1/1 ARM: An adjustable-rate mortgage that has a set initial interest rate for the first year. After that period, the mortgage rate adjusts each year. Each annual rate adjustment is based on (or “indexed to”) another rate, often the yield on a U.S. Treasury note.
10/1 ARM: An adjustable-rate mortgage that has a set initial interest rate for the first 10 years. After that period, the mortgage rate adjusts each year.
3/1 Interest-Only ARM: An adjustable rate mortgage in which none of the payments go toward paying off the loan principal for the first three years.
3-in-1 Credit Report: Also called a merged credit report, this type of report includes your credit data from TransUnion, Equifax and Experian in a side-by-side format for easy comparison.
80-10-10 Loan: A combination of an 80% loan-to-value first mortgage, a 10% home equity loan and a 10% down payment. The loans can be used to eliminate the need for private mortgage insurance.
Acceleration clause: Condition in a mortgage that gives the lender the right to require immediate repayment of the loan balance if regular mortgage payments are not made or for breach of other conditions of the mortgage.
Adjustable Rate Mortgage (ARM): A home loan where the interest rate is changed periodically based on a standard financial index. ARM’s offer lower initial interest rates with the risk of rates increasing in the future. In comparison, a fixed rate mortgage (FRM’s) offers a higher rate that will not change for the length of the loan. ARMs often have caps on how much the interest rate can rise or fall.
Alternative Mortgage: Any home loan that is not a standard fixed-rate mortgage. This includes ARM’s, reverse mortgages and jumbo mortgages.
Alias: A note on your credit report that indicates other names used for your financial accounts. Sometimes marked as “Also Known As” or “AKA.” This can include maiden names or variations on the spelling and format of your full name.
Amortization: A monthly repayment schedule in which a loan is repaid in fixed payments of principal and interest.
AnnualCreditReport.com: The official website for obtaining your free credit report disclosures from the credit bureaus, Equifax, Experian and TransUnion. You have the right to request your credit reports online, by phone or by mail for free once every 12 months under FACT Act regulations. This free service can only be used once a year and does not include your credit scores.
Annual Fee: A charge sometimes required by credit card companies for use of an account. Annual fees range between $10-50 a year and are most common with rewards cards or cards for subprime borrowers.
Annual Percentage Rate (APR): The annual cost of a loan, expressed as a yearly rate. APR takes into account interest, discount points, lender fees and mortgage insurance, so it will be slightly higher than the interest rate on the loan.
Application Fee: Amount a lender charges to process your
loan application documents. Application fees are common with mortgage loans and many lenders will apply the cost of
the application fee towards your closing costs. Application fees are generally non-refundable.
Application Scoring: A specific kind of statistical scoring that businesses use to evaluate an applicant for acceptance or denial. Similar to credit scoring, application scoring often factors in other relevant details such as employment status and income to determine risk.
Appraisal Fee: The amount charged to deliver a professional opinion about how much a property is worth. For a standard home or condominium, this fee is usually around $200-500.
Appraised Value: An educated opinion of how much a property is worth. An appraiser considers the price of similar homes in the area, the condition of the home and the features of the property to estimate the value.
Assessment: A local tax levied against properties that have benefited from civil improvements such as road or sidewalk construction, a sewer or street lights.
Asset: Assets are things owned by a person that have cash value. This can include homes, cars, boats, savings and investments.
Assumability: A feature of a loan allowing it to be transferred to the new purchaser of a home. Assumable mortgages can help attract buyers because assumption of a loan requires lower fees and/or qualifying standards than a new loan.
Authorized User: Anyone who uses your credit cards or credit accounts with your permission. More specifically, someone who has a credit card from your account with their name on it. An authorized user is not legally responsible for the debt. However, the account may appear on their credit report which means it may also be included in the authorized user’s credit score calculation.
Back-End Ratio or Back Ratio: The sum of your monthly mortgage payment and all other monthly debts (credit cards, car payments, student loans, etc.) divided by your monthly pre-tax income. Traditionally,
lenders wouldn’t give people loans that increased this ratio past 36%, but they often do now. (See Debt-to-Income Ratio)
Balance Transfer: The process of moving all or part of the outstanding balance on one credit card to another account. Credit card companies often offer special rates for balance transfers.
Balloon Payment: A loan where the payments don’t pay off the principal in full by the end of the term. When the loan term expires (usually after 5-7 years), the borrower must pay a balloon payment for the remaining amount or refinance. Balloon loans sometimes include convertible options that allow the remaining amount to automatically be transferred into a long-term mortgage. (See Convertible ARM)
Bankruptcy: A proceeding that legally releases a person from repaying a portion or all debts owed. Bankruptcy damages your credit for 7-10 years and should only be considered as a last resort if you cannot repay your debts. (See Chapter 7-13 Bankruptcy)
Beacon Score: The name of the FICO score from Equifax. There are thousands of slightly different credit scoring formulas used by bankers, lenders, creditors, insurers and retailers. Each score can vary somewhat in how it evaluates your credit data.
Bi-Weekly Mortgage: A mortgage that schedules payments every two weeks instead of the standard monthly payment. The 26 bi-weekly payments are each equal to one-half of a monthly payment. The result is that the mortgage is paid off sooner.
Borrower: The individual who is requesting the loan and who will be responsible for paying it back.
Broker: An individual who assists in arranging funding or negotiating contracts for a client, but does not loan money himself.
Broker Premium: The amount a mortgage broker is paid for serving as the middleman between a lender and a borrower. This premium comes from the surcharge a broker applies to a discounted loan before offering it to a borrower.
Buy-down: A situation in which the seller contributes money that allows the lender to give the buyer a lower rate and payment, usually in exchange for an increase in sales price. With a refinance, this could be paid by the borrower.
Cardholder: The person who is issued a credit card and/or any authorized users.
Cash Advance: A cash loan requested from your creditor, usually by using your credit card at an ATM machine or through a loan advance on your paycheck. These loans include special interest rates
charged on the amount of the advance.
Cash-Out Refinance: A new mortgage for an existing property in which the amount borrowed is greater than the amount of the previous mortgage. The difference is given to the borrower in cash when the loan is closed.
Certificate of Eligibility: Document issued by the Veterans’ Administration to qualified veterans that entitles them to VA guaranteed loans. This certificate can be obtained through local VA office by submitting form DD-214 (Separation Papers) and VA form 1880 (request for Certificate of Eligibility).
Certificate of occupancy: Document issued by local government agency stating that a property meets the requirements of health and building codes.
Chapter 7 Bankruptcy: A type of consumer bankruptcy where your responsibility for your debts is cleared entirely. With this kind of bankruptcy you are not required to pay back debts you owe from before your filing. To qualify for a Chapter 7 bankruptcy your income must be below your state’s median income. Chapter 7 bankruptcy filing records remain on your credit report for 10 years and the record of each account included in your filing will remain on your report for 7 years.
Chapter 11 Bankruptcy: A complex type of bankruptcy usually filed by businesses that wish to restructure their debts.
Chapter 12 Bankruptcy: A type of bankruptcy specifically for farmers and fishermen. Similar to Chapter 13 bankruptcy but with a few special benefits.
Chapter 13 Bankruptcy: A type of bankruptcy where the consumer must pay off some of their debts over time. Chapter 13 bankruptcy filing records remain on your credit report for 7 years from the discharge date or 10 years from the filing date if it is not discharged. Each account included in the filing will remain on your report for 7 years.
Charge-Off: When a creditor or lender writes off the balance of a delinquent debt, no longer expecting it to be repaid. A charge-off is also known as a bad debt. Charge-off records remain on your credit report for 7 years and will harm your credit score. After a debt is charged-off, it can be sold to a collections agency.
ChexSystems: A credit reporting company that tracks your banking history and provides this data to banks when you apply for a new checking account. Negative records, such as bounced checks, can be kept in their database for up to five years. If there are errors on your ChexSystems record, you can contact the company to submit a dispute.
Closing (or Settlement): Meeting between the buyer, seller and lender or their agents at which property and funds legally change hands.
Closing Costs: The amounts charged to a consumer when they are transferring ownership or borrowing against a property. Closing costs include lender, title and escrow fees and usually range from 3-6% of the purchase price.
Cloud on title: An outstanding claim or encumbrance that, if valid, would affect or impair the owner’s title.
Collateral: An asset or property used as security against a loan.
Collections: When a business sells your debt for a reduced amount to an agency in order to recover the amounts owed. Credit card debts, medical bills, cell phone bills, utility charges, library fees and video store fees are often sold to collections. Collection agencies attempt to recover past-due debts by contacting the borrower via phone and mail. Collection records can remain on your credit report for 7 years from the last 180 day late payment on the original debt. Your rights are defined by the Fair
Debt Collection Practices Act.
Combined Loan-to-Value Ratio: The total amount you are borrowing in mortgage debts divided by the home’s fair market value. Someone with a $50,000 first mortgage and a $20,000 equity line secured against a $100,000 house would have a CLTV ratio of 70%.
Commission: Money paid to a real estate agent or broker by the seller (usually 6 to 7 percent of a home’s sale price).
Commitment Fee: A fee paid by a borrower to a lender in exchange for a promise to lend money on certain terms for a specified period. Usually charged in order to extend a loan approval offer for longer than the 30-60 day standard period. Quality lenders don’t usually charge these fees.
Conforming Loan: A mortgage that meets the requirements for purchase by Fannie Mae and Freddie Mac. Requirements include size of the loan, type and age. Current loan size limits for single-family
homes range between $200,000 and $400,000. Loans that exceed the conforming size are considered jumbo mortgages and usually have higher interest rates.
Contingency: A condition that must be satisfied before a contract is legally binding before a sale can close.
Co-Signer: An additional person who signs a loan document and takes equal responsibility for the debt. A borrower may want to use a co-signer if their credit or financial situation is not good enough to qualify for a loan on their own. A co-signer is legally responsible for the loan and the shared account will appear
on their credit report.
Convenience Check: Checks provided by your credit card company that you can use to access your available credit. These checks often have different rates and terms than your standard credit
Convertible ARM: An adjustable rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.
Credit Bureaus: Also known as credit reporting agencies, these companies collect information from creditors and lenders about consumer financial behavior. This data is then provided to businesses
that want to evaluate how risky it would be to lend money to a potential borrower. Once a low-tech system of regional credit reporting agencies, the industry is now consolidated into the three national credit bureaus – Equifax, Experian and TransUnion.
Credit Counseling: A service that helps consumers repay their debts and improve their credit. Usually non-profit companies, most of these agencies offer helpful and affordable services. Consumers should be aware that there are also credit counseling agencies that are expensive, ineffective and even damaging to the client’s credit (see Credit Repair). Consumers should carefully review the company’s reputation and services before signing up.
Credit File: Another term for your credit report. The term credit file is usually used to indicate
the full record of your credit history maintained by a credit bureau. Your credit report may not include all the information in your credit file.
Credit History: Another term for the information on your credit report. Your credit history is a record of how you have has repaid your credit obligations in the past.
Credit Limit: The total amount that a company will allow you to charge to a credit card or credit line. It’s best for your credit score to keep your credit card balances below 10% of your credit limit.
Credit Obligation: An agreement where a person becomes legally responsible for paying back borrowed money.
Credit Repair: A process whereby a consumer hires a third party company to act as their proxy and attempts to get negative information removed from their credit report.
Credit Report: The individual records of consumer financial behavior kept by credit bureaus and provided to businesses when they want to evaluate potential borrowers. Credit reports include
records on: consumer name, current and former addresses, employment, credit and loan histories, inquiries, collection records, and public records such as bankruptcy filings and tax liens.
Credit Score: A numerical evaluation of your credit history used by businesses to quickly understand how risky a borrower you are. Credit scores are calculated using complex mathematical formulas that look at your most current payment history, debts, credit history, inquiries and other factors from your credit report. Credit scores usually range from 300-850, the higher the score, the better. There are thousands of slightly different credit scoring formulas used by bankers, lenders, creditors, insurers and retailers. Each score can vary somewhat in how it evaluates your credit data.
Covenants, conditions and restrictions (CC&Rs): A document defining the use, requirements and restrictions of a property.
Debt: The amount of money owed.
Debt Consolidation: A process of combining debts into one loan or repayment plan. Debt consolidation can be done on your own, with a financial institution or through a counseling service. Student loans are often consolidated in order to secure a lower interest rate. (See Debt Counseling and Debt Settlement)
Debt Counseling: A type of credit counseling that focuses specifically on helping people with debt issues. Instead of consolidating debts into one loan, debt counseling agencies negotiate with your creditors using pre-set agreements and spread your payments over a longer period in order to reduce the monthly amount due. Usually non-profit companies, most of these agencies offer helpful and affordable
services. Consumers should be aware that there are also debt counseling agencies that are expensive, ineffective and even damaging to the client’s credit score (see Credit Repair).
Debt Settlement: A process where you pay an agency to negotiate directly with your creditors in the hopes of making significantly reduced settlements for your debts. Working with a debt settlement company can result in damaged credit from numerous late payments and collection records. Consumers should fully investigate the practices, reputation and costs of working with a debt settlement company before signing up.
Debt-to-Available-Credit Ratio: The amount of money you owe in outstanding debts compared to the total amount of credit you have available though all credit cards and credit lines. This ratio measures how much of your available credit you are using. The higher your debt to available credit ratio, the more risky you appear to potential lenders.
Debt-to-Income Ratio: The percentage of your monthly pre-tax income that is used to pay off debts such as auto loans, student loans and credit card balances. Lenders look at two ratios: The front-end ratio is the percentage of monthly pre-tax earnings that are spent on house payments. In the back-end ratio, the borrower’s other debts are factored in along with the house payments.
Deed: A legal document that transfers a property from one owner to another. The deed contains a description of the property, and is signed, witnessed and delivered to the buyer at closing.
Deed of trust: Agreement to pledge property as security for a loan, used in many states in place of a mortgage. In this arrangement, the borrower transfers legal title to a trustee who holds the property in trust as security for the repayment of the debt. The deed of trust becomes void if the debt is repaid, but if the borrower defaults on the loan, the trustee may sell the property to pay the debt.
Default: The status of a debt account that has not been paid. Accounts are usually listed as being in default after they have been reported late (delinquent) several times. Defaults are a serious negative item on a credit report.
Delinquency: A term used for late payment or lack of payment on a loan, debt or credit card account. Accounts are usually referred to as 30, 60, 90 or 120 days delinquent because most lenders have monthly payment cycles. Delinquencies remain on your credit report for 7 years and are damaging to your credit score.
Demand Draft Checks: A type of electronic check that can be created online by entering account numbers listed on the bottom of a personal check and that can be cashed without a signature. This system was originally designed to help telemarketers take check payments over the phone. Now it is one of the fastest growing fraud tools.
Discount points (or Points): Money paid to a lender at closing in exchange for lower interest rates. Each point is equal to 1 percent of the loan amount.
Dispute: The process of submitting a request to the credit bureaus to have an error on your credit report corrected. Disputes are investigated and updates made to your credit report over a 30 day period. If your correction is made, you will receive a letter from the credit bureaus and a copy of your updated credit report. If your dispute is rejected, you will receive a letter explaining why the credit bureau could not verify the correction.
Divorce Decree: A court order that grants a divorce and outlines terms for child support, alimony and the separation of assets. While a divorce decree may define responsibility for shared debts (your spouse pays the car loan, you pay the mortgage) it does not legally separate responsibility for these accounts. In order to stop double responsibility and credit reporting of shared accounts, the debts must be closed or refinanced directly with the lender.
Documentary stamps: A state tax, in the forms of stamps, required on deeds and mortgages when a real estate title passes from one owner to another.
Down payment: Money paid for a house from one’s own funds at closing. The down payment will be the difference between the purchase price and mortgage amount.
Due-on-sale clause: Provision in a mortgage or deed of trust allowing the lender to demand immediate payment of the loan balance upon sale of the property.
Earnest money: Deposit made by a buyer in evidence of good faith when the purchase agreement is signed.
Empirica Score: A co-signer is legally responsible for the loan and the shared account will appear on their credit report. There are thousands of slightly different credit scoring formulas used by bankers, lenders, creditors, insurers and retailers. Each score can vary somewhat in how it evaluates your credit data.
Equal Credit Opportunity Act (ECOA): A law that protects consumers from discrimination on the basis of race, sex, public assistance income, age, marital status, nationality or religion in the credit and lending process.
Equifax: One of the three national credit bureaus (also known as credit reporting agencies) that collects and provides consumer financial records.
Equity: The fair market value of a home minus the unpaid mortgage principal and liens. You build up equity in a home as you pay down your mortgage and as the property value increases. Also called the lendable value or net value.
Equity loan: A loan based on the borrower’s equity in his home.
Escrow: The neutral third party that holds money and/or documents until the escrow instructions are fulfilled and escrow can be a title company or an attorney, depending on state regulations.
Escrow account: Account held by a lender containing funds collected as part of mortgage payments for annual expenses such as taxes and insurance, so that the homeowner does not have to pay a large sum when these fall due.
Escrow waiver: Escrow Waiver is waiver of the requirement to fund an escrow account with lender and instead pay insurance and taxes separately. This waiver may require a fee and is not available with all loan programs.
Experian: One of the three national credit bureaus that collects and provides consumer financial records. Experian (formerly known as TRW) operates the ConsumerInfo, FreeCreditScore and CreditExpert brands.
Expiration Term: The set number of years that a record will remain on your credit report as mandated by the FCRA. Most negative records stay on your credit report for 7-10 years. The shortest expiration term is two years for inquiry records. The longest expiration term is 15 years for paid tax liens or indefinitely for unpaid tax liens. Positive information can also stay on your credit report indefinitely.
Fair and Accurate Credit Transaction (FACT) Act: The FACT Act was signed into law December 2003 and includes several consumer credit industry regulations. This law requires credit bureaus to provide all US residents with a free copy of their credit report once every 12 months. The law also includes new privacy regulations, identity theft protections and dispute procedure requirements. First passed in the 1970’s that promotes accuracy, confidentiality and proper use of information in the files kept by credit reporting agencies. This law specifies the expiration terms of records on your credit report, defines who can access your credit data and grants consumers the right to view and dispute their credit records.
Fannie Mae: The largest mortgage investor. A government-sponsored enterprise that buys mortgages from lenders, bundles them into investments and sells them on the secondary mortgage market. Formerly known as the Federal National Mortgage Association.
Federal Housing Administration (FHA): A division of the Department of Housing and Urban Development (HUD) that provides mortgage insurance and sets construction and underwriting standards.
Fee simple: Absolute ownership of real property.
FICO Score: A specific credit score developed by Fair Isaac Corporation. There are thousands of slightly different credit scoring formulas used by bankers, lenders, creditors, insurers and retailers. Each score can vary somewhat in how it evaluates your credit data.
File Freeze: Consumers can request that the credit bureaus freeze their credit reports. This freeze
stops new credit from being issued in your name by blocking creditors, lenders, insurers and other companies from accessing your credit data. In some cases, a $10 fee for each credit bureau is required
to process the file freeze. The freeze can also be temporarily or permanently undone for an additional fee.
Finance Charge: The total cost of using credit. Besides interest charges, the finance charge may include other costs such as cash-advance fees.
First Mortgage: The primary loan on a real estate property. This loan has priority over all other “secondary” loans.
Fixed Rate: An interest rate for a credit card or loan that remains constant.
Fixed-Rate Option: A home equity line of credit financing option that allows borrowers to specify the payments and interest on a portion of their balance. This can be done a few times during the life of the loan, usually for an additional fee.
Fixed Rate Mortgage (FRM): A mortgage with an interest rate that remains constant for the entire duration of the loan. FRM’s have longer terms (15-30 years) and higher interest rates than adjustable
rate mortgages but are not at risk for changing interest rates. You can shop and compare mortgage
options securely online.
Flood insurance: A form of hazard insurance required by lenders to cover properties in flood zones.
Floor: The minimum rate of interest payable on an adjustable-rate mortgage.
Floor (Interest – ARM): A pre-determined amount that establishes the minimum interest rate life of a loan. This can be expressed as a percentage below the start rate, as a rate of interest independent of the start rate, or, quite typically, the “Floor” may be established as being equal to the Margin.
Forbearance: Grace period given when a lender postpones foreclosure to give the borrower time to catch up on overdue payments.
Foreclosure: When a borrower is in default on a loan or mortgage, the creditor can enact a legal process to claim hownership of the collateral property. Foreclosure usually involves a forced sale of the property where the proceeds go toward paying off the debt.
Fraud Alert: If you suspect that you are a victim of identity theft, you may contact the credit bureaus to request that a 90-day fraud alert is placed on your credit reports. If you have been a victim of identity theft you only need to contact one bureau to have a temporary 90 day alert added to all three of your
credit reports. This 90-day alert notifies potential creditors that your identity may have been stolen and suggests that they take extra steps to confirm your identity before opening a new account. If it turns out that your identity has been stolen, you can request an extended 7 year alert by providing documentation of the crime (such as a police report). There is also a special 1 year fraud alert available for military personnel on activity duty.
Freddie Mac: Formerly known as the Federal Home Loan Mortgage Corporation, this is a government-sponsored firm that buys mortgages from lenders, pools them with other loans and sells them to investors.
Front-End Ratio or Front Ratio: A calculation of the percentage of your monthly pre-tax income that goes toward a house payment. The general rule is that your front ratio shouldn’t exceed 28%.
Garnishment: When a creditor receives legal permission to take a portion of your assets (bank account, salary, etc) to repay a delinquent debt.
Ginnie Mae: Also known as the Government National Mortgage Association. A part of the Department of Housing and Urban Development that buys mortgages from lending institutions and pools them to form securities, which it then sells to investors.
Grace Period: A period of time, often about 25 days, during which you can pay your credit card bill without incurring a finance charge. With most credit card accounts, the grace period applies only if you pay your balance in full each month. It does not apply if you carry a balance forward or in the case of cash advances. If your account has no grace period, interest will be charged on a purchase as soon as it is made.
Gross: Before taxes.
Gross income: Total income before taxes or expenses are deducted.
Gross monthly income: The total amount earned by a borrower each month.
Hard Inquiry: A record of a business request to see your credit report data for the purpose of an application for credit. Hard inquiries appear on your credit report each time you complete an application for a credit card, loan, cell phone, etc. Hard inquiries remain on your credit report for 2 years but are
only included in your credit score for the first 12 months.
Hazard insurance: Protects the insured against loss due to fire or other natural disaster in exchange for a premium paid to the insurer.
High-LTV Equity Loan: A specific kind of home loan that causes your loan-to-value ratio to be 125% or more. When the total principal of a loan leaves the borrower with debt that exceeds the fair market value of the home, the interest paid on the portion of the loan above that value may not be tax deductible.
Home Equity Line of Credit: Often called a HELOC, is an open-ended loan that is backed by the part of a home’s value that the borrower owns outright. This type of loan is used much like a credit card. This type of loan is used much like a credit card. Home equity lines of credit can be effective ways to borrow large sums of money with a relatively low interest rate. These types of loans should be used with caution. If a borrower is unable to pay back the loan for some reason (loss of job, illness, etc.) they risk losing the home they used as collateral.
Home Equity: The part of a home’s value that the mortgage borrower owns outright. This is the difference between the fair market value of the home and the principal balances of all mortgage loans.
Home Ownership and Equity Protection Act: A law designed to discourage predatory lending in mortgages and home equity loans.
Housing code: Local government ordinance that sets minimum standards of safety and sanitation for existing residential buildings.
Housing Expense Ratio: The percentage of your monthly pre-tax income that goes toward your house payment. The general rule is that this ratio shouldn’t exceed 28%. This is also known as the “front ratio.”
Individual Taxpayer Identification Number (ITIN): This nine digit identification number is issued by the Internal Revenue Service to taxpayers who don’t have a Social Security number, such as people who are not US citizens. This number can be used to apply for credit and loans or to access credit reports.
Income Verification: Loan applications may require fully documented proof of an applicant’s income.
Index: A published rate used by lenders to calculate interest adjustments on ARMs (Index + Margin = Interest Rate). Some indexes are more volatile than others.
Index (ARM): Established at loan origination, the index is a widely published financial indicator that, combined with the Margin, works to establish the effective rate of an adjustable-rate mortgage (“Index + Margin = Rate”).
Initial rate: The rate charged during the first interval of an ARM.
Inquiry: A record on your credit report that shows every time you, one of your creditors, or a potential creditor requests a copy of your credit report data. (See Soft Inquiry, Promotional Inquiry and Hard Inquiry).
Installment Account: A type of loan where the borrower makes the same payment each month. This includes personal loans and automotive loans. Mortgage loans are also installment accounts but
are usually classified by the credit reporting system as real-estate accounts instead.
Interest Rate Cap: A limit on how much a borrower’s percentage rate can increase or decrease at rate adjustment periods and over the life of the loan. Interest rate caps are used for Adjustable Rate Mortgage ARM loans where the rates can vary at certain points.
Interest Rate: A measure of the cost of credit, expressed as a percent. For variable-rate credit card plans, the interest rate is explicitly tied to another interest rate. The interest rate on fixed-rate credit card plans, though not explicitly tied to changes in other interest rates, can also change over time.
Interest: The money a borrower pays for the ability to borrow from a lender or creditor. Interest is calculated as a percentage of the money borrowed and is paid over a specified time.
Interest-Only Loan: A type of loan where the repayment only covers the interest that accumulates on the loan balance and not the actual price of the property. The principal does not decrease with the payments. Interest-only loans usually have a term of 1-5 years.
Introductory Rate: A temporary, low interest rate offered on a credit card in order to attract customers. Under the CARD Act, an introductory rate must remain in effect for a minimum of 6 months before converting to a normal or variable rate.
Joint Account: An account shared by two or more people. Each person on the account is legally responsible for the debt and the account will be reported to each person’s credit report.
Joint tenancy: The ownership of property by two or more persons with the survivor taking the share of the deceased.
Judgment: A decision from a judge on a civil action or lawsuit; usually an amount of money a person is required to pay to satisfy a debt or as a penalty. Judgment records remain on your credit report for 7 years and harm your credit score significantly.
Jumbo Mortgage: A loan that exceeds the limits set by Fannie Mae and Freddie Mac (usually when the loan amount is more than $200,000-400,000). Also known as a non-conventional or non-conforming
loan, these mortgages usually have higher interest rates than standard loans.
Late Payment: A delinquent payment or failure to deliver a loan or debt payment on or before the time agreed. Late payments harm your credit score for up to 7 years and are usually penalized with late payment charges.
Late Payment Charge: A fee charged by your creditor or lender when your payment is made after the date due. Late payment charges usually range from $10-50.
Lender: The individual or financial institution who will be providing the loan.
Lien: A legal claim against a person’s property, such as a car or a house, as security for a debt. A lien (pronounced “lean”) may be placed by a contractor who did work on your house or a mechanic who repaired your car and didn’t get paid. The property cannot be sold without paying the lien. Tax liens can remain on your credit report indefinitely if left unpaid or for 15 years from the date paid.
Loan administration: The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans and remitting payments to investors).
Loan application: A document required by lenders prior to loan approval containing detailed information about the borrower and property.
Loan application fee: A fee a prospective buyer pays a lender when applying for a mortgage.
Loan Origination Fee: A fee charged by a lender for underwriting a loan. The fee often is expressed in “points;” a point is 1% of the loan amount.
Loan Processing Fee: A fee charged by a lender for accepting a loan application and gathering the supporting paperwork.
Loan-to-Value Ratio (LTV): The percentage of a home’s price that is financed with a loan. On a $100,000 house, if the buyer makes a $20,000 down payment and borrows $80,000, the loan-to-value ratio is 80%. When refinancing a mortgage, the LTV ratio is calculated using the appraised value of the home, not the sale price. You will usually get the best deal if your LTV ratio is below 80%.
Lock or lock-in: A lender’s guarantee of an interest rate for a set period of time, usually between loan application and loan closing. This protects borrowers against rate increases during that time.
Low-Documentation Loan: A mortgage that requires less income and/or assets verification than a conventional loan. Low-documentation loans are designed for entrepreneurs or self-employed borrowers – or for borrowers who cannot or choose not to reveal information about their incomes.
Low-Down Mortgages: Secured loans that require a small down payment, usually less than 10%. Often, low-down mortgages are offered to special kinds of borrowers such as first-time buyers, police officers, veterans, etc. These kinds of loans sometimes require that private mortgage insurance (PMI) is purchased by the borrower.
|Market rate: The average rate charged by lenders for a loan.
Market value: The highest price that a buyer would pay for a property and the lowest price a seller would accept.
Maxed Out: A slang term for using up the entire credit limit on a credit card or a line of credit. Borrowing the maximum limit on credit cards hurts your credit score.
Merged Credit Report: Also called a 3-in-1 Credit Report, this type of report shows your credit data from TransUnion, Equifax and Experian in a side-by-side format for easy comparison. Order a merged credit report.
Minimum Payment: The minimum amount that a credit card company requires you to pay toward your debt each month.
Monthly Housing Expense: Total monthly expense of principal, interest, taxes and insurance.
Mortgage: A document that creates a lien on a property as security for the payment of a debt.
Mortgagee: The lender in a mortgage loan transaction.
Mortgage Banker: A person or company that originates home loans, sells them to investors (such as Fannie Mae) and processes monthly payments.
Mortgage Broker: A person or company that matches lenders with borrowers who meet their criteria. A mortgage broker does not make the loan directly like a mortgage banker, but receives payment for their services. (See Broker Premium)
MIP (Mortgage insurance premium): Insurance purchased by borrower to insure against default on a FHA loans.
Mortgage Interest Expense: A tax term for the interest paid on a loan that is fully deductible, up to certain limits, when you itemize income taxes.
Mortgage loan: A loan for which real estate serves as collateral to provide for repayment in case of default.
Mortgage note: A legal document that obligates a borrower to repay a loan at a stated interest rate during a specified period of time. The agreement is secured by a mortgage.
Mortgagor: The borrower in a mortgage loan transaction.
Mortgage Refinance: The process of paying off and replacing an old loan with a new mortgage. Borrowers usually choose to refinance a mortgage to get a lower interest rate, lower their
monthly payments, avoid a balloon payment or to take cash out of their equity.
Negative Amortization: When your minimum payment toward a debt is not enough to cover the interest charges. When this occurs, your debt balance continues to increase despite your payments.
Net: After taxes.
Net effective income: Gross income minus estimated federal income tax.
Non-assumption clause: A statement in a mortgage contract forbidding the assumption of the mortgage by another borrower without the prior approval of the lender.
Non-conforming loan: A conventional loan that can not be sold to Fannie and Freddie Mac. Often, these loans are larger than the conforming loan amount.
Non-dischargeable debt: Debt, such as taxes, that cannot be forgiven in a bankruptcy liquidation.
Note: Legal document stating the terms of a debt and a promise to repay it.
Notice of default: Written notice to a borrower that a default has occurred and that legal action may be taken.
Opt-Out: You can opt-out from pre-approved credit card offers, insurance offers and other third party marketing offers or solicitations by calling 1-888-5-OPT-OUT. Calling this number will stop mail offers
that use your credit data from all three credit bureaus. You can also call this number to ask to opt-in again.
Origination fee: A fee that a lender charges, usually expressed as a percentage of the loan (or points) for evaluating and processing the loan.
Over-Limit Fee: A fee charged by a creditor when your spending exceeds the credit limit set on your card, usually $10-50. Under the CARD Act, credit card issuers must first get your consent before charging
over-limit fees and they are only allowed to charge one over-limit fee per billing cycle.
Payment cap: Limit on the amount by which a borrower’s ARM payments may increase, regardless of rise in interest rates. This may result in negative amortization.
Payment cap (ARM): A pre-determined amount that establishes the maximum by which the payment can increase, irrespective of increases to the interest rate.
Payment change date: Dates upon which the payment amount is subject to change. Products featuring “negative amortization” typically will include a payment change date which differs from the interest rate change date in frequency.
Periodic Rate: The interest rate you are charged each billing period. For most credit cards, the periodic rate is a monthly rate. You can calculate your card’s periodic rate by dividing the APR by 12. A credit card with an 18% APR has a monthly periodic rate of 1.5%.
Per diem interest: Interest calculated per day. Depending on the day of the month on which closing takes place, you’ll have to pay interest from the date of closing to the end of the month.
Permissible Purpose: Specific guidelines regulating when your credit data can be reviewed and by what type of business. These guidelines are part of the FCRA laws under Section 604. Permissible purposes of consumer reports.
Person to Person Loan: Usually applied to auto loans; this loan is a request for direct financing for a vehicle rather than a loan through a dealership.
PITI: Acronym for the four elements of a mortgage payment: principal, interest, taxes and insurance.
PMI: See Private Mortgage Insurance.
Point: A unit for measuring fees related to a loan; a point equals 1% of a mortgage loan. Some lenders charge “origination points” to cover the expense of making a loan. Some borrowers pay “discount
points” to reduce the loan’s interest rate.
Power of attorney: Legal document authorizing one person to act on behalf of another.
Prepaid expenses: Taxes, insurance and assessments paid in advance of their due dates, including at closing.
Prepaid interest: Charged to a borrower at closing to cover interest on the loan between the closing date and the end of that month.
Pre-Approval Letter: A document from a lender or broker that estimates how much a potential homebuyer could borrow based on current interest rates and a preliminary look at credit history. The letter is a not a binding agreement with a lender. Having a pre-approval letter can make it easier to shop for home and negotiate with sellers. It is better to have a pre-approval letter than an informal pre-qualification letter.
Prepayment Penalty: A fee that a lender charges a borrower who pays off their loan before the end of its scheduled term. Prepayment penalties are not charged by most standard lenders. Subprime borrowers should review the terms of their loan offers carefully to see if this fee is included.
Pre-Qualification Letter: A non-binding evaluation of a prospective borrower’s finances to determine how much he or she can borrow and on what terms. A pre-qualification letter is a less formal version of a pre-approval letter.
Prime rate: Lowest commercial interest rate charged by a bank on short-term loans to its most credit-worthy customers.
Principal: The amount of money borrowed with a loan or the amount of money owed, excluding interest.
Private Mortgage Insurance (PMI): A form of insurance that protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. Private mortgage insurance usually is required if the down payment is less than 20% of the sale price.
Promotional Inquiry: A type of soft inquiry made by a creditor, lender or insurer in order to send you a pre-approved offer. Only limited credit data is made available for this type of inquiry and it does not harm your credit score.
Public Records: Information that is available to any member of the public. Public records like a bankruptcy, tax lien, foreclosure, court judgment or overdue child support harm your credit report and credit score significantly.
Qualifying rate: Adjustable-rate mortgages often employ a “qualifying fate” that differs from the “start rate.” The qualifying rate may be a pre-determined percentage of interest (i.e. “8 percent”), expressed as the “highest possible rate of interest at the beginning of the 2nd year”, based on the start rate (i.e. “start rate + 2 percent), expressed as the “Fully Indexed Accrual Rate” (“FIAR”) or another amount.
Qualifying Ratios: As calculated by lenders, the percentage of income that is spent on housing debt and combined household debt.
Rate Shopping: Applying for credit with several lenders to find the best interest rate, usually for a mortgage or a car loan. If done within a short period of time, such as two weeks, it should have little impact on a person’s credit score.
Reaffirmation Agreement: An agreement by a bankrupt debtor to continue paying a dischargeable debt after the bankruptcy, usually to keep collateral or a mortgaged property that would otherwise be repossessed.
Re-aging Accounts: A process where a creditor can roll-back an account record with the credit bureaus. This is commonly used when cardholders request that late payment records are removed because they are incorrect or resulting from a special circumstance. However, re-aging can also be used illegally by collections agencies to make a debt account appear much younger than it actually is. Some collections agencies use this tactic to keep an account from expiring from your credit report in order to try to get you to pay the debt.
Real Estate Agent: A real estate professional who is a member of the National Association of Realtors.
Real estate broker: An agent representing a buyer or seller in a real estate transaction.
Real Estate Settlement Procedures Act: A law that governs acceptable practices and fees in real estate transactions.
Real property: Land and everything that is permanently affixed to it.
Reconveyance: The transfer of property back to the owner when a mortgage is fully repaid.
Recording: The act of entering documents concerning title to a property into public records.
Recording fee: Money paid to an agent for entering the sale of a property into the public records.
Refinancing: The process of paying off one loan with the proceeds from a new loan secured by the same property.
Repayment Period: The period of a loan when a borrower is required to make payments. Usually applies to home equity lines of credit. During the repayment period, the borrower cannot take out any more money and must pay down the loan.
Repossession: When a loan is significantly overdue, a creditor can claim property (cars, boats, equipment, etc.) that was used as collateral for the debt.
Reserves: A portion of a borrower’s monthly payments held by the lender to pay for taxes, insurance and other items as they become due.
RESPA: See Real Estate Settlement Procedures Act.
Reverse Mortgage: A mortgage that allows elderly borrowers to access their equity without selling their home. The lender makes payments to the borrower with a reverse mortgage. The loan is repaid from the proceeds of the estate when the borrower moves or passes away.
Revolving Account: An account where your balance and monthly payment can fluctuate. Most credit cards are revolving accounts.
Rewards Card: A credit card that rewards spending with points, cash back programs or airline miles. These types of cards usually require that borrowers have good credit and commonly involve an annual fee.
Risk Score: Another term for a credit score. (See Credit Score, FICO Score, Beacon Score and Empirica Score)
Sale agreement: A contract signed by buyer and seller stating the terms and conditions under which a property will be sold.
Satisfaction: The payment of a debt that satisfies an obligation.
Schumer Box: An easy to use chart that explains the rates, fees, terms and conditions of a credit account. Creditors are required to provide this on credit applications by the U.S. Truth in Lending Act and it usually appears on statements and other documents.
Scoring Model: A complex mathematical formula that evaluates financial data to predict a borrower’s future behavior. Developed by the credit bureaus, banks and FICO, there are thousands of slightly different scoring models used to generate credit scores.
Second Mortgage: A loan using a home’s equity as collateral. A first mortgage must be repaid before a second mortgage in a sale.
Secured Credit Card: A consumer credit account that requires the borrower to produce some form of collateral—usually a cash deposit equal to the amount of the credit limit on the card. Secured credit cards are easier to obtain than standard credit accounts and are helpful for borrowers with poor credit or no credit.
Secured Debt: A loan that requires a piece of property (such as a house or car) to be used as collateral. This collateral provides security for the lender, since the property can be seized and sold if you don’t repay the debt.
Servicing (or Loan administration): The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans and remitting payments to investors).
Settlement (or Closing): An agreement reached with a creditor to pay a debt for less than the total amount due. Settlements can be noted on your credit report and can negatively impact your credit score. The only time it is a good idea to settle a debt is if the debt has already gone to collections or is significantly past due. Settling a debt that is current and in good standing can have a severe negative impact on your credit score.
Settlement cost (HUD guide): A booklet given to consumers after applying for a loan that provides an overview of the lending process.
Settlement costs: See Closing costs.
Social Security Number: Also referred to as a SSN. This unique nine digit number is meant to track your Social Security savings but is also used by creditors, lenders, banks, insurers, hospitals, employers and numerous other businesses to identify your accounts. People who do not have a SSN, such as non-US citizens, use a nine digit Individual Taxpayer Identification Number (ITIN) instead.
Soft Inquiry: A type of inquiry that does not harm your credit score. Soft inquires are recorded when a business accesses your credit data for a purpose other than an application for credit. Soft inquiries include your request to see your own credit report and employment-related requests. This type of inquiry is recorded by the credit bureaus but does not usually appear on a credit report purchased by you or a business.
Subprime Borrower: A borrower who does not meet the qualifications for standard or “prime” credit and loan offers. Usually a subprime borrower has poor credit (a score under 650) due to late payments, collection accounts or public records. Lenders often grade them based on the severity of past credit problems, with categories ranging from “A-” to “D” or lower. Subprime borrowers can qualify for loans and credit, but usually at a higher interest rate or with special terms.
Subsidized second mortgage: Alternative financing option for low- and moderate-income households that also includes a down payment and a first mortgage, with funds for the second mortgage provided by city, county or state housing agencies, foundations or nonprofit corporations. Payment on the second mortgage is often deferred and carries low interest rates (if any). Part of the debt may be forgiven for each year the family remains in the home.
Survey: A measurement of land, prepared by a licensed surveyor, showing a property’s boundaries, elevations, improvements and relationship to surrounding tracts.
Sweat equity: Value added to a property by improvements made by the owner.
Tax lien: Claim against a property for unpaid taxes.
Tax sale: Public sale of property by a government authority as a result of nonpayment of taxes.
Teletrack: A credit reporting system that specifically tracks subprime borrowers or borrowers with no official credit. Data about payday loan payments, rent payments and non-standard lenders is collected to develop accurate risk predictions for borrowers who may not be included in the standard credit reporting system.
Title: A document that gives evidence of ownership of a property, as well as rights of ownership and possession.
Title Company: A company that insures the title to a property.
Title Insurance: Insurance that protects the lender (lender’s policy) or buyer (owner’s policy) against loss due to disputes over property ownership.
Title Search: Examination of municipal records to ensure that the seller is the legal owner of a property and that there are no liens other claims against the property.
Transfer tax: Tax paid when a title passes from one owner to another.
TransUnion: One of the three national credit bureaus that collects and provides consumer financial records. TransUnion operates the TrueCredit and FreeCreditProfile brands.
Trust account: An account maintained by a broker or escrow company to handle all money collected for clients.
Trustee: Someone given legal responsibility to hold property in the best interest of another.
Truth-in-Lending Act: A federal law requiring written disclosure of the terms of a mortgage (including APR and other charges) by a lender to a borrower after application.
TRW: A former credit reporting agency that is now
part of Experian.
Underwriting: The process of verifying data and evaluating a loan application. The underwriter gives the final loan approval.
Universal Default Clause: A credit card policy that allows a creditor to increase your interest rates if you make a late payment on any account, not just on their account. Universal default clauses were banned under the CARD Act – credit card issuers are no longer allowed to use this practice to increase cardholder interest rates.
Unsecured Debt: A loan on which there is no collateral. Most credit card accounts are unsecured debt.
Utilization Ratio: The ratio between the credit limits on your accounts and the outstanding balances. This ratio shows lenders how much of your available credit you are using overall.
VA Loan: A home loan available to veterans with little or no down payment and guaranteed by the U.S. Veterans’ Administration.
Variable Rate: A type of adjustable rate loan tied directly to the movement of some other economic index. For example, a variable rate might be prime rate plus 3%; it will adjust as the prime rate does.
Verification of deposit (VOD): A document signed by the borrower’s bank or other financial institution that verifies the borrower’s account balance and history.
Verification of employment (VOE): A document signed by the borrower’s employer that verifies the borrower’s position and salary.
Waiver: Voluntary relinquishment or surrender of some right or privilege.
Walk-through: A final inspection of a home to check for problems that may need to be corrected before closing.
Zoning ordinances: Local laws that establish building codes and usage regulations for properties in a specified area. This creation of districts specifies different types of property uses, such as commercial or residential.