A-Credit

A consumer with the best credit rating, deserving of the lowest prices that lenders offer. Most lenders require a FICO score above 720. There is seldom any payoff for being above the A-credit threshold, but youcan 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 called “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 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. Agreement of sale

A contract signed by buyer and seller stating the terms and conditions under which a property will be sold. 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.

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 which can be very confusing.

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 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. 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.

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. 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.

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.

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.

Bridge loan

A short-term loan, usually from a bank, that “bridges” the period between the closing date of a home purchase and the closing date of a home sale. To qualify for a bridge loan, the borrower must have a contract to sell the existing house.

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. Cash-Out refinance

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

On a home purchase, 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 payment to the old lender. Closing costs

Closing costs are costs associated with the loan closing, while settlement charges include closing costs, pre-paid interest, escrow reserves for taxes and insurance, and the down payment (if the loan is a for a home purchase). Closing costs and settlement charges are listed on the Good Faith Estimate (GFE) during the loan application and on the HUD at the closing.

COFI

Cost of funds index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage.

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.

Contract knavery

Inserting provisions into a loan contract that severely disadvantage the borrower, without the borrower’s knowledge, and sometimes despite oral assurances to the contrary.

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.

COSI

Cost of savings index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage.

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.

Debt consolidation

Rolling short-term debt into a home mortgage loan, either at the time of home purchase or later.

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.

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.

Discretionary ARM

An adjustable rate mortgage on which the lender has the right to change the interest rate at any time subject only to advance notice. Discretionary ARMs are not typically found in the US.

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-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.

Effective rate

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.In most texts on the mathematics of finance, however, the “effective rate” is the quoted rate adjusted for intra-year compounding.

Equity

In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home.

Equity grabbing

A type of predatory lending where the lender intends for the borrower to default so the lender can grab the borrower’s equity.

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.

Fannie Mae

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.

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 lower, but the maximum loan amount is also low. A buyer with an FHA Loan will typically net the Seller around $700 to 800 less than what a buyer with a Conventional Loan would.

First mortgage

A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan.

Fixed rate mortgage (FRM)

A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage.

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. Foreclosure

The legal process by which a lender acquires possession of the property secured by 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.

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 .

Gift of equity

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 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.

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.

Guaranteed Mortgage Price Agreement

A proposal by HUD in 2002 to allow lenders and others to offer packages of loans and settlement services at a single price.

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. (Principal, Interest, Taxes and Insurance)

Historical scenario

The assumption that the index value to which the rate on an ARM is tied follows the same pattern as in some prior historical period.

Homeowners insurance

Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards.

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. Housing expense

The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees. Same as PITI and “monthly housing expense.”

Housing expense ratio

The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers. See Qualifying for a Mortgage .

Housing investment

The amount invested in a house, equal to the sale price less the loan amount.

HUD 1 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.

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.

Interest cost

A time-adjusted measure of cost to a mortgage borrower. It is calculated in the same way as the APR except that the APR assumes that the loan runs to term, and is always measured before taxes. Interest cost is measured over the individual borrower’s time horizon, and it may be measured after taxes at the individual borrower’s tax rate. In addition, the cost items included in interest cost may be more or less inclusive than those included in the APR.

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 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.

Interest rate ceiling

The highest interest rate possible under an ARM contract; same as “lifetime cap.” It is often expressed as a specified number of percentage points above the initial interest rate.

Interest rate floor

The lowest interest rate possible under an ARM contract. Floors are less common than ceilings.

Interest rate increase cap

The maximum allowable increase in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points, but may be 5 points if the initial rate period is 5 years or longer.

Interest rate decrease cap

The maximum allowable decrease in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points.

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.”

Interim refinance

An ill-advised scheme to avoid a prepayment penalty by refinancing twice instead of once.

Jumbo mortgage

A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac. Some lenders also use the term to refer to programs for even larger loans, such as, e.g., greater than $500,000.

Junk fees

A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount.

Late fees

Fees that lenders are entitled to collect from borrowers who don’t pay within the grace period .

Lead-Generation site

A mortgage web site designed to provide leads (potential customers) to lenders. Where a referral site provides information about lenders to consumers, with consumers contacting the lenders, a lead-generation site provides information about the consumers to the lenders, and the lenders contact the consumers. They are sometimes called “auction sites” because lenders post their prices directly to the consumer.

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-to-value ratio

The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts.

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.

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.

Maximum lock

The longest period for which the lender will lock the rate and points on any program. The most common maximum lock period is 60 days, but on some programs the maximum is 90 days; only a few go beyond 90 days.

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.

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 insurance

Insurance against loss provided to a mortgage lender in the event of borrower default. In most cases, the borrower pays the premiums.

Mortgage insurance premium

The up-front and/or periodic charges that the borrower pays for mortgage insurance. There are different mortgage insurance plans with differing combinations of up-front, monthly and annual premiums.

Negative amortization

A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called “deferred interest.” Negative amortization arises most frequently on ARMs.

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 .

Negative points

Points paid by a lender for a loan with a rate above the rate on a zero point loan.

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. One of the advantages of this arrangement to brokers is that they need not disclose yield spread premiums received from lenders.

No change scenario

On an ARM, the assumption that the value of the index to which the rate is tied does not change from its initial level.

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.

Non-Permanent resident alien

A non-citizen with a green card employed in the US. As distinct from a permanent resident alien, which 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.

No-Surprise adjustable rate mortgage

An ARM with a preset graduated payment combined with variable term. A quoted interest rate that is not adjusted for either intra-year compounding, or for inflation.

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.

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.

Option ARM

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.

Origination fee

An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate.

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 power

A program begun by Fannie Mae in 2003-4 that allows a borrower to skip up to 2 mortgage payments in any 12 month period, and up to 10 over the life of a loan.

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.

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. Usually waived after loan balance drops below 80% of the property value.

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., “2 points” means a charge equal to 2% of the loan. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed “discounts” and “premiums,” respectively.

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 imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest.

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 portion of the monthly payment that is used to reduce the loan balance.

Principal limit

The present value of a house, given the elderly owner’s right to live there until death or voluntary move-out, under the FHA reverse mortgage program.

Private mortgage insurance

Mortgage insurance provided by private mortgage insurance companies, or PMIs.

Qualification

The process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay a loan. Qualification is sometimes referred to as “pre-qualification” because it is subject to verification of the information provided by the applicant. Qualification is short of approval because it does not take account of the credit history of the borrower. Qualified borrowers may ultimately be turned down because, while they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay.

Qualification rate

The interest rate used in calculating the initial mortgage payment in qualifying a borrower. The rate used in this calculation may or may not be the initial rate on the mortgage.

Qualification ratios

Requirements stipulated by the lender that the ratio of housing expense to borrower income, and housing expense plus other debt service to borrower income, cannot exceed specified maximums, e.g., 28% and 35%. These may reflect the maximums specified by Fannie Mae and Freddie Mac; they may also vary with the loan-value ratio and other factors.

Rate protection

Protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. This protection can take the form of a ” lock ” where the rate and points are frozen at their initial levels until the loan closes; or a ” float-down ” where the rates and points cannot rise from their initial levels but they can decline if market rates decline. In either case, the protection only runs for a specified period. If the loan is not closed within that period, the protection expires and the borrower will either have to accept the terms quoted by the lender on new loans at that time, or start the shopping process anew.

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.

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.

Right of rescission

The right of refinancing borrowers, under the Truth in Lending Act, to cancel the deal at no cost to themselves within 3 days of closing.

Scheduled mortgage payment

The amount the borrower is obliged to pay each period, including interest, principal, and mortgage insurance, under the terms of the mortgage contract. Paying less than the scheduled amount results in delinquency.

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.

Self-employed borrower

A borrower who must document income using tax returns rather than information provided by an employer.

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.

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 release premium

A payment made by the purchaser of a mortgage to the seller for the release of the servicing on the mortgage. It has no direct relevance to borrowers.

Servicing transfer

When one servicing agent is replaced by another.

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.

Silent second

A second mortgage offered at preferential (subsidized) terms to those who qualify. For example, a labor union may offer members who are first-time home buyers a silent second to finance closing costs or the down payment. The second might bear no interest, and might not be repayable until the first mortgage is repaid or the property is sold.

Simple interest mortgage

A mortgage on which interest is calculated daily based on the balance at the time of the last payment. The daily interest charge within the month is constant — interest is not charged on the interest charges of prior days.

Simple interest biweekly mortgage

A biweekly mortgage on which the biweekly payment is applied to the balance every two weeks, rather than held in an account as on a conventional biweekly.

Single file mortgage insurance

A type of mortgage insurance on which the lender pays the premium and prices it in the interest rate. Stated assets

A documentation requirement where the borrower discloses her assets but they are not verified by the lender.

Stated income

A documentation requirement where the lender verifies the source of the income but not the amount.

Streamlined refinancing

Refinancing that omits some of the standard risk control measures, and is therefore quicker and less costly.

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. Such borrowers pay more than prime borrowers, and are sometimes taken advantage of.

Sub-prime lender

A lender who specializes in lending to sub-prime borrowers.

Swing loan

Same as Bridge loan

Tangible Net Benefit

The net gain to a borrower from a refinancing, which some proposed legislation would make the responsibility of lenders.

Teaser rate

The initial interest rate on an ARM, when it is below the fully indexed rate .

Temporary buydown

A reduction in the mortgage payment in the early years of the loan in exchange for an upfront cash payment provided by the home buyer, the seller, or both.

Term

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 insurance

Insurance against loss arising from problems connected to the title to property.

Total interest payments

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.

Total expense ratio

The ratio of housing expense plus current debt service payments to borrower income, which is used (along with the housing expense ratio and other factors) in qualifying borrowers.

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.

Underage

Fees collected from a borrower by a loan officer that are lower than the target fees specified by the lender or mortgage broker who employs the loan officer.

Underwriting

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.

Underwriting requirements

The standards imposed by lenders in determining whether a borrower qualifies for a loan. These standards are more comprehensive than qualification requirements in that they include an evaluation of the borrower’s creditworthiness.

Upfront Mortgage Broker (UMB)

A mortgage broker who charges a set fee for services provided, established in writing at the outset of the transaction, and acts as the borrower’s agent in shopping for the best deal.

Upfront Mortgage Lender

A lender offering loans on the internet who provides mortgage shoppers with the information they need to make an informed decision before applying for a mortgage; and guarantees them fair treatment during the period after they apply through to closing.

VA mortgage

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. A VA buyer will net a Seller around $1200 less than a buyer with a conventional loan.

Waive escrows

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.

Workout assumption

The assumption of a mortgage, with permission of the lender, from a borrower unable to continue making the payments.

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.

80/10/10, 80/15/5, and 80/20/0 loan plans

Combination first mortgages for 80% of sale price or value and second mortgages for 10%, 15%, or 20%. The main purpose is to avoid mortgage insurance, which is required on first mortgages that exceed 80% of value.

12 MTA

An interest rate index that is used on some ARMs. It is the average of the most recent 12 monthly values of the Treasury One-Year Constant Maturity series.