203(b): FHA’s single family program which provides mortgage insurance to lenders to protect against the borrower defaulting; 203(b) is used to finance the purchase of new or existing one to four family housing; 203(b) insured loans are known for requiring a low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amount.
203(k): this FHA mortgage insurance program enables homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.
“A” Loan or “A” Paper: a credit rating where the FICO score is 660 or above. There have been no late mortgage payments within a 12-month period. This is the best credit rating to have when entering into a new loan.
ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the change in monthly payment amount, however, is usually subject to a cap.
Abstract of Title: documents recording the ownership of property throughout time.
Acceleration: the right of the lender to demand payment on the outstanding balance of a loan.
Acceptance: the written approval of the buyer’s offer by the seller.
Additional Principal Payment: money paid to the lender in addition to the established payment amount used directly against the loan principal to shorten the length of the loan.
Adjustable-Rate Mortgage (ARM): a mortgage loan that does not have a fixed interest rate. During the life of the loan the interest rate will change based on the index rate. Also referred to as adjustable mortgage loans (AMLs) or variable-rate mortgages (VRMs).
Adjustment Date: the actual date that the interest rate is changed for an ARM.
Adjustment Index: the published market index used to calculate the interest rate of an ARM at the time of origination or adjustment.
Adjustment Interval: the time between the interest rate change and the monthly payment for an ARM. The interval is usually every one, three or five years depending on the index.
Affidavit: a signed, sworn statement made by the buyer or seller regarding the truth of information provided.
Amenity: a feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, woods, water) or man-made (like a swimming pool or garden).
American Society of Home Inspectors: the American Society of Home Inspectors is a professional association of independent home inspectors. Phone: (800) 743-2744
Amortization: a payment plan that enables you to reduce your debt gradually through monthly payments. The payments may be principal and interest, or interest-only. The monthly amount is based on the schedule for the entire term or length of the loan.
Annual Mortgagor Statement: yearly statement to borrowers detailing the remaining principal and amounts paid for taxes and interest.
Annual Percentage Rate (APR): a measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is a higher rate than the simple interest of the mortgage.
Application: the first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
Application Fee: a fee charged by lenders to process a loan application.
Appraisal: a document from a professional that gives an estimate of a property’s fair market value based on the sales of comparable homes in the area and the features of a property; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
Appraisal Fee: fee charged by an appraiser to estimate the market value of a property.
Appraised Value: an estimation of the current market value of a property.
Appraiser: a qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.
Appreciation: an increase in property value.
Arbitration: a legal method of resolving a dispute without going to court.
As-is Condition: the purchase or sale of a property in its existing condition without repairs.
Asking Price: a seller’s stated price for a property.
Assessed Value: the value that a public official has placed on any asset (used to determine taxes).
Assessments: the method of placing value on an asset for taxation purposes.
Assessor: a government official who is responsible for determining the value of a property for the purpose of taxation.
Assets: any item with measurable value.
Assumable Mortgage: when a home is sold, the seller may be able to transfer the mortgage to the new buyer. This means the mortgage is assumable. Lenders generally require a credit review of the new borrower and may charge a fee for the assumption. Some mortgages contain a due-on-sale clause, which means that the mortgage may not be transferable to a new buyer. Instead, the lender may make you pay the entire balance that is due when you sell the home. An assumable mortgage can help you attract buyers if you sell your home.
Assumption Clause: a provision in the terms of a loan that allows the buyer to take legal responsibility for the mortgage from the seller.
Automated Underwriting: loan processing completed through a computer-based system that evaluates past credit history to determine if a loan should be approved. This system removes the possibility of personal bias against the buyer.
Average Price: determining the cost of a home by totaling the cost of all houses sold in one area and dividing by the number of homes sold.
“B” Loan or “B” Paper: FICO scores from 620 – 659. Factors include two 30 day late mortgage payments and two to three 30 day late installment loan payments in the last 12 months. No delinquencies over 60 days are allowed. Should be two to four years since a bankruptcy. Also referred to as Sub-Prime.
Back End Ratio (debt ratio): a ratio that compares the total of all monthly debt payments (mortgage, real estate taxes and insurance, car loans, and other consumer loans) to gross monthly income.
Back to Back Escrow: arrangements that an owner makes to oversee the sale of one property and the purchase of another at the same time.
Balance Sheet: a financial statement that shows the assets, liabilities and net worth of an individual or company.
Balloon Loan or Mortgage: a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.
Balloon Payment: the final lump sum payment due at the end of a balloon mortgage.
Bankruptcy: a federal law whereby a person’s assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.
Biweekly Payment Mortgage: a mortgage paid twice a month instead of once a month, reducing the amount of interest to be paid on the loan.
Borrower: a person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
Bridge Loan: a short-term loan paid back relatively fast. Normally used until a long-term loan can be processed.
Broker: a licensed individual or firm that charges a fee to serve as the mediator between the buyer and seller. Mortgage brokers are individuals in the business of arranging funding or negotiating contracts for a client, but who does not loan the money. A real estate broker is someone who helps find a house.
Building Code: based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.
Budget: a detailed record of all income earned and spent during a specific period of time.
Buy Down: the seller pays an amount to the lender so the lender provides a lower rate and lower payments many times for an ARM. The seller may increase the sales price to cover the cost of the buy down.
“C” Loan or “C” Paper: FICO scores typically from 580 to 619. Factors include three to four 30 day late mortgage payments and four to six 30 day late installment loan payments or two to four 60 day late payments. Should be one to two years since bankruptcy. Also referred to as Sub – Prime.
Callable Debt: a debt security whose issuer has the right to redeem the security at a specified price on or after a specified date, but prior to its stated final maturity.
Cap: a limit, such as one placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage. Payment caps do not limit the amount of interest the lender is earning, so they may cause negative amortization.
Capacity: The ability to make mortgage payments on time, dependant on assets and the amount of income each month after paying housing costs, debts and other obligations.
Capital Gain: the profit received based on the difference of the original purchase price and the total sale price.
Capital Improvements: property improvements that either will enhance the property value or will increase the useful life of the property.
Capital or Cash Reserves: an individual’s savings, investments, or assets.
Cash-Out Refinance: when a borrower refinances a mortgage at a higher principal amount to get additional money. Usually this occurs when the property has appreciated in value. For example, if a home has a current value of $100,000 and an outstanding mortgage of $60,000, the owner could refinance $80,000 and have additional $20,000 in cash.
Cash Reserves: a cash amount sometimes required of the buyer to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.
Casualty Protection: property insurance that covers any damage to the home and personal
property either inside or outside the home.
Certificate of Title: a document provided by a qualified source, such as a title company, that shows the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and free of all liens or other claims.
Chapter 7 Bankruptcy: a bankruptcy that requires assets be liquidated in exchange for the cancellation of debt.
Chapter 13 Bankruptcy: this type of bankruptcy sets a payment plan between the borrower and the creditor monitored by the court. The homeowner can keep the property, but must make payments according to the court’s terms within a 3 to 5 year period.
Charge-Off: the portion of principal and interest due on a loan that is written off when deemed to be uncollectible.
Clear Title: a property title that has no defects. Properties with clear titles are marketable for sale.
Closing: the final step in property purchase where the title is transferred from the seller to the buyer. Closing occurs at a meeting between the buyer, seller, settlement agent, and other agents. At the closing the seller receives payment for the property. Also known as settlement.
Closing Costs: fees for final property transfer not included in the price of the property. Typical closing costs include charges for the mortgage loan such as origination fees, discount points, appraisal fee, survey, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes. A common estimate of a Buyer’s closing costs is 2 to 4 percent of the purchase price of the home. A common estimate for Seller’s closing costs is 3 to 9 percent.
Cloud On The Title: any condition which affects the clear title to real property.
Co-Borrower: an additional person that is responsible for loan repayment and is listed on the title.
Co-Signed Account: an account signed by someone in addition to the primary borrower, making both people responsible for the amount borrowed.
Co-Signer: a person that signs a credit application with another person, agreeing to be equally responsible for the repayment of the loan.
Collateral: security in the form of money or property pledged for the payment of a loan. For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made.
Collection Account: an unpaid debt referred to a collection agency to collect on the bad debt. This type of account is reported to the credit bureau and will show on the borrower’s credit report.
Commission: an amount, usually a percentage of the property sales price that is collected by a real estate professional as a fee for negotiating the transaction. Traditionally the home seller pays the commission. The amount of commission is determined by the real estate professional and the seller and can be as much as 6% of the sales price.
Common Stock: a security that provides voting rights in a corporation and pays a dividend after preferred stock holders have been paid. This is the most common stock held within a company.
Comparative Market Analysis (COMPS): a property evaluation that determines property value by comparing similar properties sold within the last year.
Compensating Factors: factors that show the ability to repay a loan based on less traditional criteria, such as employment, rent, and utility payment history.
Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex. The owner also shares financial responsibility for common areas.
Conforming loan: is a loan that does not exceed Fannie Mae’s and Freddie Mac’s loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans.
Consideration: an item of value given in exchange for a promise or act.
Construction Loan: a short-term, to finance the cost of building a new home. The lender pays the builder based on milestones accomplished during the building process. For example, once a sub-contractor pours the foundation and it is approved by inspectors the lender will pay for their service.
Contingency: a clause in a purchase contract outlining conditions that must be fulfilled before the contract is executed. Both, buyer or seller may include contingencies in a contract, but both parties must accept the contingency.
Conventional Loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.
Conversion Clause: a provision in some ARMs allowing it to change to a fixed-rate loan at some point during the term. Usually conversions are allowed at the end of the first adjustment period. At the time of the conversion, the new fixed rate is generally set at one of the rates then prevailing for fixed rate mortgages. There may be additional cost for this clause.
Convertible ARM: an adjustable-rate mortgage that provides the borrower the ability to convert to a fixed-rate within a specified time.
Cooperative (Co-op): residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
Cost of Funds Index (COFI): an index used to determine interest rate changes for some adjustable-rate mortgages.
Counter Offer: a rejection to all or part of a purchase offer that negotiates different terms to reach an acceptable sales contract.
Covenants: legally enforceable terms that govern the use of property. These terms are transferred with the property deed. Discriminatory covenants are illegal and unenforceable. Also known as a condition, restriction, deed restriction or restrictive covenant.
Credit: an agreement that a person will borrow money and repay it to the lender over time.
Credit Bureau: an agency that provides financial information and payment history to lenders about potential borrowers. Also known as a National Credit Repository.
Credit Counseling: education on how to improve bad credit and how to avoid having more debt than can be repaid.
Credit Enhancement: a method used by a lender to reduce default of a loan by requiring collateral, mortgage insurance, or other agreements.
Credit Grantor: the lender that provides a loan or credit.
Credit History: a record of an individual that lists all debts and the payment history for each. The report that is generated from the history is called a credit report. Lenders use this information to gauge a potential borrower’s ability to repay a loan.
Credit Loss Ratio: the ratio of credit-related losses to the dollar amount of MBS outstanding and total mortgages owned by the corporation.
Credit Related Expenses: foreclosed property expenses plus the provision for losses.
Credit Related Losses: foreclosed property expenses combined with charge-offs.
Credit Repair Companies: Private, for-profit businesses that claim to offer consumers credit and debt repayment difficulties assistance with their credit problems and a bad credit report.
Credit Report: a report generated by the credit bureau that contains the borrower’s credit history for the past seven years. Lenders use this information to determine if a loan will be granted.
Credit Risk: a term used to describe the possibility of default on a loan by a borrower.
Credit Score: a score calculated by using a person’s credit report to determine the likelihood of a loan being repaid on time. Scores range from about 360 – 840: a lower score meaning a person is a higher risk, while a higher score means that there is less risk.
Credit Union: a non-profit financial institution federally regulated and owned by the members or people who use their services. Credit unions serve groups that hold a common interest and you have to become a member to use the available services.
Creditor: the lending institution providing a loan or credit.
Creditworthiness: the way a lender measures the ability of a person to qualify and repay a loan.
Debtor: The person or entity that borrows money. The term debtor may be used interchangeably with the term borrower.
Debt-to-Income Ratio: a comparison or ratio of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
Debt Security: a security that represents a loan from an investor to an issuer. The issuer in turn agrees to pay interest in addition to the principal amount borrowed.
Deductible: the amount of cash payment that is made by the insured (the homeowner) to cover a portion of a damage or loss. Sometimes also called “out-of-pocket expenses.” For example, out of a total damage claim of $1,000, the homeowner might pay a $250 deductible toward the loss, while the insurance company pays $750 toward the loss. Typically, the higher the deductible, the lower the cost of the policy.
Deed: a document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description and the owner’s signature. Also known as the title.
Deed-in-Lieu: to avoid foreclosure (“in lieu” of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process does not allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.