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Addendum
A supplemental document for borrowers advising them of the characteristics of the
mortgage loan they are applying for. This document is often required when applying
for a government loan program.
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Adjustable Rate Mortgage (ARM)
A type of mortgage rate loan whose interest rate changes periodically up or down,
usually once or twice a year.
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Adjustment Period
The time between changes in your interest rate and/or monthly payment with a variable
rate loan. These intervals will vary depending on the type of loan.
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Amortization
The means by which a home loan is scheduled to be paid off, including interest and
principal, by a series of regular installment payments. Loans are typically amortized
over 30 years.
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Application Fee
A fee charged to cover the lender's out of pocket costs of processing your loan.
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Appraisal
A formal, written estimation by a qualified appraiser of the current value of a
home.
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Appraiser
A licensed professional who determines the market value for property values. They
offer an unbiased opinion based on current market data and the replacement value
of the property.
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Annual Percentage Rate (APR)
The cost of your credit expressed as a yearly rate. It takes into account interest,
points, and origination fees. Since all lenders are required to use the same guidelines
in determining APR, this is a good basis for comparing the cost of various loan
programs. For more information see about APR Information.
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Assumability/Assumption
A feature of the loan which permits you to transfer your mortgage and its specified
terms to the person(s) purchasing your home. Having an assumable loan could make
it easier for you to sell your home, since assumption of a loan usually involves
lower fees and/or qualifying standards for the new borrower than a new loan.
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Balloon
A short-term loan which has a fixed rate and smaller payments for short-term period
which is followed by one large payment for the balance of the principal.
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Bankruptcy
The legal process in which a person or firm declares the inability to pay debts.
Upon a court declaration of bankruptcy, a person or firm surrenders assets to a
court-appointed trustee, and is relieved from the payment of previous debts.
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Broker
An individual or company who does not fund loans himself, but facilitates the processing
or approval procedures for a customer. A broker generally uses a lender to approve
and close loans for customers rather than close and fund the loan himself or itself.
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Buy-Downs
Obtaining a lower interest rate (buying down the rate) by paying additional points
to the lender. The lower rate may apply to the full duration of the loan or just
the first few years. A buydown may be used to qualify a borrower who would not otherwise
qualify. This is because a buydown results in lower payments which are easier to
qualify for.
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Caps (interest)
A limit to the rise and fall of the interest rate on an adjustable rate
mortgage (ARM). A consumer safeguard.
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Caps (payment)
A limit to the amount the monthly payment can grow on an adjustable
rate mortgage (ARM). A consumer safeguard.
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Certificate
of Eligibility
A document which verifies the eligibility of veterans for a VA
guaranteed loan. This certificate is obtained through a local VA
office.
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Certificate of Title
A document showing ownership of record as reflected in public records.
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Closing Costs
One-time costs that must be paid before the loan can be "closed" or funded.
These costs may include such things as property taxes, insurance,
broker's fees, escrow fees, title insurance premium, deed recording fee,
title transfer tax, etc. Escrow instructions will stipulate
which portion of the fees are to be paid by buyer or seller. An estimate of closing
costs will be given to you by the lender within a few days after receiving your
loan application and is called a Good Faith Estimate.
All or a portion of your closing costs may be financed with some loan programs.
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Co-operative
Cooperative Housing is an apartment building or a group of dwellings owned by a
corporation, the stockholders of which are the residents of the dwellings. It is
operated for their benefit by their elected board of directors. In a cooperative,
the corporation or association owns title to the real estate. A resident purchases
stock in the corporation which entitles him to occupy a unit in the building or
property owned by the cooperative. While the resident does not own his unit, he
has an absolute right to occupy his unit for as long as he owns the stock.
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Collateral
The property pledged to secure a loan.
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Condominium
A single dwelling unit in a multi-unit structure in which each unit is individually
owned. The owner holds legal title to his or her unit and owns the common areas
and land jointly with other unit owners. An owner may sell, lease and encumber his
unit.
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Conforming
The loan program guidelines meet Fannie Mae and or Freddie Mac underwriting requirements.
This means the income, credit, and property requirements must meet nationally standardized
guidelines.
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Contributions
This is the amount other parties may contribute towards allowable closing costs,
repairs, and prepaid items for a borrower. Other lender restrictions may apply.
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Conventional
financing
Home loans made by a lender without government backing provided on FHA
and VA loans.
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Covenant
A written agreement which defines or restricts the use of a given property. This
may include, architectural restrictions or maintenance requirements.
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Credit Report
A report made by a private agency which states a borrower's credit history, current
accounts, and account balances.
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Creditors
Companies or individuals who loan money.
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Deed
A written document recorded with the state or local government office which conveys
real property.
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Default
Failure to legal obligations in a contract. In mortgage terms this generally means
to fail to make the required monthly payments.
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Disclosure
A document that discloses to the customer either all or one of the following: terms,
costs, adjustment period, and/or other characteristics
of the mortgage.
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Discount Points
Fees paid to a lender to reduce the interest rate.
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Down Payment
Usually between 10 and 20 percent, the down payment often demonstrates the borrower's
commitment to the property and to "make good" on the mortgage. A downpayment
is the difference between the purchase price of real estate property and the amount
that is financed by the mortgage.
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Earnest Money
A deposit made by a buyer of real estate towards the down payment to evidence good
faith. A buyer gives "earnest money" to the seller as part of the purchase
price to secure the transaction. This money is typically held by the real estate
broker or escrow company.
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Escrow
In the sale of property, a neutral third party "the escrow agent" is appointed
to act as custodian for documents and funds during the transfer from seller to buyer.
The funds can include taxes and mortgage insurance.
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Fannie Mae or FNMA (Federal National Mortgage
Association)
A secondary mortgage institution which holds the majority of home mortgages in the
U.S. FNMA buys conventional mortgages from lenders when they meet
conforming guidelines.
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Federal Housing Administration (FHA)
A government agency within the Department of Housing and Urban Development (HUD)
that administers many programs including housing subsidies and mortgage insurance.
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Fixed Rate Mortgage (FRM)
A loan where the rate of interest is fixed over the life of the loan. Payments on
a fully amortized fixed rate loan will not change.
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Foreclosure
Repossession of the Property
A legal proceeding by which a mortgage lender may claim title to mortgaged property
if the borrower fails to repay the loan.
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Federal Home Loan Mortgage Corporation (Freddie
Mac or FHLMC)
A private corporation chartered by Congress to make funds from the capital markets
available for home financing. It does this by operating a secondary market for home
mortgage loans, buying such mortgages from lenders and selling securities backed
by those mortgages.
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Free and Clear
This is a term used for a property which does not have any liens or debts recorded
on title. That means the owner does not have a mortgage.
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Government National Mortgage Association (Ginnie
Mae or GNMA)
The source of funds for FHA or VA residential
mortgages.
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Good Faith Estimate
(GFE)
A written estimate of closing costs associated with the financing transaction which
is to be provided by the lender within three days of application.
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Hazard Insurance
A form of insurance in which the insurance company protects the insured from specified
losses, for example fire, flood, or windstorm damage.
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Impound/Escrow
Account
This is an account set up by the lender to collect monies monthly for property tax,
hazard insurance, mortgage insurance, and paid on the borrowers behalf when the
applicable charge becomes due. Any unused funds are returned to the borrower upon
payoff of the loan.
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Index
Used by lenders to calculate the interest adjustments on variable rate loans. Most
programs use either the 11th District Cost of Funds or the 1-year Treasury Rate
as the index. Some indexes are more volatile than others. This can affect the adjustments
in interest rates and subsequently monthly payments.
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Initial rate
A fixed interest rate charged for the first six or twelve months of a variable rate
loan. Normally this rate will be lower than prevailing market rates.
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Interest Rate Cap
A safeguard built into a variable rate loan to protect the consumer against dramatic
increases in the rate of interest and, consequently, in the monthly payment. For
example, a variable rate loan may have a two percentage point limit per year on
the amount of increase or decrease, as well as a five percentage point limit (increase
or decrease) over the life of the loan.
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Jumbo Loan
A loan that is larger than the conforming limits established by Fannie Mae or Freddie
Mac.
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Lien
A claim against the property for the payment of a debt, judgment, mortgage or taxes.
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Loan to Value (LTV)
This is expressed as a percentage figure of the lower of the sales price or appraisal
divided by the loan amount. If a purchase loan reflects 80% LTV that means the borrower
paid a 20% down payment.
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Margin (spread)
An amount expressed as a percentage which is added to an index to determine the
interest rate on a variable rate loan (e.g. index rate + 2% margin). Different loan
programs may use different margins and indexes. With a variable rate loan, this
margin (spread) generally does not change once it is established in your documents.
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Negative Amortization
A situation may occur on variable rate loans which have the "payment cap"
features. Because your monthly payment is capped, your adjusted payment amount may,
at times, be insufficient to pay the actual amount of interest due. The unpaid (deferred)
interest would the be added to your loan balance. This increase in your loan balance
is known as "negative amortization." A borrower usually has the option
of increasing the monthly payment in any given month to avoid negative amortization
or making a lump sum payment to pay off any accrued negative amortization.
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Origination
Fee or Points
The charge by a lender or broker connected with originating a loan. This is different
from discount points which are used to buy down the rate of interest.
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Payment Cap
Limits the amount by which the payment on a variable rate loan can increase or decrease
at each payment adjustment interval (typically one year). A payment cap ensures
that the payment changes occur at a gradual pace.
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Principal
The amount borrowed or the remaining unpaid balance on a loan. It may also be used
to describe the part of a monthly payment that reduces the remaining balance of
a mortgage.
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Principal-Interest-Taxes-Insurance (PITI)
The total of your monthly home payment, including taxes and insurance.
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Private Mortgage Insurance (PMI)
Insurance which guarantees the lender payment of the balance of the loan not covered
by the sale of the property in the event of foreclosure. PMI is normally required
on conventional loans where the LTV is greater than 80% and will
be included as part of your monthly payment.
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Points and Fees
A point is a loan charge equal to one percent of the principal amount of the loan.
Points are payable at the close of escrow and may be paid by the buyer or seller,
or split between them. (E.g. Two points charged on a $100,000 loan would equal $2,000.)
In addition, a flat dollar amount fee may also be charged. Under some lending programs,
a buyer may be allowed to include these points and fees as part of the total amount
financed.
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Prepayment Penalty
A fee for paying off the principal amount of the loan prior to the pre-agreed term.
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Planned Unit Development (PUD)
A type of development that provides more planning flexibility than traditional zoning.
Buildings are often clustered on smaller lots, permitting the presence of natural
features in common areas or park areas. Individual properties are owned in fee with
the common areas owned jointly or deeded to the local government.
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Rate Lock
Assures that the rate in effect on the date you submit your loan application, during
loan processing, or at the time of final approval will be the final rate on your
loan when funded. This assurance usually expires after a specified period of time.
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Ratios
A ratio used as an underwriting guideline to determine the amount of debt a borrower
may have compared to their income (e.g. Borrower's house payment divided by gross
income). A ratio may be used to calculate the total allowable debt or the monthly
housing portion. It is expressed as a percent.
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Refinance
Negotiation of a new loan in order to pay off an existing loan. Homes are usually
refinanced in order to (a) take advantage of lower interest rates, (b) switch from
one loan type to another (e.g. from variable to fixed), or (c) generate cash from
built-up equity. Since refinancing generally involves new loans costs, these costs
must be weighed against the benefits to be gained.
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Reserves
This is the amount of liquid assets that the lender needs to verify in the borrower's
account above and beyond the funds required to close the transaction. This amount
is expressed as a multiple of the total monthly payment (i.e. if PITI
is $1200 per month, 2 months reserves would be $2400.) Reserves remain in the borrowers
account.
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Self Employed
A borrower is typically considered self employed if they own 25% or more of the
company by which they are employed.
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Term
The number of years before your loan is scheduled to be paid off. 15-year and 30-year
terms are most common.
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Title Insurance
An insurance policy issued by a title insurance company ensuring that the title
will reflect only liens allowed by the lender at closing. Liens that need to be
cleared prior to closing may include other mortgages, tax liens, and judgments.
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Truth and Lending Disclosure
A disclosure required by Federal law (The Truth in Lending Act). Discloses the terms
of a mortgage, using required terminology, such as the Annual Percentage Rate (APR).
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Underwriting
Standards established by a lender to determine whether a borrower qualifies for
a loan.
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Veterans Administration (VA)
A government agency providing guarantees for lenders on approved loans to qualifying
veterans.
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Verification
of Documents
Most loan programs require the mortgage company to verify information on loan applications
such as the borrower's employment, bank account balances, and credit references.
Often, these verifications are referred to as VOE's (verification of employment),
VOD's (verification of deposits) and VOM's (verification of mortgage).
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