Acceleration: The right of the mortgagee (lender) to demand the immediate payment of the mortgage loan balance upon the default of the mortgager (borrower), or by exercising the right vested in the due-on-sale clause.
Adjustable-Rate Mortgage (ARM): A loan on which the monthly payments will increase or decrease over time, based on changes in the interest rate index. ARM payments typically are adjusted every six months or once a year. Common indices to which ARMs are tied include the 11th District Cost of Funds, one-year T-note and six-month T-bill.
Affordability Analysis: An analysis of a buyer’s ability to afford the purchase of a home. The lender reviews income, liabilities and available funds.
Amortization: The repayment of a mortgage through monthly installment payments. In the early years of a mortgage, most of the monthly payment goes toward interest. Later in the mortgage, more of the payment goes toward reducing the principal balance.
Amortization Term: The length of time required to pay off the mortgage, expressed as a number of months. For example, the amortization term for a 30-year fixed-rate mortgage is 360 months.
Annual Percentage Rate (APR): The annual cost of a mortgage, including interest, loan fees and other costs, stated as a percentage of the loan amount.
Appraisal: An opinion of the market value of a home expressed by a real estate appraiser.
Arbitration: The term used to describe a form of dispute resolution that occurs outside of the court system, usually by private agreement between parties. The parties submit arguments and evidence to a neutral person, known as an arbitrator, who then renders a decision, called an award, based on the evidence and arguments presented.
Assessment: A local tax levied against a property for a specific community purpose, such as a sewer or streetlights.
Assignment: The transfer of a contractual interest or obligation from one person to another such as, but not limited to, the transfer of a mortgage obligation.
Assumable Mortgage: An assumable mortgage can be transferred from the Seller(s) to the new Buyer(s). It generally requires a credit review of the new borrower and lenders typically charge a fee for the assumption.
Assumption: The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money by acquiring an existing mortgage debt, instead of obtaining a new mortgage where closing costs and market-rate interest charges apply.
Balloon Mortgage: A loan that is amortized for a longer period than the term of the loan. Usually this refers to a 30-year amortization with a five-year term. At the end of five years, the outstanding principal on the loan is due.
Balloon Payment: The final lump sum paid at the maturity date of a balloon mortgage.
Borrower (Mortgager): One who applies for and receives a mortgage with the intention of repaying the loan in full.
Bridge Loan: A second trust for which the borrowers present home is collateral, allowing the proceeds to be used to close on a new house before the present home is sold. Also known as a “swing loan.”
Buy-down: When the lender and/or the homebuilder subsidize a mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.
Caps: Provisions of an adjustable-rate mortgage limiting how much the interest rate can change at each adjustment period or over the life of the loan (rate cap). A payment cap limits how much the payment due on the loan can increase or decrease.
Cash Flow: The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income-producing property (mortgage payment, maintenance, utilities, etc.).
Certificate of Eligibility: The document given to qualified veterans entitling them to VA-guaranteed loans for homes, businesses and mobile homes.
Certificate of Reasonable Value (CRV): An appraisal issued by Veterans Affairs showing the property’s current market value.
Certificate of Veteran Status: The document given to veterans or reservists who have served 90 days of continuous active duty (including training time). It enables veterans to obtain lower down payments on certain FHA-insured loans).
Closing: The meeting at which a home sale is finalized. The buyer signs the mortgage, pays closing costs and receives title to the home. The seller pays closing costs and receives the net proceeds from the home sale.
Closing Costs: Expenses in addition to the price of the home incurred by buyers and sellers when a home is sold. Common closing costs include escrow fees, title insurance fees, document recording fees and real estate commissions.
Construction Loan: A short-term interim loan to pay for the construction of buildings or homes. They are designed to provide periodic disbursements to the builder as he or she progresses.
Consumer Reporting Agency (or Credit Bureau): An organization that prepares the reports used by lenders to determine a potential borrower’s credit-worthiness.
Contingency: A condition that must be fulfilled before a contract is binding, ie home inspections, title reviews, financing approval, etc.
Conventional Mortgage: A loan not guaranteed, insured or made by the federal or state government.
Conversion Clause: A provision in an adjustable-rate mortgage allowing the loan to be converted to a fixed-rate mortgage at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
Counter-offer (or counter-proposal): An offer in response to an original offer.
Credit Report: A report documenting the credit history and credit-worthiness of a borrower.
Default: The failure to meet the legal obligations set forth in a contract, specifically, the failure to make the monthly payments on a mortgage.
Delinquency: Failure to make payments on time. This can lead to foreclosure.
Department of Veterans Affairs (VA): An independent agency of the federal government that guarantees long-term, low- or no-down payment mortgages to eligible veterans.
Debt-To-Income (DTI) Ratio: The ratio of monthly debt payments to monthly gross income. Lenders use a housing DTI ratio (house payment divided by monthly income) and a total DTI ratio (total debt payments, including the house payment divided by monthly income) to determine whether a borrowers income qualifies him or her for a mortgage.
Deed: A legal document conveying ownership of property.
Down Payment: The portion of the homes purchase price the buyer pays in cash.
Due-on-Sale-Clause: A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
Earnest Money Deposit: The deposit given by Buyer(s) to Seller(s) to demonstrate the Buyer(s) is (are) serious about purchasing the home. Earnest money is typically refundable to the Buyer(s) in the event a contingency of the sales contract is not met.
Equity: The difference between the value of a property and the mortgage amount owed on it.
Escrow: The holding of money by a neutral third party prior to closing.
Escrow Disbursements: The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance and other property expenses as they become due.
Exclusive Right to Sell Listing: A listing agreement that provides a real estate brokerage with the exclusive right to market and sell a property under certain conditions and within a specific time frame.
Farmers Home Administration (FmHA): Agency that provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
Federal Housing Administration (FHA): A division of the U. S. Department of Housing and Urban Development whose main activity is insuring residential mortgage loans made by private lenders. FHA also sets the standards for underwriting mortgages.
Federal National Mortgage Association (Fannie Mae): A privately owned corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by Federal Housing Administration or guaranteed by Veterans Affairs. Fannie Mae and Freddie Mac are the key secondary mortgage-market agencies.
FHA Loan: A mortgage that is made available to qualified Buyers and insured by the Federal Housing Administration.
FHA Mortgage Insurance: There are two elements to the FHA mortgage insurance program: the first requires a fee (up to 2.25 percent of the loan amount) that is paid at closing to insure the loan with FHA; the second requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments.
First Mortgage: The primary lien against a property.
Fixed-Rate Mortgage (FRM): A loan on which the interest rate and monthly payment do not change.
Foreclosure: A legal process by which a lender forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage.
Federal Home Loan Mortgage Corporation (Freddie Mac): A quasi-governmental, privately-owned agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers. Fannie Mae and Freddie Mac are the key secondary mortgage-market agencies.
Graduated-Payment Mortgage (GPM): A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.
Hazard Insurance: A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
Homeowners Warranty: A policy that covers certain aspects (e.g. heating, plumbing or roof) of a newly purchased home for a certain period of time. The warranty is typically offered by and paid for by the Seller(s).
Housing Expenses-to-Income Ratio: The ratio, expressed as a percentage, arrived at when the borrower’s housing expenses are divided by his or her gross monthly income.
Index: A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments, which is then used to adjust the interest rate on an ARM.
Initial Interest Rate: This refers to the original interest rate of an ARM at the time of closing. This rate changes at periodic intervals. It’s also known as “start rate” or “teaser rate.”
Installment: The regular periodic payment that a borrower agrees to make to a lender.
Interest: The fee charged for borrowing money.
Interest Accrual Rate: The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.
Interest Rate Ceiling: For an adjustable-rate mortgage, the maximum interest rate as specified in the mortgage note.
Interest Rate Floor: For an adjustable-rate mortgage, the minimum interest rate as specified in the mortgage note.
Lease-Purchase Mortgage Loan: An alternative financing option that allows low- and moderate-income homebuyers to lease a home with an option to buy. Each month’s rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in an escrow account to be applied toward a down payment.
Liabilities: A person’s financial obligations. Liabilities include long-term and short-term debt.
Lien: A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Lifetime Payment Cap: For an adjustable-rate mortgage, a limit on the amount that payments can increase or decrease over the life of the mortgage.
Lifetime Rate Cap: For an adjustable-rate mortgage, a limit on the amount that the interest rate can increase or decrease over the life of the loan.
Listing: A property placed on the market by a real estate agent.
Loan-to-Value (LTV) Ratio: The ratio of the amount of money owed on a home to the home’s value. The LTV ratio for a $100,000 home financed with a $90,000 mortgage would be 90 percent, for example.
Lock (also referred to as a “Rate Lock”): A lender’s guarantee that the mortgage rate quoted will be good for a specific number of days from day of application.
Margin: The amount a lender adds to the index on an adjustable-rate mortgage to establish the adjusted interest rate.
Market Value: The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
Maturity: The date on which the principal balance of a loan becomes due and payable.
Mediation: A process used to resolve disputes. In mediation, the parties to the dispute are assisted by a neutral third person called a mediator. The mediator is not empowered to impose a settlement or decision on the parties; rather, the mediator facilitates discussions and negotiation between the parties with the goal of assisting the parties in reaching a mutually acceptable settlement of their dispute.
MIP (Mortgage Insurance Premium): Insurance from FHA to the lender against incurring a loss on account of a borrower’s default.
Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Broker: An individual or company that arranges mortgage financing between a borrower and a lender.
Mortgagee: The lender.
Mortgage Insurance: Money paid to insure the mortgage when the down payment is less than 20 percent.
Mortgage Life Insurance: A type of term-life insurance providing that, in the event a borrower dies while the policy is in force, the debt will be paid by the insurance company.
Mortgage Interest Deduction: The ability of the borrower to deduct the interest paid on a home loan for purposes of federal and state income taxes.
Mortgager: The borrower or homeowner.
Multiple Listings Service (MLS): The service combines the listings for all available homes in an area, except most FSBO properties, in one directory or database (in NH, the New England Real Estate Network, or NEREN)
Negative Amortization: Occurs when monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan.
Non-assumption Clause: A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.
One-year Adjustable: Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin chosen by the lender.
Open Listing: A property marketed by more than one agent at a time.
Origination Fee: A fee charged by a lender for making a mortgage.
Owner Financing: A transaction in which the party selling the property provides all or part of the financing.
Periodic Payment Cap: A limit on the amount that payments on an ARM can increase or decrease during any one-adjustment period.
Periodic Rate Cap: A limit on the amount that the interest rate can increase or decrease during any one-adjustment period on an ARM, regardless of how high or low the index might be.
PITI: Principal, interest, taxes and insurance — the primary components of monthly mortgage payments.
Points: Points are charged by lenders to increase the lenders return on the mortgage. Typically, lenders may charge anywhere from zero to two points. One point equals 1 percent (1%) of the mortgage amount. Loan points are tax-deductible.
Power of Attorney: A legal document authorizing one person to act on behalf of another.
Pre-approval: The process of determining how much money you will be eligible to borrow before you apply for a loan.
Pre-paid Expenses: “Pre-paids” include taxes, hazard insurance, private mortgage insurance and special assessments, and are typically held in an escrow account.
Prepayment: A privilege in a mortgage that permits the borrower to make payments in advance of their due date.
Prepayment Penalty: Money charged for an early repayment of debt.
Principal: The loan amount borrowed or still owed.
Private Mortgage Insurance (PMI): Insurance issued by private insurers that protects lenders against a loss if a borrower defaults on a mortgage with a low down payment (e.g., less than 20 percent).
Qualifying Ratios: Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
Rate Lock: See, “Lock”
Real Estate Settlement Procedures Act (RESPA): A federal consumer protection law that requires lenders to provide borrowers advance notice of closing costs. RESPA allows consumers to review known or estimated settlement costs prior to or at settlement.
REALTOR®: A real estate broker or agent who, as a member of a local association of REALTORS®, a state association of REALTORS® and the NATIONAL ASSOCIATION OF REALTORS® adheres to high standards of professionalism and a strict code of ethics.
Recission: The cancellation of a contract by putting all parties back to the position before they entered the contract.
Recording Fees: Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records. Refinance: Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.
Satisfaction of Mortgage: The document issued by the mortgagee when the mortgage loan is paid in full. Also referred to as a “release of mortgage.”
Second Mortgage: A mortgage made subsequent to another mortgage and subordinate to the first one.
Secondary Mortgage Market: The marketplace where primary mortgage lenders sell off the mortgages they make to obtain more funds to originate new loans. It provides liquidity for the lenders.
Security: The property that will be pledged as collateral for a loan.
Seller Financing: A financing agreement in which a seller provides part or all of the financing needed by a buyer to purchase the sellers home.
Servicer: A company that collects principal and interest payments from borrowers and manages borrowers escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
Servicing: All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes and insurance, etc.
Settlement statement: A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points and initial escrow amounts. The amounts at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.
Simple Interest: Interest that is computed only on the principle balance.
Step-Rate Mortgage: A mortgage that provides the interest rate may increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.
Survey: A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.
Sweat Equity: Equity created by a purchaser performing work on a property being purchased.
Third-Party Origination: When a lender uses another party to completely or partially originate, process, underwrite, close, fund or package the mortgages it plans to deliver to the secondary mortgage market.
Title: A legal concept relating to ownership of property.
Title Insurance: Insurance to protect the buyer and lender against losses arising from disputes over the ownership of a property.
Title Search: An examination of public records to determine the legal ownership of property. Usually the records are recorded with the County Recorders office. The search is usually performed by an attorney or a title company using computerized records.
Total Expense Ratio: Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
Truth In Lending Act: A federal law requiring disclosure of the annual percentage rate to homebuyers shortly after they apply for the loan. Also known as Regulation Z.
Two-Step Mortgage: A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of seven or 10 years.
Underwriting: The process of evaluating a loan application to determine if it meets the lender’s standards.
Usury: Interest charged in excess of the legal rate established by law.
VA Loan: A long-term, low- or no-down payment loan guaranteed by the U. S. Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee: A premium of up to 1.5 percent (depending on the size of the down payment) paid on a VA-backed loan.