Real estate and mortgages are a world that many of us enter only occasionally and usually along with a great deal of pressure. Use the definitions below to help understand this world.
Refers to borrowers with the best credit rating. This means they can get the best loans. If you do not have A-credit, you may have to pay more for your loan. Typically, you would need a FICO score above 720 to qualify.
In a loan, an acceleration clause allows the lender to specify conditions in the contract, and if these conditions are not met, the lender can demand that the loan be paid in full at once.
adjustable rate mortgage
An adjustable rate mortgage is one for which the interest rate can adjusted. In the US, many ARM loans are tied to an interest rate index and scheduled to change at a specified period of time.
Also known as: ARM
Alt-A refers to a borrower’s credit worthiness. It is less than A-credit, but higher than subprime.
Amortization refers to paying down the principal balance of the loan. For many loans, the scheduled payment includes a portion that covers interest and a portion that also reduces the actual amount of the loan balance.
Annual Percentage Rate
The cost you are charged for the credit – it includes all finance charges as well the interest rate.
Also known as: APR
An appraisal is an evaluation of the real estate’s current value. In California, the appraiser must be licensed by the state.
Assumption occurs when a buyer takes over the repayment of loan already held on the property, or assumes the loan payments. However, unless the lender agrees, the person selling the loan to the buyer is still responsible for the full amount of the loan.
The amount of the original loan that has yet to be paid.
Also known as: loan balance, principal
A balloon situation occurs when the loan balance is not completely paid off at the end of the loan term. In many loans, the payments are designed so that at the end of the term, the loan balance is paid off. For some loans, only a specified period of regular payments occurs, and after that, the rest of the entire loan balance is due.
Also known as: balloon mortgage, balloon payment
A bridge loan allows a person to sell one house and buy another. The bridge loan covers the period between when the purchase closes and the sale closes. A secured bridge loan occurs when the existing house is under a confirmed contract to sell. If the borrower does not have a confirmed contract for the house he or she is selling, the bridge loan is unsecured.
In a buy-down, the borrower pays points so that the interest rate on the loan is reduced. A permanent buy-down covers the life of the loan. A temporary buy-down only reduces the interest for the early years of the loan.
Also known as: permanent buy-down, temporary buy-down
Good Faith Estimate
A federally mandated document that outlines the fees for a loan, which fees may change, a cap on certain fee changes, and which fees may change without a cap.
Also known as: GFE
HUD settlement statement
A document that outlines the costs of the loan. If requested in writing previously, must be given to the borrower 24 hours before the loan closes. Mandatory for all federally related mortgage loans.
The lender is the person or entity that provides the funds to make the loan. The lender may be a bank, credit union, savings and loan or other financial institution, or can be companies, private companies, and private parties. Mortgage brokers most often work with borrowers to find the appropriate lenders
The lien is the hold or claim that the lender has on the property. The lender can take the property if the borrower fails to repay the loan.
When the last payment is due on the loan.
Sometimes lenders will guarantee a loan’s terms for a specific period. This period is referred to as the lock. The maximum lock is the longest time for which the lender will guarantee the loan’s terms. It ranges from 30-90 days, usually, with 60 being very common.
Mortgage Loan Disclosure Statement
A document that licensees of the California Department of Real Estate are required to give borrowers that outlines the costs of the loan.
Also known as: MLDS
A national resource that consumers can use to ensure their mortgage industry professional is licensed.
Also known as: Nationwide Mortgage Licensing System
Sometimes, lenders pay points above the quoted rate of the loan. If the negative points go to the borrowers, the money can be used for settlement costs. If the negative points go to the mortgage broker, they are called the yield spread premium.
When borrowers work with a broker to gain understanding of the market and improve their creditworthiness, then actually go to the Internet to get a loan.
An option fee occurs when a lease-to-own situation happens. The option fee allows the buyer to pay money that will go toward the purchase price if the buyer opts to buy. If the purchaser does not choose to buy, the option fee is lost.
Lenders may provide a price for a loan to mortgage brokers. The price for a loan that is quote to buyers is higher than this quoted price. The difference is called the overage.
Also known as: mortgage overage
A piggyback mortgage is a mortgage that is taken out to cover any outstanding purchase price after the initial mortgage covers 80% of the purchase price. Piggyback loans may cover the remaining 20% of the price. They may be a single loan for the 20%, or they may be divided into even smaller loans to make the total 100%. Piggybacks allow borrowers to avoid mortgage insurance which is often required when borrowers cannot put 20% of the purchase price down.
PITI refers to the components that make up regular housing expenses.
Also known as: Principal, Interest, Taxes, Insurance
A point is equal to one percent of the loan balance. Borrowers pay points up front in cash to lower the interest rate on their loans.
Real Estate Settlement Procedures Act
A federal law designed to better regulate real estate practices. Passed after the financial industry collapse, it is designed to give consumers the protection of documents that explain loan terms.
Also known as: RESPA
The period used to calculate the mortgage payment. For example, a 30-year fixed rate loan has a 30-year term, and payments are calculated so at the end of 30 years, the loan is paid off.
yield spread premium
Fees paid by the lender to the mortgage broker that increase the interest rate the borrower would otherwise have paid for the loan. It’s not illegal, but in California it must be disclosed.
Also known as: YSP, commission, back-end fee
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