Mortgage Glossary  

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Acceleration clause

A provision of the note that gives the lender the right to demand repayment of the entire balance if the borrower violates a contractual requirement, or is found to have provided false information.

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.

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.

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.

Amortization

The repayment of principal from mortgage payments that exceed the interest due. The payment less the interest equals amortization -- which is the same as the reduction in the loan balance.

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.

Application

Solicitation of a loan by a borrower through the provision of a written request that includes information about the borrower, the property and the requested loan. 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 be refundable if the lender declines the loan.

Appraisal

A judgment of the value of a property by an expert -- an "appraiser".

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.

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.

Balloon

The loan balance remaining at the time the loan contract calls for full repayment.

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.

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. See

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.

Builder-financed construction

Having the builder finance the construction.

Cap

A pricing option exercised by the borrower at the time of the application wherein the rates and points prevailing at the time cannot rise if market rates rise, but they can decline if market rates decline. Also called a "float-down". A cap costs the borrower more than a lock because it is more costly to the lender. Caps vary widely in terms of how often the borrower can exercise (usually only once), and exactly when the borrower can exercise.

Cash-Out refinancing

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 costs

Costs that the borrower must pay at the time of closing, in addition to the down payment. Also referred to as settlement costs.

COFI

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

COSI

Cost of savings index. Another interest rate index 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.

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.

Contract knavery

Sneaking provisions into a loan contract with an uninformed or gullible borrower that severely disadvantage the borrower.

Correspondent

A lender who delivers loans to a wholesale lender against prior price commitments the wholesaler has made to the correspondent. The commitment protects the correspondent against pipeline risk.

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 on an 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.

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 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 purchase price of the property and the loan amount, expressed in dollars, or as a percentage of the price. For example, if the house sells for $100,000 and the loan is for $80,000, the down payment is $20,000 or 20%.

Dual apper

A borrower who submits applications through two loan providers.

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. A mortgage containing a due-on-sale clause is not an assumable mortgage.

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.

Equity

The difference between the value of a home and the outstanding loan balance 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.

Fallout

Loan applications that are withdrawn by borrowers, usually because they have found a better deal.

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. Because of their massive size, the agencies have had a major influence on the evolution of underwriting practices.

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.

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

The 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 is specified in the loan contract and remains 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 lockthe 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

See Cap.

Foreclosure

The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults.

Freddie Mac

See Fannie Mae

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. ARMs with a payment increase cap for example, may be less than fully amortizing following a large rate increase.

Fully indexed interest rate

The current index value plus the margin on an ARM. Most ARMs have initial interest rates well 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.

Generic Prices

Prices that assume a more or less standardized set of transaction characteristics. Generic prices are distinguished from transaction specific prices, which pertain to the characteristics of a specific transaction.

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 list of settlement charges that the lender is obliged to provide the borrower within three business days of receiving the loan application.

Grace period

The period after the payment due date during which the borrower can pay without being hit for late fees.

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.

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.

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.

Homebuyer protection plan

A plan purporting to protect FHA homebuyers against property defects.

Homeowner's equity

See equity.

Home equity loan

A second mortgage, structured either as a lump sum loan similar to a first mortgage, or as a line of credit.

Housing bank

A government-owned or affiliated housing lender. With minor exceptions, government in the US has never loaned directly to consumers, but housing banks are widespread in many developing countries.

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 ratioand other factors) in qualifying borrowers.

Initial interest rate

The interest rate that is fixed for some specified number of months at the beginning of the life of a mortgage. On an ARM, the initial rate is sometimes referred to as a "teaser" because it is below the fully indexed interest rate.

Initial rate period

The number of months for which the initial rate holds. On ARMs this period can range from 1 month to 10 years, but on an FRM the initial rate holds for the life of the loan.

Investor

A borrower who owns or purchases a property as an investment rather than as a residence.

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. The formula is shown in Formulas. 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 portion of the mortgage payment which goes toward interest on the loan, expressed in dollars. It is computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by 12. It is the same as interest payment except when the total 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 except when the total mortgage payment is less than the interest due, in which case the interest payment is less than the interest due; the difference is added to the balance and constitutes negative amortization.

Interest rate

The rate charged the borrower each period, by custom quoted on an annual basis. A rate of 6%, for example, means a rate of 1/2% per month. For a monthly payment mortgage the rate divided by 12 is multiplied by the balance at the end of the preceding month to determine the monthly interest due.

Interest rate adjustment period

The frequency of rate adjustments on an ARM after the initial rate periodis over. The rate adjustment period is sometimes but not always the same as the initial rate period. As an example, using common terminology, 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.

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.

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.

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.

Late fees

Fees that lenders are entitled to collect from borrowers who don't pay within the grace period. Most mortgage notes offer borrowers a 15-day grace period, with a late charge of 5% on payments received after the 16^th

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.

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.

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 provider

A lender or a mortgage broker.

Loan-to-value ratio

The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV.

Loan "flipping"

The process of raising cash periodically through successive cash-out refinancings. It is very costly.

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 letter 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 jumper

A borrower, usually refinancing rather than purchasing a home, who allows a lock to expire when interest rates go down in order to lock again at the lower rate.

Lock period

The number of days for which any lock or cap holds. Ordinarily, the longer the period, the higher the price to the borrower.

Mandatory disclosure

The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure.

Margin

The amount added to the interest rate index, ranging generally from 2 to 3 percentage points, to obtain the fully indexed interest rateon an ARM.

Market niche

A particular combination of loan, borrower and property characteristics that lenders use in setting prices and underwriting requirements. These characteristics are believed to affect the default risk or cost of the loan. As examples, borrowers who don't intend to occupy the house they purchase pay more than those who do, and borrowers who refinance only the balance on their existing loan pay less than those who take "cash out".

Maturity

The period until the last payment is due.

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.

Maximum loan to value ratio

The maximum allowable loan-to-value ratio on the selected loan program.

Maximum lock

The maximum period for which the lender will provide a rate/point commitment 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.

Minimum down payment

The minimum allowable ratio of down payment to sale price on any program. If the minimum is 10%, for example, it means that you must make a down payment of at least $10,000 on a $100,000 house, or $20,000 on a $200,000 house. For articles on down payment, see Down Payment.

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 terms of the loan are contained in the note.

Mortgage banker

Same as mortgage company.

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

Mortgage insurance premium

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

Mortgage payment

The monthly payment of principal and interest made by the borrower.

Mortgage price

The interest rate, points and fees paid to the lender and/or mortgage broker. On ARMs, the price also includes the fully indexed rate and the maximum rate.

Mortgage program

A bundle of characteristics of a mortgage including 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 of Freddie Mac) or "non-conforming".

Negative amortization

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.

Negative Points

Points paid by a lender for a loan with a rate above the rate on a zero point loan. For example, a wholesaler quotes the following prices to a mortgage broker. 8%/0 points, 7.5%/4 points, 8.75%/-3 points. On mortgage web sites, negative points are usually referred to as "rebates" because they are used to reduce a borrower's settlement costs. When negative points are retained by a mortgage broker, they are called a "yield spread premium".

No change scenario

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

No-cost refinance

A refinancing in which all costs are borne by the lender or mortgage broker.

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 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

Origination fee

An upfront fee charged by some lenders, 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.

Overage

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

Partial prepayment

Prepayment of part of the loan balance.

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 increase cap

The maximum percentage increase in the payment on an ARM at a payment adjustment date. A 7.5% cap is common.

Payment decrease cap

The maximum percentage decrease in the payment on an ARM at a payment adjustment date.

Payment rate

The interest rate used to calculate the mortgage payment, which is usually but not necessarily the interest rate.

Payoff month

The month in which the loan balance is paid down to zero. It may or may not be the term.

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 loan 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.

Processing

Compiling and maintaining the file of information about the 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.

Qualification

The process of determining whether a customer has enough cash and sufficient income to meet the qualification requirements set by the lender on a requested loan. It is sometimes referred to as "pre-qualification" because it is subject to verification of the information provided by the applicant. Qualification is short of approvalbecause 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 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.

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. On ARMs, for example, the borrower may be qualified at the fully indexed rate rather than the initial rate.

Qualification requirements

Standards imposed by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum loan-to-value ratios, and so on. Less comprehensive than underwriting requirements, which take account of the borrower's credit record.

Rate

See Interest Rate.

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/point options

All the combinations of interest rate and points that are offered on a particular program. On an ARM, rates and points may also vary with the margin and interest rate ceiling.

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 "cap" 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.

Rebate

See Negative points.

Recast payment

Raising the mortgage paymentto the fully amortizing payment. Periodic recasts are sometimes used on ARMs in lieu of negative amortization caps.

Refinance

Replacing an existing loan with a new loan. 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. Or it may be done to raise cash, as an alternative to a home equity loan.

Required cash

The total cash required of the home buyer to close the transaction, including down payment, points and fixed dollar charges paid to the lender, any portion of the mortgage insurance premium that is paid up-front, and other settlement charges associated with the transaction such as title insurance, taxes, etc.

Retail lender

A lender who offers mortgage loans directly to the public. As distinct from a wholesale lender who operates through mortgage brokers and correspondents.

Reverse annuity

A transaction on which the lender makes periodic payments to an elderly home owner and is repaid on the home owner's death.

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.

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.

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.

Settlement Costs

Costs that the borrower must pay at the time of closing, in addition to the down payment.

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.

Servicing transfer

When one servicing agent is replaced by another.

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

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

Standard mortgage

An FRM with a single rate and level payments that fully amortizes over its term.

Stated income

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

Stated assets

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

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.

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. As an illustration, a 2-1 buydown on an 8% loan results in a payment in year 1 calculated at 6%, in year two the payment is calculated at 7%, and in year 3 and thereafter it is calculated at 8%. The upfront cash payment must be large enough to cover the difference between the reduced payments made in the first two years by the borrower and the regular payment calculated at 8% received by the lender.

Temporary Lender

A lender that sells the loans it originates, as opposed to a portfolio lender who holds them.

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.

Total housing expense

Housing expense plus current debt service payments.

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.

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.

VA mortgage

A mortgage on which the lender is insured against loss by the Veterans Administration. The major advantage of a VA mortgage is that the required down payment is very low, and maximum allowable loan amounts are higher than on FHA loans, but only veterans are eligible.

Waive escrows

The borrower has the right 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.

Wholesale lender

A lender who provides loans through mortgage brokers or correspondents. mortgage broker or correspondent initiates the transaction, takes the borrower's application, and processes the loan. As distinct from a Retail lender.

Worst case scenario

The assumption that the index to which the rate on an ARM is tied rises to 100% in the second month and remains there. The resulting rise in the interest rate will depend on the interest rate increase cap and the interest rate ceiling.

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.

Contact Alliance Lending Services, Inc. by:
phone: (504) 834-8771
fax: (504) 834-8774
Email

Alliance Lending Services, Inc.
4444 York Street
Suite 101
Metairie, Louisiana 70001