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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 (a.k.a. unbundled 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. (See RESPA)

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.

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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.

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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.

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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 (a.k.a. back-end 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. 

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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 (a.k.a. escrow holder)
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.

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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.

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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. (Example: 7.5 percent payment—not interest—increase for the first seven years of the loan, then the payment remains fixed at that level.)

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. 

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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. 

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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 – See contract for deed.

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.

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Jumbo loan (a.k.a. non-conforming loan)
Mortgage loans that exceed the loan amount acceptable for sale to Fannie Mae and Freddie Mac. These jumbo loans must be packaged and sold differently to investors and therefore have separate underwriting guidelines and are less profitable to lenders.

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Lease option
A lease with an option to buy; an option can either be exercised to culminate in a purchase or forfeited by the optionee.

Lease purchase
A type of delayed-closing purchase. A lease purchase is drafted on a purchase agreement, stating the terms of the purchase as well as a specific future date for closing. Should the buyer default, the seller has all remedies available under the sales contract.

Leverage
Using a small asset to purchase a larger asset. Leverage allows a borrower’s down payment to go further. (Example: Instead of using $50,000 down on a $100,000 property, the buyer could use $10,000 down on each of five properties of $100,000 each.)

Lifetime cap
The maximum amount of interest an ARM loan can reach during the life of the loan.

Loan strategist
An experienced mortgage professional who oversees customers loans from opening through closing and provides guidance and assistance.

Loan-to-value ratio (LTV)
The amount of the loan as compared to the appraised value of the property.

Lock-in
The fixing of an interest rate or points at a certain point, usually during the loan application process. It is done for a set period of time, such as 60 days, and may require a fee or premium to the lender.

Long-term debt
For qualifying purposes, debt that cannot be paid off within a certain amount of time, which varies based on the loan.

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Margin
An amount added by the lender to an ARM index in order to compute the interest rate. The margin is set by the lender at the time of loan inception and remains constant for the life of the loan. The margin is considered to be the lender’s cost of doing business plus profit.

Market-rate interest
The average interest rate charged for a specific loan term and type under prevailing market conditions.

Market value
The price a property should bring in a competitive market when there is sufficient marketing time, no coercion, typical financing availability, arms-length negotiation and knowledgeable buyers and sellers.

Market valuation – See comparative market analysis.

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Negative amortization
An interest payment shortfall which is added back onto the principal balance. During times of meager appreciation, this could result in the debt against the property exceeding its market value. 

No-income-verification (NIV) loan
This type of loan does not require stated income to be verified. The borrower signs a statement that says, upon penalty or perjury, that the he or she made as much money as claimed. These loans often appeal to the self-employed, however, the interest rate is normally 1 – 2 points higher than market rate and may require a larger down payment and/or additional points.

Note rate
The rate of interest shown on the face of the loan’s promissory note or in the contract of sale language;  the rate of interest charged on an obligation.

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Online lending
Accessing mortgage programs and lenders via the Internet.

Origination fee
A lender’s charge for creating a mortgage.

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Payment cap
The maximum amount the payment can adjust at any one time (e.g., 7.5% per period).

Payment shock
The shock of the payment change affecting the buyer’s ability to repay the loan.

Pest inspection
An inspection performed by a pest control agency, which provides an official wood infestation report detailing evidence of both active and previous infestation from termites and other wood-destroying organisms.

PITI
An acronym for principal, interest, taxes and homeowner insurance (including any private mortgage insurance and/or homeowner association fees, if applicable).

Pledged account mortgage (PAM)
Instead of using all of the down payment at closing, part of the funds are placed in an interest-bearing account with the lender and drawn from over time to apply to the mortgage payment. These funds are said to be pledged to the lender as additional security to reduce the lender’s risk on the loan.

POC (paid outside of closing)
Funds disbursed on behalf of the borrower outside of the formal closing with that borrower. (Example: Additional points paid as an incentive to a mortgage broker to obtain the lowest-interest rate loan for the borrower.)

Points – See discount points.

Portfolio lending
Instead of selling the mortgage into the secondary market, the lender keeps it “in portfolio” (in the in-house investment file) for the life of the loan.

Pre-approval
A lender analyzes the borrower’s income, debt and funds for down payment/closing and checks credit. Verification of funds and employment may also be performed. If the borrower meets qualifying guidelines, the lender pre-approves the borrower for a loan. Pre-approval gives a borrower assurance that, unless something changes in his/her financial picture, the lender will grant a specific loan up to a certain amount at a certain interest rate with a certain payment.

Premium yield adjustment
Denotes that a lender is receiving compensation from the party funding the real estate mortgage.

Prepaids
Property expenses that are paid in advance and are usually prorated at the time of closing (e.g., insurance).

Prepayment penalty
A fine imposed when a loan is paid off before it comes due. Many states have laws against prepayment penalties.

Prepayment privilege
The right of the borrower to prepay (without penalty) the entire principal sum remaining on the loan.

Private mortgage insurance (PMI or MI)
Insurance that indemnifies the lender from the borrower’s default, usually on the top 20% of the loan (in the absence of a minimum of 20% down.) Premiums are paid as an initial fee at the time of closing, and as a recurring annual fee based on the principal balance, but paid monthly with the PI payment. Alternatively, the borrower could choose to add the PMI to the loan amount under either a refundable or non-refundable premium plan. Private mortgage insurance is typically paid by the borrower.

Pro-rated interest
On the first of each month, your mortgage payment includes interest that accrued the previous month. Upon closing your mortgage, the monthly interest is divided (pro-rated) to determine the daily interest, then it's multiplied by the remaining days in the month to calculate how much you owe. If you close on the 20th of the June for example, the 10 days of interest that would normally be paid on July 1 is collected at closing. You will not have to make another payment until August 1, which will include interest for July.

Planned unit development (PUD)
A type of housing development based on high density (clusters of buildings) and maximum use of open space usually resulting in more affordable housing. The common areas of the grounds are owned by a community association, not by individuals. Developers often mix residential with light commercial zoning to maximize land use. (Example: For most conventional loans, long-term debts are considered those that exceed ten months; however, a lender could choose to be more restrictive, e.g., six months.)

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Qualifying ratio
Percentages used by lenders to compare the amount of housing expense and total debt to that of the buyer’s gross monthly income.

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Rate cap
The maximum rate of interest that can be charged on an ARM loan; expressed as either per period or lifetime, or both.

Rate ceiling
The maximum to which the rate can go in an ARM loan, specified in an interest amount, e.g. 12%.

Rate gap
The difference between where the rate is now and where it could adjust to on an ARM. Also used to compare the difference between a current conventional rate and that of an ARM.

Ratio
A percentage used as a qualifying guideline in mortgage lending.

Regulation Z
A federal regulation requiring disclosure of the overall cost of borrowing (truth in lending). It states that if you disclose one piece of financial information, you must disclose it in its entirety (including the total of all payments and the number of payments). The only exception to this rule is the use of the annual percentage rate. If this is used, no other piece of financial information is necessary.

Reserves
The amount of funds a borrower has left over after down payment and closing costs are paid. A lender usually needs to verify there will be at least two months of PITI in a borrower’s account after paying closing fees. (These funds are not taken by the lender nor held in escrow).

RESPA
The Real Estate Settlement Procedures Act is the up-front view of the costs of borrowing in a mortgage loan, including the APR (annual percentage rate), which is the note rate plus the up-front costs of borrowing.

Reverse annuity mortgage (RAM)
A loan developed for senior citizens to unlock a portion of their equity from their home (allowing them to receive payments, not make them). 

R-factor
"R" stands for resistance and is used to measure the amount of insulation in the walls, ceilings, and floors of homes.

Right of first refusal
The privilege extended to a potential buyer to remove contingencies on a contract should the seller receive another acceptable offer (e.g., a buyer with a contingency of selling his home before purchasing the seller’s home would be given a right of first refusal to either remove the contingency and purchase the property or forfeit the purchase should the seller receive another acceptable offer).

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Sales concession
A cost paid by the seller or other third party, even though the cost is customarily paid by the buyer. Most loan programs have limits as to the amount of sales concessions that can occur before overage would decrease the amount of loan available to the borrower.

Secondary market
Comprised of FannieMae, GNMA, and FraddieMac, which recycle lent funds from the primary/ lender market.

Security document
A legal document that creates a lien against a property as security for repayment of a debt (such as mortgages or deeds of trust).

Self-insure
When providers of materials and services use personal or corporate savings to stand behind warranties rather than providing formal protection written through insurance companies; also refers to lenders who do not require private mortgage insurance on new mortgages, instead charging higher interest or more fees on same.

Seller financing
The seller allows the borrower to finance the property by using a portion of the seller’s equity; can be the sole financing vehicle or a secondary one.

Seller’s market
Real estate market conditions where there are more buyers than there are properties available, giving an upper hand to sellers.

Service release premium
The fee a servicing company pays a lender for the right to service its mortgage loans, i.e., perform administrative, customer service and accounting functions. Most lenders sell their loans to investors but may or may not retain the servicing rights to these loans. If servicing rights are sold, customers must be informed of the change and where future payments should be sent. Selling the loan and/or its servicing rights does not change its terms and conditions.

Settlement –  See closing/settlement costs.

Sub-prime loans
Mortgage loans of A, B, C & D grades (less than the prime/standard A grade mortgage) that are available to credit-damaged borrowers. Sub-prime loans are made at rates in excess of standard market rates and typically require more points and fees to be paid. 

Survey
A drawing of the property being bought performed by a licensed engineer which depicts property boundaries, where the residence sits, improvements, fence lines, public easements and means of ingress and egress. 

Sweat equity
Materials or labor used by a buyer in addition to, or in lieu of, cash.

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Teaser rate
An unusually low introductory rate (usually applying to ARMs) to entice borrowers into a loan and allow them to more readily qualify. 

Title insurance
Insurance that protects against losses arising from defects or problems with the title to the property. Coverage for the lender is required and is often paid by the seller. Simultaneous buyer coverage is advised and can usually be obtained for a nominal cost. Defects can include the seller not being the owner of the property, hidden mortgage or tax liens or boundary discrepancies of the property.

Title search
An examination by a title company of all public records, including court cases and laws, to see how they affect the title to a particular piece of property.

Trailing spouse
An employable spouse.

Truth-in-lending statement
A federally required disclosure signed by the buyer at closing. This document discloses the annual percentage rate, principal loan amount, interest to be paid over the life of the loan and the total principal and interest over the life of the loan (see Regulation Z).

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Unbundled real estate services – See a la carte real estate services.

Underwriter
A person who checks to see if the mortgage you are getting will qualify under the secondary lender’s guidelines (such as FannieMae or Fraddie Mac).

Underwriting
The process in which a lender determines if a borrower is qualified for a loan using income, credit, employment and other factors. See also automated/desktop underwriting.

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VA (The Department of Veterans Affairs)
The VA administers the loan program that guarantees loans to qualified persons who are or were in the military service.

Verification
The process of ensuring the information (such as income, employment and available funds) stated on a borrower’s application is accurate. Telephone confirmation and supporting documents like W-2s, pay stubs and bank statements are often used for verification. Sometimes formal verification of deposit and verification of employment forms are sent, with the borrower’s permission, to the bank and employer.

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W-2
As required by Federal law, employers issue this form each year to their employees and the IRS. The form reports an employee's wages and tips earned and taxes withheld.

Wraparound
An original loan obligation remains stationary while a new amortizing obligation wraps around the first loan. An inclusive payment (covering both loans) is made, often to a third-party escrow-holder, out of which the underlying payment is disbursed with the remainder going to the seller. 

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Yield
Return on investment.

Yield spread premium (YSP)
Compensation paid by a lender to a broker for originating a loan. This fee is passed to the customer in the form of higher interest rates. It usually appears as "yield-spread premium, POC" (paid outside closing) on the closing statement. The legality of paying a rebate to a broker has been challenged in many-class action lawsuits against lenders. Leader Mortgage does NOT pay YSPs.

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Zero-net
When the seller receives no net proceeds from the sale of the property. accompanying the other spouse in relocating for job reasons, who expects to return to work. Lenders often use trailing spouses as compensating factors when making mortgages to relocating buyers.

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