A-Credit
A consumer with the
best credit rating, deserving of the lowest prices that lenders offer.
Most lenders require a FICO score above 720. There is seldom any payoff
for being above the A-credit threshold (but you pay a penalty for being
below it.
Acceleration clause
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.
Accrued interest
Interest that is earned but not
paid, adding to the amount owed. S
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.
Adjustment interval
On an ARM, the time between
changes in the interest rate or monthly payment. 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.
Affordability
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.
Agreement of sale
A
contract signed by buyer and seller stating the terms and conditions
under which a property will be sold.
Alt-A
A
mortgage risk categorization that falls between prime and sub-prime, but
is closer to prime. Also referred to as "A minus".
Alternative
documentation
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.
For a detailed explanation,
If the payment is less than the interest due, the
balance rises, which is
negative
amortization.
Amortization
schedule
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.
Amount financed
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.
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.
Application fee
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.
Appraisal
A written estimate of a property's
current market value prepared by an appraiser.
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.
Appraisal fee
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 comprehensive measure of credit cost to the borrower that takes
account of the interest rate, points, and flat dollar charges. It is
also adjusted for the time value of money, so that dollars paid by the
borrower up-front carry a heavier weight than dollars paid ten years
down the road. 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.
Assumption
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.
Auction site
See
Lead-Generation site.
Authorized user
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”.
Balance
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.
Balloon mortgage
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.
Balloon
The
loan balance remaining at the time the loan contract calls for full
repayment.
Bimonthly mortgage
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.
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.
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. To qualify for a bridge loan, the borrower must have a contract
to sell the existing house.
Builder-financed
construction
Having the builder finance the
construction.
Buy-down
A permanent buy-down is the payment of
points in exchange for a lower interest rate. A temporary buy-down
concentrates the rate reduction in the early years.
Buy-up
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.
Closing
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.
Closing costs
Same as
Settlement costs.
Closing date
The date on which the
closing occurs.
CMG plan
A technique for
repaying a loan early that involves using the mortgage as a substitute
for a checking account.
Co-Borrowers
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.
COFI
Cost of funds index. One of
many interest rate indexes used to determine interest rate adjustments
on an adjustable rate mortgage.
Conforming mortgage
A loan eligible for purchase by
the two major Federal agencies that buy mortgages, Fannie Mae and
Freddie Mac.
Construction
financing
The method of financing used
when a borrower contracts to have a house built, as opposed to
purchasing a completed house.
Contract knavery
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.
Conventional mortgage
A home
mortgage that is neither FHA-insured nor VA-guaranteed.
Conversion option
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.
COSI
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.
Credit report
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.
Cumulative interest
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.
The
most recently published value of the index used to adjust the
interest rate on an indexed ARM.
Deadbeat
A
borrower who doesn't pay.
Debtaholic
A borrower who cannot handle debt
except by complete abstinence.
Debt consolidation
Rolling short-term debt into a
home mortgage loan, either at the time of home purchase or later.
Deed in lieu of
foreclosure
Deeding the property over to the
lender as an alternative to having the lender foreclose on the
property.
Default
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.
Deferred interest
Same as
negative amortization.
Delinquency
A
mortgage payment that is more than 30 days late.
Demand clause
A
clause in the note that allows the lender to demand repayment at any
time for any reason.
Direct lender
Same as
lender.
Discount mortgage
broker
A mortgage broker who claims to be
compensated entirely by the lender rather than by the borrower.
Discount points
Same as
points.
Discretionary ARM
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.
Documentation
requirements
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%.
Dual apper
A borrower who submits
applications through two loan providers, usually mortgage brokers.
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. |
