Dictionary

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203(b) FHA

A 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 homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.

 

A  


Adjustable Rate Mortgage (ARM)

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.

Adjustment Date

The date on which the interest rate changes for an adjustable-rate mortgage (ARM). Adjustment Period: the period that elapses between the adjustment dates for an adjustable-rate mortgage (ARM).

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. Assesor: a government official who is responsible for determining the value of a property for the purpose of taxation.

Asset

Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).

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  


Buy-Down

method for lowering the buyer's monthly payment either permanently or temporarily. The borrower or home builder may subsidize the mortgage by lowering the interest rate for the first few years of the loan.

 

 

C  


Certificate of Occupancy

written authorization given by local authorities allowing a newly completed or substantially completed structure to be inhabited.

Closing Disclosure

this form provides final details about the mortgage loan selected including the loan terms, monthly payment, fees and closing costs.

Condominium

a real estate project in which each unit owner has title to a unit in the project and sometimes undivided interest in the common areas.

Credit Rating (Score)

a score calculated by using a person's credit report to determine the likelihood of a loan being repaid on time. Scores range from about 360-840: a lower score meaning a person is a higher risk, while a higher score means that there is less risk.

 

D  


Debt-to-Income Ratio

a comparison or ratio of gross income to housing and non-housing expenses.

Department of Veteran Affairs (VA)

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. Independent agency of the federal government created in 1930. The VA home loan guaranty program is designed to encourage lenders to offer long-term, low-down payment mortgages to eligible veterans by guaranteeing the lender against loss.

 

E  


Earnest Money

money put down by a potential buyer to show that they are 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.

 

F  


Fannie Mae (FNMA- FEDERAL NATIONAL MORTGAGE ASSOCIATION)

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 homebuyers. Also known as a Government Sponsored Enterprise (GSE).

FHA (FEDERAL HOUSING ADMINISTRATION)

established in 1934 to provide homeownership opportunities for all Americans; assists homebuyers 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.

FHA Loan

a loan insured by the Federal Housing Administration open to all qualified home purchasers.

Freddie Mac FHLMC (FEDERAL HOME LOAN MORTGAGE CORPORATION)

a federally chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders with funds for new homebuyers. Also known as a Government Sponsored Enterprise (GSE).

Foreclosure

a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower. Foreclosure laws are based on the statutes of each state.

 

G  


Gross Monthly Income

money earned before taxes and other deductions. Sometimes it may include from self-employment, rental property, alimony, child support, public assistance payments, and retirement benefits.

 

H  


Hazard Insurance (Homeowner's Insurance)

protection against a specific loss, such as fire, wind etc., over a period of time that is secured by the payment of a regularly scheduled premium.

Homeowners Association

an organization of homeowners residing within a particular development whose major purpose is to maintain and provide community facilities and services for the common enjoyment of the residents.

 

I  


Impound/Escrow

that portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due (also known as reserves).

Index

measure of interest rate changes that the lender uses to decide how much the interest rate on an ARM will change over time.

 

L  


Loan Estimate

this form provides important information, including estimated interest rate, APR, monthly payment and total closing costs.

Loan-to-Value Ratio (LTV)

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 a down payment.

Lock-In Rate

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.

 

M  


Margin

number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

Mortgage Insurance

a policy allowing mortgage lenders to recover part of their financial losses if a borrower fails to repay a loan. Mortgage insurance makes it possible to buy a home with as little as 5% down. Typically purchased for loans with less than 20% down payment. The cost of mortgage insurance is added to the monthly payment. Mortgage insurance is maintained on conventional loans until the outstanding amount of the loan is less than 80 percent of the value of the house or for a set period of time (7 years is common). Mortgage insurance is also available through a government agency, such as the Federal Housing Administration (FHA) or through companies (Private Mortgage Insurance or PMI).

Mortgage Interest Rates and the Bond Market

the mortgage backed securities market, not the bond market as is commonly believed, directly determines interest rates for mortgages. Bond market movements are often similar to movements that occur in the mortgage backed securities market so consumers tend to watch the bond market movement to determine mortgage interest rate movement. While most times the securities move in the same direction, at times the interest rates charged to consumers can actually move in the opposite direction of the bond market because of differing supply and demand within the two markets.

Mortgage Life Insurance

term life insurance bought by borrowers to pay off a mortgage in the event of death or make monthly payments in the case of disability. The amount of coverage decreases as the principal balance declines. There are many different terms of coverage determining amounts of payments and when payments begin and end.

 

O  


Origination Fee

the charge for originating a loan; is usually calculated in the form of points and paid at closing. One point equals one percent of the loan amount. On a conventional loan, the loan origination fee is the number of points a borrower pays.

 

P  


PITI

Principal, Interest, Taxes and Insurance are the components of a mortgage payment. These 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.

Points

dollar amount paid to a lender for making a loan. A point is one percent of the loan amount. Also called discount points.

Prepaids

used to create an escrow account or to adjust the seller's existing escrow account. They can include taxes, hazard insurance, private mortgage insurance and special assessments.

Prepayment Penalty

provision in some loans that charge a fee to a borrower who pays off a loan before it is due.

Pre-qualification

lender informally determines the maximum amount an individual is eligible to borrow. This is not a guaranty of a loan.

 

R  


Rate

the amount of interest charged on a monthly loan payment, expressed as a percentage.

RESPA (Real Estate Settlement Procedures Act)

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  


Servicer

after a mortgage loan closes, the loan servicer collects the payments, manages escrow accounts, pays escrow taxes and insurance, and manages delinquent payments.

 

T  


Title Insurance

insurance protecting the lender against any claims arising from arguments about ownership of the property; also available for homebuyers. An insurance policy guaranteeing the accuracy of a title search protecting against errors. Most lenders require the buyer to purchase title insurance protecting the lender against loss in the event of a title defect. This charge is included in the closing costs. A policy that protects the buyer from title defects is known as an owner's policy and requires an additional charge.

 

U  


Underwriting

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.

 

V  


Verification of Employment

a document signed by the borrower's employer verifying his/her position and salary.