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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.
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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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