A

Acceleration clause
A provision in a mortgage agreement that states the whole debt becomes immediately due and payable if a payment is missed or any other mortgage provision is violated.

Adjustable rate mortgage (ARM)
A mortgage tied to an index that adjusts based on changes in the economy.

Adjustment period
The period during which an ARM adjusts (e.g., six months, one year, three years, etc.).

A la carte real estate services
Paying for and receiving professional real estate services one by one rather than via a full-service “bundled” approach (Example: As a seller, paying a real estate agent to solely write up a sales agreement and negotiate for you versus listing your property with him/her.)

Alienation clause
A provision in a document which can either give or forbid a person the right to transfer the property. See also due-on-sale.

Amortization
Paying a debt through predetermined periodic payments, including principal and interest.

Annual percentage rate (APR)
The effective rate of interest per year for a loan. This rate is typically higher than the note rate because it takes into account closing costs (interest, points and fees). It provides a good basis for comparing loans, but keep in mind, the APR calculation assumes the loan is kept for the full term. In reality, most people sell or refinance their home well before their loan expires.

Appraisal
An expert estimate of the value of real estate as of a given date using one of three methods: Market Value Approach, Income Approach and Replacement Cost Approach. An appraisal should not be confused with a comparative market analysis (market valuation), which shows recent comparable sales of properties.

Assignment
The transfer of rights to pay an obligation from one party to another, with the original party remaining secondarily liable for the debt, should the second party default.

Assumption
To take over one’s obligation under an existing agreement.

Automated/desktop underwriting
Using software programs and online credit reports to evaluate the repayment capacity of the borrower; also to reference programs underwritten using FNMA’s Desktop Underwriter® loan processing system.

B

Balloon payment
A principal sum coming due at a predetermined time (may also contain payment of accrued interest).

Bankruptcy
A person adjudged insolvent by a court, his non-exempt property being transferred to a trustee and administered for the benefit of his creditors.

Biweekly mortgage
A mortgage under which a payment is due every two weeks (one-half of a monthly payment), giving the benefit of thirteen full payments per year; This allows a thirty-year loan to retire in approximately twenty-two years (depending on the rate of interest charged).

Buydown, permanent
Prepaid interest that brings the note (loan) rate on the loan down to a lower, permanent rate.

Buydown, temporary
Prepaid interest that temporarily lowers the note (loan) rate on the mortgage, allowing the buyer to more readily qualify and to increase the interest rate over a predetermined time. (Example: the 3-2-1 plan – 3 percent lower the first year, 2 percent the second, and 1 percent the third.)

Buyer’s market
Real estate market condition when there are more properties available than there are qualified buyers, thereby giving buyers potentially more negotiating power over sellers.

C

Cap
A ceiling, usually found on ARM loans; can be expressed as per period (e.g., annual, or lifetime, meaning or the entire loan term).

Cash reserves
The amount of buyer’s liquid cash remaining after making the down payment and paying closing costs. Two months of PITI is often required by the lender.

Closing conditions
Stipulations or documentation requirements that are not vital for loan approval but must be satisfied in order to close the transaction, e.g., proof of identification, proof of homeowner's insurance.

Closing/settlement agent
A person designated to close the sale of a piece of property. This can be an escrow officer, a title company representative or an attorney.

Closing/settlement costs
One-time charges paid by buyer and seller on the day the property changes hands. On average, closing fees run 2% – 6% and are normally paid by cashier’s check at closing. (In addition to the down payment, costs can include fees for points, origination, inspection, document preparation, escrow, title insurance, prorated items, and attorney and lender charges.)

Collateral/collateral agreement
Means “additional”, but is generally termed to mean security for a debt.

Commitment period
The period during which a loan approval is valid.

Compensating factors
Additional positive factors a lender looks for in order to strengthen a buyer’s loan qualifying position (e.g., a strong ability to build savings).

Comparative market analysis (CMA)
The approach used to determine the market value of a property by analyzing what similar properties with similar locations and similar amenities have recently sold for, as compared to the subject property.

Consumer credit counseling service
A nonprofit organization with locations throughout the United States, designed to help consumers analyze income and debt and orchestrate repayment programs in an effort to clean up and/or reestablish credit.

Contract for deed (a.k.a. installment sales and land sales contract)
A document used to secure real property when financed by the seller; contains the full agreement between the parties, including purchase price, terms of payment, and any additional agreements.

Conventional loan
A loan that is not insured or guaranteed by the Government. Conventional loans are underwritten by banks, savings and loan institutions or other mortgage companies.

Convertible ARM
An adjustable-rate mortgage containing a provision allowing for the rate to become fixed during a certain period (e.g., between months 13 and 60 of the loan term).

Counter offer
A follow-up offer made after the offeror has made an initial offer; a counteroffer is a brand new offer that the offeree is under no obligation to accept and that the offeror can withdraw at an time prior to notification of the offeree’s acceptance.

Credit bureau
An organization that collects credit information and organizes it into a credit report.

Credit report
A credit report lists a borrower’s employment information, creditors, balances owed, monthly payments, payment history and public records such as bankruptcies, foreclosures and judgments.

1) In-file report: Also called a consumer credit report. A report obtained by a consumer from a credit bureau.
2) Full-factual/mortgage: Most lenders use this type of report to qualify borrowers. This type of credit report involves telephone verification of the applicant’s employment and a public records check for judgments or liens against the borrower. It combines information from two or more national credit reporting bureaus and includes a credit score.
3) Merged credit report: Combines information from two or more national credit reporting bureaus and includes a credit score.

Credit scoring
Electronically giving a numerical weighting to various financial factors in the borrower’s credit in order to determine the risk of lending to that borrower.

D

Debt assumption letter/assignment of debt
The formal transfer of debt from one person to another, backed by a formal contract of assumption, signed by the parties. (Usually done to reduce the amount of a person’s long-term debt to ease loan qualifying.)

Debt ratio
The comparison of a buyer’s total long-term debt (housing expense plus other debt) to his or her gross income, expressed as a percentage. (Divide total long term debt by gross monthly income.) See also housing expense ratio.

Deed
A document of ownership transferred from seller to buyer at closing.

Deed of trust (trust deed)
A document used in some states to secure the collateral in financing the property; title is transferred to the trustee, with payments made to the beneficiary by the trustor (grantor in some states).

Default
Failure to make payments on a loan.

Discount points
A point is equal to one percent of the loan amount. Points are used to increase the lender’s yield on the loan (e.g., to bridge the financial gap between what a lender could make on a conventional loan versus a lower-rate governmental loan like VA or FHA).

Discounting, seller
Reducing the sales price in lieu of paying points or other fees from the seller’s gross price.

Dual contracts
Double contracts on the same property by the same buyer. Usually refers to an illegal second contract requesting a higher loan amount from a lender, even though the first contract bears the agreed-upon price between buyer and seller.

Due-on-sale clause
A provision in a note or mortgage that calls for payment of the entire debt at mortgagee's option upon sale of the mortgaged property. Such clauses prevent subsequent purchasers from assuming existing loans. Also see alienation clause.

E

Earnest money
Money (also called a deposit) to show good faith, which accompanies an offer to purchase a property. Usually held in an escrow account and applied toward the down payment at closing.

Equity
The difference between what is owed on the property and what it could sell for (less any costs of sale).

Equity loans
Tapping into an owner’s equity, with the property used as the collateral.

Escrow
An impartial holding by a third party of documents and/or funds pertinent to the sale and transfer of real estate; also the term used to describe the long-term holding of documents, such as with seller financing. Escrows are often placed with title companies, attorneys, or financial institutions. Also called long-term escrow or escrow collection.

Escrow/impound account
In mortgage transactions: that portion of a borrower's monthly payments held by the lender or servicer in an account to pay for taxes, hazard insurance, mortgage insurance, special assessments and other items as they become due. In real estate sales transactions: funds paid by one party to a third party (an escrow agent) to hold until the occurrence of a specified event, after which the funds are released to a designated individual. Earnest money is often placed in escrow.

F

Fannie Mae (Federal National Mortgage Association - FNMA)
A privately owned part of the secondary market, particularly used to purchase loans from lenders in the primary market; purchases conventional, FHA and VA loans.

Fannie Mae Foundation
A nonprofit foundation affiliated with FNMA, designed to educate consumers on home affordability and home buying options.

Federal Housing Administration (FHA)
The FHA is part of the federal government’s Department of Housing and Urban Development. It exists to underwrite insured loans made by lenders in order to provide economical housing to consumers.

Fixed rate mortgage (FRM)
A fixed-rate mortgage is a loan with a specific interest rate for the life of the loan.

FICO
The Fair, Isaac and Company credit scoring system used by many lenders to determine a borrower’s ability to repay a mortgage; uses a scoring range of 450 to 850 – the lower the score, the higher the risk.

Float downs
Provisions in the mortgage rate lock-in agreement that allow the consumer to access a lower rate of interest (and lock it in) should interest rates drop during the prescribed lock-in period.

Foreclosure
A proceeding, in or out of court, to extinguish one’s rights in a property, and pay off all outstanding debts via a sale/transfer of the property.

Freddie Mac (Federal Home Loan Mortgage Corporation - FHLMC)
Part of the secondary market, particularly used to purchase loans from lenders within the Federal Home Loan Bank Board.

Fully indexed rate
The maximum interest rate an ARM loan can reach at the first adjustment.

G

Gift letter
A letter from a relative (or party with whom a strong relationship has been established– for some loans) stating that an amount will be gifted to the buyer, and that said amount is not to be repaid.

Good faith estimate
Under RESPA, lenders are required to give potential borrowers a written Good Faith Estimate of closing costs within three days of an application submission.

Ginnie Mae (Government National Mortgage Association – GNMA)
A governmental division of the secondary market that primarily recycles VA and FHA mortgages, particularly those with low or no down payments.

Graduated payment mortgage (GPM)
A type of conventional loan containing a fixed rate for the life of the loan, but graduates, or increases the payment during a certain period of the loan.

Growing equity mortgage (GEM)
The GEM has fixed interest for the life of the loan; but payments increase 3 percent, 5 percent or 7.5 percent (depending on the program) for a period during the loan (usually not to exceed ten years), with all payment increases being applied to directly reduce the principal. Depending on interest rates, thirty-year GEM loans typically pay off between fifteen and eighteen years.

H

Hazard/homeowner insurance
Required insurance coverage equal to at least the amount of the mortgage loan that protects a property against damages that might materially affect its value.

Hybrid ARM (a.k.a. intermediate ARM and fixed ARM)
Common hybrids are 3/1, 5/1, 7/1 and 10/1. Hybrid ARMs have fixed interest rates for the first respective number of years (e.g., 3, 5, 7, or 10) then convert to a traditional ARM and adjust annually thereafter for the life of the loan (payments are amortized over 30 years). The initial fixed rate is typically lower than a 30-year fixed loan.

Housing expense ratio (a.k.a. front-end ratio)
The comparison of a buyer’s housing costs to his or her gross income. (Divide housing expense -- PITI -- by gross monthly income.) This percentage can also vary based on the loan-to-value ratio of the loan. See also debt ratio.

HUD-1 settlement statement
A RESPA statement that outlines what parties in the transaction are paying what costs and from which sources. It also details how the money gets paid out. This document is usually presented and signed at closing, although it may be available for review prior to close.

I

Income qualifications
The amount of income required by the lender for loan qualifying.

Index
A financial indicator used to measure inflation, which is the basis for the ARM loan. Various sources exist including treasury securities, treasury bills, 11th District cost of funds, and the index of the Federal Home Loan Bank Board. The index, plus the margin, becomes the interest rate in the ARM.

Inflation
An increase in value; most often used as an indicator of the economy. When inflation is high, real estate typically appreciates at a faster rate.

Initial interest rate
The introductory interest rate on a loan; signals that there may be rate adjustments later in the loan. Installment sales contract –

Interest only
Payments received are applied only to accrued interest on the loan; therefore, there is no principal reduction.

Interest rate cap
The maximum amount of interest that can be charged on an ARM loan. Can be expressed in terms of annual or lifetime figures.