Hard Money and Mortgage Lending Glossary
A-Credit
A consumer with the best credit rating, deserving of the lowest prices that conventional 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. Same as Negative Amortization.
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 is often displayed in x/y format, where “x” is the period until the first adjustment, and “y” is the adjustment period thereafter. For example, a 5/1 ARM is one on which the initial rate holds for 5 years, after which it is adjusted every year. 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.
Agency
The legal requirement that one party in a relationship has a fiduciary obligation to the other.
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.
Amortization
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. If the payment is less than the interest due, the balance rises, which is negative amortization.
Amortized Mortgage
A mortgage loan in which the principal, in addition to the interest payment is paid via periodic installments during the loan’s term.
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.
Annual percentage rate
See APR.
Anticipation
Paying the amount one owes before it is due. Although this can result in a savings on interest charges, it can result. a Prepayment Penalty.
Application
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.
APR
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.
Approval
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.
ARM
An adjustable rate mortgage.
Assignment
The written transfer of an interest in a lease or mortgage. The lessee (assignor) transfers the remainder of the term and the assignee becomes liable to the original lessor for the rent. Based on the terms of the original contract or assignment, the assignor may retain secondary liability for payments on the lease.
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.
Assumable 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.
Automated underwriting
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”.
Mortgage broker income paid by the lender, same as yield-spread premium and Negative points.
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.
Biweekly mortgage
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.
Blanket Loan
Also known as a blanket mortgage, this type of loan covers more than one parcel of property. Usually, individual parcels are released or partially released from the blanket loan / mortgage as the debt is paid off. See Cross-collateralization.
Blemished borrower
A borrowers have one or more of the following risk factors: they can only make a very small or no down payment; they cannot fully document their income and assets; their property is something other than a single-family home; their loan is intended to raise cash or to purchase an investment property; they have low credit scores; their income is low relative to their expected total obligations; and their mortgage carries an adjustable rate that will result in substantially higher payments in a few years.
Bridge Loan
Bridge loans are loans intended to be used for a short period of time between the initial requirement for funds and a permanent, usually less costly, financial solution.
Bridge loans are typically funded against collateralized real estate. There are typically very few limitations on the uses of funds for a bridge loan, although lenders will review the use to insure that payback can be met.
Broker
A broker is an intermediary who negotiates rates, handles paperwork, forms & legal items and serves the borrower.
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.
Capitalization Rate
Also called the Cap Rate. A ratio used to estimate the value of income-producing properties, which describes a return rate acceptable to an investor taking the risk of a capital investment. The Cap Rate is calculated by dividing the Annual Net Income by the Value of the property.
Cash Flow Option Loan
Same as Flexible Payment ARM.
Cash-Out refi
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
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.
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.
Collateral
A security for the repayment of a loan. In the case of real estate, a piece of property is collateral to ensure the borrower’s ability to repay what is owed.
COFI
Cost of funds index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage.
Commercial Conduit Lenders
These conglomerates attempt to pool assets from different types and classes and sell them to other lenders or investors, thus creating an intermediary to achieve massive funding based on the equity in an entire estate or large group of unique collateral.
Hedging in the secondary market helps to mitigate the risk assumed by these lenders, thus driving down the rates and making conduit lending a competitive alternative.
Commercial Lender
Commercial lenders offer a variety of mortgage-backed loans for commercial property. Each commercial lender sets economic, demographic and geographic criteria.
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.
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.
Correspondent
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.
Credit score
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.
Current index value
The most recently published value of the index used to adjust the interest rate on an indexed ARM.
Rolling short-term debt into a home mortgage loan, either at the time of home purchase or later.
Debt elimination
Scams designed to relieve you of your money by promising to eliminate your mortgage debt.
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 points
Same as points.
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.
Down payment
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 propert sells for $1,000,000 and the loan is for $600,000, the down payment is $400,000 or 40%.
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.
Due Dilligence
The process of investigating the condition and legal status of assets.
Due-on-sale clause
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.
A term used in two ways. In one context it refers to a measure of interest cost to the borrower that is identical to the APR except that it is calculated over the time horizon specified by the borrower. The APR is calculated on the assumption that the loan runs to term, which most loans do not.
Equity
In connection with real preperty, the difference between the value of the property and the balance of outstanding mortgage loans on the property.
Escrow
An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.
Estoppel Certificate
A legal clause that can be taken out by a mortgage borrower. The certificate verifies the major points of an existing lease between a landlord & tenant.
One of two Federal agencies that purchase home loans from lenders. (The other is Freddie Mac). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities.
Fed Rate
The overnight lending rate between banks as set by the United States’ Federal Reserve Bank.
The overnight lending rate influences the interest charged by banks to lend to one another and is used by the Federal Reserve to regulate inflation during economic growth (by raising the rate) and encourage investment during recession (by lowering the rate).
Fees
The sum of all upfront cash payments required by the lender as part of the charge for the loan. Origination fees and points are expressed as a percent of the loan. Other fees are expressed in dollars.
FHA mortgage
A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low.
FICO Score
See Credit Score.
Financing points
Including points in the loan amount.
First mortgage
A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan. For example, a borrower defaults on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only what is left of the $100,000.
Fixed Installment
The regular payments (usually monthly) due on a mortgage loan. This includes payment of both principal and interest.
Fixed rate mortgage (FRM)
A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage.
Flexible payment ARM.
Same as Option ARM.
Float
Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing. Allowing the rate to float exposes the borrower to market risk, and also to the risk of being taken advantage of by the loan provider.
Float-down
A rate lock, plus an option to reduce the rate if market interest rates decline during the lock period. Also called a cap. A float-down costs the borrower more than a lock because it is more costly to the lender. Float-downs vary widely in terms of how often the borrower can exercise (usually only once), and exactly when the borrower can exercise. Do not confuse with interest rate increase caps and payment increase caps.
Foreclosure
The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults.
Forbearance agreement
An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrower’s delinquency.
Freddie Mac
One of two Federal agencies that purchase home loans from lenders. The other is Fannie Mae.
Front-end fee
Mortgage broker income paid by the borrower, as distinguished from the fee paid by the lender, which is “back-end”.
Fully amortizing payment
The monthly mortgage payment which, if maintained unchanged through the remaining life of the loan at the then-existing interest rate, will pay off the loan over the remaining life. On FRMs the payment is always fully amortizing, provided the borrower has made no prepayments. (If the borrower makes prepayments, the monthly payment is more than fully amortizing). On GPMs, the payment in the early years is always less than fully amortizing. On ARMs, the payment may or may not be fully amortizing, depending on the type of ARM.
Fully indexed interest rate
The current index value plus the margin on an ARM. Usually, initial interest rates on ARMs are below the fully indexed rate. If the index does not change from its initial level, after the initial rate period ends the interest rate will rise to the fully indexed rate after a period determined by the interest rate increase cap. For example, if the initial rate is 4% for 1 year, the fully indexed rate 7%, and the rate adjusts every year subject to a 1% rate increase cap, the 7% rate will be reached at the end of the third year.
A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as down payment.
Good fairy syndrome
A belief that somewhere out there is a good fairy who will solve all our financial (and other) problems.
Good faith estimate
The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application.
Government National Mortgage Association (GNMA)
A Federal agency that guarantees mortgage securities that are issued against pools of FHA and VA mortgages.
Graduated payment mortgage (GPM)
A mortgage on which the payment rises by a constant percent for a specified number of periods, after which it levels out over the remaining term and amortizes fully. For example, the payment might increase by 7.5% every 12 months for 60 months, after which it is constant for the remaining term at a fully amortizing level.
Graduation period
The interval at which the payment rises on a GPM.
Graduation rate
The percentage increase in the payment on a GPM.
GSE Lenders
GSE – Government Sponsored Enterprises.
These are lenders who focus exclusively on properties backed by government programs. These can include multi-family properties, senior citizen properties, etc.
Guarantor
A person who pledges collateral for the contract of another or who guarantees the performance of another.
A loan primarily collateralized by hard assets, such as real estate. Typically loans made by private lenders that conventional lenders or mortgage companies can’t or won’t make.
Hard Money Lender
A lender who offers loan funding based primarily on the real estate collateral and less on the borrower’s credit.
Hazard insurance
Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as “homeowner insurance”, it is the second “I” in PITI.
Homeowner’s equity
See Equity.
Homeowners insurance
Same as Hazard Insurance.
Home equity line of credit (HELOC)
A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $150,000, in an amount and at a time of your choosing. You can draw on the line by writing a check, using a special credit card, or in other ways.
HUD1 form
The form a borrower receives at closing that details all the payments and receipts among the parties in a real estate transaction, including borrower, lender, home seller, mortgage broker and various other service providers.
Hybrid ARM
An ARM on which the initial rate holds for some period, during which it is “fixed-rate”, after which it becomes adjustable rate. Generally, the term is applied to ARMs with initial rate periods of 3 years or longer.
Hypothecate
To give property as security without relinquishing ownership of said property. A mortgage is a good example of a hypothecation.
Same as Escrow.
Income Property
A property with the primary purpose of generating income for the owner through rent, as opposed to a primary residence or owner-occupied commercial property.
Indexed ARM
An ARM on which the interest rate adjusts mechanically based on changes in an interest rate index, as opposed to a “discretionary ARM” on which the lender can change the rate at any time subject only to advance notice. All ARMs in the US are indexed.
Initial interest rate
The interest rate that is fixed for some specified number of months at the beginning of the life of a an ARM. The initial rate is sometimes referred to as a “teaser” when it is below the fully indexed interest rate.
Initial rate period
The number of months for which the initial rate holds, ranging from 1 month to 10 years.
Interest accrual period
The period over which the interest due the lender is calculated. If interest accrues monthly, as it does on most mortgages in the US, the monthly interest is .06/12($100,000) = $500. If interest accrues biweekly, as on a few programs in the US, the biweekly interest is .06/26($100,000) = $230.77. And if interest accrues daily, as HELOCs and some other mortgages in the US do, the daily interest is .06/365($100,000) = $16 .44.
Interest due
The amount of interest, expressed in dollars, computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by the interest accrual period. It is the same as interest payment except when the scheduled mortgage payment is less than the interest due, in which case the difference is added to the balance and constitutes negative amortization.
Interest-only mortgage
A mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged.
Interest payment
The dollar amount of interest paid each month. It is the same as interest due so long as the scheduled mortgage payment is equal to or greater than than the interest due. Otherwise, the interest payment is equal to the scheduled payment.
Interest rate
The rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A rate of 6%, for example, means a rate of 1/2% per month. A mortgage interest rate is a rate on a loan secured by a specific property.
Interest rate adjustment period
The frequency of rate adjustments on an ARM after the initial rate period is over. The rate adjustment period is sometimes but not always the same as the initial rate period. As an example, a 3/3 ARM is one in which both periods are 3 years while a 3/1 ARM has an initial rate period of 3 years after which the rate adjusts every year.
Interest rate index
The specific interest rate series to which the interest rate on an ARM is tied, such as “Treasury Constant Maturities, 1-Year,” or “Eleventh District Cost of Funds.” All the indices are published regularly in readily available sources.
A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac. However, some lenders use the term to refer to programs for even larger loans, which may also be referred to as Super Jumbo mortgages.
Fees that lenders are entitled to collect from borrowers who don’t pay within the grace period. Most mortgage notes offer borrowers a 10 or 15-day grace period, with a late charge of about 5% on payments received on the 16th or later.
Late payment
A payment received after the grace period stipulated in the note. Most mortgage grace periods are 10 or 15 days.
Lease-to-own purchase
A transaction in which a hopeful home buyer leases a home with an option to buy it within a specified period.
Letter of Intent
A non-binding agreement between parties involved in a contract to move forward with negotiations or complete a project.
LIBOR
The BBA LIBOR is the most widely used benchmark or reference rate for short term interest rates. LIBOR stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from other banks, in marketable size, in the London interbank market. The European equivalent of the Fed Funds rate.
Lien
The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.
Loan amount
The amount the borrower promises to repay, as set forth in the mortgage contract. It differs from the amount of cash disbursed by the lender by the amount of points and other upfront costs included in the loan.
Loan discount fee
The term used to describe points paid upfront to decrease the overall interest rate of the loan.
Loan Origination Fee
A loan origination fee is the free charged by a broker or lender for the services of structuring and delivering a funded loan.
Loan-to-value ratio (LTV)
The loan amount divided by the value of the property as established by the lender.
Lock
An option exercised by the borrower, at the time of the loan application or later, to “lock in” the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.
Lock commitment letter
A written statement from a lender verifying that the price and other terms of a loan have been locked. Borrowers who lock through a mortgage broker should always demand to see the lock commitment letter.
Lock period
The number of days for which any lock or float-down holds. Ordinarily, the longer the period, the higher the price to the borrower.
The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure.
Manufactured housing
A house built entirely in a factory, transported to a site and installed there. They are usually built without knowing where they will be sited, and are subject to a Federal building code administered by HUD.
Margin
The amount added to the interest rate index, ranging generally from 2 to 3 percentage points, to obtain the fully indexed interest rate on an ARM.
Market Price
The actual selling price of the property or land involved in a deal.
Market Value
The written, estimated value obtained by factoring in location, assets, demand & supply. Estimates for market value are typically provided by a licensed appraiser or experienced broker.
Marketable Title
Also known as a merchantable title, this is a title that is free from liens. It enables an owner to sell property freely and without complication.
Maturity
The period until the last payment is due. This is usually but not always the term, which is the period used to calculate the mortgage payment.
Maximum loan amount
The largest loan size permitted on a particular loan program. For programs where the loan is targeted for sale to Fannie Mae or Freddy Mac, the maximum will be the largest loan eligible for purchase by these agencies. On FHA loans, the maximums are set by the Federal Housing Administration, and vary somewhat by geographical area. On other loans, maximums are set by lenders.
Maximum loan to value ratio
The maximum allowable loan-to-value ratio on the selected loan program.
Monthly debt service
Monthly payments required on credit cards, installment loans, home equity loans, and other debts but not including payments on the loan applied for.
Mortgage
A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note. Some states, such as California, use an equivalent instrument known as a Trust Deed.
Mortgage broker
An independent contractor who offers the loan products of multiple lenders, termed wholesalers. A mortgage broker counsels on the loans available from different wholesalers, takes the application, and usually processes the loan. When the file is complete, but sometimes sooner, the lender underwrites the loan. In contrast to a correspondent, a mortgage broker does not fund a loan.
Mortgage company
A mortgage lender who sells all loans in the secondary market. As distinguished from a portfolio lender, who retains loans in its portfolio. Mortgage companies may or may not service the loans they originate.
Mortgage insurance
Insurance against loss provided to a mortgage lender in the event of borrower default. In most cases, the borrower pays the premiums.
Mortgage lender
The party who disburses funds to the borrower at the closing table. The lender receives the note evidencing the borrower’s indebtedness and obligation to repay, and the mortgage which is the lien on the subject property.
Mortgage payment
The monthly payment of interest and principal made by the borrower.
Mortgage program
A bundle of mortgage characteristics that lenders see fit to distinguish as a distinct instrument. These include whether it is an FRM, ARM, or Balloon; the term; the initial rate period on an ARM; whether it is FHA-insured or VA-guaranteed; and if is not FHA or VA, whether it is “conforming” (eligible for purchase by Fannie Mae or Freddie Mac) or “non-conforming”.
A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called “deferred interest.
Negative amortization cap
The maximum amount of negative amortization permitted on an ARM, usually expressed as a percentage of the original loan amount (e.g., 110%). Reaching the cap triggers an automatic increase in the payment, usually to the fully amortizing payment level, overriding any payment increase cap.
Net branch
A facility offered by some lenders to mortgage brokers where de jure the brokers become employees of the lender but de facto they retain their independence as brokers.
Net Worth
Assets minus liabilities of a company or individual. Here, assets include cash. Also referred to as shareholders’ equity.
No-Cost mortgage
A mortgage on which all settlement costs except per diem interest, escrows, homeowners insurance and transfer taxes are paid by the lender and/or the home seller.
Non-conforming mortgage
A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation. The flexibility of private money (of which hard money is a niche market) can allow for a much wider range of projects to be funded, although additional collateral and documentation may be required by the lender.
Non-Permanent resident alien
A non-citizen without a green card who is employed in the US. As distinct from a permanent resident alien, who has a green card and who lenders do not distinguish from US citizens. Non-permanent resident aliens are subject to somewhat more restrictive qualification requirements than US citizens.
No asset loan
A documentation requirement where the applicant’s assets are not disclosed.
No income loan
A documentation requirement where the applicant’s income is not disclosed.
Non-warrantable condo
A condominium that does not meet meet lender requirements.
Nominal interest rate
A quoted interest rate that is not adjusted for either intra-year compounding, or for inflation. A quoted rate of 6% on a mortgage, for example, is nominal. Adjusted rates are called “effective”.
No ratio loan
A documentation requirement where the applicant’s income is disclosed and verified but not used in qualifying the borrower. The conventional maximum ratios of expense to income are not applied.
Notary Public
A public officer who is authorized by the state government through a certification process to witness and verify certain documents (i.e., contracts, deeds, mortgages). Official affidavits may be sworn before a notary public.
Note
A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents.
An adjustable rate mortgage with flexible payment options, monthly interest rate adjustments, and very low minimum payments in the early years. They carry a risk of very large payments in later years.
Option fee
An upfront fee paid by the buyer under a lease-to-own purchase, usually 1% to 5% of the price, which is credited to the purchase price when the option is exercised but is lost if it is not.
Origination fee
An fee charged by lenders, usually expressed as a percent of the loan amount, for the service of structuring and delivering a funded loan.
Making a payment larger than the scheduled payment as a way of paying off the loan earlier.
Payment adjustment interval
The period between payment changes on an ARM, which may or may not be the same as the interest rate adjustment period. Loans on which the payment adjusts less frequently than the rate may generate negative amortization.
Payment period
The period over which the borrower is obliged to make payments. On most mortgages, the payment period is a month, but on some it is biweekly.
Payment rate
The interest rate used to calculate the mortgage payment, which is usually but not necessarily the interest rate.
Per diem interest
Interest from the day of closing to the first day of the following month. In some cases, however, the borrower can get a credit at closing by making the first payment a month earlier.
Permanent buydown
Paying points as a way of reducing the interest rate.
Piggyback mortgage
A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down.
Pipeline risk
The lender’s risk that between the time a lock commitment is given to the borrower and the time the loan is closed, interest rates will rise and the lender will take a loss on selling the loan.
PITI
Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.
PMI
Private mortgage insurance, as distinguished from insurance provided by government under FHA and VA.
Points
An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., “3 points” means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations with negative points. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed “discounts” and “premiums,” respectively.
Portfolio lender
A lender that holds the loans it originates in its portfolio rather than selling them, as a temporary lender does.
Pre-approval
A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Unlike a pre-qualification, the lender checks the applicant’s credit.
Prepayment
A payment made by the borrower over and above the scheduled mortgage payment. If the additional payment pays off the entire balance it is a “prepayment in full”; otherwise, it is a “partial prepayment.”
Prepayment penalty
A charge, usually given as a percentage, for paying off the loan ahead of a schedule agreed to in the terms of the loan documents.
Primary residence
The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented.
Principal
The amount borrowed or remaining unpaid. The portion of the monthly payment that is used to reduce the loan balance.
Principal Balance
The outstanding balance of principal on a mortgage not including interest or any other charges.
Private mortgage insurance
Mortgage insurance provided by private mortgage insurance companies, or PMIs.
Processing
Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. The processing file is handed off to underwriting for the loan decision.
Promissory Note
Signed by the borrower, this legally binding document promises repayment of the loan, listing, among other things, the terms of how the loan must be repayed and when it must be repayed by.
Limitations on the size of rate adjustments on an ARM, often expressed in a/b/c fashion: “a” is the maximum rate change at the first rate adjustment, “b” is the maximum at all subsequent adjustments, and “c” is the maximum increase over the initial rate during the life of the contract.
Rate/point breakeven
The period you must retain a mortgage in order for it to be profitable to pay points to reduce the rate.
Rate sheets
Tables of interest rates and points that lenders distribute daily to their loan officer employees or mortgage brokers. See Questions About Rate Sheets.
Raw Land
Land that has had no man-made improvements or legal alterations made to it. Man-made improvements include all structures, such as sewers and streets, as well as buildings. Legal alterations would include subdividing, building permits, and plat maps.
Rebate
Same as Negative points.
Recast payment
Raising the mortgage payment to the fully amortizing payment. Periodic recasts are sometimes used on ARMs in lieu of or in addition to negative amortization caps.
Refinance
Paying off an old loan while simultaneously taking a new one. This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan. It may be done to raise cash, as an alternative to a home equity loan. Or it may be done to reduce the monthly payment.
REIT
REIT – Real Estate Investment Trust. Many hard money lenders are formed as a REIT, with either private individual investors or institutions funding the loans the company makes.
RESPA
The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.
Reverse mortgage
A loan to an elderly home owner on which the balance rises over time, and which is not repaid until the owner dies, sells the house, or moves out permanently. See Reverse Mortgages.
The Small Business Administration, managing financial, legal and business issues for small business in America. The SBA is a government organization under federal authority. For more information, visit their site – www.sba.com.
Second mortgage
A loan with a second-priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.
Secure option ARM
An option ARM on which the initial rate holds for 5 years rather than one month.
Secondary markets
Markets in which mortgages or mortgage-backed securities are bought and sold.
Self-employed borrower
A borrower who must document income using tax returns rather than information provided by an employer. This complicates the process somewhat.
Seller contribution
A contribution to a borrower’s down payment or settlement costs made by a home seller, as an alternative to a price reduction.
Seller financing
Provision of a mortgage by the seller of a house, often a second mortgage, as a condition of the sale.
Servicing
Administering loans between the time of disbursement and the time the loan is fully paid off. This includes collecting monthly payments from the borrower, maintaining records of loan progress, assuring payments of taxes and insurance, and pursuing delinquent accounts.
Servicing agent
The party who services a loan, who may or may not be the lender who originated it.
Settlement costs
Costs that the borrower must pay at the time of closing, in addition to the down payment.
Shared appreciation mortgage
A mortgage on which the borrower gives up a share in future price appreciation in exchange for a lower interest rate and/or interest deferral.
Short sale
An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure.
Subordinate financing
A second mortgage on the property which is not paid off when a new loan is taken out. The second mortgage lender must allow subordination of the second to the new first mortgage.
Subordination policy
The policy of a second mortgage lender for allowing a borrower to refinance the first mortgage while leaving the second in place.
Sub-prime borrower
A borrower with poor credit, who can borrow only from sub-prime lenders who specialize in dealing with borrowers who have poor credit. Such borrowers pay more than prime borrowers, and are sometimes taken advantage of. Not all borrowers who deal with sub-prime lenders, however, are sub-prime borrowers. Some could obtain loans from mainstream lenders if they properly shop the market.
Sub-prime lender
A lender who specializes in lending to sub-prime borrowers.
Swing loan
Same as Bridge loan.
The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity. On a 7-year balloon loan, for example, the maturity is 7 years but the term in most cases is 30 years.
Title
The ownership rights.
Title insurance
Insurance against loss arising from problems connected to the title to property.
Trust Deed
Similar to a mortgage. A Trust Deed is the document that backs a borrowers promise to repay a loan, and gives the lender the right to foreclose on the property if the borrower fails to pay the loan as promised.
Truth in Lending (TIL)
The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information.
The process of examining all the data about a borrower’s property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.
A mortgage with no down payment requirement, available only to ex-servicemen and women as well as those on active duty, on which the lender is insured against loss by the Veterans Administration.
Valuation
Estimated price or value for a property.
Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure where the lender adds a charge to the monthly mortgage payment that is deposited in an escrow account, from which the lender pays the borrower’s taxes and insurance when they are due. On some loans lenders will not waive escrows, and on loans where waiver is permitted lenders are likely either to charge for it in the form of a small increase in points, or restrict it to borrowers making a large down payment.
Warehouse lender
A firm that lends to temporary lenders against the collateral of closed mortgage loans prior to the sale of the loans in the secondary market. Warehouse lenders can call the loans if the loans “in the warehouse” drop in value.
Warrantable condos
A condominium project with features that lenders view as protections against hazards that would threaten the value of condo units. These features include the project being completed with most units sold rather than rented, no one party owning more than 10% of them, adequate insurance coverage of common structures, and an ownership association independent of the developer.
Wholesale lender
A lender who provides loans through mortgage brokers or correspondents. The mortgage broker or correspondent initiates the transaction, takes the borrower’s application, and processes the loan.
Wrap-around mortgage
A mortgage on a property that already has a mortgage, where the new lender assumes the payment obligation on the old mortgage. Wrap-around mortgages arise when the current market rate is above the rate on the existing mortgage, and home sellers are frequently the lender. A due-on-sale clause prevents a wrap-around mortgage in connection with sale of a property except by violating the clause.
A graph that shows, at any given time, how the yield varies with the period to maturity. Usually, the curve slopes upwards but occasionally it slopes down or is flat. A flat yield curve means that yields on long-term bonds are not much higher than those on short-term notes.
A law by local or regional authority (government) that sets parameters for the uses of a property.
