MORTGAGE LIBRARY

203(b): An FHA program which provides mortgage insurance to protect lenders from default. It is used to finance the purchase of new or existing one-to-four family housing and is characterized by a low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amount.

203(k): An FHA mortgage insurance program which enables home buyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.

A

Amenity: An appealing feature of a home or property that serves as a benefit to the buyer, but is not necessary to its practical use. The amenity may be natural (like location, woods, water) or man-made (like a swimming pool or garden).

Amortization: The 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, such as 15 or 30 years.

Annual Percentage Rate (APR): This figure is calculated via a standard formula and reveals 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: This is the first official step in the loan approval process.  An application form is used to record important information about the potential borrower which is necessary for 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 the 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.

Adjustable Rate Mortgage (ARM): A mortgage loan that is 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 money 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.

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 on how much a monthly payment or interest rate can increase or decrease, such as the cap that might be placed on an adjustable rate mortgage.

Cash Reserves: A cash amount that is determined by the lender and sometimes required to be held in reserve in the event of an emergency.  This sum is required in addition to the down payment and closing costs.

Certificate Of Title: A document that is provided by a qualified source (such as a title company) and shows that the property legally belongs to the current owner. Before the title is transferred at closing, it should be free and clear of all liens or other claims.

Closing: Also known as the 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 sales 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, which is collected by a real estate professional as a fee for negotiating the entire 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 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, and each stockholder is then entitled to live in a specific unit of the structure. The stockholder is responsible for paying a portion of the loan.

Credit History: Lenders use this information about an individual's debt payment to gauge the potential borrower's ability to repay a loan.

Credit Report: A record which documents an individual's credit history and lists all past and present debts as well as the timeliness of their repayment.

Credit Bureau Score: A number representing the possibility that a borrower may default. The credit bureau score is based upon credit history and is used to determine the ability that one has 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 successfully 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. The down payment is not part of the mortgage loan.

E

Earnest Money: Money put down by a potential buyer to demonstrate that he or she is serious about purchasing a home. This sum becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, and is forfeited if the buyer pulls out of the deal.

Energy Efficient Mortgage (EEM): An FHA program that helps homebuyers 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 which is calculated by subtracting the amount still owed on the mortgage loan(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 sales price of a home 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.

Federal Housing Administration (FHA): Established in 1934 to advance homeownership opportunities for all Americans, FHA assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults. This encourages lenders to extend 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 floodplain, 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 and the Federal Home Loan Mortgage Corporation (FHLM): A federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors. FHLM provides lenders with funds for new home buyers.

G

Ginnie Mae: Government National Mortgage Association (GNMA). A government-owned corporation overseen by the U.S. 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 (GFE): An estimate of all closing fees, including pre-paid and escrow items as well as lender charges.  A GFE must be given to the borrower within three days after submission of a loan application.

H

Home Buyer Education Learning Program (HELP): 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.  A thorough home inspection enables the potential homebuyer to become 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. This coverage 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 its contents with protection against claims of negligence or inappropriate action that results in someone's injury or damage to property.

Housing Counseling Agency: This organization provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and home buying.

The U.S. Department of Housing and Urban Development (HUD):  Established in 1965, HUD works to ensure that suitable living environments are available for all Americans. HUD achieves this goal by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

HUD1 Statement: Also known as the "settlement sheet," this statement itemizes all closing costs and must be given to the borrower at or before closing.

Heating, Ventilation and Air Conditioning (HVAC): 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 that 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 via a loan.

Interest Rate: The amount of interest charged on a monthly loan payment and 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: This option assists low-to-moderate income homebuyers 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 on the home that is being leased.

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 supplying incorrect information on a loan application in order to better qualify for a loan.  Such fraud may result in civil liability or criminal penalties.

Loan-To-Value Ratio (LTV): A percentage that is 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 supply as a down payment on a home.

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 that the lender adds to an index to determine the interest rate on an adjustable rate mortgage.

Mortgage: A lien on a 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 which is usually part of the mortgage payment and paid by a borrower for their mortgage insurance.

Mortgage Modification: A loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan, thus reducing the monthly payments.

O

Offer: An indication by a potential buyer of a willingness to purchase a home at a specific price and generally put forth in writing.

Origination: The process of preparing, submitting, and evaluating a loan application. It generally includes a credit check, verification of employment, and a property appraisal.

Origination Fee: The charge for originating a loan which 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.

Principal, Interest, Taxes and Insurance (PITI): The four elements of a monthly mortgage payment. Payments of principal and interest go directly toward 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.

Private Mortgage Insurance (PMI): 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-Approval: When the lender commits to lend to a potential borrower. A commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.

Pre-Foreclosure Sale: This type of sale allows a defaulting borrower to sell the mortgaged property so they can satisfy the loan and avoid foreclosure.

Pre-Qualify: When a lender informally determines the maximum amount an individual is eligible to borrow in order to purchase a home.

Premium: An amount paid on a regular schedule by a policyholder that maintains insurance coverage.

Prepayment: Paying off a mortgage loan before the scheduled due date. It is imperative that one explore whether they are subject to a prepayment penalty or not.

Principal: The amount borrowed from a lender which does not include interest or additional fees.

R

Radon: A radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause serious health problems.

Real Estate Agent: An individual who is licensed to negotiate and arrange real estate sales and 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 (such as capitalizing on a lower interest rate).

Rehabilitation Mortgage: A mortgage that covers the costs of rehabilitating (repairing or improving) a property. Some rehabilitation mortgages, such as the FHA 203(k), will allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.

Real Estate Settlement Procedures Act (RESPA):  A law protecting consumers from abuses during the residential real estate purchase and loan process. RESPA requires lenders to disclose all settlement costs, practices, and relationships.

S

Settlement: This term refers to the closing of your loan transaction.

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 that are 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.  This type of insurance is also available to homebuyers.

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 full written disclosure of all fees, terms, and conditions associated with the initial loan period, as well as when it adjusts to another rate that lasts for the duration of the loan.

U

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.

V

Department of Veterans Affairs (VA): A federal agency which guarantees loans that are offered specifically to veterans. Similar to mortgage insurance, a VA loan protects lenders against loss that may result from a borrower default.