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A clause that allows a lender to declare the entire outstanding balance of a loan immediately due and payable should a borrower violate specific loan provisions or default on the loan.
Adjustable Rate Mortgage (ARM)
A variable or flexible rate mortgage with an interest rate that varies according to the financial index it is based upon. To limit the borrower's risk, the ARM may have a payment or rate cap. See also: Cap.
Adjustable-Rate Mortgage (ARM) Disclosure
This document describes the features of the adjustable-rate mortgage (ARM) program you are considering. It includes information about how your interest rates and payments are determined, how your interest rate can change, and how your monthly payment can change. The lender is required to provide this document to you when you hand in your application or before you pay a nonrefundable fee (whichever is earlier).
This term refers to the gradual paying down of a loan. For example, traditional mortgage terms require that each payment include, in addition to interest, part of the loan principal. That way, you continually lessen the amount you owe and extinguish the debt within a set period of time.
Annual Percentage Rate (A.P.R.)
The APR provides the true cost of a loan expressed as one number that enables you to compare all types of loans. The APR calculates the annual cost of the loan, taking into consideration points (loan origination fees), the interest rate, and other costs associated with getting the loan, including appraisal and credit report fees.
An estimate of a property's value as of a given date, determined by a qualified professional appraiser. The value may be based on replacement cost, the sales of comparable properties or the property's income-producing ability.
See: Annual Percentage Rate.
See: Adjustable Rate Mortgage.
An agreement between a buyer and a seller, requiring lender approval, where the buyer takes over the payments for a mortgage and accepts the liability. Assuming a loan can be advantageous for a buyer because there are no closing costs and the loan's interest rate may be lower than current market rates. Depending on what is in the mortgage or deed of trust, the lender may raise the interest rate, require the buyer to qualify for the mortgage, or not permit the buyer to assume the loan at all.
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A loan requiring payments of principal and interest at two-week intervals. This type of loan amortizes much faster than monthly payment loans. The payment for a biweekly mortgage is half what a monthly payment would be.
A certificate serving as security for payment of a debt. Bonds backed by mortgage loans are pooled together and sold in the Secondary Market.
A loan to "bridge" the gap between the termination of one mortgage and the beginning of another, such as when a borrower purchases a new home before receiving cash proceeds from the sale of a prior home. Also known as a swing loan.
A type of mortgage which requires the buyer to pay additional discount points or make a substantial down payment in return for a below market interest rate. Another form of a buy-down is one in which the seller offers 3-2-1 interest payment plans or pays closing costs such as the origination fee. During times of high interest rates buy-downs may induce buyers to purchase property they might otherwise not have purchased.
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A limit in how much an adjustable rate mortgage's monthly payment or interest rate can increase. A cap is meant to protect the borrower from large increases and may be a payment cap, an interest cap, a life-of-loan cap or an annual cap. A Payment Cap is a limit on the monthly payment. An Interest Cap is a limit on the amount of the interest rate. A Life-of-Loan Cap restricts the amount the interest rate can increase over the entire term of the loan. An Annual Cap limits the amount the interest rate can increase over a twelve-month period.
A mortgage principal amount that is fixed and cannot be increased during the life of the loan. See also: Open-End Mortgage.
Costs payable by both seller and buyer at the time of settlement, when the purchase of a property is finalized. These costs can be up to ten percent of the mortgage amount and usually include but are not limited to the following:
One who is individually and jointly obligated to repay a mortgage loan and shares ownership of the property with one or more borrowers. See also: Co-Signer.
An individually owned unit within a multi-unit building where others or the Condominium Owners Association share ownership of common areas such as grounds, parking facilities and tennis courts.
A loan that conforms to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. See also: non-conforming loan.
A short-term loan financing improvements to real estate, such as the building of a new home. The lender advances funds to the borrower as needed while construction progresses. Upon completion of the construction the borrower must obtain permanent financing or repay the construction loan in full.
A mortgage loan that is not insured, guaranteed or funded by the Veterans Administration (VA), the Federal Housing Administration (FHA) or Rural Economic Community Development (RECD) (formerly Farmers Home Administration).
A person who is obligated to repay a mortgage loan should the borrower default but who does not share ownership in the property. See also: co-mortgagor.
This is a report containing detailed information on your credit history. The report includes identifying information and details about your credit accounts, loans, bankruptcies, late payments, and recent credit inquiries. Prospective lenders will obtain these reports, with your permission, to evaluate your creditworthiness. Every year, you should order a free copy of your credit report and review it for accuracy.
Your credit score is a measure of the risk you pose to someone who wants to lend you money. It is calculated using a standardized formula. There are many factors that could damage a credit score, including late payments and poor credit card use. Lenders may use your credit score to determine whether to give you a loan and what rate to charge. The better your credit score, the better the rate you can get on a loan.
See: certificate of reasonable value.
The borrower's privilege to make payments on a loan's principal before they are due. Paying off a mortgage before it is due may incur a penalty if so specified in the mortgage's prepayment clause.
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Debt-to-Income Ratio (DTI)
This ratio represents your monthly fixed expenses divided by your gross monthly income (income before taxes and deductions). The lender uses this ratio to help determine how much it will lend you. If the percentage is greater than 36, the ratio could negatively impact your credit score because the lender considers you to have too much debt.
Deed of Trust
A document, used in many states in place of a mortgage, held by a trustee pending repayment of the loan. The advantage of a deed of trust is that the trustee does not have to go to court to proceed with foreclosure should the borrower default on the loan.
A percentage of the loan amount paid to the lender to buy down the interest rate. Each point is one percent of the loan amount; for example, two points on a $100,000 mortgage is $2,000.
The difference between the purchase price and mortgage amount. The down payment becomes the property equity. Typically it comes from cash savings, but it can also be a gift that is not to be repaid or a borrowed amount secured by assets.
A clause in a mortgage or deed of trust allowing a lender to require immediate payment of the balance of the loan if the property is sold (subject to the terms of the security instrument).
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Equal Credit Opportunity Act
A federal law prohibiting lenders and other creditors from discrimination based on race, color, sex, religion, national origin, age, marital status, receipt of public assistance or because an applicant has exercised his or her rights under the Consumer Credit Protection Act.
The value of a property beyond any liens against it. Also referred to as owner's interest.
A provision allowing one party or more to cancel all or part of the contract if certain events fail to happen, such as the ability of the buyer to obtain financing within a specified period.
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Nickname for Federal National Mortgage Association (FNMA).
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)
A quasi-governmental, federally-sponsored organization that acts as a secondary market investor to buy and sell mortgage loans. FHLMC sets many of the guidelines for conventional mortgage loans, as does FNMA.
Federal Housing Administration (FHA)
An agency within the Department of Housing and Urban Development that sets underwriting standards and insures residential mortgage loans made by private lenders. One of FHA's objectives is to help make affordable mortgages available to homeowners with low or moderate income. FHA loans may be high loan-to-value, and they are limited by loan amount. FHA mortgage insurance requires a fee of 1.5 percent of the loan amount to be paid at closing, as well as an annual fee of 0.5 percent of the loan amount added to each monthly payment.
Federal National Mortgage Association (FNMA or Fannie Mae)
A private corporation that acts as a secondary market investor to buy and sell mortgage loans. FNMA sets many of the guidelines for conventional mortgage loans, as does FHLMC. The major purpose of this organization is to make mortgage money more affordable and more available.
The maximum form of ownership, with the right to occupy a property and sell it to a buyer at any time. Upon the death of the owner, the property goes to the owner's designated heirs. Also known as fee absolute.
See: Federal Housing Administration.
A loan with a term of 15 years. Although the monthly payment on a 15-year mortgage is higher than that of a 30-year mortgage, the amount of interest paid over the life of the loan is substantially less.
A form of insurance that protects the owner of the insured property against losses stemming from flood damage. The Federal Flood Disaster Protection Act of 1973 requires that federally-regulated lenders determine if real estate to be used to secure a loan is located in a Specially Flood Hazard Area (SFHA). If the property is located in a SFHA area, the borrower must obtain and maintain flood insurance on the property. Most insurance agents can assist in obtaining flood insurance.
See: Federal National Mortgage Association.
Nickname for Federal Home Loan Mortgage Corporation (FHLMC).
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A sum of money, including amounts from a relative or a grant from the borrower's employer, a municipality, non-profit religious organization, or non-profit community organization that does not have to be repaid.
Nickname for Government National Mortgage Association (GNMA).
Good Faith Estimate (GFE)
In this document, the lender estimates the amount of or range of charges for the specific settlement services that you are likely to incur in connection with the loan closing. The lender is required to deliver or mail the GFE to you within three business days after receiving or preparing the loan application.
Government National Mortgage Association (GNMA or Ginnie Mae)
A government organization that participates in the secondary market, securitizing pools of FHA, VA, and RHS loans.
Graduated Payment Mortgage (GPM)
A fixed-interest loan with lower payments in the early years than in the later years. The amount of the payment gradually increases over a period of time and then levels off at a payment sufficient to pay off the loan over the remaining amortization period.
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A form of insurance that protects the owner of the insured property against losses from physical damage such as fire and tornadoes. Mortgage lenders often require a borrower to maintain an amount of hazard insurance on the property that is equal at least to the amount of the mortgage loan.
A thorough review of the physical aspects and condition of a home by a professional home inspector. This inspection should be completed prior to closing so that any repairs or changes can be completed before the transfer of the home is completed.
Housing Affordability Index
An index that indicates what proportion of homebuyers can afford to buy an average-priced home in specified areas. The most well known housing affordability index is published by the National Association of Realtors.
Housing Expenses-to-Income Ratio
See: Debt-to-Income Ratio.
See: Housing and Urban Development.
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Income Approach to Value
A method used by real estate appraisers to predict a property's anticipated future income. Income property includes shopping centers, hotels, motels, restaurants, apartment buildings, office space, etc.
See: debt-to-income ratio.
A published interest rate compiled from other indicators such as U.S. Treasury bills or the monthly average interest rate on loans closed by savings and loan organizations. Mortgage lenders use the index figure to establish rates on adjustable rate mortgages (ARMs).
Initial Truth in Lending (TIL) Disclosure
This document reflects the terms of the legal obligation between you and the lender. The lender is required to deliver or mail the TIL disclosure within three business days after receiving or preparing your loan application.
As a part of PITI, the amount of the monthly mortgage payment that does not include the principal, interest, and taxes. Also see: Homeowners Insurance.
The amount of the entire mortgage loan which does not include the principal. Also, as a part of PITI, the amount of the monthly mortgage payment which does not include the principal, taxes, and insurance.
The borrower is required only to make interest payments for a specified number of years. When this initial period expires, the loan changes so the monthly payment includes principal and interest. At this point, the mortgage begins to fully amortize and monthly payments could increase significantly. The monthly principal payment could be greater than the conventional fixed-rate mortgage payment because there are fewer years to pay down the principal.
The simple interest rate, stated as a percentage, charged by a lender on the principal amount of borrowed money. See also: Annual Percentage Rate.
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A claim against a property for the payment of a debt. A mortgage is a lien; other types of liens a property might have include a tax lien for overdue taxes or a mechanic's lien for unpaid debt to a subcontractor.
Loan Origination fee
See: origination fee.
Loan-to-Value Ratio (LTV)
The relationship, expressed as a percentage, between the amount of the proposed loan and a property's appraised value. For example, a $75,000 loan on a property appraised at $100,000 is a 75% loan-to-value ratio.
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The cost of the upkeep of the house. These costs may be minor in cost and nature (replacing washers in the faucets) or major in cost and nature (new heating system or a new roof) and can apply to either the interior or exterior of the house.
The amount a lender adds to the index of an adjustable rate mortgage to establish an adjusted interest rate. For example, a margin of 1.50 added to a 7 percent index establishes an adjusted interest rate of 8.50 percent.
A legal instrument in which property serves as security for the repayment of a loan. In some states, a deed of trust is used rather than a mortgage.
A lender that originates, closes, services and sells mortgage loans to the secondary market.
Money paid to insure the lender against loss due to foreclosure or loan default. Mortgage insurance is required on conventional loans with less than a 20 percent down payment. FHA mortgage insurance requires a payment of 1.5 percent of the loan amount to be paid at closing, as well as an annual fee of 0.5 percent of the loan amount added to each monthly payment.
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This can occur when you choose to make the minimum payments based on an offered "teaser" rate. The minimum monthly payment often does not cover the interest owed each month for a certain period of time. The interest that is not covered by these monthly payments becomes part of the principal. As a result, the balance of the loan increases and could eventually exceed what you intended to borrow in the first place.
A loan that does not conform to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. Jumbo loans are nonconforming. See also: conforming loan.
These products are more complex than traditional fixed-rate or adjustable-rate mortgages. They present greater risk of negative amortization and payment shock. Typically referred to as alternative or exotic, these products take many different forms. They include interest-only mortgages, payment-option ARMS, low-doc. and no-doc. loans, piggybacks (simultaneous second lien loans – loans that cover the down payment) and 40- or 50-year mortgages. Although these products may provide flexibility for some, for others they may simply lead to increased future payment obligations and possibly financial disaster.
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A mortgage allowing the borrower to receive advances of principal from the lender during the life of the loan. See also: closed-end mortgage.
This product typically offers the borrower three different monthly payment options: 1) payments of principal and interest, 2) interest-only payments, or 3) minimum monthly payments ("teaser" payment options that are less than interest-only payments). Choosing minimum monthly payments (MMPs) means the unpaid interest is added to your principal loan amount. To ensure that the loan is repaid within the agreed-upon time, these loans "recast" after a set number of years (usually three or five) or when negative amortization drives the loan amount to a certain level above the original loan amount. Monthly payments increase so that the loan fully amortizes.
The amount charged by a lender to originate and close a mortgage loan. Origination fees are usually expressed in points.
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Payment shock is a large and sudden increase in monthly payments. It occurs primarily in interest-only products and option-adjustable-rate mortgages (option-ARMs). Prepayment Penalty: The lender may charge a considerable fee if you pay off the loan early.
Charges levied by the lender based on the loan amount. Each point equals one percent of the loan amount; for example, two points on a $100,000 mortgage equals $2,000. Discount points are used to buy down the interest rate. Points can also include a loan origination fee, which is usually one point.
Tentative establishment of a borrower's qualification for a mortgage loan amount of a specific range, based on the borrower's assets, debts, income, employment status and credit history.
Private Mortgage Insurance (PMI)
PMI is required by lenders when a loan is originated and closed without a 20 percent down payment. This insurance protects the lender from default losses in the event a loan becomes delinquent. If you are approved for a mortgage that requires PMI, you still have to apply for PMI and you may not qualify. You can be approved for a mortgage and not qualify for PMI. See: mortgage insurance.
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Commonly referred to as a low-doc. or no-doc. loan, this is a loan for which the lender sets reduced or minimal standards for documenting the borrower's income and assets. For example, the borrower may state that her income is a certain amount, and the lender will accept that statement with little or no documentation. Low-doc. loans may charge a higher interest rate than traditional products.
Abbreviation for the Real Estate Settlement Procedures Act. This act allows consumers to review settlement costs at application and once again prior to closing.
Right of Rescission
The right to back out of a transaction, given automatically by law to the borrower in a real estate purchase transaction. When a borrower's principal dwelling is going to secure a loan, the borrower has three business days following signing of the loan documents to rescind or cancel the transaction. Any and all money paid by the borrower must be refunded upon rescission. The right to rescind does not apply to loans to purchase real estate or to refinance a loan under the same terms and conditions where no additional funds will be added to the existing loan.
The process by which a construction loan becomes a mortgage. At the end of the construction loan period, the borrower's file is delivered to Bank One Mortgage Loan Servicing Dept. Prior to delivery, CLD contacts the borrower and obtains funds for the tax and insurance escrows, a final title policy and homeowner's policy. This process is called a rollover.
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A loan that is junior to a primary or first mortgage and often has a higher interest rate and a shorter term.
The responsibility of collecting monthly mortgage payments and properly crediting them to the principal, taxes and insurance, as well as keeping the borrower informed of any changes in the status of the loan.
See: Closing Costs.
Simultaneous Second-Lien Loan
This product, also called a piggyback loan or soft second, provides an alternative to paying private mortgage insurance. (Lenders typically require PMI if your down payment is less than 20 percent of the purchase price.) The loan is originated simultaneously with the first-lien mortgage. There are many government programs offering these products to low- and moderate-income first-time homebuyers.
Be sure to compare the cost of this second mortgage with the cost of purchasing PMI. If you take a simultaneous second-lien loan in place of making a down payment, you reduce the equity you have in your home. Also, if your secondlien loan is a home equity line of credit (HELOC), you may be exposed to increasing interest rates and higher monthly payments.
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The deduction a taxpayer can take on their tax form for interest paid on a home mortgage. The amount of money that the homeowner is not required to pay the government in taxes because he or she owns a home.
- Joint Tenancy - equal ownership of property by two or more parties, each with the right of survivorship.
- Tenancy by The Entireties - ownership of property only between husband and wife in which neither can sell without the consent of the other and the property is owned by the survivor in the event of death of either party.
- Tenancy in Common - equal ownership of property by two or more parties without the right of survivorship.
- Tenancy in Severalty - ownership of property by one legal entity or a sole party.
- Tenancy at Will - a license to use or occupy a property at the will of the owner.
These are low rates that lenders offer to make mortgage products more attractive. When the "teaser-rate" period expires, the lender raises the interest rate for the remainder of the loan period. This new rate may be fixed or change periodically, depending upon the terms of your loan.
A formal document establishing ownership of property.
A policy issued by a title insurance company insuring the purchaser against any losses resulting from errors in the title search. The cost of title insurance may be paid for by the buyer, the seller or both. trust deed See: deed of trust.
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See: Veterans Administration.
Variable Rate Mortgage (VRM)
See: Adjustable Rate Mortgage.
Veterans Administration (VA)
The federal agency responsible for the VA loan guaranty program as well as other services for eligible veterans. In general, qualified veterans can apply for home loans with no down payment and a funding fee of 1 percent of the loan amount.
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- X -No entries for "X".
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The ability of local governments to specify the use of private property in order to control development within designated areas of land. For example, some areas of a neighborhood may be designated only for residential use and others for commercial use such as stores, gas stations, etc.