Untitled Document

Glossary:

3/1, 5/1, 7/1 and 10/1 ARMs - Adjustable-rate mortgages are rates that are fixed for a 3 year, 5 year, 7 year or 10 year period and may adjust annually after that. Also known as Hybrid loans.

Adjustable Rate Mortgage (ARM) – Loan on which the monthly payments will increase or decrease over time. An ARM’s interest rate may be tied to the 11th District Cost of Funds, one-year and six-month T-bill. ARM payments are typically adjusted every six months or once a year.

Amortization – The gradual repayment of a mortgage through monthly payments. In the early years of a mortgage, most of the monthly payment goes toward interest. Later in the mortgage, more of the payment goes toward reducing the loan’s principal balance.

Annual Percentage Rate (APR) – The annual cost of a mortgage, including interest, loan fees and other costs, stated as a percentage of the loan amount.

Appraisal/Appraised Value – An opinion of the market value of a home expressed by a professional real estate appraiser.

Assumability - An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.

Buy Down - When the lender and/or the home builder subsidized the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

Cap – Provisions of an adjustable rate mortgage which limit how much the interest rate can change at each adjustment period (i.e., every six months or once a year) or over the life of the loan (rate cap). A payment cap limits how much the payment due on the loan can increase or decrease.

Closing Costs – Expenses, in addition to the price of the home, incurred by buyers and sellers when a home is sold. Common closing costs include escrow fees, title insurance fees, document recording fees, real estate commissions and transfer tax.

Construction Loan - A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.

Credit Risk Score - A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair Issac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.

Debt-to-Income Ratio – The ratio of monthly debt payments to monthly gross income. Lenders use a debt-to-income (or DTI) ratio to determine whether a borrower’s income qualifies him or her for a mortgage.

Deferred Interest - When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred.

Earnest Money – The deposit given by a buyer to a seller to show that the buyer is serious about purchasing the home. Earnest money binds the contract. Earnest money usually is refundable to homebuyers in the event a contingency of the sale contract cannot be met.

Fannie Mae and Freddie Mac – The Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation are government sponsored, privately-owned entities which purchase mortgages from lenders and turn the mortgages into securities which are bought by investors. Fannie Mae and Freddie Mac are the key secondary mortgage market agencies.

Federal Home Loan Mortgage Corporation (FHLMC) also called Freddie Mac - Is a quasi-governmental agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers.

Hard Money – Often short-term money lent from one individual to another. These interest rates are usually much higher than those found in conventional or government financing.

Hazard Insurance – A policy which protects against damage to a property caused by fire, wind or other hazards.

Homeowner’s Warranty – A policy that covers certain repairs (such as plumbing or heating) of a newly-purchased home for a certain period of time.

Impound Account – An account established by a lender to collect a borrower’s property tax and insurance payments. Impound accounts are normally required on mortgages with down payments of 10 percent or less.

Index - A published interest rate which lender measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three- and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs of funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Loan-To-Value (LTV) Ratio - The ratio of the amount of money owned on a home to the home’s value. The LTV ratio for a $100,000 home financed with a $90,000 mortgage would be 90 percent.

Margin - The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

Mortgage Banker – A company which originates mortgages for sale into the secondary mortgage market (for example to Fannie Mae or Freddie Mac).

Mortgage Broker – A company that matches borrowers with lenders. Mortgage brokers do not originate loans.

Mortgage Interest Deduction – The ability of mortgage borrowers to deduct the interest paid on a home loan for purposes of federal and state income taxes.

Negative Amortization - Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.

No-Doc Loan - No doc loans are for self-employed and commissioned individuals and the loan requires no documentation from the borrower such as tax returns, pay stubs or bank statements (which is normally required on other home loan programs). No doc loans are hard to find because most banks do not offer them. Many banks do not like no doc loans because the lender takes on a greater risk because the lender is lending money based upon just the borrower’s credit score, rather than on their documented and closely analyzed ability to pay back the loan.

Points – One point equals "one" percent of the mortgage amount. Points are charged by lender to increase the lender’s return on the mortgage. Typically, lenders may charge anywhere from zero to two points. Loan points are tax deductible.

Prepayment Penalty - Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but necessarily imposed) in many states.

Private Mortgage Insurance – Insurance issued by private insurers which protects lenders against a loss if a borrower defaults on a mortgage with a low down payment (less than 20 percent).

Qualifying Ratios - Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

REALTOR® – A real estate broker or agent who is a member of the local Board of Realtors, a state Association of Realtors and the National Association of Realtors. Realtors adhere to a high standard of professionalism and strict code of ethics.

Secondary Mortgage Market - The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.

Seller Financing – A financing agreement in which a seller provides part (or all) of the financing needed by a buyer to purchase the seller’s home.

Title insurance – Insurance to protect the buyer and lender against losses arising from disputes over the ownership of property.

Underwriting – The process of evaluating a loan application to determine if it meets the lender’s standards.