A consumer with the best credit rating, deserving of the lowest prices that lenders offer. Most lenders require a FICO score above 720 (see Credit Issues). There is seldom any payoff for being above the A-credit threshold (see Does the Mortgage Market Reward Virtue?), but you pay a penalty for being below it.
A contractual provision that gives the lender the right to demand repayment of the entire loan balance in the event that the borrower violates one or more clauses in the note.
Interest that is earned but not paid, adding to the amount owed. Same as Negative amortization.
Adjustable Rate Mortgage (ARM)
A mortgage on which the interest rate, after an initial period, can be changed by the lender. While ARMs in many countries abroad allow rate changes at the lender’s discretion (“discretionary ARMs”), in the US most ARMs base rate changes on a pre-selected interest rate index over which the lender has no control. These are “indexed ARMs”. There is no discretion associated with rate changes on indexed ARMs.
On an ARM, the time between changes in the interest rate or monthly payment. The rate adjustment interval is often displayed in x/y format, where “x” is the period until the first adjustment, and “y” is the adjustment period thereafter. For example, a 5/1 ARM is one on which the initial rate holds for 5 years, after which it is adjusted every year. The rate adjustment interval and the payment adjustment interval are the same on a fully amortizing ARM, but may not be on a negative amortization ARM.
A consumer’s capacity to afford a house. Affordability is usually expressed in terms of the maximum price the consumer could pay for a house, and be approved for the mortgage required to pay that amount.
The legal requirement that one party in a relationship has a fiduciary obligation to the other.
Agreement of Sale
A contract signed by buyer and seller stating the terms and conditions under which a property will be sold.
A mortgage risk categorization that falls between prime and sub-prime, but is closer to prime. Also referred to as “A minus”.
Expedited and simpler documentation requirements designed to speed up the loan approval process. Instead of verifying employment with the applicant’s employer and bank deposits with the applicant’s bank, the lender will accept paycheck stubs, W-2s, and the borrower’s original bank statements. Alternative documentation remains “full documentation”, as opposed to the other documentation options.
The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment.
A table showing the mortgage payment, broken down by interest and amortization, the loan balance, tax and insurance payments if made by the lender, and the balance of the tax/insurance escrow account.
On the Truth in Lending form, the loan amount less “prepaid finance charges”, which are lender fees paid at closing. For example, if the loan is for $100,000 and the borrower pays the lender $4,000 in fees, the amount financed is $96,000. A useless number.
Annual percentage rate
A request for a loan that includes the information about the potential borrower, the property and the requested loan that the solicited lender needs to make a decision. In a narrower sense, the application refers to a standardized application form called the “1003” which the borrower is obliged to fill out.
A fee that some lenders charge to accept an application. It may or may not cover other costs such as a property appraisal or credit report, and it may or may not be refundable if the lender declines the loan.
A written estimate of a property’s current market value prepared by an appraiser.
A professional with knowledge of real estate markets and skilled in the practice of appraisal. When a property is appraised in connection with a loan, the appraiser is selected by the lender, but the appraisal fee is usually paid by the borrower.
A fee charged by an appraiser for the appraisal of a particular property.
The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges by the lender. The charges covered by the APR also include mortgage insurance premiums, but not other payments to third parties, such as payments to title insurers or appraisers. The APR is adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid in the future. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons.
Acceptance of the borrower’s loan application. Approval means that the borrower meets the lender’s qualification requirements and also its underwriting requirements. In some cases, especially where approval is provided quickly as with automated underwriting systems, the approval may be conditional on further verification of information provided by the borrower.
An adjustable rate mortgage.
A method of selling real estate where the buyer of the property agrees to become responsible for the repayment of an existing loan on the property. Unless the lender also agrees, however, the seller remains liable for the mortgage.
A mortgage contract that allows, or does not prohibit, a creditworthy buyer from assuming the mortgage contract of the seller. Assuming a loan will save the buyer money if the rate on the existing loan is below the current market rate, and closing costs are avoided as well. A loan with a “due-on-sale” clause stipulating that the mortgage must be repaid upon sale of the property, is not assumable.
See Lead-Generation site.
Someone authorized by the original credit card holder to use the holder’s card. The card-holder is responsible for the charges of the authorized user, but the authorized user is not responsible for paying any charges, including his own. But sometimes authorized users are dunned for the unpaid bills of the card holder.
A computer-driven process for informing the loan applicant very quickly, sometimes within a few minutes, whether the applicant will be approved, or whether the application will be forwarded to an underwriter. The quick decision is based on information provided by the applicant, which is subject to later verification, and other information retrieved electronically including information about the borrower’s credit history and the subject property.
Automated underwriting system
A particular computerized system for doing automated underwriting. Mortgage insurers and some large lenders have developed such systems, but the most widely used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.
Back-end fee or commission
Mortgage broker income paid by the lender, same as yield-spread premium and Negative points.
The practice of low-balling figures for settlement costs on the Good Faith Estimate to make them appear more attractive to mortgage shoppers.
Government support to a firm in trouble, which is usually limited to protecting creditors and employees.
The amount of the original loan remaining to be paid. It is equal to the loan amount less the sum of all prior payments of principal.
A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher rate later. They are riskier than ARMs because there is no limit on the extent of a rate increase at the end of the balloon period. See Balloon Mortgages.
The loan balance remaining at the time the loan contract calls for full repayment.
A mortgage on which the borrower pays half the monthly payment on the first day of the month, and the other half on the 15th. See Alternative Early Payoff Plans.
A mortgage on which the borrower pays half the monthly payment every two weeks. Because this results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term. See Biweekly Mortgages.
A single mortgage covering several structures on one parcel of land. Usually the structures are occupied by different family members. In a market with very stringent appraisal rules, blanket mortgages are difficult to obtain because comparable properties to support an appraisal are not likely to be available.
Borrowers with one or more of the following risk factors: they can only make a very small or no down payment; they cannot fully document their income and assets; their property is something other than a single-family home; their loan is intended to raise cash or to purchase an investment property; they have low credit scores; their income is low relative to their expected total obligations; and their mortgage carries an adjustable rate that will result in substantially higher payments in a few years.
A short-term loan, usually from a bank, that “bridges” the period between the closing date of a home purchase and the closing date of a home sale. Unsecured bridge loans are available if the borrower has a firm contract to sell the existing house. Secured bridge loans are available without such a contract.
Having the builder finance the construction.
A permanent buy-down is the payment of points in exchange for a lower interest rate. SeePoints. A temporary buy-down concentrates the rate reduction in the early years.
Paying a higher interest rate in exchange for a rebate by the lender which reduces upfront costs.
Same as Float-down.
Cash Flow Option Loan
Same as Flexible Payment ARM.
Refinancing for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes “cash-out” of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan. For a discussion of the relative merits of the two approaches, read Debt Consolidation With a Cash-Out Refinance.
As part of a refinance transaction, paying down the loan balance in order to reduce the loan-to-value ratio and qualify for a lower interest rate and/or reduced mortgage insurance premium.
On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.
Same as Settlement costs.
The date on which the closing occurs.
A technique for repaying a loan early that involves using the mortgage as a substitute for a checking account.
One or more persons who have signed the note, and are equally responsible for repaying the loan. Unmarried co-borrowers who live together are advised to agree beforehand on what happens if they split.
Cost of funds index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage.
Assets pledged as security for the repayment of a loan.
A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.
A legal status where a conservator is appointed to oversee a firm in trouble in order to protect and conserve the firm’s assets. Fannie Mae and Freddie Mac were placed in conservatorships in September, 2008.
The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house.
Positive contagion is the tendency during a bubble period for new players to be attracted by the profits being earned by existing players. Negative contagion is the tendency during a financial crisis for the loss of confidence in the ability of major players to meet their obligations to spread rapidly among all their actual and potential creditors.
Inserting provisions into a loan contract that severely disadvantage the borrower, without the borrower’s knowledge, and sometimes despite oral assurances to the contrary. Prepayment penalties are perhaps the most frequently cited subject of such abuse.
A home mortgage that is neither FHA-insured nor VA-guaranteed.
The option to convert an ARM to an FRM at some point during its life. These loans are likely to carry a higher rate or points than ARMs that do not have the option.
A lender who delivers loans to a (usually larger) wholesale lender against prior price commitments the wholesaler has made to the correspondent. The commitment protects the correspondent against pipeline risk.
Cost of savings index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage.
Co-signing a note
Assuming responsibility for someone else’s loan in the event that that party defaults. A risk not to be taken lightly.
A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual’s credit history.
A single numerical score, based on an individual’s credit history, that measures that individual’s credit worthiness. Credit scores are as good as the algorithm used to derive them. The most widely used credit score is called FICO for Fair Issac Co. which developed it. Many of the columns in Mortgage Credit Issues discuss factors that affect the FICO score.
The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money.
Current index value
The most recently published value of the index used to adjust the interest rate on an indexed ARM.
Current projected rate
The expected interest rate on an ARM at the next rate adjustment. A method for developing such an estimate is explained in Estimating the New Rate at the Next ARM Rate Adjustment.
A borrower who doesn’t pay.
A borrower who cannot handle debt except by complete abstinence.
Rolling short-term debt into a home mortgage loan, either at the time of home purchase or later.
Scams designed to relieve you of your money by promising to eliminate your mortgage debt.
Deed in lieu of foreclosure
Deeding the property over to the lender as an alternative to having the lender foreclose on the property.
Failure of the borrower to honor the terms of the loan agreement. Lenders (and the law) usually view borrowers delinquent 90 days or more as in default.
Same as negative amortization.
A mortgage payment that is more than 30 days late. Don’t confuse with Late payment.
A clause in the note that allows the lender to demand repayment at any time for any reason.
Reversing the securitization process by converting a security back into individual loans.
Same as lender.
The tendency of lenders to ignore potential shocks that can cause them major losses if a long period has elapsed since a shock has occurred.
Discount mortgage broker
A mortgage broker who claims to be compensated entirely by the lender rather than by the borrower.
Same as points.
An adjustable rate mortgage on which the lender has the right to change the interest rate at any time subject only to advance notice. Discretionary ARMs are found abroad, not in the US.
The set of lender requirements that specify how information about a loan applicant’s income and assets must be provided, and how it will be used by the lender.
The difference between the value of the property and the loan amount, expressed in dollars, or as a percentage of the price. For example, if the house sells for $100,000 and the loan is for $80,000, the down payment is $20,000 or 20%.
A borrower who submits applications through two loan providers, usually mortgage brokers. See Is It OK to Submit Two Mortgage Loan Applications?
Dual index mortgage
A mortgage on which the interest rate is adjustable based on an interest rate index, and the monthly payment adjusts based on a wage and salary index.
A provision of a loan contract that stipulates that if the property is sold the loan balance must be repaid. This bars the seller from transferring responsibility for an existing loan to the buyer when the interest rate on the old loan is below the current market. A mortgage containing a due-on-sale clause is not an assumable mortgage.
A term used in two ways. In one context it refers to a measure of interest cost to the borrower that is identical to the APR except that it is calculated over the time horizon specified by the borrower. The APR is calculated on the assumption that the loan runs to term, which most loans do not. (See Does the Annual Percentage Rate (APR) Help?). In most texts on the mathematics of finance, however, the “effective rate” is the quoted rate adjusted for intra-year compounding. For example, a quoted 6% mortgage rate is actually a rate of .5% per month, and if interest received in the early months is invested for the balance of the year at .5%, it results in a return of 6.17% over the year. The 6.17% is called the “effective rate” and 6% is the “nominal” rate.
In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home.
A type of predatory lending where the lender intends for the borrower to default so the lender can grab the borrower’s equity.
An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.
The practice of using escrow accounts inappropriately to generate more income from hapless borrowers.
Loan applications that are withdrawn by borrowers, sometimes because they have found a better deal.
A fully-amortizing mortgage with equal monthly payments.
One of two Federal agencies that purchase home loans from lenders. (The other is Freddie Mac). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities.
The sum of all upfront cash payments required by the lender as part of the charge for the loan. Origination fees and points are expressed as a percent of the loan. Junk fees are expressed in dollars.
A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low.
See Credit Score.
The prices paid by the borrower, as opposed to posted prices.
Financial Services Authority (FSA)
In the UK, a series of sweeping changes beginning in 1997 placed most financial regulation under a new Financial Services Authority (FSA). FSA is an independent non-governmental body but it is answerable to the Treasury and ultimately to the Parliament. In 2004, the FSA took over regulation of the mortgage sector, including mortgage brokers.
Including points in the loan amount.
A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan. For example, a borrower defaults on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only what is left of the $100,000.
Fixed rate mortgage (FRM)
A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage.
An Upfront Mortgage Lender who discloses his wholesale price and markup.
Flexible payment ARM
Same as Option ARM.
Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing. Allowing the rate to float exposes the borrower to market risk, and also to the risk of being taken advantage of by the loan provider.
A rate lock, plus an option to reduce the rate if market interest rates decline during the lock period. Also called a cap. A float-down costs the borrower more than a lock because it is more costly to the lender. Float-downs vary widely in terms of how often the borrower can exercise (usually only once), and exactly when the borrower can exercise Do not confuse with interest rate increase caps and payment increase caps.
The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults.
An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrower’s delinquency.
One of two Federal agencies that purchase home loans from lenders. The other is Fannie Mae.
Mortgage broker income paid by the borrower, as distinguished from the fee paid by the lender, which is “back-end”.
Fully amortizing payment
The monthly mortgage payment which, if maintained unchanged through the remaining life of the loan at the then-existing interest rate, will pay off the loan over the remaining life. See Mortgage Amortization: How Does It Work? On FRMs the payment is always fully amortizing, provided the borrower has made no prepayments. (If the borrower makes prepayments, the monthly payment is more than fully amortizing). On GPMs, the payment in the early years is always less than fully amortizing. On ARMs, the payment may or may not be fully amortizing, depending on the type of ARM.
Fully indexed interest rate
The current index value plus the margin on an ARM. Usually, initial interest rates on ARMs are below the fully indexed rate. If the index does not change from its initial level, after the initial rate period ends the interest rate will rise to the fully indexed rate after a period determined by the interest rate increase cap. For example, if the initial rate is 4% for 1 year, the fully indexed rate 7%, and the rate adjusts every year subject to a 1% rate increase cap, the 7% rate will be reached at the end of the third year.
Prices that assume a more or less standardized set of transaction characteristics that generally command the lowest prices. Generic prices are distinguished from transaction specific prices, which pertain to the characteristics of a specific transaction.
Gift of equity
A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as down payment.
Good fairy syndrome
A belief that somewhere out there is a good fairy who will solve all our financial (and other) problems.
Good faith estimate
The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application.
Government National Mortgage Association (GNMA)
A Federal agency that guarantees mortgage securities that are issued against pools of FHA and VA mortgages.
The period after the payment due date during which the borrower can pay without being hit for late fees. Grace periods apply only to mortgages on which interest is calculated monthly. Simple interest mortgages do not have a grace period because interest accrues daily.
Graduated payment mortgage (GPM)
A mortgage on which the payment rises by a constant percent for a specified number of periods, after which it levels out over the remaining term and amortizes fully. For example, the payment might increase by 7.5% every 12 months for 60 months, after which it is constant for the remaining term at a fully amortizing level.
The interval at which the payment rises on a GPM.
The percentage increase in the payment on a GPM.
Guaranteed Mortgage Price Agreement
A proposal by HUD in 2002 to allow lenders and others to offer packages of loans and settlement services at a single price.
The Home Affordability Refinance Program (HARP) was started by Fannie Mae and Freddie Mac in 2010 to provide refinancing to borrowers with loan-to-value ratios too high to be eligible for their standard programs.
Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as “homeowner insurance”, it is the second “I” in PITI.
Stands for Home Equity Conversion Mortgage, a reverse mortgage program authorized by Congress in 1988. On a HECM, FHA insures the lender against loss in the event the loan balance at termination exceeds the value of the property, and insures the borrower that any payments due from the lender will be made, even if the lender fails.
The assumption that the index value to which the rate on an ARM is tied follows the same pattern as in some prior historical period. In meeting their disclosure obligations in connection with ARMs, some lenders show how the mortgage payment would have changed on a mortgage originated some time in the past. That is not very useful. Showing how a mortgage originated now would change if the index followed a historical pattern would be useful, but nobody does it.
Homebuyer protection plan
A plan purporting to protect FHA homebuyers against property defects.
Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. It is the second “I” in PITI.
Home equity line of credit (HELOC)
A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $150,000, in an amount and at a time of your choosing. You can draw on the line by writing a check, using a special credit card, or in other ways.
Home Equity Conversion Mortgage (HECM)
A reverse mortgage program administered by FHA.
Home equity line
Same as HELOC.
Home equity loan
Same as second mortgage.
A reverse mortgage program administered by Fannie Mae.
Home Owners Loan Corporation
A Federal Government agency established by Congress in 1933 to help families avoid having their homes foreclosed.
Home Valuation Code of Conduct (HVCC)
A rule issued by Fannie Mae and Freddie Mac, effective May 1, 2009, that the agencies thenceforth would only purchase mortgages that were supported by an “independent” appraisal. The rule had some very bad though unintended side effects.
A government-owned or affiliated housing lender. With minor exceptions, government in the US has never loaned directly to consumers, but housing banks are widespread in many developing countries.
A marked increase in house prices fueled partly by expectations that prices will continue to rise.
The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees. Same as PITI and “monthly housing expense.”
Housing expense ratio
The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers.
The amount invested in a house, equal to the sale price less the loan amount.
The form a borrower receives at closing that details all the payments and receipts among the parties in a real estate transaction, including borrower, lender, home seller, mortgage broker and various other service providers.
An ARM on which the initial rate holds for some period, during which it is “fixed-rate”, after which it becomes adjustable rate. Generally, the term is applied to ARMs with initial rate periods of 3 years or longer.
Same as Escrow.
An ARM on which the interest rate adjusts mechanically based on changes in an interest rate index, as opposed to a “discretionary ARM” on which the lender can change the rate at any time subject only to advance notice. All ARMs in the US are indexed.
Initial interest rate
The interest rate that is fixed for some specified number of months at the beginning of the life of a an ARM. The initial rate is sometimes referred to as a “teaser” when it is below thefully indexed interest rate.
Initial rate period
The number of months for which the initial rate holds, ranging from 1 month to 10 years.
Interest accrual period
The period over which the interest due the lender is calculated. If the interest accrual period on a 6 % mortgage for $100,000 is a year, as it is on some loans in the UK and India, the interest for the year is .06($100,000) = $6,000. If interest accrues monthly, as it does on most mortgages in the US, the monthly interest is .06/12($100,000) = $500. If interest accrues biweekly, as on a few programs in the US, the biweekly interest is .06/26($100,000) = $230.77. And if interest accrues daily, as HELOCs and some other mortgages in the US do, the daily interest is .06/365($100,000) = $16 .44.
A time-adjusted measure of cost to a mortgage borrower. It is calculated in the same way as the APR except that the APR assumes that the loan runs to term, and is always measured before taxes. The formula is shown in Mortgage Formulas. Interest cost is measured over the individual borrower’s time horizon, and it may be measured after taxes at the individual borrower’s tax rate. In addition, the cost items included in interest cost may be more or less inclusive than those included in the APR.
The amount of interest, expressed in dollars, computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by the interest accrual period. It is the same as interest payment except when the scheduled mortgage payment is less than the interest due, in which case the difference is added to the balance and constitutes negative amortization.
A mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged.
The dollar amount of interest paid each month. It is the same as interest due so long as the scheduled mortgage payment is equal to or greater than than the interest due. Otherwise, the interest payment is equal to the scheduled payment.
The rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A rate of 6%, for example, means a rate of 1/2% per month. A mortgage interest rate is a rate on a loan secured by a specific property.
Interest rate adjustment period
The frequency of rate adjustments on an ARM after the initial rate period is over. The rate adjustment period is sometimes but not always the same as the initial rate period. As an example, a 3/3 ARM is one in which both periods are 3 years while a 3/1 ARM has an initial rate period of 3 years after which the rate adjusts every year.
Interest rate ceiling
The highest interest rate possible under an ARM contract; same as “lifetime cap.” It is often expressed as a specified number of percentage points above the initial interest rate.
Interest rate floor
The lowest interest rate possible under an ARM contract. Floors are less common than ceilings.
Interest rate increase cap
The maximum allowable increase in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points, but may be 5 points if the initial rate period is 5 years or longer.
Interest rate decrease cap
The maximum allowable decrease in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points.
Interest rate index
The specific interest rate series to which the interest rate on an ARM is tied, such as “Treasury Constant Maturities, 1-Year,” or “Eleventh District Cost of Funds.” All the indices are published regularly in readily available sources.
Interest rate risk premium
The rate premium above the rate on the least risky or “prime” loan.
An ill-advised scheme to avoid a prepayment penalty by refinancing twice instead of once.
Mortgages delivered using the internet as a major part of the communication process between the borrower and the lender.
In real estate, a borrower who owns or purchases a property as an investment rather than as a residence.
A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $417,000 in 2008 (see Non-conforming mortgage). However, in that year, the agencies were given limited authority to purchase jumbos.
A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount. See What Are Junk Fees on a Mortgage?
Fees that lenders are entitled to collect from borrowers who don’t pay within the grace period. Most mortgage notes offer borrowers a 10 or 15-day grace period, with a late charge of about 5% on payments received on the 16th or later.
A payment received after the grace period stipulated in the note. Most mortgage grace periods are 10 or 15 days.
A mortgage web site designed to provide leads (potential customers) to lenders. Where a referral site provides information about lenders to consumers, with consumers contacting the lenders, a lead-generation site provides information about the consumers to the lenders, and the lenders contact the consumers. They are sometimes called “auction sites” because lenders post their prices directly to the consumer.
A transaction in which a hopeful home buyer leases a home with an option to buy it within a specified period.
See Mortgage lender.
The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.
The amount the borrower promises to repay, as set forth in the mortgage contract. It differs from the amount of cash disbursed by the lender by the amount of points and other upfront costs included in the loan.
The process of raising cash periodically through successive cash-out refinancings. It is a scam initiated by mortgage brokers that victimizes wholesale lenders, with the connivance of borrowers.
Loan discount fee
The term used to describe points on the Good Faith Estimate.
Loan level price adjustments
The risk-based pricing system used by Fannie Mae.
See Mortgage modification.
Employees of lenders or mortgage brokers who find borrowers, sell and counsel them, and take applications.
A lender or a mortgage broker.
The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts.
An option exercised by the borrower, at the time of the loan application or later, to “lock in” the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.
Lock commitment letter
A written statement from a lender verifying that the price and other terms of a loan have been locked. Borrowers who lock through a mortgage broker should always demand to see the lock commitment letter.
The inability or unwillingness of a lender to honor a mortgage price that a borrower had believed was guaranteed.
A borrower, usually refinancing rather than purchasing a home, who allows a lock to expire when interest rates go down in order to lock again at the lower rate.
The number of days for which any lock or float-down holds. Ordinarily, the longer the period, the higher the price to the borrower.
The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure.
A house built entirely in a factory, transported to a site and installed there. They are usually built without knowing where they will be sited, and are subject to a Federal building code administered by HUD.
The amount added to the interest rate index, ranging generally from 2 to 3 percentage points, to obtain the fully indexed interest rate on an ARM.
A particular combination of loan, borrower and property characteristics that lenders use in setting prices and underwriting requirements. These characteristics are believed to affect the default risk or cost of the loan. As examples, borrowers who don’t intend to occupy the house they purchase pay more than those who do, and borrowers who refinance only the balance on their existing loan pay less than those who take “cash out”.
The period until the last payment is due. This is usually but not always the term, which is the period used to calculate the mortgage payment.
Maximum loan amount
The largest loan size permitted on a particular loan program. For programs where the loan is targeted for sale to Fannie Mae or Freddy Mac, the maximum will be the largest loan eligible for purchase by these agencies. On FHA loans, the maximums are set by the Federal Housing Administration, and vary somewhat by geographical area. On other loans, maximums are set by lenders.
Maximum loan to value ratio
The maximum allowable loan-to-value ratio on the selected loan program.
The longest period for which the lender will lock the rate and points on any program. The most common maximum lock period is 60 days, but on some programs the maximum is 90 days; only a few go beyond 90 days.
Minimum down payment
The minimum allowable ratio of down payment to sale price on any program. If the minimum is 10%, for example, it means that you must make a down payment of at least $10,000 on a $100,000 house, or $20,000 on a $200,000 house.
Monthly housing expense
Same as Housing expense.
Monthly debt service
Monthly payments required on credit cards, installment loans, home equity loans, and other debts but not including payments on the loan applied for.
Monthly total expenses
Same as Total housing expense.
A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.
Mortgage auction site
See Lead generation site.
Same as mortgage company.
An independent contractor who offers the loan products of multiple lenders, termedwholesalers. A mortgage broker counsels on the loans available from different wholesalers, takes the application, and usually processes the loan. When the file is complete, but sometimes sooner, the lender underwrites the loan. In contrast to a correspondent, a mortgage broker does not fund a loan.
A mortgage lender who sells all loans in the secondary market. As distinguished from aportfolio lender, who retains loans in its portfolio. Mortgage companies may or may not service the loans they originate.
A packet of information about a consumer who a loan provider might be able to convert into a borrower. You become a lead when you fill out a questionnaire about yourself on-line in response to a sexy ad.
Equations used to derive common measures used in the mortgage market, such as monthly payment, balance, and APR.
A broker web site with many attractive features, and one not so attractive.
Insurance against loss provided to a mortgage lender in the event of borrower default. In most cases, the borrower pays the premiums.
Mortgage insurance disclosure
Read Disclosure Rules About Mortgage Insurance
Mortgage insurance premium
The up-front and/or periodic charges that the borrower pays for mortgage insurance. There are different mortgage insurance plans with differing combinations of up-front, monthly and annual premiums. The most widely used premium plan is a monthly charge with no upfront premium.
Mortgage insurance cancellation
Canceling a mortgage insurance policy.
The party who disburses funds to the borrower at the closing table. The lender receives the note evidencing the borrower’s indebtedness and obligation to repay, and the mortgage which is the lien on the subject property.
A change in the terms of a loan, usually the interest rate and/or term, in response to the borrower’s inability to make the payments under the existing contract.
The monthly payment of interest and principal made by the borrower. The formula used to calculate it is shown in Mortgage Formulas.
The interest rate, points and fees paid to the lender and/or mortgage broker. On ARMs, the price also includes the fully indexed rate and the maximum rate.
A bundle of mortgage characteristics that lenders see fit to distinguish as a distinct instrument. These include whether it is an FRM, ARM, or Balloon; the term; the initial rate period on an ARM; whether it is FHA-insured or VA-guaranteed; and if is not FHA or VA, whether it is “conforming” (eligible for purchase by Fannie Mae or Freddie Mac) or “non-conforming”.
Advice on where to go to get a mortgage.
Deceptive and exploitative schemes by lenders, brokers, home sellers and sometimes even borrowers.
Trying to find the best deal on a mortgage.
Offers for great mortgage deals that appear unbidden in your email.
The doctrine that mortgage lenders should be held liable for providing loans that are not suitable for the borrower.
A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called “deferred interest.” It is explained in detail in How Does Negative Amortization on a Mortgage Work? Negative amortization arises most frequently on ARMs.
Negative amortization cap
The maximum amount of negative amortization permitted on an ARM, usually expressed as a percentage of the original loan amount (e.g., 110%). Reaching the cap triggers an automatic increase in the payment, usually to the fully amortizing payment level, overriding any payment increase cap.
Negative Homeowners Equity
The condition of owing more on the house than the house is worth.
Points paid by a lender for a loan with a rate above the rate on a zero point loan. For example, a wholesaler quotes the following prices to a mortgage broker. 8%/0 points, 7.5%/3 points, 8.75%/-3 points. On mortgage web sites, negative points are usually referred to as “rebates” because they are used to reduce a borrower’s settlement costs. When negative points are retained by a mortgage broker, they are called a “yield spread premium”.
A facility offered by some lenders to mortgage brokers where de jure the brokers become employees of the lender but de facto they retain their independence as brokers. One of the advantages of this arrangement to brokers is that they need not disclose yield spread premiums received from lenders.
Using a broker’s time and expertise to become informed and creditworthy, then jumping to the internet to get the loan.
See Market niche.
Proliferation in the number of loan, borrower and property characteristics used by lenders to set mortgage prices and underwriting requirements.
No change scenario
On an ARM, the assumption that the value of the index to which the rate is tied does not change from its initial level.
A mortgage on which all settlement costs except per diem interest, escrows, homeowners insurance and transfer taxes are paid by the lender and/or the home seller.
A person who lives paycheck to paycheck, and is therefore not cut out to be a homeowner.
A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.
Non-Permanent resident alien
A non-citizen without a green card who is employed in the US. As distinct from a permanent resident alien, who has a green card and who lenders do not distinguish from US citizens. Non-permanent resident aliens are subject to somewhat more restrictive qualification requirements than US citizens.
No asset loan
A documentation requirement where the applicant’s assets are not disclosed.
No Fee Mortgage Plus
A Bank of America program for home purchasers that eliminates all lender fees except points, and all third party fees.
No income loan
A documentation requirement where the applicant’s income is not disclosed.
A condominium that does not meet meet lender requirements.
No-Surprise adjustable rate mortgage
An ARM with a preset graduated payment combined with variable term.
Nominal interest rate
A quoted interest rate that is not adjusted for either intra-year compounding, or for inflation. A quoted rate of 6% on a mortgage, for example, is nominal. Adjusted rates are called “effective”.
No ratio loan
A documentation requirement where the applicant’s income is disclosed and verified but not used in qualifying the borrower. The conventional maximum ratios of expense to income are not applied.
A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents.
An adjustable rate mortgage with flexible payment options, monthly interest rate adjustments, and very low minimum payments in the early years. They carry a risk of very large payments in later years.
An upfront fee paid by the buyer under a lease-to-own purchase, usually 1% to 5% of the price, which is credited to the purchase price when the option is exercised but is lost if it is not.
An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate.
The difference between the price posted to its loan officers by a lender or mortgage broker, and the price charged the borrower.
The mortgage interest rate at zero points. In the secondary market, it is the security rate that trades at a price of 100.
Making a payment larger than the scheduled payment as a way of paying off the loan earlier.
Belief that there is a special way to pay down the balance of a home mortgage faster, if you know the secret.
Payment adjustment interval
The period between payment changes on an ARM, which may or may not be the same as the interest rate adjustment period. Loans on which the payment adjusts less frequently than the rate may generate negative amortization.
Payment increase cap
The maximum percentage increase in the payment on an ARM at a payment adjustment date. A 7.5% cap is common.
Payment decrease cap
The maximum percentage decrease in the payment on an ARM at a payment adjustment date.
The period over which the borrower is obliged to make payments. On most mortgages, the payment period is a month, but on some it is biweekly.
A program begun by Fannie Mae in 2003-4 that allows a borrower to skip up to 2 mortgage payments in any 12 month period, and up to 10 over the life of a loan.
The interest rate used to calculate the mortgage payment, which is usually but not necessarily the interest rate.
A very large increase in the payment on an ARM that may surprise the borrower. Also used to refer to a large difference between the rent being paid by a first-time home buyer, and the monthly housing expense on the purchased home.
The month in which the loan balance is paid down to zero. It may or may not be the term.
Per diem interest
Interest from the day of closing to the first day of the following month. In some cases, however, the borrower can get a credit at closing by making the first payment a month earlier.
An ill-advised scheme to tap into equity for cash advances through periodic refinancings.
Paying points as a way of reducing the interest rate.
Pick a Payment ARM
Same as Flexible Payment ARM.
A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down.
The lender’s risk that between the time a lock commitment is given to the borrower and the time the loan is closed, interest rates will rise and the lender will take a loss on selling the loan.
Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.
Private mortgage insurance, as distinguished from insurance provided by government under FHA and VA.
An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., “3 points” means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations withnegative points. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed “discounts” and “premiums,” respectively.
A mortgage that can be moved from one property to another. These were introduced in the US by E*TRADE Mortgage in 2003.
A lender that holds the loans it originates in its portfolio rather than selling them, as atemporary lender does.
The mortgage prices delivered by lenders to loan officers and mortgage brokers, as opposed to the final prices paid by borrowers.
A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Unlike a pre-qualification, the lender checks the applicant’s credit.
A variety of unsavory lender practices designed to take advantage of unwary borrowers.
A payment made by the borrower over and above the scheduled mortgage payment. If the additional payment pays off the entire balance it is a “prepayment in full”; otherwise, it is a “partial prepayment.”
A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest.
Same as qualification.
Charging interest rates and/or fees that are excessive relative to what the same borrowers could have found had they shopped the market.
Pricing Notch Point (PNP)
A loan amount at which any increase will increase the interest rate, points or mortgage insurance premium.
The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented. S
The portion of the monthly payment that is used to reduce the loan balance.
The present value of a house, given the elderly owner’s right to live there until death or voluntary move-out, under the FHA reverse mortgage program.
Private mortgage insurance
Mortgage insurance provided by private mortgage insurance companies, or PMIs.
Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. The processing file is handed off to underwriting for the loan decision.
Successive sham home sales at progressively higher prices as part of a scheme to defraud FHA.
Purchase money mortgage
A mortgage offered by a house buyer as partial payment for the house. From the seller’s point of view, it is seller financing.
The process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay a loan. Qualification is sometimes referred to as “pre-qualification” because it is subject to verification of the information provided by the applicant. Qualification is short of approval because it does not take account of the credit history of the borrower. Qualified borrowers may ultimately be turned down because, while they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay.
The interest rate used in calculating the initial mortgage payment in qualifying a borrower. The rate used in this calculation may or may not be the initial rate on the mortgage. On ARMs, for example, the borrower may be qualified at the fully indexed rate rather than the initial rate.
Requirements stipulated by the lender that the ratio of housing expense to borrower income, and housing expense plus other debt service to borrower income, cannot exceed specified maximums, e.g., 28% and 35%. These may reflect the maximums specified by Fannie Mae and Freddie Mac; they may also vary with the loan-value ratio and other factors.
Standards imposed by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum loan-to-value ratios, and so on. Less comprehensive than underwriting requirements, which take account of the borrower’s credit record.
See Interest Rate.
Limitations on the size of rate adjustments on an ARM, often expressed in a/b/c fashion: “a” is the maximum rate change at the first rate adjustment, “b” is the maximum at all subsequent adjustments, and “c” is the maximum increase over the initial rate during the life of the contract.
The period you must retain a mortgage in order for it to be profitable to pay points to reduce the rate.
All the combinations of interest rate and points that are offered on a particular loan program. On an ARM, rates and points may also vary with the margin and interest rate ceiling.
Protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. This protection can take the form of a “lock” where the rate and points are frozen at their initial levels until the loan closes; or a “float-down” where the rates and points cannot rise from their initial levels but they can decline if market rates decline. In either case, the protection only runs for a specified period. If the loan is not closed within that period, the protection expires and the borrower will either have to accept the terms quoted by the lender on new loans at that time, or start the shopping process anew.
Tables of interest rates and points that lenders distribute daily to their loan officer employees or mortgage brokers.
Same as Negative points.
Raising or lowering the mortgage payment to the fully amortizing payment. Periodic payment-increase recasts are sometimes used on ARMs in lieu of or in addition to negative amortization caps. Payment reduction recasts arise when borrowers have made extra payments and need to have their payment reduced.
Payments made by service providers to other parties as quid pro quo for referring customers. For example, a title company provides something of value to a Realtor or lender for sending a customer who requires title insurance.
The ability to direct a client to a specific vendor. Referral power is based on information and authority of the referrer, and ignorance of the client.
A mortgage web site that introduces potential borrowers to participating lenders, in some cases to multiple hundreds of them. The principal lure to the consumer is information ongeneric prices posted by the lenders.
Paying off an old loan while simultaneously taking a new one. This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan. It may be done to raise cash, as an alternative to a home equity loan. Or it may be done to reduce the monthly payment.
An increment above the rent paid on a lease-to-own home purchase, which is credited to the purchase price if the purchase option is exercised, but which is lost if the option is not exercised.
The total cash required of the home buyer to close the transaction, including down payment, points and fixed dollar charges paid to the lender, any portion of the mortgage insurance premium that is paid up-front, and other settlement charges associated with the transaction such as title insurance, taxes, etc. The total required cash is shown on the Good Faith Estimate of Settlement that every borrower receives.
The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.
A lender who offers mortgage loans directly to the public. As distinct from a wholesale lender who operates through mortgage brokers and correspondents.
A loan to an elderly home owner on which the balance rises over time, and which is not repaid until the owner dies, sells the house, or moves out permanently.
Right of rescission
The right of refinancing borrowers, under the Truth in Lending Act, to cancel the deal at no cost to themselves within 3 days of closing.
Determining how the interest rate and payment on an ARM will change in response to specified future changes in market interest rates, called “scenarios”.
Scheduled mortgage payment
The amount the borrower is obliged to pay each period, including interest, principal, and mortgage insurance, under the terms of the mortgage contract. Paying less than the scheduled amount results in delinquency. On most mortgages, the scheduled payment is the fully amortizing payment throughout the life of the loan. On some mortgages, however, the scheduled payment for the first 5 or 10 years is the interest payment (see Interest Only Mortgages). And on option (flexible payment) ARMs, it can be the “minimum” payment as defined by the program.
A loan with a second-priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.
Secure option ARM
An option ARM on which the initial rate holds for 5 years rather than one month.
Markets in which mortgages or mortgage-backed securities are bought and sold
A borrower who must document income using tax returns rather than information provided by an employer. This complicates the process somewhat.
A contribution to a borrower’s down payment or settlement costs made by a home seller, as an alternative to a price reduction.
Provision of a mortgage by the seller of a house, often a second mortgage, as a condition of the sale.
Administering loans between the time of disbursement and the time the loan is fully paid off. This includes collecting monthly payments from the borrower, maintaining records of loan progress, assuring payments of taxes and insurance, and pursuing delinquent accounts.
The party who services a loan, who may or may not be the lender who originated it.
Servicing release premium
A payment made by the purchaser of a mortgage to the seller for the release of the servicing on the mortgage. It has no direct relevance to borrowers.
When one servicing agent is replaced by another.
Costs that the borrower must pay at the time of closing, in addition to the down payment.
Shared appreciation mortgage
A mortgage on which the borrower gives up a share in future price appreciation in exchange for a lower interest rate and/or interest deferral.
A type of multi-lender web site that offers borrowers the capacity to shop among multiple competing lenders.
An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure.
A second mortgage used to deceive the first mortgage lender, or to provide preferential (subsidized) terms to qualified home buyers.
Simple interest mortgage
A mortgage on which interest is calculated daily based on the balance at the time of the last payment. The daily interest charge within the month is constant — interest is not charged on the interest charges of prior days.
Simple interest biweekly mortgage
A biweekly mortgage on which the biweekly payment is applied to the balance every two weeks, rather than held in an account as on a conventional biweekly.
Single file mortgage insurance
A type of mortgage insurance on which the lender pays the premium and prices it in the interest rate.
Single-lender web site
A web site of an individual lender or mortgage broker who wants users to select a loan from them. They are easy to identify because the name of the lender or broker will be prominently displayed on the screens. Single-lender sites account for the majority of all mortgage web sites.
A documentation requirement where the borrower discloses her assets but they are not verified by the lender.
A documentation requirement where the lender verifies the source of the income but not the amount.
Default by a mortgage borrower who has the capacity to make the payments on his mortgage but elects not to because of negative equity — the loan balance is substantially larger than the house value.
Refinancing that omits some of the standard risk control measures, and is therefore quicker and less costly.
A second mortgage on the property which is not paid off when a new loan is taken out. The second mortgage lender must allow subordination of the second to the new first mortgage.
The policy of a second mortgage lender for allowing a borrower to refinance the first mortgage while leaving the second in place.
A borrower with poor credit, who can borrow only from sub-prime lenders who specialize in dealing with borrowers who have poor credit. Such borrowers pay more than prime borrowers, and are sometimes taken advantage of. Not all borrowers who deal with sub-prime lenders, however, are sub-prime borrowers. Some could obtain loans from mainstream lenders if they properly shop the market.
A lender who specializes in lending to sub-prime borrowers.
The network of sub-prime lenders, mortgage brokers, warehouse lenders and investment bankers who make possible the delivery of loans to sub-prime borrowers.
Same as Bridge loan.
Tangible net benefit
The net gain to a borrower from a refinancing, which some proposed legislation would make the responsibility of lenders.
Tax service fee
A fee charged by some lenders at closing to cover the cost of paying taxes on the borrower’s property when they come due, or (if the borrower is paying the taxes), verifying that the payment has been made.
The initial interest rate on an ARM, when it is below the fully indexed rate.
A reduction in the mortgage payment in the early years of the loan in exchange for an upfront cash payment provided by the home buyer, the seller, or both.
A lender that sells the loans it originates, as opposed to a portfolio lender who holds them.
An option available to borrowers under a Home Equity Conversion Mortgage to draw a fixed amount monthly for as long as they remain in their house.
The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity. On a 7-year balloon loan, for example, the maturity is 7 years but the term in most cases is 30 years.
Insurance against loss arising from problems connected to the title to property.
Total housing expense
Housing expense plus Monthly debt service.
Total expense ratio
The ratio of Total housing expense to borrower income.
Total interest payments
The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money.
Total expense ratio
The ratio of housing expense plus current debt service payments to borrower income, which is used (along with the housing expense ratio and other factors) in qualifying borrowers.
Mandatory loss reserves based on the riskiness of individual transactions. An example is the contingency reserve requirements applicable to private mortgage insurers.
Truth in Lending (TIL)
The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information.
Fees collected from a borrower by a loan officer that are lower than the target fees specified by the lender or mortgage broker who employs the loan officer.
The process of examining all the data about a borrower’s property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.
The standards imposed by lenders in determining whether a borrower qualifies for a loan. These standards are more comprehensive than qualification requirements in that they include an evaluation of the borrower’s creditworthiness.
Upfront Mortgage Broker (UMB)
A mortgage broker who charges a set fee for services provided, established in writing at the outset of the transaction, and acts as the borrower’s agent in shopping for the best deal. For articles on UMBs, see Upfront Mortgage Brokers. UMBs are listed at List of Upfront Mortgage Brokers.
Upfront Mortgage Lender
A lender offering loans on the internet who provides mortgage shoppers with the information they need to make an informed decision before applying for a mortgage; and guarantees them fair treatment during the period after they apply through to closing.
A mortgage with no down payment requirement, available only to ex-servicemen and women as well as those on active duty, on which the lender is insured against loss by the Veterans Administration. See Are VA Mortgage Loans a Good Deal?
Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure where the lender adds a charge to the monthly mortgage payment that is deposited in an escrow account, from which the lender pays the borrower’s taxes and insurance when they are due. On some loans lenders will not waive escrows, and on loans where waiver is permitted lenders are likely either to charge for it in the form of a small increase in points, or restrict it to borrowers making a large down payment.
A firm that lends to temporary lenders against the collateral of closed mortgage loans prior to the sale of the loans in the secondary market. Warehouse lenders can call the loans if the loans “in the warehouse” drop in value.
A condominium project with features that lenders view as protections against hazards that would threaten the value of condo units. These features include the project being completed with most units sold rather than rented, no one party owning more than 10% of them, adequate insurance coverage of common structures, and an ownership association independent of the developer.
A lender who provides loans through mortgage brokers or correspondents. The mortgage broker or correspondent initiates the transaction, takes the borrower’s application, and processes the loan. As distinct from a Retail lender.
Wholesale mortgage prices
The interest rate and points quoted by wholesale lenders to mortgage brokers and correspondent lenders.
The assumption of a mortgage, with permission of the lender, from a borrower unable to continue making the payments.
Worst case scenario
The assumption that the interest rate on an ARM rises to the maximum extent permitted in the note. On a one-month ARM with no rate adjustment caps, for example, the rate would jump to the maximum rate stipulated in the note in month 2.
A mortgage on a property that already has a mortgage, where the new lender assumes the payment obligation on the old mortgage. Wrap-around mortgages arise when the current market rate is above the rate on the existing mortgage, and home sellers are frequently the lender. A due-on-sale clause prevents a wrap-around mortgage in connection with sale of a property except by violating the clause.
Same as Negative points.
Yield-Spread premium abuse
The practice by mortgage brokers of pocketing a rebate from the lender for delivering a high-rate loan, without the knowledge of the borrower.
A graph that shows, at any given time, how the yield varies with the period to maturity. Usually, the curve slopes upwards but occasionally it slopes down or is flat. A flat yield curve means that yields on long-term bonds are not much higher than those on short-term notes.
1 Month Option ARM
Same as Flexible Payment ARM.
Programs offered by some lenders under which a borrower who is able to secure a grant or gift equal to 2% of the down payment will only have to provide a 3% down payment from their own funds. This can be a good deal for a cash-short borrower.
80/10/10, 80/15/5, and 80/20/0 loan plans
Combination first mortgages for 80% of sale price or value and second mortgages for 10%, 15%, or 20%. The purpose is to avoid mortgage insurance, which is required on first mortgages that exceed 80% of value.
An interest rate index that is used on some ARMs. It is the average of the most recent 12 monthly values of the Treasury One-Year Constant Maturity series.
12 MTA Pay Option ARM
Same as Flexible Payment ARM.
A monthly ARM on which the initial rate is 3.95%.
A loan with no down payment. The loan amount equals the property value.
A loan for 125% of property value.
A mortgage with a term of 40 years.