Addendum
A supplemental document for borrowers
to advise them of the characteristics of the mortgage loan they
are applying for. This document is often required when applying
for a government loan program.
Adjustment
period
The time between changes in your interest rate and/or monthly
payment with a variable rate loan. These intervals will vary
depending on the type of loan.
Amortization
The means by which a home loan is scheduled to be paid off,
including interest and principal, by a series of regular installment
payments. Loans are typically amortized over 30 years.
Application
Fee
A fee charged used to cover the out of pocket costs of processing
your loan.
Appraisal
A formal, written estimation by a qualified appraiser of the
current value of a home.
APR (Annual Percentage
Rate)
The cost of your credit expressed as a yearly rate. It takes
into account interest, points, and origination fee. Since
all lenders are required to use the same guidelines in determining
APR, this is a good basis for comparing the cost of various
loan programs.
Assumability/Assumption
A feature of the loan which permits you to transfer your mortgage
and its specified terms to the person(s) purchasing your home.
Having an assumable loan could make it easier for you to sell
your home, since assumption of a loan usually involves lower
fees and/or qualifying standards for the new borrower than a
new loan.
Bait and Switch
An unethical practice of some brokers where they promise a low
interest rate only to manipulate the situation, forcing you
to take a higher rate. They are betting the customer would
rather pay more than start the whole process over again.
Balloon
A short-term loan which has a fixed rate and smaller payments
for short-term period which is followed by one large payment
for the balance of the principal.
Bankruptcy
A debtor surrenders his assets to the Bankruptcy Court and is
not required to repay unsecured debts under a federal law provision.
Unsecured creditors may not pursue collection, and secured creditors
are entitled only to the security the subject property holds
for them. They may not pursue further collection.
Broker
An individual who does not who does not fund loans himself,
but facilitates the funding and negotiates the contracts for
a client.
Buydowns
Some mortgage programs can be qualified and obtained at lower
initial rates by paying a higher fee to obtain the mortgage.
Fixed rate and ARM programs can offer mortgage rate buydowns.
Caps (interest)
A limit to the rise and fall of the interest rate on an adjustable
rate mortgage (ARM). A consumer safeguard.
Caps (payment)
A limit to the amount the monthly payment can grow on an adjustable
rate mortgage (ARM). A consumer safeguard.
Certificate
of Eligibility
A document which verifies the eligibility of veterans for a
VA guaranteed loan. This certificate is obtained through a local
VA office.
Certificate
of Title
A legal document which declares the status of a given property
as shown on public records. Does not guarantee matters not of
record, unless negligence is involved.
Closing costs
One-time costs that must be paid before the loan can be "closed"
or funded. These costs may include such things as property taxes,
insurance, broker's fees, escrow fees,
title insurance premium, deed recording fee, title transfer
tax, etc. Escrow instructions will stipulate
which portion of the fees are to be paid by buyer or seller.
An estimate of closing costs will be given to you within a few
days after receiving your loan application. (All or a portion
of your closing costs may be financed with some loan programs.)
Collateral
The property used to secure the loan.
Condominium
Units in a multi-unit structure which may be bought, sold, and
encumbered individually with joint ownership of common areas.
Conventional
financing
Home loans made by a lender without government backing provided
on FHA and VA loans.
Covenant
A written agreement which defines or restricts the use of a
given property. This may include, architectural restrictions
or maintenance requirements.
Credit report
A report made by a private agency which states a borrower's
credit history, current accounts, and account balances.
Deed
A written document recorded at the Courthouse which conveys
real property.
Default
Failure to legal obligations in a contract. In mortgage terms
this generally means to fail to make the required monthly payments.
Disclosure
A document that discloses to the client either all or one of
the following: terms, costs, adjustment
period, and/or other characteristics of the mortgage.
Down payment
Usually between 10 and 20 percent, the down payment often demonstrates
the borrower's commitment to the property and to "make good"
on the mortgage. It is the difference between the sales price
and the amount of the mortgage.
Earnest money
The buyer gives "earnest money" to the seller as part of the
purchase price to secure the transaction.
Escrow
In the sale of property, a neutral third party-the escrow agent-is
appointed to act as custodian for documents and funds during
the transfer from seller to buyer. The funds can include taxes
and mortgage insurance.
Fannie Mae or FNMA
(Federal National Mortgage Association)
A secondary mortgage institution which holds the majority of
home mortgage in the U.S. FNMA buys VA, FHA, conventional mortgages
from primary lenders.
FHA Federal Housing
Administration
A government agency which insures repayment of a loan, with
the result that the borrower is able to obtain a home loan with
a smaller down payment and often at a lower rate of interest.
Fixed rate
loan
A loan where the rate of interest is fixed over the life of
the loan. Payments on a fully amortized fixed rate loan will
not change.
Foreclosure
Repossession of the property
The forced sale of a mortgaged property because mortgage terms
are unmet.
Freddie Mac or FHLMC
(Federal Home Loan Mortgage Corporation)
A secondary market for savings and loans to purchase their conventional
loans.
Ginnie Mae or GNMA
(Government National Mortgage Association)
The source of funds for FHA or VA
residential mortgages.
Hazard Insurance
A form of insurance in which the insurance company protect the
insured form specified losses, for example fire, flood, or windstorm
damage.
Index
Used by lenders to calculate the interest adjustments on variable
rate loans. Most programs use either the 11th District Cost
of Funds or the 1-year Treasury Rate as the index. Some indexes
are more volatile than others; this can affect the adjustments
in your interest rate and subsequently your monthly payment.
Initial rate
A fixed interest rate charged for the first six or twelve months
of a variable rate loan. Normally this rate will be lower than
prevailing market rates.
Interest
rate cap
A safeguard built into a variable rate loan to protect the consumer
against dramatic increases in the rate of interest and, consequently,
in the monthly payment. For example, a variable rate loan may
have a two percentage point limit per year on the amount of
increase or decrease, as well as a five percentage point limit
(increase or decrease) over the life of the loan.
Margin (spread)
An amount expressed as a percentage which is added to an index
to determine the interest rate on a variable rate loan (e.g.
index rate + 2% margin). Different loan programs may use different
margins and indexes. With a variable rate loan, this margin
(spread) generally does not change once it is established in
your documents.
Negative
amortization
A situation may occur on variable rate loans which have the
"payment cap" features. Because your monthly payment is capped,
your adjusted payment amount may, at times, be insufficient
to pay the actual amount of interest due. The unpaid (deferred)
interest would the be added to your loan balance. This increase
in your loan balance is known as "negative amortization." A
borrower usually has the option of increasing the monthly payment
in any given month to avoid negative amortization or making
a lump sum payment to pay off any accrued negative amortization.
Payment cap
This limited amount by which the payment on a variable rate
loan can increase or decrease at each payment adjustment interval
(typically one year). A payment cap ensures that the payment
changes occur at a gradual pace.
PITI (Principal-Interest-Taxes-Insurance)
The total of your monthly home payment, including taxes and
insurance.
PMI (Private Mortgage
Insurance)
Insurance which guarantees the lender payment of the balance
of the loan not covered by the sale of the property in the event
of foreclosure. PMI is normally required on conventional loans
and will be included as part of your monthly payment. PMI is
normally required on conventional loans with a loan amount greater
than 80% of Value.
Points and
Fees
A point is a loan charge equal to one percent of the principal
amount of the loan. Points are payable at the close of escrow
and may be paid by the buyer or seller, or split between them.
(e.g. Two points charged on a $100,000 loan would equal $2,000.)
In addition, a flat collar amount fee may also be charged. Under
some lending programs, a buyer may be allowed to include these
points and fees as part of the total amount financed.
Refinance
Negotiation of a new loan in order to pay off an existing loan.
Homes are usually refinanced in order to (a) take advantage
of lower interest rates, (b) switch from one loan type to another
(e.g. from variable to fixed), or (c) to generate cash from
built-up equity. Since refinancing generally involves new loans
costs, these costs must be weighed against the benefits to be
gained.
Rate Lock
Assures that the rate in effect on the date you submit your
loan application, during loan processing, or at the time of
final approval will be the final rate on your loan when funded.
This assurance usually expires after a specified period of time.
Ratios
A ratio used as an underwriting guideline to determine the amount
of debt a borrower may have compared to their income (e.g. Borrower's
house payment divided by gross income). A ratio may be used
to calculate the total allowable debt or the monthly housing
portion. It is expressed as a percent.
Term
The number of years before your loan is scheduled to be paid
of. 15-year and 30-year terms are most common
Title insurance
A required policy purchased by the buyer of a home ensuring
that the title will be held free and clear of any liens other
than that obtained by the buyer.
Underwriting
Standards established by a lender to determine whether a borrower
qualifies for a loan.
VA
Veterans Administration. A government agency providing guarantees
for lenders on approved loans to qualifying veterans.
Verification
of documents
Most loan programs require the mortgage company to verify information
on loan applications such as the borrowers employment, bank
account balances, and credit references. Oftern these verifications
are referred to as VOE's (verification of employment), VOD's
(verification of deposits) and VOM's (verification of mortgage).
