Improving) a property; some
rehabilitation mortgages - like the FHA's 203(k) - allow a
borrower to roll the costs of rehabilitation and home purchase
into one mortgage loan.
RESPA:
Real Estate Settlement Procedures Act; a law protecting consumers
from abuses during the residential real estate purchase and loan
process by requiring lenders to disclose all settlement costs,
practices, and relationships
[S]
Settlement:
another name for closing .
Special
Forbearance: a loss mitigation option where the lender
arranges a revised repayment plan for the borrower that may
include a temporary reduction or suspension of monthly loan
payments.
Subordinate:
to place in a rank of lesser importance or to make one claim
secondary to another.
Survey:
a property diagram that indicates legal boundaries, easements,
encroachments, rights of way, improvement locations, etc.
Sweat
equity: using labor to build or improve a property as part
of the down payment
[T]
Title
1: an FHA-insured loan that allows a borrower to make
non-luxury improvements (like renovations or repairs) to their
home; Title I loans less than $7,500 don't require a property
lien.
Title
insurance: insurance that protects the lender against any
claims that arise from arguments about ownership of the property;
also available for home buyers
Title
search: a check of public records to be sure that the
seller is the recognized owner of the real estate and that there
are no unsettled liens or other claims against the property.
Truth-in-Lending:
a federal law obligating a lender to give fuII written disclosure
of aII fees, terms, and conditions associated with the loan
initial period and then adjusts to another rate that lasts for the
term of the loan.
Underwriting:
the process of analyzing a loan application to determine the
amount of risk involved in making the loan; it includes a review
of the potential borrower's credit history and a judgment of the
property value.
VA:
Department of Veterans Affairs: a federal agency which guarantees
loans made to veterans; similar to mortgage insurance, a loan
guarantee protects lenders against loss that may result from a
borrower default.
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