Glossary of Terms
7/23 and 5/25 Mortgages: Mortgages with a one-time rate adjustment after
seven years and five years, respectively.
3/1, 5/1, 7/1 and 10/1 ARMs: Adjustable-rate mortgages in which the rate is fixed
for three-year, five-year, seven-year and 10-year periods, respectively, but may
adjust annually after that.
Acceleration: The right of the mortgagee (lender) to demand the immediate
repayment of the mortgage loan balance upon the default of the mortgager
(borrower), or by using the right vested in the due-on-sale clause.
Adjustable-Rate Mortgage (ARM): A loan on which the monthly payments will
increase or decrease over time, based on changes in the ARMs interest rate
index. ARM payments typically are adjusted every six months or once a year.
Common indices to which ARMs are tied include the 11th District Cost of Funds,
one-year T-note and six-month T-bill.
Adjusted Basis: The cost of a property plus the value of any capital expenditure
for improvements to the property minus any depreciation taken.
Adjustment Date: The date that the interest rate changes on an adjustable-rate
Adjustment Interval: The interval between changes on an adjustable-rate
mortgage in the interest rate and/or monthly payment; typically one, three or five
years depending on the index.
Adjustment Period: The period elapsing between adjustment dates for an
Affordability Analysis: An analysis of a buyer’s ability to afford the purchase of
a home. Reviews income, liabilities and available funds. Considers the type of
mortgage you plan to use, the area where you want to purchase a home and the
probable closing costs.
Amortization: The gradual repayment of a mortgage through monthly (e.g.
installment) payments. In the early years of a mortgage, most of the monthly
payment goes toward interest. Later in the mortgage, more of the payment goes
toward reducing the loans principal balance.
Amortization Term: The length of time required to amortize the mortgage loan
expressed as a number of months. For example, 360 months is the amortization
term for a 30-year fixed-rate mortgage.
Annual Percentage Rate (APR): The annual cost of a mortgage, including
interest, loan fees and other costs, stated as a percentage of the loan amount.
Appraisal/Appraised Value: An opinion of the market value of a home
expressed by a real estate appraiser.
Arbitration: The term used to describe a form of dispute resolution that occurs
outside of the court system, usually by private agreement between parties.
Basically, arbitration is a dispute resolution system where the parties submit
arguments and evidence to a neutral person, known as the arbitrator, who then
renders a decision, called an award, based upon the evidence and arguments
Assessment: A local tax levied against a property for a specific community
purpose, such as a sewer or streetlights.
Assignment: The transfer of a contractual interest or obligation from one person
to another such as, but not limited to, a transfer of a mortgage obligation.
Assignment is a legal term used to transfer interest from one contract to another.
Assumable Mortgage: An assumable mortgage can be transferred from the
seller to the new buyer. Generally requires a credit review of the new borrower
and lenders may charge a fee for the assumption. If a mortgage contains a due-
on-sale clause, a new buyer may not assume the mortgage.
Assumption: The agreement between buyer and seller where the buyer takes
over the payments on an existing mortgage from the seller. Assuming a loan can
usually save the buyer money by acquiring an existing mortgage debt, instead of
obtaining a new mortgage where closing costs and market-rate interest charges
Assumption Fee: The fee paid to a lender (usually by the purchaser of real
property) when an assumption takes place.
Balloon Mortgage: A loan that is amortized for a longer period than the term of
the loan. Usually this refers to a 30-year amortization and a five-year term. At the
end of the term of the loan, the remaining outstanding principal on the loan is
Balloon Payment: The final lump sum paid at the maturity date of a balloon
Biweekly Payment Mortgage: A plan to make mortgage payments every two
weeks (instead of the standard monthly payment schedule). The 26 (or 27)
biweekly payments are each equal to one-half of the monthly payment required if
the loan were a standard 30-year fixed-rate mortgage. The result for the borrower
is a substantial saving in interest.
Blanket Mortgage: A mortgage covering at least two pieces of real estate as
security for the same mortgage.
Borrower (Mortgager): One who applies for and receives a loan in the form of a
mortgage with the intention of repaying the loan in full.
Bridge Loan: A second trust for which the borrowers present home is collateral,
allowing the proceeds to be used to close on a new house before the present
home is sold. Also known as a “swing loan.”
Broker: An individual who assists with arranging funding or negotiating contracts
for a client but who does not loan the money himself or herself. Brokers usually
charge a fee or receive a commission for their services.
Buy-down: When the lender and/or the homebuilder subsidize a mortgage by
lowering the interest rate during the first few years of the loan. While the
payments are initially low, they will increase when the subsidy expires.
Caps: Provisions of an adjustable-rate mortgage limiting how much the interest
rate can change at each adjustment period (e.g., every six months, once a year)
or over the life of the loan (rate cap). A payment cap limits how much the
payment due on the loan can increase or decrease.
Cash Flow: The amount of cash derived over a certain period of time from an
income-producing property. The cash flow should be large enough to pay the
expenses of the income-producing property (mortgage payment, maintenance,
Certificate of Eligibility: The document given to qualified veterans entitling them
to VA-guaranteed loans for homes, businesses and mobile homes. Certificates of
eligibility may be obtained by sending form DD-214 (Separation Paper) to the
local Veterans Affairs office with VA form 1880 (request for Certificate of
Certificate of Reasonable Value (CRV): An appraisal issued by Veterans
Affairs showing the property’s current market value.
Certificate of Veteran Status: The document given to veterans or reservists
who have served 90 days of continuous active duty (including training time). It
may be obtained by sending DD 214 to the local Veterans Affairs office with form
26-8261a (request for certificate of veteran status; this document enables
veterans to obtain lower down payments on certain FHA-insured loans).
Change Frequency: The frequency (in months) of payment and/or interest rate
changes on an adjustable-rate mortgage.
Closing: The meeting at which a home sale is finalized. The buyer signs the
mortgage, pays closing costs and receives title to the home. The seller pays
closing costs and receives the net proceeds from the home sale.
Closing Costs: Expenses in addition to the price of the home incurred by buyers
and sellers when a home is sold. Common closing costs include escrow fees,
title insurance fees, document recording fees and real estate commissions.
COFI: An adjustable-rate mortgage with a rate that adjusts based on a cost-of-
funds index, often the 11th District Cost of Funds.
Construction Loan: A short-term interim loan to pay for the construction of
buildings or homes. These are usually designed to provide periodic
disbursements to the builder as he or she progresses.
Consumer Reporting Agency (or Bureau): An organization that handles the
preparation of reports used by lenders to determine a potential borrowers credit
history. The agency gets data for these reports from a credit repository and other
Contingency: A condition that must be fulfilled before a contract is binding.
Contract Sale or Deed: A contract between purchaser and seller of real estate
to convey title after certain conditions have been met. It is a form of installment
Conventional Mortgage: A loan not guaranteed, insured or made by the federal
or state government.
Conversion Clause: A provision in an adjustable-rate mortgage allowing the
loan to be converted to a fixed-rate mortgage at some point during the term.
Usually conversion is allowed at the end of the first adjustment period. The
conversion feature may cost extra.
Counteroffer: An offer in response to an original offer.
Credit Report: A report documenting the credit history and current status of a
borrowers credit standing.
Credit Risk Score: A credit risk score is a statistical summary of the information
contained in a consumers credit report. The most well known type of credit risk
score is the Fair, Isaac or FICO score. This form of credit scoring is a
mathematical summary calculation that assigns numerical values to various
pieces of information in the credit report. The overall credit risk score is highly
relative in the credit underwriting process for a mortgage loan.
Default: Failure to meet legal obligations in a contract, specifically, failure to
make the monthly payments on a mortgage.
Deferred Interest: When a mortgage is written with a monthly payment that is
less than required to satisfy the note rate, the unpaid interest is deferred by
adding it to the loan balance.
Delinquency: Failure to make payments on time. This can lead to foreclosure.
Department of Veterans Affairs (VA): An independent agency of the federal
government that guarantees long-term, low- or no-down payment mortgages to
Debt-To-Income (DTI) Ratio: The ratio of monthly debt payments to monthly
gross income. Lenders use a housing DTI ratio (house payment divided by
monthly income) and a total DTI ratio (total debt payments including the house
payment divided by monthly income) to determine whether a borrowers income
qualifies him or her for a mortgage.
Deed: A legal document conveying ownership of property.
Down Payment: The portion of the homes purchase price the buyer pays in
Due-on-Sale-Clause: A provision in a mortgage or deed of trust that allows the
lender to demand immediate payment of the balance of the mortgage if the
mortgage holder sells the home.
Earnest Money: The deposit given by a buyer to a seller to show that the buyer
is serious about purchasing the home. Earnest money usually is refundable to
home buyers in the event a contingency of the sales contract cannot be met.
Entitlement: The Veterans Affairs home loan benefit (i.e., entitlement for a VA-
guaranteed home loan). This is also known as eligibility.
Equal Credit Opportunity Act (ECOA): A federal law requiring lenders and
other creditors to make credit equally available without discrimination based on
race, color, religion, national origin, age, sex, marital status, or receipt of income
from public assistance programs.
Equity: The difference between a homes value and the mortgage amount owed
on the home.
Escrow: The holding of documents and money by a neutral third party prior to
Escrow Disbursements: The use of escrow funds to pay real estate taxes,
hazard insurance, mortgage insurance and other property expenses as they
Escrow Payment: The part of a mortgagers monthly payment that is held by the
servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments
and other items as they become due.
Exclusive Right to Sell Listing: A contract giving an agent the exclusive right to
market a property under a certain time frame.
Exclusive Agency Listing: A contract giving the broker the right to market an
owners property for a certain period of time, but also allowing the owner to sell
the property during that period without paying a commission.
Farmers Home Administration (FmHA): Provides financing to farmers and
other qualified borrowers who are unable to obtain loans elsewhere.
Federal Housing Administration (FHA): A division of the Department of
Housing and Urban Development whose main activity is insuring residential
mortgage loans made by private lenders. FHA also sets standards for
Federal National Mortgage Association (Fannie Mae): A privately owned
corporation created by Congress that purchases and sells conventional
residential mortgages as well as those insured by Federal Housing
Administration or guaranteed by Veterans Affairs. This institution, which provides
funds for one in seven mortgages, makes mortgage money more available and
more affordable. Fannie Mae and Freddie Mac are the key secondary mortgage-
FHA Loan: A loan insured by the Federal Housing Administration open to all
qualified home purchasers. While there are limits to the size of FHA loans, they
are generous enough to handle moderately priced homes almost anywhere in the
FHA Mortgage Insurance: Requires a fee (up to 2.25 percent of the loan
amount) paid at closing to insure the loan with FHA. In addition, FHA mortgage
insurance requires an annual fee of up to 0.5 percent of the current loan amount,
paid in monthly installments. The lower the down payment, the more years the
fee must be paid.
Firm Commitment: A promise by Federal Housing Administration to insure a
mortgage loan for a specified property and borrower. A promise from a lender to
make a mortgage loan.
First Mortgage: The primary lien against a property.
Fixed Installment: The monthly payment due on a mortgage loan, including
payment of both principal and interest.
Fixed-Rate Mortgage (FRM): A loan on which the interest rate and monthly
payment do not change.
For Sale By Owner (FSBO): The owner sells his or her home without a
REALTOR® to avoid paying a sales commission.
Foreclosure: A legal process by which the lender or the seller forces a sale of a
mortgaged property because the borrower has not met the terms of the
mortgage. Also known as a repossession of property.
Federal Home Loan Mortgage Corporation (Freddie Mac): A quasi-
governmental, privately owned agency that purchases conventional mortgage
from insured depository institutions and HUD-approved mortgage bankers.
Fannie Mae and Freddie Mac are the key secondary mortgage-market agencies.
Fully Amortized ARM: An adjustable-rate mortgage (ARM) with a monthly
payment that is sufficient to amortize the remaining balance, at the interest
accrual rate, over the amortization term.
Graduated-Payment Mortgage (GPM): A type of flexible-payment mortgage
where the payments increase for a specified period of time and then level off.
This type of mortgage has negative amortization built into it.
Growing-Equity Mortgage (GEM): A fixed-rate mortgage that provides
scheduled payment increases over an established period of time. The increased
amount of the monthly payment is applied directly toward reducing the remaining
balance of the mortgage.
Guaranty: A promise by one party to pay a debt or perform an obligation
contracted by another if the original party fails to pay or perform according to a
Guarantee Mortgage: A mortgage that is guaranteed by a third party.
Hazard Insurance: A form of insurance in which the insurance company protects
the insured from specified losses, such as fire, windstorm and the like.
Homeowners Warranty: A policy that covers certain repairs (e.g. plumbing or
heating) of a newly purchased home for a certain period of time.
Housing Expenses-to-Income Ratio: The ratio, expressed as a percentage,
which results when a borrowers housing expenses are divided by his or her
gross monthly income.
HUD-1 statement: A document that provides an itemized listing of the funds that
are payable at closing. Items that appear on the statement include real estate
commissions, loan fees, points and initial escrow amounts. A separate number
within a standardized numbering system represents each item on the statement.
The totals at the bottom of the HUD-1 statement define the seller’s net proceeds
and the buyer’s net payment at closing.
Impound Account: An account established by a lender to collect a borrowers
property tax and insurance payments. Impound accounts are normally required
on mortgages with down payments of 10 percent or less.
Index: A published interest rate against which lenders measure the difference
between the current interest rate on an adjustable rate mortgage and that earned
by other investments (such as one-, three- and five-year U.S. Treasury security
yields, the monthly average interest rate on loans closed by savings and loan
institutions, and the monthly average costs-of-funds incurred by savings and
loans), which is then used to adjust the interest rate on an adjustable mortgage
up or down.
Indexed rate: The sum of the published index plus the margin. For example if
the index were 9 percent and the margin 2.75 percent, the indexed rate would be
11.75 percent. Often, lenders charge less than the indexed rate the first year of
an adjustable-rate mortgage.
Initial Interest Rate: This refers to the original interest rate of the mortgage at
the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It’s
also known as “start rate” or “teaser.”
Installment: The regular periodic payment that a borrower agrees to make to a
Insured Mortgage: A mortgage that is protected by the Federal Housing
Administration (FHA) or by private mortgage insurance (MI).
Interest: The fee charged for borrowing money.
Interest Accrual Rate: The percentage rate at which interest accrues on the
mortgage. In most cases, it is also the rate used to calculate the monthly
Interest Rate Buy down Plan: An arrangement that allows the property seller to
deposit money to an account. That money is then released each month to reduce
the mortgagor’s monthly payments during the early years of a mortgage.
Interest Rate Ceiling: For an adjustable-rate mortgage, the maximum interest
rate as specified in the mortgage note.
Interest Rate Floor: For an adjustable-rate mortgage, the minimum interest rate
as specified in the mortgage note.
Interim Financing: A construction loan made during completion of a building or
a project. A permanent loan usually replaces this loan after completion.
Investor: A money source for a lender.
Lease-Purchase Mortgage Loan: An alternative financing option that allows
low- and moderate-income homebuyers to lease a home with an option to buy.
Each months rent payment consists of principal, interest, taxes and insurance
(PITI) payments on the first mortgage plus an extra amount that accumulates in a
savings account for a down payment.
Liabilities: A person’s financial obligations. Liabilities include long-term and
Lien: A claim upon a piece of property for the payment or satisfaction of a debt
Lifetime Payment Cap: For an adjustable-rate mortgage, a limit on the amount
that payments can increase or decrease over the life of the mortgage.
Lifetime Rate Cap: For an adjustable-rate mortgage, a limit on the amount that
the interest rate can increase or decrease over the life of the loan.
Listing: A property placed on the market by a listing agent.
Loan: A sum of borrowed money (principal) that is generally repaid with interest.
Loan-to-Value (LTV) Ratio: The ratio of the amount of money owed on a home
to the homes value. The LTV ratio for a $100,000 home financed with a $90,000
mortgage would be 90 percent, for example.
Lock: Lenders guarantee that the mortgage rate quoted will be good for a
specific number of days from day of application.
Margin: The amount a lender adds to the index on an adjustable-rate mortgage
to establish the adjusted interest rate.
Market Value: The highest price that a buyer would pay and the lowest price a
seller would accept on a property. Market value may be different from the price a
property could actually be sold for at a given time.
Maturity: The date on which the principal balance of a loan becomes due and
Mediation: A process used to resolve disputes. In mediation, the parties to the
dispute are assisted by a neutral third person called a mediator. The mediator is
not empowered to impose a settlement or decision on the parties; rather, the
mediator facilitates discussions and negotiation between the parties with the goal
of assisting the parties in reaching a mutually acceptable settlement of their
MIP (Mortgage Insurance Premium): Insurance from FHA to the lender against
incurring a loss on account of the borrowers default.
Monthly Fixed Installment: That portion of the total monthly payment that is
applied toward principal and interest. When a mortgage negatively amortizes, the
monthly fixed installment does not include any amount for principal reduction and
doesn’t cover all of the interest. The loan balance therefore increases instead of
Mortgage: A legal document that pledges a property to the lender as security for
payment of a debt.
Mortgage Banker: A company that originates mortgages for sale into the
secondary mortgage market (e.g., Fannie Mae and Freddie Mac).
Mortgage Broker: An individual or company that arranges mortgage financing
between a borrower and a lender.
Mortgagee: The lender.
Mortgage Insurance: Money paid to insure the mortgage when the down
payment is less than 20 percent.
Mortgage Life Insurance: A type of term life insurance specifying that in the
event that the borrower dies while the policy is in force, the debt is automatically
paid by insurance proceeds.
Mortgage Interest Deduction: The ability of mortgage borrowers to deduct the
interest paid on a home loan for purposes of federal and state income taxes.
Mortgager: The borrower or homeowner.
Multiple Listings Service (MLS): The service combines the listings for all
available homes in an area, except for For-Sale-By-Owner properties, in one
directory or database.
Negative Amortization: Occurs when monthly payments are not large enough
to pay all the interest due on the loan. This unpaid interest is added to the unpaid
balance of the loan. The danger of negative amortization is that the homebuyer
ends up owing more than the original amount of the loan.
Net Effective Income: The borrowers gross income minus federal income tax.
Net Listing: A listing agreement in which the broker’s commission consists of the
amount above a net price set by the owner. If the net price is not met, a
commission is not earned.
Non-assumption Clause: A statement in a mortgage contract forbidding the
assumption of the mortgage without the prior approval of the lender.
Note: A legal document that obligates a borrower to repay a mortgage loan at a
stated interest rate during a specified period of time.
One-year Adjustable: Mortgage whose annual rate changes yearly. The rate is
usually based on movements of a published index plus a specified margin
chosen by the lender.
Open Listing: A property marketed by more than one agent at a time.
Origination Fee: A fee charged by a lender for making a mortgage.
Owner Financing: A property purchase transaction in which the party selling the
property provides all or part of the financing.
Payment Change Date: The date when a new monthly payment amount takes
effect on an adjustable-rate mortgage or a graduated-payment mortgage.
Generally, the payment change date occurs in the month immediately after the
Periodic Payment Cap: A limit on the amount that payments can increase or
decrease during any one-adjustment period.
Periodic Rate Cap: A limit on the amount that the interest rate can increase or
decrease during any one-adjustment period, regardless of how high or low the
index might be.
Permanent Loan: A long-term mortgage, usually 10 years or more. Also called
an “end loan.”
PITI: Principal, interest, taxes and insurance — the primary components of a
monthly mortgage payment.
Pledged-account Mortgage (PAM): Money is placed in a pledged savings
account and this fund plus earned interest is gradually used to reduce mortgage
Points: One point equals 1 percent of the mortgage amount. Points are charged
by lenders to increase the lenders return on the mortgage. Typically, lenders may
charge anywhere from zero to two points. Loan points are tax-deductible.
Power of Attorney: A legal document authorizing one person to act on behalf of
Pre-approval: The process of determining how much money you will be eligible
to borrow before you apply for a loan.
Prepaid Expenses: Necessary to create an escrow account or to adjust the
sellers existing escrow account. Can include taxes, hazard insurance, private
mortgage insurance and special assessments.
Prepayment: A privilege in a mortgage permitting the borrower to make
payments in advance of their due date.
Prepayment Penalty: Money charged for an early repayment of debt.
Prepayment penalties are allowed in some form (but not necessarily imposed) in
Primary Mortgage Market: Lenders, such as savings-and-loan associations,
commercial banks and mortgage companies, who make mortgage loans directly
to borrowers. These lenders sometimes sell their mortgages to the secondary
Principal: The loan amount borrowed or still owed.
Private Mortgage Insurance (PMI): Insurance issued by private insurers that
protects lenders against a loss if a borrower defaults on a mortgage with a low
down payment (e.g., less than 20 percent).
Qualifying Ratios: Calculations used to determine if a borrower can qualify for a
mortgage. They consist of two separate calculations: a housing expense as a
percent of income ratio and total debt obligations as a percent of income ratio.
Rate Lock: A commitment issued by a lender to a borrower or other mortgage
originator guaranteeing a specified interest rate and lender costs for a specified
period of time.
Real Estate Settlement Procedures Act (RESPA): A consumer protection law
that requires lenders to give borrowers advance notice of closing costs. RESPA
is a federal law that, among other things, allows consumers to review information
on known or estimated settlement cost after application and prior to or at
settlement. The law requires lenders to furnish the information after application
REALTOR®: A real estate broker or agent who, as a member of a local
association of REALTORS®, a state association of REALTORS® and the
NATIONAL ASSOCIATION OF REALTORS® (link to www.onerealtorplace.com),
adheres to high standards of professionalism and a strict code of ethics.
Recission: The cancellation of a contract by putting all parties back to the
position before they entered the contract. In some mortgage financing situations
involving equity in the home as security, the law gives the homeowner three days
to cancel a contract.
Recording Fees: Money paid to the lender for recording a home sale with the
local authorities, thereby making it part of the public records.
Refinance: Obtaining a new mortgage loan on a property already owned. Often
to replace existing loans on the property.
Renegotiable Rate Mortgage: A loan in which the interest rate is adjusted
Reverse Annuity Mortgage (RAM): A form of mortgage in which the lender
makes periodic payments to the borrower using the borrower’s equity in the
home as collateral for and repayment of the loan.
Revolving Liability: A credit arrangement, such as a credit card, that allows a
customer to borrow against a pre-approved line of credit when purchasing goods
Satisfaction of Mortgage: The document issued by the mortgagee when the
mortgage loan is paid in full. Also called a “release of mortgage.”
Second Mortgage: A mortgage made subsequent to another mortgage and
subordinate to the first one.
Secondary Mortgage Market: The place where primary mortgage lenders sell
the mortgages they make to obtain more funds to originate more new loans. It
provides liquidity for the lenders.
Security: The property that will be pledged as collateral for a loan.
Seller Carry-back: An agreement in which the seller provides financing, often in
combination with an assumable mortgage.
Seller Financing: A financing agreement in which a seller provides part (or all) of
the financing needed by a buyer to purchase the sellers home.
Servicer: An organization that collects principal and interest payments from
borrowers and manages borrowers escrow accounts. The servicer often
services mortgages that have been purchased by an investor in the secondary
Servicing: All the steps and operations a lender performs to keep a loan in good
standing, such as collection of payments, payment of taxes, insurance, property
inspections and the like.
Shared-Appreciation Mortgage (SAM): A mortgage in which a borrower
receives a below-market interest rate in return for which the lender (or another
investor such as a family member or other partner) receives a portion of the
future appreciation in the value of the property. May also apply to a mortgage
where the borrower shares the monthly principal and interest payments with
another party in exchange for part of the appreciation.
Simple Interest: Interest that is computed only on the principle balance.
Standard Payment Calculation: The method used to determine the monthly
payment required to repay the remaining balance of a mortgage in substantially
equal installments over the remaining term of the mortgage at the current interest
Step-Rate Mortgage: A mortgage that allows for the interest rate to increase
according to a specified schedule (i.e., seven years), resulting in increased
payments as well. At the end of the specified period, the rate and payments will
remain constant for the remainder of the loan.
Survey: A measurement of land, prepared by a registered land surveyor,
showing the location of the land with reference to known points, its dimensions,
and the location and dimensions of any buildings.
Sweat Equity: Equity created by a purchaser performing work on a property
Third-Party Origination: When a lender uses another party to completely or
partially originate, process, underwrite, close, fund or package the mortgages it
plans to deliver to the secondary mortgage market.
Title: A legal concept relating to ownership of property.
Title Insurance: Insurance to protect the buyer and lender against losses arising
from disputes over the ownership of a property.
Title Search: An examination of public records to determine the legal ownership
of property. Usually the records are recorded with the County Recorders office.
The search is usually performed by a title company using computerized records.
Total Expense Ratio: Total obligations as a percentage of gross monthly
income including monthly housing expenses plus other monthly debts.
Truth In Lending Act: A federal law requiring disclosure of the annual
percentage rate to homebuyers shortly after they apply for the loan. Also known
as Regulation Z.
Two-Step Mortgage: A mortgage in which the borrower receives a below-market
interest rate for a specified number of years (most often seven or 10), and then
receives a new interest rate adjusted (within certain limits) to market conditions at
that time. The lender sometimes has the option to call the loan due with 30 days
notice at the end of seven or 10 years.
Underwriting: The process of evaluating a loan application to determine if it
meets the lender’s standards.
Usury: Interest charged in excess of the legal rate established by law.
VA Loan: A long-term, low- or no-down payment loan guaranteed by the
Department of Veterans Affairs. Restricted to individuals qualified by military
service or other entitlements.
VA Mortgage Funding Fee: A premium of up to 1.5 percent (depending on the
size of the down payment) paid on a VA-backed loan. On a $75,000 fixed-rate
mortgage with no down payment, this would amount to $1,406 either paid at
closing or added to the amount financed.
Verification of Deposit (VOD): A document signed by the borrower’s financial
institution verifying the status and balance of that person’s financial accounts.
Warehouse Fee: Many mortgage firms must borrow funds on a short-term basis
in order to originate loans that are to be sold later in the secondary mortgage
market or to investors. When the prime rate of interest is higher on short-term
loans than on mortgage loans, the mortgage firm has an economic loss that is
offset by charging a warehouse fee.
Wraparound Mortgage: Results when an existing assumable loan is combined
with a new loan, resulting in an interest rate somewhere between the old rate and
the current market rate. The payments are made to a second lender or the
previous homeowner, who then forwards the payments to the first lender after
taking the additional amount off the top.