Glossary Terms

/Glossary Terms
Glossary Terms2017-03-19T22:36:12-07:00
Adjustable-Rate Loan (ARM)2017-03-16T00:18:04-07:00

A loan with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable Mortgage loans) or VRMs (variable-rate Loans).

Appraised Value2017-03-16T00:18:56-07:00
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
Assignment2017-03-16T00:21:49-07:00
The transfer of a Loan from one person to another.
Assumability2017-03-16T00:22:17-07:00
An assumable Loan 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 Loan contains a due-on-sale clause, it may not be assumed by a new buyer.
2/1 Buy Down Loan2017-03-16T19:29:59-07:00

The 2/1 Buy Down Loan allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long term rates; however, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.

Adjustable-Rate Loan (ARM)2017-03-16T19:29:59-07:00

A loan with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable Mortgage loans) or VRMs (variable-rate Loans).

Adjustment Date2017-03-16T19:29:59-07:00

The date that the interest rate changes on an adjustable-rate Loan (ARM).

Adjustment Period2017-03-16T19:29:59-07:00

The period elapsing between adjustment dates for an adjustable-rate Loan (ARM).

Appraised Value2017-03-16T19:29:59-07:00

An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.

Asset2017-03-16T19:29:59-07:00

Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and etc.).

Assignment2017-03-16T19:29:59-07:00

The transfer of a Loan from one person to another.

Assumability2017-03-16T19:29:59-07:00

An assumable Loan 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 Loan contains a due-on-sale clause, it may not be assumed by a new buyer.

Certificate of Eligibility2017-03-16T19:29:59-07:00

A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) Loan.

Certificate of Reasonable Value (CRV)2017-03-16T19:29:59-07:00

A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA Loan.

Change Frequency2017-03-16T19:29:59-07:00

The frequency (in months) of payment and/or interest rate changes in an adjustable-rate Loan (ARM).

Closing2017-03-16T19:29:59-07:00

A meeting held to finalize the sale of a property. The buyer signs the Loan documents and pays closing costs. Also called “settlement.”

Compound Interest2017-03-16T19:29:59-07:00

Interest paid on the original principal balance and on the accrued and unpaid interest.

Consumer Reporting Agency (or Bureau)2017-03-16T19:29:59-07:00

An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources.

Conversion Clause2017-03-16T19:29:59-07:00

A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.

Credit Report2017-03-16T19:29:19-07:00

A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.

Credit Risk Score2017-03-16T19:29:19-07:00

A credit score measures a consumer’s credit risk relative to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Issac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the Loan underwriting process.

Deed of Trust2017-03-16T19:29:19-07:00

The document used in some states instead of a Loan. Title is conveyed to a trustee.

Default2017-03-16T19:29:19-07:00

Failure to make Loan payments on a timely basis or to comply with other requirements of a Loan.

Delinquency2017-03-16T19:29:19-07:00

Failure to make Loan payments on time.

Deposit2017-03-16T19:29:19-07:00

This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.

Discount2017-03-16T19:29:19-07:00

In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the Loan term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.

Down Payment2017-03-16T19:29:19-07:00

Part of the purchase price of a property that is paid in cash and not financed with a Loan.

Effective Gross Income2017-03-16T19:29:19-07:00

A borrower’s normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.

Equity2017-03-16T19:29:19-07:00

The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the Loan.

Escrow2017-03-16T19:29:19-07:00

An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.

Escrow Disbursements2017-03-16T19:29:19-07:00

The use of escrow funds to pay real estate taxes, hazard insurance, Loan insurance, and other property expenses as they become due.

Escrow Payment2017-03-16T19:29:19-07:00

The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, Loan insurance, lease payments, and other items as they become due.

Fannie Mae2017-03-16T19:29:19-07:00

A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home Loan funds.

FICO Score2017-03-16T19:29:19-07:00

FICO® scores are the most widely used credit score in U.S. Loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.

First Loan2017-03-16T19:29:19-07:00

The primary lien against a property.

Fixed Installment2017-03-16T19:29:19-07:00

The monthly payment due on a Loan including payment of both principal and interest.

Fixed-Rate Loan (FRM)2017-03-16T20:05:52-07:00

A Loan interest that are fixed throughout the entire term of the loan.

Fully Amortized ARM2017-03-16T20:05:47-07:00

An adjustable-rate Loan (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.

GNMA2017-03-16T20:05:41-07:00

A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.

Growing-Equity Loan (GEM)2017-03-16T20:25:32-07:00

A fixed-rate Loan that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the Loan.

Guarantee Loan2017-03-16T20:02:10-07:00

A Loan that is guaranteed by a third party.

Housing Expense Ratio2017-03-16T20:02:10-07:00

The percentage of gross monthly income budgeted to pay housing expenses.

HUD-1 Statement2017-03-16T20:02:10-07:00

A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.

Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)2017-03-16T20:02:10-07:00

A combination fixed rate and adjustable rate loan – also called 3/1,5/1,7/1 – can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.

Index2017-03-16T20:02:10-07:00

The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.

Initial Interest Rate2017-03-16T20:02:10-07:00

This refers to the original interest rate of the Loan at the time of closing. This rate changes for an adjustable-rate Loan (ARM). It’s also known as “start rate” or “teaser.”

Installment2017-03-16T20:02:10-07:00

The regular periodic payment that a borrower agrees to make to a lender.

Insured Loan2017-03-16T20:02:10-07:00

A Loan that is protected by the Federal Housing Administration (FHA) or by private Loan insurance (MI).

Interest2017-03-16T20:00:59-07:00

The fee charged for borrowing money.

Interest Accrual Rate2017-03-16T20:00:59-07:00

The percentage rate at which interest accrues on the Loan. In most cases, it is also the rate used to calculate the monthly payments.

Interest Rate Buydown Plan2017-03-16T20:00:59-07:00

An arrangement that allows the property seller to deposit money to an account. That money is then released each month to reduce the mortgagor’s monthly payments during the early years of a Loan.

Interest Rate Ceiling2017-03-16T20:00:59-07:00

For an adjustable-rate Loan (ARM), the maximum interest rate, as specified in the Loan note.

Interest Rate Floor2017-03-16T20:00:59-07:00

For an adjustable-rate Loan (ARM), the minimum interest rate, as specified in the Loan note.

Late Charge2017-03-16T20:00:59-07:00

The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.

Lease-Purchase Loan2017-03-16T20:00:59-07:00

An alternative financing option that allows low- and moderate-income home buyers to lease a home with an option to buy. Each month’s rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first Loan plus an extra amount that accumulates in a savings account for a down payment.

Liabilities2017-03-16T20:00:59-07:00

A person’s financial obligations. Liabilities include long-term and short-term debt.

Lifetime Payment Cap2017-03-16T20:00:59-07:00

For an adjustable-rate Loan (ARM), a limit on the amount that payments can increase or decrease over the life of the Loan.

Lifetime Rate Cap2017-03-16T20:00:59-07:00

For an adjustable-rate Loan (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.

Line of Credit2017-03-16T20:00:59-07:00

An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.

Liquid Asset2017-03-16T20:00:59-07:00

A cash asset or an asset that is easily converted into cash.

Loan2017-03-16T20:00:59-07:00

A sum of borrowed money (principal) that is generally repaid with interest.

Loan-to-Value (LTV) Percentage2017-03-16T20:00:59-07:00

The relationship between the principal balance of the Loan and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 Loan has an LTV of 80 percent.

Lock-In Period2017-03-16T20:00:59-07:00
The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.
Margin2017-03-16T20:00:59-07:00
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Maturity2017-03-16T20:00:59-07:00

The date on which the principal balance of a loan becomes due and payable.

Monthly Fixed Installment2017-03-16T20:00:59-07:00
That portion of the total monthly payment that is applied toward principal and interest. When a Loan negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn’t cover all of the interest. The loan balance therefore increases instead of decreasing.
Mortgage2017-03-16T20:00:59-07:00

A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Banker2017-03-16T20:00:59-07:00

A company that originates Loans exclusively for resale in the secondary Loan market.

Mortgage Insurance2017-03-16T19:58:53-07:00

A contract that insures the lender against loss caused by a mortgagor’s default on a government Loan or conventional Loan. Loan insurance can be issued by a private company or by a government agency.

Mortgage Insurance Premium (MIP)2017-03-16T19:58:53-07:00
The amount paid by a mortgagor for Loan insurance.
Mortgage Life Insurance2017-03-16T19:58:53-07:00
A type of term life insurance In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.
Mortgagor2017-03-16T21:38:40-07:00
The borrower in a Loan agreement.
Negative Amortization2017-03-16T20:24:08-07:00
Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your Loan. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn’t covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.
Net Worth2017-03-16T19:58:08-07:00
The value of all of a person’s assets, including cash.
Non Liquid Asset2017-03-16T19:58:08-07:00
An asset that cannot easily be converted into cash.
Note2017-03-16T19:58:08-07:00
A legal document that obligates a borrower to repay a Loan at a stated interest rate during a specified period of time.
Origination Fee2017-03-16T19:58:08-07:00
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the Loan amount.
Payment Change Date2017-03-16T19:58:08-07:00

The payment change date is an agreement that a lender and person who took out the loan comes to in order to change the due date of a loan’s payment each month.

Sometimes there are changes in a person’s circumstances that makes it necessary to change the due date of a loan each month. A person does have the option of approaching the lender and checking to see under what terms the due date of a bill can be changed.

For example, all of someone’s bills may be due at the same time each month and it is not possible for everything to get paid.

Another scenario that may come into effect is if a person only gets paid once a month and needs the loan payments to better align with his payment date.

Both of the previous circumstances may make it so the loan payments are hard to come up with at that date and a new date needs to be negotiated.

The terms for changing the payment due date vary with each lender. It is important to approach your lender and be very honest about your needs and your situation for options in helping you make your payments on time.

Periodic Payment Cap2017-03-16T19:58:08-07:00

In order to protect consumers from unreasonable payment increases in an adjustable rate mortgage, periodic payment caps defines a firm limit for the amount payments can go up and down in a single adjustment period.

In simpler terms, the periodic payment cap defines the amount that a payment can be decreased or increased in a term period. Adjustable rate mortgages have payments and interest rates that can change at different times. In order to make sure that the consumer’s payments never get too high or too low the cap is put into place, to keep the rates within certain limits.

For example, if the adjustment rate was from January to May there could be a payment cap put into place saying that the payments cannot increase or decrease by more than $300 on a loan. Otherwise, the payments could be changed with no limits either way based on the market or lender’s choice.

PITI Reserves2017-03-16T19:58:08-07:00
A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).
Points2017-03-16T19:58:08-07:00
A point is equal to one percent of the principal amount of your Loan. For example, if you get a Loan for $165,000 one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.
Pre-Approval2017-03-16T19:58:08-07:00
The process of determining how much money you will be eligible to borrow before you apply for a loan.
Prepayment Penalty2017-03-16T19:58:08-07:00

A fee that may be charged to a borrower who pays off a loan before it is due.

Prime Rate2017-03-16T19:58:08-07:00
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including Loan interest rates.
Principal2017-03-16T19:58:08-07:00
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a Loan.
Principal Balance2017-03-16T19:58:08-07:00
The outstanding balance of principal on a Loan not including interest or any other charges.
Principal, Interest, Taxes, and Insurance (PITI)2017-03-16T19:58:08-07:00
The four components of a monthly Loan payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the Loan. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.
Private Loan Insurance (PMI)2017-03-16T19:58:08-07:00
Loan insurance provided by a private Loan insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
Qualifying Ratios2017-03-16T19:57:23-07:00
Calculations used to determine if a borrower can qualify for a Loan. 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.
Rate Lock2017-03-16T19:57:23-07:00
A commitment issued by a lender to a borrower or other Loan originator guaranteeing a specified interest rate and lender costs for a specified period of time.
Real Estate Agent2017-03-16T19:57:23-07:00

A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Real Estate Agents.

Real Estate Settlement Procedures Act (RESPA)2017-03-16T19:57:23-07:00

A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Recording2017-03-16T19:57:23-07:00
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a Loan note, a satisfaction of Loan, or an extension of Loan, thereby making it a part of the public record.
Refinance2017-03-16T19:57:23-07:00
Paying off one loan with the proceeds from a new loan using the same property as security.
Revolving Liability2017-03-16T19:57:23-07:00
A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.
Secondary Loan Market2017-03-16T19:57:23-07:00
Where existing Loans are bought and sold.
Security2017-03-16T19:57:22-07:00

The property that will be pledged as collateral for a loan.

Servicer2017-03-16T19:57:22-07:00
An organization that collects principle and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services Loans that have been purchased by an investor in the secondary Loan market.
Standard Payment Calculation2017-03-16T19:57:22-07:00

The method used to determine the monthly payment required to repay the remaining balance of a Loan in substantially equal installments over the remaining term of the Loan at the current interest rate.

Step-Rate Loan2017-03-16T19:57:22-07:00
A Loan that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.
Third-party Origination2017-03-16T19:57:22-07:00
When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the Loans it plans to deliver to the secondary Loan market.
Total Expense Ratio2017-03-16T19:57:22-07:00
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
Treasury Index2017-03-16T19:57:22-07:00
An index used to determine interest rate changes for certain adjustable-rate Loan (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
Truth in Lending2017-03-16T19:57:22-07:00

In 1968 the Truth in Lending Act became a federal law. This law was designed to give consumers all of the information they need when they are taking out a loan including credit cards and mortgages. The information consumers need when choosing a loan are the terms of the loan and the costs of the loan as well as charges imposed by the lender.

What this means to you as someone who is seeking a loan is that when you approach a lending institution they have to be completely honest about terms of the loan such as payment schedule, interest rates, payments due, and charges such as filing fees and late fees.

The ultimate goal of the Truth in Lending Act is to allow consumers to make a decision about who they want to carry their loans and to be able to get the best terms they qualify for. The lender cannot add any “hidden terms” that the buyer is not informed of before he signs on the dotted line.

Two- Step Loan2017-03-16T19:57:22-07:00

The two-step loan is broken up into two parts.

    • The fixed rate period. This is a set period of time at the beginning of the loan. Most of these periods are between 5-7 years at a fixed rate of interest rate.
  • The next rate period. After the first set period of time, the interest rate adjusts to the market rate found after that first period.

After the first rate has expired then the buyer has the option of going to another fixed rate of interest established by the market rates or choosing an adjustable rate mortgage.

Who Would Choose a Two-Step Loan?

A couple sets of consumers may see the two-step loan as the best choice for them.

    • Someone who has plans of refinancing the loan before the first period ends.
    • A buyer who is planning on moving before the first period ends so he will not have to go past the first period.
  • Some people who choose the two-step plan do not plan to have the property until the end of the loan and most not past the period that has the firm interest rates.
Underwriting2017-03-16T21:39:33-07:00

In layman’s terms it refers to the chance that an institution is taking that the loans it extends will be repaid.

Several factors go into figuring out if the chances are worth taking.

    • Rating the borrower’s ability to pay back a loan. This is estimated using tools such as a debt to asset sheet and credit scores.
  • Assessing if the property is worth less than the loan. This involves estimating if the property could recover the price of the loan if it is used as collateral.

What Does Underwriting Look In A Real Situation?

For example, Mr. Smith wants to buy a home. The bank would underwrite his loan by looking at his situation and asking itself several questions.

    • Does/would Mr. Smith owe more money than he has assets?
    • Does he have a decent credit score and can/does he pay his bills?
    • Is the loan that Mr. Smith seeking more than the value of the home?
  • If the loan should default and the home go to the bank will the bank be able to sell it for enough to recover its investment?

The answers to these questions tell the bank whether they are able to take on the risk of Mr. Smith’s loan or if it is just too risky for them to gamble on.

“Wrap Around” Loan2017-03-16T20:29:54-07:00
A Loan that includes the remaining balance on an existing first Loan plus an additional amount requested by the mortgagor. Full payments on both Loans are made to the “Wrap Around” Loan, who then forwards the payments on the first Loan to the first Loan. These Loans may not be allowed by the first Loan holder, and if discovered, could be subject to a demand for full payment.
VA Loan2017-03-16T20:29:33-07:00

Department of Veterans Affairs.

There are several great benefits for veterans who qualify for the VA loan versus a private loan backed by a civilian bank.

    • Allows our veterans the ability to get a loan where otherwise the ability to get a mortgage may not exist.
    • No down payment options.
    • Areas that are short on credit opportunities for homes are the target of the VA loan.
    • 3% loans for the sale price or market value of the home (the lower number is chosen) that do not require private mortgage insurance.
    • Can get up to 20% for a second mortgage.
    • Offers $6,000 in exchange for energy efficient improvements.
    • Chance to take a loan on fee of 0 to 3.3% that is paid to the VA for this mortgage.
    • No mortgage insurance means that more of the payment can to applied towards the price of the home.
  • Most veterans qualify for better loans through this means than a traditional lending facility.

The VA loan is a great way to put our brave veterans and their families on the path to home ownership.