Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on an index. Also called a variable rate mortgage.
For an adjustable rate mortgage, the time between changes in the interest rate charged. The most common adjustment intervals are one, three or five years.
Someone who acts on behalf of another for a fee. In real estate, the term refers to a person with a real estate license who works under the authority of a real estate broker.
Extinguishing the outstanding balance of a loan by making equal payments on a regular schedule (usually monthly). The payments are structured so that the borrower pays both interest and principal with each payment.
Annual Percentage Rate (APR)
The interest rate which reflects the cost of a mortgage as a yearly rate. This rate is usually higher than the stated loan rate for the mortgage because it includes points and other charges.
A written report by a qualified person that determines a property’s value based on recent sales information of similar properties.
Increase in value of a property, not including increases from improvements.
The value of a property based on its present condition.
These loans may be passed from a seller of a home to the buyer. The buyer “assumes” all outstanding payments.
A loan that behaves like a fixed-rate mortgage for a set number of years (usually five or seven) and then must be paid off in full in a single “balloon” payment. Balloon loans are popular with those expecting to sell or refinance their property within a definite period of time.
A intentionally small company that offers highly specialized services or products. Boutique companies are able to pay more attention and give greater focus to their clients, which ensures you get a personalized solution to your need, provided by someone you can trust.
Funds paid to the lender by the borrower or third party for the purpose of reducing the interest rate of the loan for a specified period of time.
A set percentage by which an ARM may adjust each pre-set period as described in the mortgage note. Caps are usually quoted as two numbers as in 2/6. The first number indicates how much a loan may change at each adjustment period while the second number indicates the percentage a loan may adjust over its lifetime. Loans like the 3/1 and 5/1 adjustable which have an initial fixed period are quoted with 3 numbers as in 3/2/6 which would mean that the first adjustment may be as much as 3%, subsequent adjustments are capped at 2% each, and the lifetime cap is 6%.
The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (i.e., mortgage payment, maintenance, and utilities).
Certificate of Eligibility
The COE verifies to the lender that you are eligible for a VA-backed loan. See the Department of Veterans Affairs website for more information on the evidence you submit to verify your eligibility for a VA home loan and how to submit the evidence and obtain a COE.
Certificate of Occupancy
Written authorization issued by a local municipal authority that permits occupancy of a newly constructed home.
Also referred to as settlement. The process of finalizing the purchase or refinance of a property, including but not limited to, signing papers, disbursing money, and preparing the deed and transfer of ownership.
Closing Disclosure (CD)
Final review of costs and terms including costs paid by the buyer, seller and third parties.
Personal property pledged as security for a debt. Collateral for a mortgage is usually the property.
Real estate that includes the separate ownership of a specified unit with undivided interest in the ownership of the common elements which are owned jointly with the other condominium unit owners.
A mortgage loan with an initial balance equal to or less than the maximum amount established by Fannie Mae and Freddie Mac ($424,100).
A short term loan for funding the cost of construction. The lender advances funds to the builder/contractor as the work progresses.
A provision that makes the occurrence of one event dependent upon the completion of another. For example, the purchase of a home may be contingent on the seller repairing structural damages.
A mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate.
The right of a borrower to convert an adjustable or balloon loan into a fixed rate loan.
Credit Rating/Credit Score
Borrowers are rated by credit bureaus according to their credit-worthiness or risk profile. These ratings are based on various factors such as a borrower’s payment history, foreclosures, bankruptcies, and charge-offs.
A report to a prospective lender on the credit standing of a prospective borrower which is used to help determine creditworthiness. Information regarding late payments, defaults, or bankruptcies will appear on the report.
A legal document which conveys ownership of real estate from the seller to the buyer.
Deed of Trust
This document is used to secure the payment of a note. It pledges the property as collateral for the note.
The borrower’s failure to make payments on a loan. It may also be a breach of the terms of the note or deed of trust.
The borrower’s failure to make payments on time. Delinquency can lead to foreclosure.
Money paid by a buyer from his own funds, as opposed to the portion of the purchase price which is financed by the lender.
Due on Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the borrower sells the home.
Earnest Money Deposit
A sum of money given to bind a sale of real estate. Usually held by the real estate company until closing.
The rights of an individual to use another property for a particular purpose (e.g., access to their own property).
Equal Credit Opportunity Act (ECOA)
Federal law prohibiting lenders from discrimination in lending 1) by reason of race, color, religion, national origin, sex, marital status or age, 2) because any income is derived from public assistance, or 3) because the applicant has exercised any rights under the Consumer Protection Act.
The difference between the current market value of a property and the principal balance of all outstanding loans.
Federal Home Loan Mortgage Corporation
A private corporation authorized by Congress which sells participation certificates secured by conventional mortgage loans. Also known as Freddie Mac.
Federal National Mortgage Association
A private, for profit, corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA and guaranteed by the VA as well as conventional mortgages. Also known as Fannie Mae.
Having full title ownership of an estate.
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately-priced homes.
FHA Mortgage Insurance
FHA requires a fee called up front MIP, which is up to 1.75 percent of the loan amount, paid at closing to insure the loan. Upfront MIP is typically financed into the loan. In addition, FHA mortgage insurance requires a monthly installment of .85 percent of the loan amount.
The total dollar amount your loan will cost you. It includes all interest payments for the life of the loan, any interest paid at closing, your origination fee and any other charges paid to the lender and/or broker. Certain closing costs are not included in the finance charge calculation.
Fixed Rate Mortgage
A mortgage where the interest rate does not change for the life of the loan.
Between application and closing, a borrower may choose to “play the market” by electing to float the interest rate. Floating is essentially choosing not to lock the interest rate. Since it is the borrower’s responsibility to lock his or her rate before closing, choosing to float is considered risky and may result in a higher interest rate.
A legal procedure in which real estate is sold by the lender to pay a defaulting borrower’s debt.
A mortgage that is guaranteed against default, such as a VA, FHA, or USDA RD insured mortgage. Borrowers must pay an insurance premium determined by the agency in order to get a guaranteed mortgage.
The time period between the due date of a mortgage payment and the date when late charges are assessed.
Graduated Payment Mortgage (GPM)
A mortgage with monthly payments that are smaller at the beginning of the loan period and gradually increase by a specified amount for the first five or ten years, after which they become fixed. A GPM has a fixed interest rate and fixed loan period.
Gross Monthly Income
The total amount the borrower earns per month, not counting any taxes or expenses. Often used in calculations to determine whether a borrower qualifies for a loan.
A form of insurance in which the insurance company protects the insured from certain losses, such as fire, vandalism, storms, and certain other natural causes. Also called Homeowners Insurance.
The ratio of the monthly housing payment (including taxes, insurance, and mortgage insurance) to total gross monthly income. Also called Payment-to-Income Ratio or Front-End Ratio.
A published interest rate tied to an ARM loan’s interest rate. The index is not controlled by the lender. The index and the interest rate linked to it may increase or decrease.
An examination of a property or building to determine condition or quality for a particular purpose such as an assessment of the structural or termite damage.
A percentage of the amount of a loan paid for the use of money for a specified time.
A loan balance exceeding the maximum amount established by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Interest in an estate that entitles a person to possession, but not ownership, of the land.
The bank, mortgage company, or mortgage broker offering the loan.
A charge against a property whereby the property is made security for the payment of a debt such as a judgment or mortgage.
Life of Loan Cap
The maximum interest rate that can be charged during the life of the loan. Also called Lifetime Cap. This value is often expressed as an increment above the initial note rate. For example, an adjustable rate loan with an initial rate of 7.25% and a 6% lifetime cap will never adjust above a rate of 13.25% (7.25% + 6.0%).
Loan Estimate (LE)
An estimate of charges that a borrower is likely to incur in connection with the loan.
Loan-To-Value Ratio (LTV)
The relationship between the amount of the mortgage loan and the lesser of the sales price or appraised value of the property in a purchase transaction, expressed as a percentage. A LTV ratio of 90 means that a borrower is borrowing 90% of the value of the property and contributing 10% as a down payment. For refinances, the value is determined by the appraised value.
The period, expressed in days, during which a lender will guarantee a rate. Some lenders will lock rates at the time of application while others will allow the borrower to lock the rate after the application is taken.
The act of committing to a mortgage rate. This action, taken by a borrower between application and closing, is sometimes accompanied by a payment to the lender. Opposite of float.
The amount a lender adds to the quoted index rate for an adjustable rate loan to determine the new interest rate.
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
Monthly Housing Expense
Total principal, interest, taxes, and insurance paid by the borrower on a monthly basis. Used with gross income to determine affordability.
The amount of money the borrower pays the lender to compensate the lender for the use of its money to purchase the home.
National Association of Realtors
A trade organization that sets the standards for the real estate profession and enforces a rigid code of ethics in real estate dealings.
The result of artificially low monthly mortgage payments which do not cover all interest due to the lender. The deferred interest is added to the loan balance which may be higher than the original amount of the loan.
The fee imposed by a lender to cover processing expenses in connection with lending money.
The sum of the principal, interest, taxes and insurance. Also called monthly housing expense.
Planned Unit Development
A subdivision having lots or areas owned in common and reserved for the use of some or all of the owners of the separately owned lots.
Prepaid interest paid by the borrower to the lender at closing. A point is equal to 1 percent of the loan amount (e.g., 1.5 points on a $100,000 mortgage would cost the borrower $1,500).
Power of Attorney
An instrument authorizing a person to act on behalf of the person granting it. A limited power of attorney restricts the power to a particular transaction.
Expenses such as taxes, insurance and assessments which are paid in advance of their due date and which must be paid by the buyer on a prorated basis at closing.
To repay the remaining balance of a loan ahead of the regular schedule.
Lenders who impose prepayment penalties will charge borrowers a fee if they wish to repay part or all of their loan in advance of the regular schedule.
The process of establishing a borrower’s qualification for a loan of a particular amount based on income and expenses. Pre – qualification does not guarantee that the loan will be approved, but can be used to demonstrate financial capability to an agent or seller.
The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI)
Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan-to-Value Ratio is greater than 80%.
The ratio of the borrower’s fixed monthly expenses to his gross monthly income.The Front-End Ratio is the percentage of a borrower’s gross monthly income (before income taxes) that would cover the cost of PITI (Mortgage Principal Payment + Mortgage Interest Payment + Property Taxes + Homeowners Insurance). In the case of a 28% Front-End Ratio, a borrower could qualify if the proposed monthly PITI payments were 28% or less of the borrower’s gross monthly income.The Back-End Ratio is the percentage of a borrower’s gross monthly income that would cover the cost of PITI plus any other monthly debt payments like personal loans and credit card debt. Please note that qualifying ratios are only a rough guideline in determining a potential borrower’s credit-worthiness. Many factors such as credit history, down payment, and loan size will influence the decision to approve or disapprove a particular loan.
Real Estate Settlement Procedures Act
Also known as RESPA. Enacted by Congress to ensure that the consumer is provided with advance disclosure of the costs involved in the real estate settlement process. The law requires lenders to furnish this information after application only.
Money paid to the local authorities for recording a home sale, thereby making it part of the public records.
Obtaining a new mortgage loan on a property already owned (often to replace existing loans on the property).
The cancellation of a contract. It gives the homeowner three days to cancel a refinancing contract once it is signed if the transaction uses equity in the home as security.
See Real Estate Settlement Procedures Act.
A contract between a purchaser and a seller of real estate to convey title after certain conditions have been met.
A collection of agencies that buy mortgages from primary lenders. These mortgage funds are then pooled and sold to investors, much like a mutual fund. By purchasing loans from primary lenders, the secondary market supplies money for additional mortgages.
A mortgage made subsequent to another mortgage and subordinate to the first one.
An agreement in which a seller provides financing needed by a buyer to purchase the seller’s home. The agreement often is reached when the buyer has insufficient funds for a down payment.
See Closing Costs.
A measurement of land prepared by a surveyor showing the location of the property and its dimensions and the location and dimensions of any improvements.
Equity created by a purchaser performing work on a property being purchased.
A document that gives evidence of an individual’s ownership of property. Documentary evidence of ownership is the title deed, which specifies in whom the legal estate is vested, and the history of ownership and transfers. Title can be acquired through purchase, inheritance, gift or foreclosure of a mortgage.
An insurance contract by which the title insurance company agrees to pay the insured a specific amount for any loss caused by defects of title to a specifically described parcel of real estate.
An examination of city, town, or county records to determine the legal ownership of real estate.
Total Debt Ratio
Monthly debt and housing payments divided by gross monthly income. Also known as Back-End Ratio.
Taxes imposed by local governments when transferring ownership of real property.
The decision whether to make a loan to a potential home buyer based on credit, employment, assets, the property appraisal, and other factors and the evaluation of risk to the Lender.
A long-term, low or no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.
Variable Rate Mortgage
See Adjustable Rate Mortgage.
A guarantee or protection provided to the purchaser regarding the condition of appliances and certain fixtures. New homes often have more extensive warranties covering not only fixtures and appliances but the overall structure as well.