Additional Principal Payment: An additional amount that a customer pays toward their mortgage that is beyond their established monthly mortgage payment.
Adjustable Rate Mortgage (ARM): Also known as a variable-rate or a floating-rate mortgage, the rate of this mortgage is adjusted periodically over the life of the loan. The terms are based on a pre-selected index and are generally reset monthly or annually. Sometimes the ARM starts with a period during which the rate is fixed, after which the rate becomes adjustable.
Affidavit: This is a written statement of facts made by a person under oath or affirmation and administered by a public officer authorized to do so, including city recorders, court clerks and notaries. Affidavits are necessary when a person needs to give information that can be relied upon, such as when one is applying for a loan.
Amortization: A loan amount, including projected interest, divided into equal periodic payments calculated to pay off a debt at the end of a specified period. The payments are calculated to include any debt that will accrue during a set time. An example of amortization is a 30-year fixed-rate mortgage.
Annual Percentage Rate (APR): The measurement of the entire cost of a loan, including any interest that will be accrued or loan fees. This percentage is accepted across the mortgage industry and serves as a way for consumers to compare the cost of different loans.
Application (mortgage application): When applying for a mortgage, potential customers submit an application to provide certain information that the lender will use to determine whether a person is a viable candidate for a home loan. The information provided by the applicant includes employment and income information, debts owed, liquid assets and current rent or mortgage payment information.
Appraisal: After a candidate submits an application for a mortgage, the lender must establish whether the property is worth the asking price. An appraiser is selected by the lender and sent to the property to make a qualified analysis based on his or her knowledge and experience about the value of the home. It may be determined that the customer is paying more than the property is worth and the loan is therefore considered a higher risk. The customer is generally responsible for covering appraisal fees.
Appraisal Fee: The appraisal fee is simply the cost of having a home appraised. The price may vary depending on the appraiser or the size of the property, though it is typically between $350 and $500.
Appraised Value: While a homebuyer may end up paying more or less than the market price of a home, the appraised value is more objective. It is an evaluation of the value of the property at a certain point in time as established by a professional appraiser.
Appreciation: This indicates how an asset such as property increases over time. A home may appreciate in value for any number of reasons, including increased demand, weak supply, inflation or changes to the community. It is the opposite of depreciation, which is a decrease in value over time.
Assessed Value: Each property comes with certain applicable taxes, and the assessed value is used to calculate these taxes. This value is typically determined by the corresponding government municipality by examining comparable home sales and inspections. The assessed value may be determined annually.
Assessment: This is the process of determining the assessed value of a property, which then establishes how much the homeowner must pay in taxes. Often, the tax itself is called the assessment. The evaluation is made by considering the physical condition of the house, comparing the home to comparable homes in the area and other criteria.
Assets: Any resource that has economic value is considered an asset. Assets can be held or controlled by individuals, corporations or governments.
Balloon Loan or Balloon Mortgage: Most loan terms feature regular monthly payments that are carefully calculated to repay the loan over a set amount of time. However, a balloon loan has lower monthly payments. Therefore, at the end of the term of the loan, the customer owes a large, or balloon, payment in order to repay the remaining balance. These loans are popular among customers who do not intend to hold onto the property long term and instead intend to sell the property and repay the loan before it expires. This is an attractive option because balloon loans tend to have lower interest rates. However, should the property owner be unable to come up with the balloon loan, they may face penalties or higher interest rates.
Balloon Payment: A balloon loan is one that is not designed to be paid off simply through monthly payments. Instead, at the end of the term of the loan, the customer will pay a large, or balloon, payment to the lender. This payment is intended to repay the remaining balance of the loan. Often, this payment is made when the customer sells the home.
Bankruptcy: If a person or business is in debt that they are unable to repay, they may choose to file for bankruptcy. The debtor first files a petition, at which point all of their assets are calculated and used to repay a portion of the outstanding debt. At the end of the proceedings, the debtor will no longer be obligated to repay the debts. There are several chapters of the Bankruptcy Code, each of which takes different steps in repaying some of the debt owed. Each serves as a way for the debtor to be given another chance with renewed finances as well as providing the lenders some measure of repayment.
Customer: A person or company who is receiving money from a lender with the intention of repayment is called a customer.
Broker: An individual or firm that charges a fee or collects commission for executing buy and sell orders as submitted by an investor. This term may also refer to the role of the firm itself or a licensed real estate professional who often represents the seller of a property.
Buy Down: A buyer may try to obtain a rate with a lower interest for the first several years of the mortgage. Generally, the builder or seller of the property will provide payments to the lender that allow the buyer’s monthly payments to be lowered. Generally, the seller will then increase the purchase price of the home to compensate for the costs. While this often will only last for the first several years, it may last for the life of the loan.
Capital or Cash Reserves: These reserves generally refer to funds that an investor can have access to quickly. One example of this is a short-term, highly liquid investment that has a fairly low rate of return. In case of an emergency, the individual can access their money quickly and easily. Cash reserves may simply refer to a checking or savings account. A capital reserve refers to an amount of money that is reserved for a specific, imminent project. With the exception of unforeseen circumstances, once funds are put into a capital reserve, they must be used for the designated project.
Cash-Out Refinance: If a homeowner is interested in using the equity that has built up in their home, a cash-out refinance is an option. This is a mortgage refinance transaction in which the new mortgage borrowed is greater than the existing mortgage amount, which provides the homeowner with more funds without taking out a home equity loan.
Certificate of Title: A state or municipal-issued document that designates the owner or owners of property. This title will also list any liens or easements associated with the property.
Charge-Off: There are two specific expenses on a company’s income statements that are considered charge-offs. The first is a debt that is considered uncollectible by the reporting firm and is therefore written off. Ultimately, this will be written off by the company after it is classified as a “bad debt expense” on the income statement. The second type of charge-off is if the company incurs a one-time extraordinary expense that may have a negative effect on the company’s earnings and results in a write-down of some of the company’s assets.
Closing: The final transaction between the buyer and seller of a property is called the closing. At this point, all documents are signed and exchanged, the seller is paid and the title is transferred to the buyer. These often take place at the office of the title company, and the buyer and seller – or their respective representatives – each has the opportunity to review the closing package. They then sign an affidavit that indicates the source of the funds the buyer is using to purchase the property and a settlement statement, which shows all costs associated with the transaction. After the closing is completed, the buyer takes possession of the property.
Closing Costs: Any expenses a buyer and seller incur upon the completion aside from the price of the property, also referred to as settlement cost. Some examples of closing costs that may be incurred are loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. Closing costs may be nonrecurring or prepaid. Nonrecurring costs are the one-time costs associated with obtaining a loan or buying a property, whereas prepaid costs will be recurring over time, such as property taxes.
Co-Customer: Any additional person or people whose name or names appear on a loan document. The co-customer’s income and credit history will be considered in order to qualify for the loan, and all parties involved will be responsible to repay it.
Co-Signer: One who signs for another person’s debt should the primary customer default. Generally, a co-signer has better income and/or credit than the customer and will leverage it to help the customer get better rates or terms on a loan.
Collateral: A customer may offer property or other assets to a lender to secure a loan. Should the loan go into default, the lender can collect the collateral to recoup its losses. For example, the collateral for a mortgage is the house. Should the customer stop making payments, the lender can foreclose on the house and take possession. Loans secured with collateral generally have lower interest rates because the lender has extra security. The lender’s claim to the collateral is called a lien.
Conforming Loan: Any loan that conforms to loan limits set by the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac. Loans that exceed this amount are called non-conforming or jumbo loans.
Contingency: Any potential negative economic event. Businesses often attempt to identify and prepare for any contingencies that have some likelihood of occurring in the future and will generally err on the conservative side by assuming worse-than-expected outcomes in order to overcome any negative occurrences as smoothly as possible. Contingency plans – for businesses or individuals – often consist of setting aside cash reserves in order to deal with a future economic downturn. Another measure is to have an unused line of credit open in case of an emergency.
Conventional Loan: A mortgage loan that is secured by investors, as opposed to the Federal Housing Authority or the Department of Veterans Affairs. Conventional loans may also be conforming loans if they follow the loan amount guidelines set by Fannie Mae and Freddie Mac, but can be nonconforming loans if they do not.
Convertible ARM: While an adjustable rate mortgage features regular rate changes, a convertible ARM gives the customer the option to convert to a fixed-rate mortgage. They are generally marketed as a way for the customer to avoid rising interest rates, though a fee is often charged to switch from the ARM to fixed-rate.
Credit: A customer who receives something of value like goods or money with a contractual agreement to repay the lender at a later time is borrowing on credit. Generally, the lender will charge interest. Credit also refers to the borrowing capacity of an individual or company.
Credit Bureau: An agency that collects individual credit information and sells it to creditors. The creditors – often banks, mortgage lenders and credit card companies – then use this information when deciding whether or not to grant loans. Credit bureaus are also referred to as consumer reporting agencies or credit reporting agencies. The bureau does not make any decisions regarding an individual’s credit, but simply reports information.
Credit History: A record of a consumer’s ability to repay debts. A credit history consists of the number and types of credit accounts a consumer has, how long they have been open, amounts owed, amount available on each card, whether payments are made in a timely manner and the number of recent credit injuries. If a consumer has any bankruptcies, liens, judgments or collections, these will also be found on a consumer credit history. Credit history can be found on a consumer’s credit report.
Credit Report: A detailed report of a consumer’s credit history. Information on a credit report includes: personal data, such as a Social Security number and current and previous address, a credit history summary, inquiries into a consumer’s credit history and any liens or wage garnishments. Generally, information will stay on the customer’s report for about seven years, except for bankruptcies, which remain for 10 years. If there is any inaccurate information on a report, it is possible to dispute it.
Credit Risk: When a lender is considering providing money to a customer, credit risk is a way to determine the lender’s risk of loss of principal or financial reward as a result of the customer’s failure to repay the loan. Interest rates reflect this risk: A customer who is less likely to repay a loan will be given a higher interest rate as a way to mitigate the risk. Credit risk is determined by considering the customer’s collateral assets and ability to generate revenue, among other factors.
Credit Score: A numeric expression between 300 and 850 of a person’s creditworthiness. Credit scores are used by lenders as a summation of the likelihood that a person will repay debts. This score is calculated by FICO using several factors, most prominently the consumer’s credit history.
Creditor: Any person or institution that extends credit by loaning money to another person with the understanding that it will be paid back at a later date. A personal creditor may loan money to family or friends, whereas a real creditor is generally a bank or finance company that has legal contracts with a customer.
Creditworthiness: An assessment of how likely a customer is to fail to pay back a loan. It is determined using several factors, including the customer’s credit score and history. Creditworthiness is generally expressed by a three-digit credit score.
Debtor: Any company or individual who owes money to a lender. A debtor is referred to as a customer if the money was lent from a financial institution. If the debt is in the form of bonds or other securities, the debtor is referred to as an issuer.
Debt-to-Income Ratio: A way to measure an individual’s finances by comparing debt payments to the income generated. It is one of several measures that a lender will use to establish how likely a prospective customer is to pay back a loan. A low debt-to-income ratio is usually more desirable.
Deed: A legal document that designates the bearer ownership of property – often land or an automobile. The deed holder often must meet certain conditions in order to maintain ownership. For example, a person who causes undue hardship on a community as a result of holding a deed may be restricted. This may be a facility that is dangerous to the surrounding area or a building that is considered an environmental hazard.
Deed-in-Lieu: If a customer defaults on a mortgage, an option to avoid foreclosure is a deed in lieu of foreclosure. The customer deeds the home – or collateral property – back to the lender in exchange for a release of all obligations under the mortgage. It can be advantageous for both parties, as a foreclosure proceeding can be costly, time consuming and detrimental to the credit of the customer. In some cases, the customer may be able to lease the property back from the lender. However, this is not a sound option for the lender if the property is worth less than the remaining balance of the mortgage or if there are other liens on the property.
Default: The failure to repay a loan when due. If the debtor is unable to meet the legal obligations of the loan because they are unwilling or unable to honor the debt, the loan goes into default.
Delinquency: When an individual or company fails to accomplish what is required by law, like making a required payment. If a party remains delinquent on a mortgage payment for a set amount of time, the lender can begin foreclosure proceedings.
Deposit (Earnest Money): If a buyer wishes to show their sincere interest in a transaction, an earnest money deposit may be used. This is commonly used during real estate transactions to buy more time in finding financing for the purchase. Usually, the deposit is held jointly by the buyer and seller in a trust or escrow account and will usually go toward a down payment. If the seller decides not to move forward with the transaction, the buyer can usually reclaim the money. However, if the buyer retracts the offer, the earnest money will usually go to the seller.
Depreciation: The decrease in an asset’s value. Usually, depreciation is caused by unfavorable market conditions or an economic downturn. Real estate and currency are most likely to fall victim to depreciation.
Disclosures: During an investment or purchase decision, all relevant information pertaining to the subject must be disclosed. For real estate, this generally pertains to major structural flaws or other issues with a home.
Discount Point: A type of prepaid interest that can be purchased by mortgage customers in order to lower the amount of interest they must pay on subsequent payments. Generally, each discount point costs 1 percent of the total loan amount and lowers the interest rate by one-eighth to one-quarter of the total rate. For example, if a loan is $100,000, each point costs $1,000. If the mortgage is 5 percent and each point will lower the interest rate by 0.25 percent, buying four points will cost $4,000 and lower the interest rate to 4 percent. This point system is beneficial to both the lender and customer, as the lender receives cash upfront instead of in smaller interest payments over time, while the customer can see decreased interest payments.
Down Payment: The initial payment made in cash at the onset of the purchase of an expensive good or service. Usually, the down payment is a specific percentage of the overall price of the product. Often, after a down payment is paid, the remainder of the balance will be paid back to the lender in installments. In some cases, the down payment is nonrefundable if the deal falls through.
Duration: A calculation made to determine how sensitive the price of a given investment is to changes in interest rates. It is determined using present value yield, coupon, final maturity and call features and expressed in years. Generally, duration is used to describe bonds.
Equal Credit Opportunity Act (ECOA): A U.S. regulation that was created to give all individuals an equal opportunity to receive loans from financial institutions and other lenders. Applicants cannot be turned down for a loan based on their racial background, religious affiliation, sex or marital status. Under ECOA, the only factor that a lender can use to decide whether to give someone a loan is relevant financial information like a credit score, income and existing debt load. If an organization is found in violation of the act, it may face class-action lawsuits and may have to pay up to $500,000.
Equity: While equity may have several definitions depending on the context, in real estate, it is the difference between the current market value of a given property verses the amount the owner owes. Should the owner sell off the home, it is the amount they would receive after repaying the remaining balance on the mortgage.
Escrow: A financial instrument that is held by a third party during a real estate transaction. All funds are held by the escrow agent or office until all necessary financial and other obligations have been met. Once this occurs, the escrow service will release the money or assets to the correct parties. Escrow is used to show that both parties are committed to the agreement after certain contingencies are met, such as the house in question passing inspection.
Escrow Account: A bank account that is intended solely for keeping the money that is the property of others. For example, a real estate agent will keep an escrow account for client money until an agreement is reached. This account cannot commingle with the agent’s own funds.
FICO Score: A credit score that makes up a large proportion of the credit report used by lenders to assess the creditworthiness of a customer. FICO stands for Fair Isaac Corporation, which created the score and is one main bureau responsible for calculating consumers’ credit scores. The three-digit score will range between 300 and 850.
Fair Credit Reporting Act: Passed in 1970, FCRA regulates the collection of credit information and access to one’s own credit report to ensure fairness, accuracy and privacy of personal information contained in credit reporting agencies. The act requires that any person or entity that requests a credit report must show a permissible purpose for the information. It also grants consumers the right to see their credit report once a year and to remove outdated, negative information.
Fair Housing Act: Enforced by the U.S. Department of Housing and Urban Development, the FHA assures that no one can be denied housing based on their age, race, sex, religion or disability.
Fair Market Value: The price that a property would likely fetch in the marketplace should the prospective buyers and sellers have reasonable knowledge of the asset, are not under pressure to sell or buy, and are each acting in their own best interest. This value is often used to assess municipal property taxes.
Fannie Mae: The Federal National Mortgage Association is a government-sponsored enterprise that was created in 1938 to expand the flow of mortgage money through the creation of a secondary mortgage market. FNMA, known as Fannie Mae, is traded publicly and operates under a congressional charter in order to increase the availability and affordability of mortgages for low- and middle-income Americans. The organization purchases and guarantees most mortgages and is funded by pension funds, insurance companies and foreign governments.
FHA: A U.S. government agency that provides mortgage insurance to qualified FHA-approved lenders, protecting them from losses associated with a mortgage default. It was established in 1934 as a way to encourage lenders and stimulated the housing industry.
First Mortgage: The first loan on a property that secures the mortgage, which has priority over any other liens or claims on a property in the event of a default.
Fixed-Rate Mortgage: A mortgage that has a fixed interest rate for the life of the loan. An extremely common choice for mortgages, this ensures that the customer knows the interest rate for each installment for the entire term, so he or she does not have to contend with loan payments that vary from month to month or year to year. The interest rate remains steady despite any fluctuations in the housing market. In order for a customer to secure a lower interest rate, he or she must refinance the loan.
Foreclosure: If a homeowner is unable to make payments on his or her mortgage, the lender has the option to seize and sell the property.
Freddie Mac: Called the “little brother” of Fannie Mae, the Federal Home Loan Mortgage Corp was established in 1970 by Congress to support homeownership by funneling money to mortgage lenders. The FHLMC purchases, guarantees and securitizes mortgages, creating mortgage-backed securities, which tend to be liquid and carry a credit rating that is close to that of U.S. Treasuries.
GSE: Government-sponsored enterprises are privately held corporations that have public purposes. They are created by Congress in order to reduce the cost of capital for some borrowing sectors of the economy, like students, farmers and homeowners. While GSEs are backed by the U.S. government, they are not direct obligations of it. Examples of GSEs include Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Farm Credit Bank and the Resolution Funding Corporation.
Ginnie Mae: The Government National Mortgage Association, also known as Ginnie Mae, is a U.S. government corporation that exists within the U.S. Department of housing and Urban Development. It ensures the liquidity of government-insured mortgages, like those insured by the Federal Housing Administration, the U.S. Department of Veterans Affairs and the Rural Housing Administration. It also is designed to bring investor capital into the market for government-issued mortgages to encourage additional lending. While Ginnie Mae does not issue, sell or buy mortgage-backed securities, it does insure them to guarantee the timely payment of qualifying loans.
Good Faith Estimate: An estimation of the fees due at closing for a mortgage loan. This estimate must be provided by the lender to the customer within three days of the lender taking a customer’s loan application, as required by the Real Estate Settlement Procedures Act. It is intended to allow customers to compare costs between various lenders.
Gross Income: The total personal income a person earns before any taxes or deductions are taken out. This will generally be the amount lenders request when a customer is applying for a mortgage.
Home Equity Line of Credit: A line of credit that is extended to a homeowner who uses their home as collateral. Once a maximum loan balance has been established, the homeowner can draw from the line of credit. Interest is charged at a predetermined variable rate that is usually based on the prime rates. When a balance is established on the loan, the customer may choose the type of repayment schedule as long as minimum interest payments are made each month. The terms of this line of credit may be very brief or last more than 20 years.
Home Equity Loan: A loan that allows homeowners to borrow against the equity in their home and is secured by taking out a second mortgage. The amount available to borrow is the difference between the homeowner’s equity and the current market value of the home. The mortgage also provides collateral for an asset-backed security issued by the lender.
Home Inspection: An evaluation of a property’s condition that is generally performed during the sale. A qualified home inspector is usually hired by the buyer and will assess the condition of the roof, foundation, heating and cooling systems, plumbing, electrical work, water and sewage, and some fire and safety issues. The inspector will also look for any evidence of insect, water or fire damage.
Homeowner’s Insurance: Property insurance that is designed to protect a house or the contents of the house. This insurance also provides liability coverage against accidents in the home or on the property. Homeowner’s insurance will not cover some events. So-called “acts of God” like floods or earthquakes require separate insurance.
Homestead Credit: A tax benefit for homeowners and renters who have low or moderate income to lessen the impact of rent and property taxes. Those who qualify for the credit can get some or all of their state taxes withheld.
HUD: The U.S Department of Housing and Urban Development, or HUD, was established in 1965 to support community development and increase homeownership. This is accomplished by improving affordable homeownership opportunities, increasing safe and affordable rental options, reducing chronic homelessness, fighting housing discrimination by ensuring equal opportunity in both the rental and purchase markets and supporting vulnerable populations.
Inquiry: The act of a bank or other credit-issuing institution viewing the credit report of an individual with the consideration of loaning him or her money or providing credit. The credit report is used for such lenders to establish creditworthiness. An inquiry may be soft – like when an individual is checking their own credit report for possible errors – and will not have an impact on the credit score, or it may be hard if a third party views the report in response to a credit application. A large number of hard inquiries will be interpreted as an attempt for an individual to greatly expand their amount of credit and will thereby hurt their credit score.
Interest: The amount a lender charges to loan money to a customer, usually expressed as an annual percentage rate.
Interest Rate: Generally noted on an annual basis, it is the percentage of the principal that the lender charges the customer.
Jumbo Loan: A mortgage loan amount that exceeds the loan limits set by the Office of Federal Housing Enterprise Oversight and therefore cannot be guaranteed, purchased or securitized by Fannie Mae or Freddie Mac. As of 2013, a jumbo loan is a mortgage exceeding $417,000 in the continental United States and $625,500 in Alaska and Hawaii.
Lender: One who loans money to another party with the expectation that the funds will be repaid, usually with interest or fees. A lender may be an individual or a public or private group, and may provide a loan for a variety of reasons, including a mortgage, automobile loan or a small-business loan. The funds may be repaid in monthly installments or as a lump sum.
Liabilities: The legal debts or obligations owed by a company that arise during the course of business operations. These are settled over time through the transfer of money, goods or services. Liabilities may include loans, accounts payable, mortgages, deferred revenues and accrued expenses, all of which make business transactions more efficient. Current liabilities are debts payable within one year, while long-term liabilities are over a longer period of time.
Lien: The legal right of a creditor to sell the collateral property of a debtor who does not meet the obligations of a loan contract. A lien may be an automobile loan – one that is released when the car is paid in full – or a mechanic’s lien, which may be attached to a property if a homeowner does not pay a contractor for services rendered. There are also federal tax liens if a homeowner does not pay property taxes due. If the debtor fails to repay the money owed, the property can be auctioned off to pay the lien holder.
Lien Waiver: A document provided by a contractor, subcontractor supplier or other party holding a mechanic’s lien that states any debts have been paid in full and waiving future lien rights to the property. There are four types of lien waivers:
1. Unconditional waiver and release upon progress payment: This discharges all claimant rights through a specific date and includes no stipulations.
2. Conditional waiver and release upon progress payment: This discharges all claimant rights through specific dates providing payments have been both received and processed.
3. Unconditional waiver and release upon final payment: Once the payment has been received, the claimant releases all rights.
4. Conditional waiver and release upon final payment: Removes all claimant rights upon receipt of payment with certain provisions.
Loan: The act of giving money, property or other material goods to another party with the expectation of future repayment of the principal amount along with any interest or charges agreed upon by both parties. A loan may either be for a one-time lump sum of an open-ended credit to a specified ceiling amount.
Loan Officer: A representative of a bank, credit union or other financial institution that finds and assists customers in acquiring either consumer or mortgage loans. Loan underwriters, specialized Loan Officers, analyze and asses the creditworthiness of potential customers to establish whether they qualify for a loan.
Loan Origination Fee: An upfront fee charged by a lender for processing a new loan application. They are generally between 0.5 and 1 percent of the total loan, and are used as compensation for putting the loan in the place.
Loan Servicer: The administration of a loan. Servicing takes place from the time the proceeds are dispersed until the loan is paid off and includes sending monthly payment statements, collecting monthly payments, maintaining payment and balance records, collecting and paying taxes and insurance, remitting funds to the note holder and following up on delinquencies.
Loan to Value (LTV) Ratio: A lending risk assessment ration used by lenders to determine whether a loan should be issued. Assessments with high LTV ratios are generally seen as higher risk and, should the loan be accepted, the lender will charge more in interest or fees for the loan.
Lock-In: A situation that leaves an investor either unwilling or unable to exit a position due to regulations, taxes or penalties associated with doing so.
Lock-in Period: The window of time during which investors of a closely-held investment vehicle, such as a hedge fund, are not allowed to redeem or sell shares. This helps portfolio managers avoid liquidity problems while capital is put to work in investments. It is commonly used in equity markets for newly-issued public shares and generally lasts anywhere from 90 to 180 days to prevent shareholders with a large proportion of ownership from flooding the market during the initial trading period.
Market Value: The current quoted price of an item on its given market. Also referred to as “market price.”
Modification: Any change made to an existing loan made by the lender. Usually, a modification is made in response to the customer’s long-term inability to repay the loan and will generally involve a reduction of the interest rate on the loan, an extension of the length of the term of the loan, a change in the type of loan or any combination. This is beneficial to the lender because the cost of doing so is less than the cost of a loan default.
Mortgage: A loan that is secured by the collateral of a specified real estate property. It is used by individuals and businesses to purchase a piece of real estate without paying the entire value of the purchase up front, instead repaying the loan in installments scheduled over a period of many years and include interest. At the end of the life of the loan, the customer owns the property free and clear. Should the customer fail to make mortgage payments, the lender may foreclose on the property.
Mortgage Banker: A company, individual or institution that originates mortgages using their funds or funds borrowed from a warehouse lender. The mortgage banker may either retain the mortgage in portfolio or sell it to an investor. The mortgage banker earns money through the fees associated with the loan origination.
Mortgage Broker: An intermediary who brings mortgage customers and lenders together, but does not use its own funds to originate mortgages. A broker gathers paperwork from a customer, passes it along to the lender for underwriting, and approval and collects an origination fee or yield spread premium from the lender as compensation.
Mortgage Insurance Premium (MIP): The premium paid by homeowners on mortgage insurance for FHA loans that may be deducted in the same manner as home mortgage interest. Some premiums can be deducted in addition to allowable mortgage interest for as many as three years.
Mortgage Interest Deduction: An itemized deduction that allows homeowners to deduct the interest paid on any loan used to build, purchase or make improvements on their residence, which is offered as an incentive for homeowners. It may also be taken on loans for second homes or vacation residences, though certain limitations apply.
Mortgage Note: A promissory note that is associated with a particular mortgage loan and represents the legal promise to repay the loan. It specifies the terms of the loan, which includes the amount of interest and principal that must be repaid and obligates the customer to make the payments.
Negative Amortization: An increase in the principal balance of a loan caused by payments that fail to cover the interest due. This remaining interest is added to the loan’s principal, increasing the amount the customer ultimately owes.
Net Income: The income of an individual after taxes, credits and other deductions are subtracted from gross income. Net income may also refer to the total earnings – or profit – of a company when factoring in the cost of doing business, depreciation, interest, taxes and other expenses and is also referred to as the bottom line.
No Cash-Out Refinance: The refinancing of an existing mortgage for an amount equal to or less than the existing balance of the loan plus an additional settlement cost. This type of refinance is generally done to lower the interest rate on a loan or to change the term of the mortgage.
Non-Conforming Loan: Any mortgage loan that does not meet the guidelines of government sponsored enterprises – Fannie Mae or Freddie Mac – and therefore cannot be sold to the GSEs. Loans may fail to conform to these guidelines because they exceed the maximum loan amount, are not a suitable property or don’t meet down payment or credit requirements.
Notary Public: A state-appointed official who witnesses important document signings and verifies the identities of the signers to help prevent fraud or identity theft. Any notarized document will contain the seal and signature of the notary who witnessed the signing. This will give the document more legal weight than one that is not notarized. A notary public is generally required for real estate deeds, affidavits, wills, trusts and powers of attorney.
Offer: When a party expresses interest in buying or selling an asset from another party, an offer will be extended. This is generally the highest the buyer will pay to purchase the asset or the lowest price the seller will accept. However, the offer is often negotiable, especially if another prospective buyer enters the scene.
Original Principal Balance: The amount that a customer owes before making any payments on the loan.
Origination: The process of creating a home loan. During this process, the customer will submit a variety of financial information, such as tax returns, prior paychecks, credit card info, bank balances, and so forth, to the lender. This information is used to determine what kind of loan that will be extended to the customer and what the interest rate will be.
Origination Fee: A fee that is charged up front by the lender for processing a new loan application. This is used as compensation for putting the loan in place. The origination fee is quoted as a percentage of the total loan and is often between 0.5 and 1 percent of the total mortgage.
PITI: Principal, interest, taxes, insurance. Principal is the amount of the customer’s monthly payment used to pay down the balance of the loan. Interest is the money charged by the lender for the privilege of borrowing the money. Taxes are the property taxes that homeowners must pay on their properties. Insurance refers to both the property insurance and private mortgage insurance.
PMI: Purchasing Managers Index. An indicator of the econometric health of the manufacturing sector that is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. If the PMI is more than 50, it indicates expansion of the manufacturing sector compared to the previous month: A reading of less than 50 represents a contraction and 50 indicates no change.
Points: In real estate mortgages, points indicate the initial fee charged by the lender. Each point is equal to 1 percent of the amount of the loan principal. It also may refer to each percentage difference between a mortgage’s interest rate and the prime interest rate. If a loan is quoted as prime plus two points, it means the current loan interest rate is 2 percent higher than the prime rate of lending.
Pre-Approval: The evaluation of a potential customer by a lender that determines whether the customer will qualify for a loan from said lender. It may also indicate the maximum amount that the lender would be willing to lend. In order to get preapproved for a mortgage, the potential customer must present his or her financial information, including income, expenses, debts, credit report and score. Presuming no major income or credit change occur between the time of the pre-approval and the actual purchase of the home, it is likely the dollar amount of the pre-approval will remain the same, though it is still subject to be reviewed once a specific property has been chosen.
Predatory Lending: Actions carried out by a lender that intend to entice, induce or assist a customer into taking a mortgage that carries high fees, a high interest rate, strips the customer of equity or places the customer in a lower credit rated loan that will benefit the lender. Many states have laws in place to prevent predatory lending, and the U.S. Department of Housing and Urban Development is taking measures to combat the practice.
Prepayment: Paying a debt or installment payment before the customer is contractually obligated to pay for it. Consumers may pay many different debts early with prepayment, including credit card charges that are paid before they receive a statement or on a tax form to settle future tax obligations. Some mortgage lenders allow prepayment, though some charge a penalty.
Prepayment Penalty: Many mortgage contracts include a clause that applies a penalty fee if the mortgage is prepaid within a certain time period. This fee is generally a percentage of the remaining mortgage balance or a certain number of months’ worth of interest. If the penalty applies to the sale of a home as well as a refinancing transaction, it is referred to as a hard penalty. One that applies only to a refinancing transaction is called a soft penalty.
Pre-Qualify: An initial evaluation of the credit worthiness of a potential customer. This is used to determine the estimated amount that a person is qualified to borrow. It is a relatively quick process that simply evaluates the potential customer’s income and expenses in order to generate an estimated borrowing range that they would likely be able to afford.
Principal: The original amount borrowed or the remaining balance on a loan, not including interest.
Property Tax: The monthly or annual fees a property owner must pay to the local government. The amount owed is generally based on the value of the property. This tax is usually used for road repair, schools, snow removal or similar municipal services.
Property Tax Deduction: Most state and local property taxes are deductible from United States federal income taxes. Taxes eligible for deduction include real estate taxes and local or foreign taxes imposed for the welfare of the general public.
Purchase Offer: A document extended to the seller that lists the price, terms and conditions under which a buyer is willing to purchase a property. There are a number of factors that should be included in the offer, such as how the buyer intends to finance the home, the down payment that will be made, who will pay which closing costs, what inspections are required, when the buyer will take possession of the house, terms of cancellation, what – if any – personal property is included in the purchase, any repairs that are to be performed, what professional services will be used and how to settle any disputes that may occur.
Quitclaim Deed: A deed that releases a person’s interest in a property without specifying the nature of that person’s interest or rights, and with no warranties of ownership. When accepting a quitclaim deed, the buyer or the property accepts the risks that the grantor of the deed may not have valid ownership of the property or that there may be additional parties with ownership interests. The deed simply prevents the grantor from later claiming an interest in the property.
Rate Cap: Limits put in place for the interest rate on an adjustable-rate mortgage loan. There are several types of interest rate cap structures: Initial cap is a value that limits by what amount the interest rate can adjust at the mortgage’s first rate adjustment date. Period cap is a value that limits by what amount the interest rate can adjust at each subsequent adjustment date. Lifetime cap limits the total amount by which the interest rate can adjust over the life of the mortgage.
Rate Lock: An agreement between a customer and a lender that allows the customer to lock in the interest rate on a mortgage over a specified time period at the prevailing market interest rate. A lock fee may be charged by the lender if the customer does not lock the interest rate, or the lender may charge a slightly higher interest rate to start with in case the customer does not choose to lock the interest rate.
Real Estate Agent: A person licensed by the state to represent a buyer or a seller in a real estate transaction. These agents perform tasks like showing homes and negotiating transactions on behalf of their client. Generally, real estate agents work in exchange for commission and may work for a real estate broker or Realtor.
Real Estate Property Tax Deduction: State and local property taxes that are usually deductible from United States federal income taxes, which include real estate taxes – any state, local or foreign taxes that are imposed for the welfare of the general public.
Realtor: A real estate agent who is a member of the National Association of Realtors. Realtors may be agents who work as residential and commercial real estate brokers, salespeople, property managers, appraisers, counselors and other real estate professionals. They must belong to a local association or board as well as a state association.
Refinancing: A revised payment schedule for repaying a debt or the act of replacing an older loan with a new one, generally to secure better terms. Often, refinancing a mortgage will lower monthly payments or shorten the life of a loan, though it may come with a penalty fee.
Remaining Balance: The amount of the principal on a home mortgage loan that has yet to be repaid. Also referred to as “outstanding balance.”
Remaining Term: The current amount of time remaining in the length of a mortgage loan.
Second Mortgage: A type of subordinate mortgage made while an original mortgage is still in effect. Should the customer default, the original mortgage would receive the proceeds from the liquidation of the property until it is paid off in full. Because of this, the interest rate charged on a second mortgage is usually higher and the amount borrowed is generally lower than on the primary mortgage. A second mortgage is often used for large expenditure like a college education, the purchase of a new vehicle or to make major renovations on the home. They may also be used to consolidate debt.
Secured Loan: A loan backed by assets owned by the customer in order to decrease the risk assumed by the lender. These assets may be forfeited if the customer fails to make necessary payments.
Servicer: A company to which some customers pay their mortgage loan payments. This may be the entity that originated the mortgage or it may have purchased the mortgage servicing rights from the original lender.
Servicing: The process by which a company collects the mortgage payments from the customer. This includes sending monthly payment statements, collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance, remitting funds to the note holder and following up on delinquencies.
Sub-Prime Loan: The act of making loans to parties who may have difficulty maintaining the repayment schedule. This loan is often offered at rates above prime for those who do not qualify for a prime loan due to low credit ratings or other factors.
Terms: The period of time assigned as the lifespan of a debt. By the end of the term of the loan, the customer will be expected to pay off the debt in its entirety.
Title: The right to the ownership and possession of any item which may be gained by descent, grant or purchase. The three components of title are possession or occupation, the right of possession and apparent ownership.
Truth-in-Lending: A federal law that protect consumers when dealing with lenders and creditors. Under the Truth in Lending Act, enacted in 1968, lenders must disclose the annual percentage rate, the term of the loan and total costs to the customer. This information must be conspicuous on documents presented to the consumer before signing.
Underwriting: The process by which a large financial service provider like a bank, lender or insurer assess the eligibility of a customer to receive their capital, equity or credit. In real estate underwriting, the customer and the property will both be assessed.
VA (Department of Veterans Affairs): Formed in 1930, the VA is a government-run military veteran benefit system and the second largest department in the government.
VA Mortgage: A mortgage loan program established by the U.S. Department of Veterans Affairs to help vets and their families obtain home financing. Though the VA does not directly originate these loans, they establish the rules for those who may qualify, dictate the terms of the mortgages offered and insure VA loans against default. To qualify for a VA loan, customers must present a certificate of eligibility, which establishes their record of military service to the lender. These loans are scrutinized by the Government National Mortgage Association – or Ginnie Mae – and are guaranteed against default by the U.S. government.
Warranty Deed: An instrument that transfers real property from one person to another. Through a warranty deed, the grantor promises the title is good and clear of any claims, which provides protection to the buyer.
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