| Adjustable
Rate Mortgage (ARM): A
mortgage with an interest rate that changes over time in
line with movements in the index. ARMs are also referred
to as AMLs (adjustable mortgage loans) or VRMs (variable
rate mortgages). |
| Adjustment
Period: The
length of time between interest rate changes on an ARM.
For example, a loan with an adjustment period of one
year is called a one-year ARM, which means that the
interest rate can change once a year. |
| Amortization:
Repayment of a
loan in installments of principal and interest, rather
than interest-only payments. |
| Annual
Percentage Rate (APR): The
total finance charge (interest, loan fees, and points)
expressed as a percentage of the loan amount. |
| Appraisal/Appraised
Value: An
opinion of the market value of a home expressed by a
Certified Real Estate Appraiser. |
| Assumption
of Mortgage: A
buyer's agreement to assume the liability under an
existing note that is secured by a mortgage or deed of
trust. The lender must approve the buyer in order to
release the original borrower (usually the seller) from
liability. |
| Balloon
Payment: A
lump sum principal payment due at the end of some
mortgages or other long-term loans. |
| Cap: The
limit on how much an interest rate or monthly payment
can change, either at each adjustment or over the life
of the mortgage. |
| CC&R's:
Covenants, conditions and restrictions. A
document that controls the use, requirements and
restrictions of a property. |
| Certificate
of Reasonable Value (CRV):
A document that establishes the maximum value and loan
amount for a VA guaranteed mortgage. |
| Closing
Statement: The
financial disclosure statement that accounts for all of
the funds received and expected at closing, including
deposits for taxes, hazard insurance, and mortgage
insurance. |
| Condominium:
A form of real
estate ownership where the owner receives title to a
particular unit and has a proportionate interest in
certain common areas. The unit itself is generally a
separately owned space whose interior surfaces (walls,
floors and ceilings) serve as its boundaries. (Sometimes
called "Paint-to-Paint.") |
| Contingency:
A condition
that must be satisfied before a contract is binding. For
instance, a sales agreement may be contingent upon the
buyer obtaining financing. |
| Conventional
Mortgage: A
loan not guaranteed, insured or made by the federal or
state government. |
| Conversion
Clause: A
provision in some ARM's that enables you to change an
ARM to a fixed-rate loan, usually after the first
adjustment period. The new fixed rate is generally set
at the prevailing interest rate for fixed-rate
mortgages. This conversion feature may require
additional funds. |
| Cooperative:
A form of
multiple ownership in which a corporation or business
trust entity holds title to a property and grants
occupancy rights to shareholders by means of proprietary
leases or similar arrangements. (Also called a
"Co-op.") |
| Deed: A
legal document conveying ownership of property. Should
be recorded by the county recorder. |
| 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 borrower's income
qualifies him or her for a mortgage. |
| Due-On-Sale
Clause: A
clause that requires full payment of a mortgage or deed
of trust when the secured property changes ownership. |
| Earnest
Money: The
portion of the down payment delivered to the seller or
escrow agent by the purchaser with a written offer as
evidence of good faith. |
| Escrow:
A procedure in
which a third party acts as a stakeholder for both the
buyer and the seller, carrying out both parties'
instructions and assuming responsibility for handling
all of the paperwork and distribution of funds. |
| FHA
Loan: A loan
insured by the Federal Housing Administration (of the
Department of Housing and Urban Development). |
| Federal
National Mortgage Association (FNMA): Popularly
known as Fannie Mae. A privately owned corporation
created by Congress to support the secondary mortgage
market. It purchases and sells residential mortgages
insured by FHA or guaranteed by the VA, as well as
conventional home mortgages. |
| Fee
Simple: An
estate in which the owner has unrestricted power to
dispose of the property as he wishes, including leaving
by will or inheritance. It is the greatest interest a
person can have in real estate. |
| Finance
Charge: The
total cost borrower must pay, directly or indirectly, to
obtain credit according to Regulation Z. |
| Fixed-Rate
Mortgage (FRM): A
loan on which the interest rate and monthly payment do
not change. |
| Graduated
Payment Mortgage: A
residential mortgage with monthly payments that start at
a low level and increase at a pre-determined rate. |
| Hazard
Insurance: A
policy that protects against damage to a property caused
by fire, wind or other hazards including acts of God. |
| Home Inspection Report:
A qualified inspector's report on a property's overall
condition. The report usually includes an evaluation of
both the structure and mechanical systems. |
| Home
Warranty Plan: Protection
against failure of mechanical systems with the property.
Generally includes plumbing, electrical, heating systems
and installed appliances. |
| Impound
Account: An
account established by a lender to collect a borrower's
property tax and insurance payments. |
| Index:
A measure of interest rate changes use to determine
changes in an ARM's interest rate over the term of the
loan. |
| Joint
Tenancy: An
equal undivided ownership of property by two or more
persons. Upon the death of any owner, the survivors take
the decedent's interest in the property. |
| Lien: A
legal hold or claim on property as security for a debt
or charge. |
| Loan-To-Value
Ratio: The
relationship between the amount of the mortgage and the
appraised value of the property, expressed as a
percentage of the appraised value. |
| Margin:
The number of
percentage points the lender adds to the index rate to
calculate the ARM interest rate at each adjustment. |
| Mortgage
Interest Deduction: The
ability of mortgage borrowers to deduct the interest
paid on a home loan for purposes of federal and state
income taxes. |
| Mortgage
Life Insurance: A
type of term life insurance often purchased by
homebuyers. The coverage decreases as the mortgage
balance declines. If the borrower dies while the policy
is in force, the mortgage debt is automatically covered
by insurance proceeds. |
| Negative
Amortization: Negative
amortization occurs when the monthly payments fail to
cover the monthly interest cost. The interest that isn't
covered is added to the unpaid principal balance, which
means that even after several payments you could owe
more than you did at the beginning of the loan. Negative
amortization can occur when an ARM has a payment cap
that results in monthly payments that aren't high enough
to cover the interest. |
| Origination
Fee: A fee or
charge for work involved in evaluating, preparing, and
submitting a proposed mortgage loan. The fee is limited
to 1 percent for FHA and VA loans. |
| PITI: Principal,
Interest, Taxes and Insurance. |
| Planned
Unit Development (PUD): A
zoning designation for property developed at the same or
slightly greater overall density than conventional
development, sometimes with improvements clustered
between open, common areas. Uses may be residential,
commercial or industrial. |
| Point: An amount equal
to 1 percent of the principal amount of the investment
or note. The lender assesses loan discount points at
closing to increase the yield on the mortgage to a
position competitive with other types of investments. |
| Prepayment
Penalty: A fee
charged to a borrower who pays a loan before it is due.
Not allowed for FHA or VA loans. |
| Private
Mortgage Insurance (PMI):
Insurance written by a private company protecting the
lender against loss if the borrower defaults on the
mortgage. |
| Purchase
Agreement: A
written document in which the purchaser agrees to buy
certain real estate and the seller agrees to sell under
stated terms and conditions. Also called a sales
contract, earnest money contract, or agreement for sale. |
| Realtor:
A real estate
broker or associate (agent) active in a local real
estate board affiliated with the National Association of
Realtors. Not all licensees are Realtors. |
| Regulation
Z: The set of
rules governing consumer lending issued by the Federal
Reserve Board of Governors in accordance with the
Consumer Protection Act. |
| Tenancy
in Common: A
type of joint ownership of property by two or more
entities. |
| Title: A
legal document establishing the right of ownership of a
property. |
| Title
Insurance Policy: A
policy that protects the purchaser, mortgagee or other
party against losses. |
| Underwriting: The
process of evaluating a loan application to assure the
lender that the buyer is qualified to secure the loan. |
| VA
Loans: A loan
made by a private lender that is partially guaranteed by
the Veterans Administration. |
| These definitions are
general in nature and not intended to be complete.
Please seek legal counsel, tax advice and/or lender
information from the appropriate professional sources. |
