A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 203(b) 203(b) program allows many fortunate Americans to qualify for a home mortgage when under "conventional" underwriting guidelines, they would have been disqualified. The following are characteristics of this program: Down payment requirements: Since this mortgage is insured by HUD, the minimum down payment required is 3% of the sales price. Furthermore, the down payment can be a gift from a family member, the government, or a non-profit agency designed to help first-time and low/moderate income home buyers. No cash reserves are required. Income and employment: There are no limitations placed upon income requirements. As for employment, there are no limitations on a specific length of time at a particular job. However, a 2 year history is required, preferably in the same line of work (education can be counted towards this 2 year history if it is for the same profession the borrower is currently in). Eligible properties and occupancy requirements: FHA loans are restricted to 1 to 4 unit single family residences that are new, under construction, or existing (i.e. resale properties), condominiums, and townhomes. Homes located in a PUD (planned urban development) must be approved by FHA or VA. Also, mobile homes with a permanent foundation, taxed as real property, and built after June 16, 1976 are eligible. All FHA insured properties must be owner-occupied. Closing Costs: HUD has created a list of allowable and non-allowable closing costs that may be charged to the home buyer. Non-allowable closing costs generally are referred to as "garbage fees" or "junk fees" and include costs such as the lender's tax service or document preparation fees.   Qualifying ratios: HUD limits a borrower's monthly payment not to exceed 29% of their gross monthly income. A borrower's total debt (proposed monthly payment plus monthly payments towards credit cards, student loans, car payments, and other installment and revolving credit) cannot exceed 41% of their gross monthly income. Mortgage Insurance Premium: There is a 1.50% fee for a 30 or 15 year mortgage, assessed at the time of originating a FHA mortgage that is paid to HUD that can be wrapped into the loan. This fee goes towards maintaining the FHA insurance program. Furthermore, the borrower will pay 0.5% per year MIP renewal premium for the life of the loan. This is paid monthly. It is important to note that condominiums are exempt from the upfront mortgage insurance premium, but a borrower would still be required to pay the monthly renewal premium. Assumability: Yes. The person assuming the loan must credit qualify for the mortgage and the seller is automatically released from liability with the approval of the lender. 203(k) This FHA mortgage insurance program enables homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan. 3/2 Option A fannie Mae mortgage product that enables low - and moderate-income borrowers to put only 3 percent down of the own funds, coupled with a 2 percent gift from a relative or a 2 percent grant from a nonprofit or state or local goverment agency. Abstract of judgment A court judgment summary that puts a lien against a property that is filed with the county recorder. Abstract or title search The process in which a title company reviews recorded transactions on a specific parcel or property to determine whether there are any existing title defects or liens that could interfere with the transfer of ownership or refinance. Acceleration clause A clause that gives a lender the right to collect the balance of a loan if the borrower defaults or misses a payment on the loan. This allows the lender to speed up the rate at which the loan becomes due or even to demand immediate payment of the entire balance of the loan if the borrower defaults. Addendum A change or addition to a document or contract. Adjustable-rate mortgage (ARM) A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index. Adjustment period or interval The time between interest rate changes in an adjustable rate mortgage, usually one, three, or five years. Alienation clause A clause that establishes that if a loan is transferred or a property sold, the loan must be paid in full. Alternative mortgage Any home loan that does not conform to a standard fixed-rate mortgage. American with Disabilities Act A law passed in 1990 that outlaws discrimination against disabled people in housing, public accommodations, employment, government services, transportation, and telecommunications. Amortization The process of paying the principal and interest on a loan through regularly scheduled installments. Initially, most of each payment is applied toward interest owed. Later in the loan term, each payment is increasingly applied toward principal. Annual Percentage Rate (APR) A measure of interest rate that expresses the cost of a mortgage as a yearly rate on the loan balance. The APR assumes that the loan is held for its full term. For an adjustable-rate loan, the APR assumes the loan's index doesn't change from its initial value. Appraisal An estimate of the value of your property, made by a licensed appraiser according to a strictly defined set of guidelines and definitions. APR See Annual Percentage Rate. ARM See Adjustable Rate Mortgage. Assessment The value placed on your property by the County Assessor's office, as opposed to the appraised value. In California, due to Proposition 13, this value is set by formula and may have little bearing on the actual value of your property. Assets Items of value include cash, real estate, securities, and investments, which can be used to repay debt. Assignor A person who transfers rights and interests of a property. Assumable mortgage A mortgage that can be transferred from one borrower to another. Assumption An agreement between a buyer and seller whereby the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money because this is an existing mortgage debt back to top B Balance sheet A statement that shows the assets, liabilities, and net worth of an individual. Balloon loan A mortgage in which monthly installments are not large enough to repay the loan by the end of the term. As a result, the final payment due is the lump sum of the remaining principal. Balloon payment The final lump sum due at the end of the balloon loan or mortgage. Bankruptcy A proceeding in which a court finds a debtor insolvent and relieves the debtor from payment of certain obligations. Bankruptcy remains on one's credit record for 7 to 10 years and can severely limit a person's ability to borrow. Beneficiary A lender or mortgagee receiving funds from the borrower or mortgagor. Binder A report issued by a title insurance company that details the condition of a home's title and provides guidelines for a title insurance policy. Blanket mortgage A mortgage that covers more than one property owned by the same borrower. Broker An individual in the business of helping to arrange funding or negotiating contracts for a client, but who does not loan the money himself. Buy-down mortgage A mortgage in which the lender receives a premium as an incentive to reduce the interest rate in early years of the mortgage. Loan payments start out relatively low and increase later. Bylaws The rules and regulations that a homeowners' association or corporation adopts to govern activities. back to top C Cancellation clause See Right to Rescission. Cap (Payment) A consumer safeguard that limits the amount that monthly payments on an adjustable-rate mortgage may change. Cap (Interest) A consumer safeguard that limits the amount the interest rate on an adjustable-rate mortgage may change per year and/or over the life of the loan. Certificate of title A certificate issued by a title company or a written opinion by an attorney that the seller has good marketable and insurable title to the property that he is offering. A certificate of title does not offer protection against hidden defects in the title that an examination of the records could not reveal. The issuer of a certificate of title is liable only for damages due to negligence. Chain of title The official record that details the ownership history of a piece of property. Charge-off A situation whereby a creditor writes off a defaulted loan because the amount is small enough; however, it will still show up on debtor's credit record for 7 to 10 years. Chattel mortgage A lien on a personal property that is used as collateral for a loan. Closing The meeting between the buyer, seller, and lender where the property and funds legally change hands. Closing costs These include a loan origination fee, points, appraisal fee, title insurance, survey, taxes, deed-recording fee, credit report fee, and other costs assessed at settlement. The closing costs usually are about 2 to 6 percent of the amount of the mortgage. Closing statement A document provided by the escrow agent that details the final financial settlement between buyer and seller in a real estate transaction, or between borrower and lender in a refinance transaction. Also known as a settlement sheet. COFI - Cost of Funds Index An index that is used to determine interest rate changes for certain adjustable-rate mortgages (ARMs). It is based on the cost of savings, borrowings, and advances of the institutions that compprise the index. Collateral Property, offered to support a loan, that can be seized if the debtor defaults. Commission Money paid to a real estate agent or broker by the seller as compensation for finding a buyer and completing the sale. Community property Property accumulated through the joint efforts of husband and wife. One way that title can be held. Condominium A type of property that includes at least two units, with each unit owned by a different individual. These units share common areas and facilities, such as a parking garage. Conforming loan A loan that meets the qualifications to be purchased by Fannie Mae or Freddie Mac. The current conforming loan limit is $275,000. Construction loan A short-term loan that a lender makes for the construction of homes and buildings. The funds are disbursed in the stages of the construction. Conventional loan A mortgage that is not insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or Farmers Home Administration (FmHA). Convertible adjustable-rate mortgage A mortgage that allows the borrower to convert from an adjustable-rate mortgage to a fixed-rate mortgage in a specified period of time. Cosigner A person who signs a mortgage note along with the buyer and therefore assumes equal responsibility for the loan. Cost of Funds Index An index that is used to determine interest rate changes for certain adjustable-rate mortgages (ARMs). It is based on the cost of savings, borrowings, and advances of the institutions that compprise the index. Credit bureau An agency that maintains your credit history. Credit history A record of your debt and payment history. Credit ratio The ratio, expressed as a percentage, that results when a borrower's monthly payment obligation on long-term debts is divided by the borrower's net income (for FHA/VA loans) or gross monthly income (for conventional loans). See also Expense-to-Income Ratio. Credit scoring A statistical system that is used to rate credit applicants according to various characteristics relevant to creditworthiness. Credit worthiness An individual's past and future ability to repay debt. back to top D Debt ratio/ Debt-to-income ratio: A comparison of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income. Deed The legal document that transfers ownership of a piece of property. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the state where the property is located, and should be delivered to the buyer at closing. There are two parties to the deed: the grantor and the grantee. (See also Deed of Trust, Quitclaim Deed, General Warranty Deed, and Special Warranty Deed.) Deed of trust A document that gives a lender the right to foreclose on a piece of property if the borrower defaults on the loan. Default The failure to make monthly mortgage payments, according to the mortgage agreement. Discount points Fees that a borrower pays when a lender makes a loan to receive a lower interest rate. Borrowers pay points to adjust the interest rate to the market rate. One point equals 1 percent of the loan amount. For example, two points on a $200,000 loan would be $4,000. Down payment Money paid to make up the difference between the purchase price and the mortgage amount. Down payments are usually 10 to 20 percent of the sales price on conventional loans, and no money down to 5 percent on FHA and VA loans. back to top E Earnest money Money given to a buyer as part of the purchase price to bind a transaction or assure payment. Equity The difference between the fair market value of your home and what you owe on your loan. Escrow The process in which a neutral third party or trustee holds documents and funds and carries out instructions agreed to by all parties. Escrow can also refer to an account held by the lender into which the homebuyer pays money that is held for tax and insurance purposes. Escrow accounts must be managed in accordance with federal law and the U.S. Department of Housing and Urban Development (HUD) requirements. Executed The signing of all legal loan documents in escrow in the presence of an escrow officer who is also a notary to certify that all borrowers' signatures are correct and true. back to top F Fannie Mae See Federal National Mortgage Corporation. Federal National Mortgage Corporation (FNMA) Also known as Fannie Mae. A tax-paying corporation created by Congress that buys and sells conventional residential mortgages, as well as those insured by the FHA or guaranteed by the VA. This institution, which provides funds for one in seven mortgages, makes money for home loans more available and more affordable.   more.... Fannie Mae is a private, shareholder-owned company that works to make sure mortgage money is available for people in communities all across America. FNMA do not lend money directly to home buyers. Instead, FNMA work with lenders to make sure they don't run out of mortgage funds, so more people can achieve the dream of homeownership. FNMA is the country's second largest corporation, in terms of assets, and the nation's largest source of financing for home mortgages. FNMA is one of the largest financial services corporations in the world. And with approximately 4,700 dedicated employees, FNMA is also one of the world's most productive corporations. Fannie Mae stock (FNM) is actively traded on the New York Stock Exchange and other exchanges and is part of the Standard & Poor's 500 Composite Stock Price Index. In 1938, the Federal government established Fannie Mae to expand the flow of mortgage money by creating a secondary market. Fannie Mae was authorized to buy Federal Housing Administration (FHA)-insured mortgages, thereby replenishing the supply of lendable money. In 1968, Fannie Mae became a private company operating with private capital on a self-sustaining basis. Its role was expanded to buy mortgages beyond traditional government loan limits, reaching out to a broader cross-section of Americans. Today, Fannie Mae operates under a congressional charter that directs us to channel our efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans. Yet Fannie Mae receives no government funding or backing, and FNMA is one of the nation's largest taxpayers as well as one of the most consistently profitable corporations in America. Ten core commitments are essential to Fannie Mae's success: Housing Leadership: Serving as the indispensable leader in breaking down all barriers to affordable housing and homeownership Honesty, Integrity and Mutual Respect: Upholding the highest standards of ethics in our daily activities Financial Strength: Continually strengthening our commitment to home buyers and investors alike through superb management of our assets Excellence and Teamwork: Working together to produce high-quality results in all aspects of FNMA business, while maximizing our intellectual capacity Diversity: Fostering a diverse workforce and recognizing and valuing every individual's unique skills and perspectives Corporate Citizenship and Responsibility: Ensuring at all times that Fannie Mae has a positive impact on the lives of our employees, the communities in which we live, and the nation FNMA serve Innovation and Corporate Renewal: Challenging comfortable methods and seeking new approaches to our business to achieve the greatest results Employee Development: Supporting the career and job development of FNMA employees Reward and Recognition: Recognizing and rewarding individual and team contributions to our success Customer Service: Striving to provide the best possible service to both external and internal customers Federal Home Loan Mortgage Corporation (FHLMC) Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets. By doing so, we ultimately help homeowners and renters get lower housing costs and better access to home financing. Freddie Mac’s mission Since the Great Depression, federal support for housing has been an enduring national public policy objective. In the late 1960s the mortgage market was unpredictable, interest rates varied widely from city to city across the country, and mortgages loans were sometimes hard to get. Neither government nor private banking interests could address the nation's housing finance needs alone. A new solution was needed. Congress created Freddie Mac's charter in 1970, with a clear mission for us: stabilize the nation's mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac's Congressional charter lays the foundation of our business and the ideals that power our mission. The charter forms the framework for our business lines, shapes the products we bring to market and drives the services we provide to the nation's housing and mortgage industry. Freddie Mac’s Business Over the past 33 years, we have accomplished a great deal. As a participant in the secondary market for mortgage loans, we purchase mortgages from lenders across the country and package them into securities that can be sold to investors around the world. That's how we ensure that there is a continuous flow of funds to mortgage lenders and provide low- to middle-income homeowners and renters with lower housing costs and better access to home financing. But not all the loans we purchase are packaged into securities; we retain some in our own portfolio. We get the funds to do this by selling bonds to investors throughout the world. By offering investors a way to invest in mortgages on homes within the United States, we increase our ability to purchase mortgages from lenders and maintain a continuous flow of mortgage loan funds that in turn provide families with even more affordable mortgage financing. America's housing finance system is the envy of the world today. The combination of a Congressional charter and private-market discipline has allowed us to bring increased efficiency, strength and affordability to the market in all economic conditions. Freddie Mac’s Contributions We take our mission very seriously at Freddie Mac, and we know the difference we have made. Over the last 33 years, we have: 1.  helped increase homeownership rate in America to record levels by purchasing more than 35  million mortgages 2.  lowered mortgage rates, which reduces homeowners' interest payments and apartment rents, 3.  helped make home mortgage credit readily available and eliminated regional disparities, 4.  helped expand the variety of mortgage loan products available, 5.  used technology to help cut down the time and cost of getting a mortgage loan, and 6.  atracted investors from here and abroad to support America's mortgage lending needs. Consumers' lives are better because we've helped them become homeowners and renters of affordable, quality housing. Thanks to our contributions, homeownership in America has reached 68% today, and we're continuously working to increase that number. The goal is simple: to open more doors for more people than ever before. Federal Housing Administration (FHA) A division of the Department of Housing and Urban Development. Its main activity is to insure residential mortgage loans made by private lenders. FHA loan A loan insured by the Federal Housing Administration that is open to all qualified home buyers. While there are limits to the size of FHA loans, the limits usually accommodate moderately priced homes almost anywhere in the country. FHA mortgage insurance Mortgage insurance that requires up to 3 percent of the loan amount to be paid at closing, or a portion of this fee to be added to each monthly payment of an FHA loan to insure the loan with FHA. FICO The Fair, Isaac Corporation, which developed the formula for credit scoring. The terms also applies to the credit score itself. A FICO score can range from 200 to 900. In general, the higher the score, the more creditworthy a borrower is in the eyes of the lender. A score of at least 680 indicates the borrower is very creditworthy. Fixed-rate mortgage A home loan with an interest rate that will remain the same for the term of the loan. Foreclosure When a borrower defaults on a loan and the lender sells the borrower's property, keeping the proceeds for mortgage and legal costs and any other liens recorded on the property. Freddie Mac See Federal Home Loan Mortgage Corporation. Fund When your mortgage lender wires money to your title company for disbursement of all payments to all parties. back to top G Ginnie Mae See Government National Mortgage Association. Good-faith estimate An estimate from a lender showing all costs a borrower will incur in connection with the loan, including costs from title and escrow. Government National Mortgage Association (GNMA). Also known as Ginnie Mae. Provides sources of funds for residential mortgages, insured or guaranteed by the FHA or VA. Graduated-payment mortgage (GPM) A type of flexible-payment mortgage that starts out with low payments, which gradually become larger over the term of the loan and then level off. This type of mortgage has negative amortization built into it. Grantee The home buyer. Grantor The home seller. Gross monthly income The total amount that the borrower earns per month, before deductions. Growing-equity mortgage A fixed-rate mortgage that increases payments over a specified period of time. The payment increases are applied to the mortgage principal. back to top H Hazard insurance A form of insurance in which the insurance company protects the insured from specified losses, such as fire and windstorm. Home-equity conversion mortgage Also known as a reverse mortgage, this type of loan is made to older borrowers who want to convert their home equity into available cash. Home-equity line of credit An open-ended line of credit based on a homeowner's equity, usually limited to 75 to 85 percent of a home's appraised value. Home-equity loan A loan that allows owners to borrow against the equity in their homes. Homeowner's insurance Always required by lenders in a mortgage transaction. Includes hazard insurance, and flood insurance if the property is located in a flood zone. HUD See U.S. Department of Housing and Urban Development. HUD-1 Uniform Settlement Statement A closing statement or settlement statement provided by the escrow company that outlines all costs associated with a loan transaction. back to top I Impound account An account used by the mortgage company to pay homeowner's insurance, county taxes, and if needed, private mortgage insurance (PMI). Additional money for the impound account is collected with the monthly payment. Income property Property that is usually not owner-occupied and used as a rental for income purposes. Loans for these properties usually have higher interest rates. Index A published interest rate against which lenders measure the difference between the current interest rate on an adjustable-rate mortgage and that earned by other investments. These investments include one-, three-, and five-year U.S. Treasury Security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average cost-of-funds (CoF) incurred by savings and loans. The index is used to adjust the interest rate up or down on an adjustable mortgage. Inspection fee A fee collected through escrow, and payable at close to a home inspector, to determine the present physical condition of a home. This is required by the lender and used as supplemental information found in the appraisal. Intermediate ARM An adjustable-rate mortgage that has an adjustment period that doesn't start for 3 to 10 years. Because the interest rate period is longer than that for a 1-year ARM, the beginning interest rate will be higher. Interest rate The fee, expressed as a percentage, charged for a loan. Helps determine the monthly mortgage payment. back to top J Joint tenancy Equal shares of a piece of property owned by two or more people. Rights to the property pass to the surviving owner or owners. Jumbo loan Loans that exceed limits set by Fannie Mae and Freddie Mac. Any loan over $275,000 is considered a jumbo loan. Junior mortgage A loan that is subordinate to the primary loan.   L Lender A mortgage company, bank or savings institution that offers home loans. Lien The legal right to hold another's property or to have it sold or applied for payment of a claim to satisfy a debt. Loan costs Costs associated with the loan that has been selected by a borrower. These costs will be collected through escrow and subtracted from the total funded at the close of escrow. Loan-to-value (LTV) The ratio of the loan amount divided by the purchase price of a home. The purchase price must be supported by an appraisal. Lock expiration date The date when the option to lock an interest rate expires. If a borrower allows the lock date to pass, the interest rate will no longer be valid and the borrower will have to lock in another interest rate. Lock in When an interest rate is set before the loan documents are processed to ensure the borrower gets the best interest rate available. LTV See Loan-to-Value. back to top M Margin The number added to the index to determine the new interest rate on an adjustable-rate mortgage. Mortgage A loan that is secured by real property. Mortgage broker A company or person who searches for a lender to fit a prospective borrower's criteria. Mortgage insurance Also known as Private Mortgage Insurance (PMI). Money paid to insure a mortgage when the down payment is less than 20 percent. See also Private Mortgage Insurance.   N Negative amortization When a borrower's monthly payment is too small to cover both the principal and interest of a loan. In this case, the unpaid interest is added to the outstanding balance of the loan. The danger of negative amortization is that it gradually increases the mortgage debt, and therefore the home buyer can end up owing more than the original amount of the loan. Non-recurring closing costs One-time fees charged through escrow. No point-no fee loan A loan program that a lender can offer if interest rates are currently down. These loans make it very attractive for a homeowner to refinance. Note The legal document that holds a borrower liable to repay a mortgage at a certain interest rate and over a specific time period. back to top O Origination fee A fee charged by the mortgage broker or banker when the loan is originated. May also be called points or fees. One-year ARM An adjustable-rate mortgage whose interest rate adjusts 2 percent once a year or 1 percent every 6 months. These loans usually have lower up-front costs and interest rates than fixed-rate loans. P Parcel An official piece of land that is described by the county in which it resides. Per diem interest Interest charged or accrued daily. PITI See Principal, Interest, Taxes, Insurance. PMI See Private Mortgage Insurance. Points A fee that the borrower pays to a lender to receive a lower interest rate on a loan. Power of Attorney A document that authorizes one individual to act on behalf of another. Pre-approval A confirmation from a lender that it has done a complete assessment of your ability to pay for a home, based on your credit report and other factors. Prequalification A preliminary assessment of a buyer's ability to pay for a home. Prepayment penalty A financial penalty for paying the balance of a mortgage before it is due. Principal The amount of debt, not counting interest, owed on a loan. Principal, interest, taxes and insurance (PITI) The four components of a monthly mortgage payment. Principal is the portion of the payment that actually reduces the balance of the loan. Private Mortgage Insurance (PMI) Insurance that protects lenders if a borrower defaults on his loan. It is required when a borrower puts less than a 20 percent down payment on a home. Can You Get Rid of PMI ? When loan-to-value ratio drops below 80%, just ask lender Have you ever wondered how your friends and relatives can afford to buy their nice houses and condos when you know they had hardly any savings for a down payment? Unless they obtained a VA or FHA mortgage, they probably borrowed 90, 95, 97, 100, or even 103 percent of their home's purchase price, thanks to PMI. Private mortgage insurance enables mortgage lenders to make these high-risk loans with safety. If the borrower defaults and the lender suffers a loss, the PMI insurer steps in to pay the top, or riskiest, portion of the mortgage, above the customary lender's maximum "safe loan" of 80 percent loan-to-value ratio. Who can get a low or no down payment PMI mortgage? Because PMI mortgages are risky for lenders, they require good income and good credit. There are two steps. The first step is to be approved by the mortgage lender. The second step is to be approved by the PMI insurer. Most mortgage lenders refer their PMI business to one or two PMI insurers (there are only seven PMI companies in the nation). Because the originating lender knows the PMI qualification standards, after obtaining approval by the originating lender there usually is no problem obtaining PMI. How much does PMI cost the borrower? PMI payment plans vary widely among mortgage lenders. Some lenders include PMI in their loan interest rate at no extra charge. But PMI borrowers can be certain they won't obtain the lowest interest rate by making a low or no down payment. The 103 percent PMI mortgages even include closing costs. Other PMI lenders charge a PMI fee at the time of loan closing, plus a monthly PMI premium, which varies with the amount of the insured mortgage. These fees range from $20 to $100 per month, sometimes more for larger mortgages. PMI borrowers should ask about alternatives for PMI payments, which can vary by lender, such as obtaining a second mortgage or a home equity loan instead of PMI. How long is PMI required? The answer to this question depends on the mortgage lender. At the time of loan closing, lenders are required to give borrowers a disclosure stating when the PMI premium can be cancelled. If the PMI premium is included in the interest rate, without a specific PMI premium each month, the extra PMI cost lasts as long as the mortgage. To illustrate, suppose 6 percent is the market interest rate. But your lender might quote a 6.25 percent interest rate for a low or no down payment mortgage without any extra PMI charge. However, most PMI lenders charge an up-front PMI fee plus a monthly PMI premium such as $100, sometimes more. This monthly PMI charge will be required until the loan balance declines below a specified ratio. But this gets very tricky and deceiving. Some lenders require the loan balance to drop below 80, 78, or 75 percent loan-to-value ratio. The problem is many lenders require these loan-to-value ratios to be based on the home's purchase price, without considering increased market value due to (1) improvements made by the borrower and/or (2) market value appreciation, currently at a 6 percent national average. Smart PMI borrowers realize, after a few years of home ownership, their loan-to-value ratio is well below 80 percent and the mortgage lender no longer needs PMI protection in the rare event of foreclosure. But many lenders are reluctant to allow PMI cancellation because of the loss protection it offers lenders. Federal law doesn't help PMI borrowers. In 1998, Congress enacted the Homeowners Protection Act. It was supposed to protect PMI mortgage borrowers from nasty lenders who refuse to cancel unnecessary PMI premiums. But this ineffective law hasn't helped one PMI borrower yet and it won't help any until 2009. Here's why. This law says PMI mortgages originated after July 29, 1999 must have the PMI cancelled when the loan-to-value ratio declines to 78 percent. However, don't be fooled. Depending on the PMI home loan's interest rate, it will take 10 to 15 years for the loan balance to drop to 78 percent of the home's market value at the time of purchase. The reason is this bad law does not take into consideration the home's rise in market value due to the borrower's capital improvements or the market value appreciation. The adverse result is PMI insurers continue to collect the monthly premiums even when the loan-to-value ratio is well below a safe 80 percent. "Good guy" lenders Fannie Mae and Freddie Mac will cancel PMI if you ask. Fortunately, the nation's two largest buyers of home loans in the secondary mortgage market are "good guy" lenders. Their PMI policy is to order their loan servicers to cancel PMI, upon the borrower's request, when the loan-to-value ratio drops below 80 percent if the borrower has an on-time payment record for the last two years. Fannie and Freddie own millions of PMI mortgages. While some of their loan servicers are very cooperative when asked by the borrower to cancel PMI, others can be extremely nasty. PMI borrowers who ask their loan servicer "who owns my loan" can rejoice if the answer is Fannie Mae or Freddie Mac. How to request PMI cancellation. If you think your PMI loan-to-value ratio is below 80 percent of your home's current market value, you can save hundreds or even thousands of wasted PMI dollars every year. But you must ask. If you are rejected, ask again. Ask, ask, ask, ask, ask until you get the answer you want. If you have a cooperative mortgage loan servicer when you request PMI cancellation, you will be given the names of several approved appraisers you can hire to appraise your home's current market value. The appraisal cost will be around $350. But the money will be well spent if it enables you to cancel your PMI premiums. What to do if your PMI cancellation request is refused. If you are not among the lucky home loan borrowers whose mortgage is owned by Freddie or Fannie, if your request is rejected, you have little recourse to get your PMI cancelled. Unless your state's law regulates PMI cancellation, mortgage lenders can set their own unreasonable PMI cancellation rules. But you have several alternatives. After you have an appraisal from an appraiser recommended by your loan servicer, if your loan-to-value ratio is below 80 percent, keep complaining up the loan servicer's "chain of command" until you reach the top person. Always be very polite, but persistent. If that doesn't work to get your PMI cancelled, you can refinance with a lender who doesn't require PMI. However, refinancing can be a hassle. Another alternative, suggested by readers, is to pay your monthly PMI premium each month under protest and then sue the loan servicer in the local Small Claims Court for a refund each month because the PMI is no longer necessary. The loan servicer is unlikely to show up and you will probably win a default judgment. After a few months of this, most loan servicers give up and cancel unnecessary PMI. Conclusion. PMI enables millions of U.S. home buyers to purchase their residences with little or no down payments. However, after a few years, PMI is no longer necessary when the loan-to-value ratio drops below 80 percent. But many lenders refuse to cancel PMI because it costs them nothing and they feel more secure. That's when PMI borrowers should become aggressive to get rid of unnecessary PMI either by refinancing elsewhere or hassling their loan servicers to cancel expensive PMI premiums.   back to top Q Qualifying ratios Ratios used to determine whether a borrower can qualify for a mortgage. They are based on a borrower's housing expense as a percentage of income and his total debt as a percentage of income. Quitclaim deed A document that releases a party from any interest in a piece of property. R Rate lock in See Lock-in. Real estate broker A middleman or agent who buys and sells real estate for a company or individual on a commission basis. Real estate taxes Taxes that are paid semi-annually, or monthly if you have an impound account. The amount is based on local tax rates and assessed property value. Real property Land and any permanent fixtures on it, including buildings, trees and minerals. Realtor A real estate broker or an associate who is an active member of a local real estate board affiliated with the National Association of Realtors. Rescission The cancellation of a contract. In the case of refinancing, this gives the buyer three days to cancel a transaction after it has closed. Reconveyance A document that is recorded when a borrower completely pays off a mortgage. Recording fees Money paid to the lender for recording a home sale with the local authorities, making it a part of public records. Refinance To replace an existing mortgage with a new mortgage in order to reduce the interest rate or take cash out of home equity. Regulation Z Requires that a borrower be advised in writing of all costs associated with the credit portion of a financial transaction. Also known as a truth-in-lending disclosure. Rehabilitation mortgage A mortgage for the purpose of repairing and improving a resale home or building. Renegotiable rate mortgage (RRM) A loan in which the interest rate is adjusted periodically. See also Adjustable-Rate Mortgage. RESPA See Real Estate Settlement Procedures Act Reverse mortgage A form of mortgage in which the lender makes periodic payments to the borrower, using the borrower's equity in the home as security. For older owners who have a lot of equity in their home, this can be used as income. The loan does not need to be repaid until the borrower sells the property or moves into a retirement community. back to top S Secured loan Any loan backed by collateral. Servicing agreement A document disclosing who will service the loan if there is a mortgage broker involved. Settlement costs See Closing Costs. Settlement statement See HUD1 Uniform Settlement statement. Shared-appreciation mortgage (SAM) A loan that allows a lender or other party to share the borrower's profits when the house is sold. Subordinate loan A loan that is a second or third lien against a property. T Tax lien Back taxes owed on a property that will show up on a title search. Teaser rates A low, short-term rate offered on a mortgage to entice a borrower. Tenants in common One of the ways that title can be held. Two or more owners hold an undivided interest in the property, with no right of survivorship. Three-day right of rescission See Rescission. Title A document that is evidence that an individual owns a piece of property. Title company The neutral third party that insures a piece of property after it has been searched and cleared of any liens or judgments. A title insurance policy or binder will be issued when a parcel is clear of liens or judgments. Title insurance A policy, usually issued by a title insurance company, that insures a homebuyer against errors in the title search. The cost of the policy is usually based on the value of the property and can be paid by the buyer or seller. Title search An examination of municipal records to determine the legal ownership of property. It is usually performed by a title company. Transfer tax A tax paid when a home is sold to transfer it from one owner to another. Trustee A legally empowered person who holds or controls a piece of property for another person. Truth-in-Lending Act See Regulation Z. Two-step mortgage An adjustable mortgage with two interest rates: one for the first 5 or 7 years of the loan, and the other for the remainder of the loan. back to top U U.S. Department of Housing and Urban Development (HUD) A federal agency that oversees the Federal Housing Administration and a variety of housing and community development programs. Underwriter A person who works for the lender and who is assigned to evaluate and prepare all loan documents necessary for the borrower to sign, then follows up to close the loan. Underwriting The process lenders go through to evaluate the borrower and set appropriate conditions for the loan. Up-front costs Any fees that are to be paid by the borrower before starting the loan process. Usually the up-front costs are for the appraisal and credit report. V VA loan A low-cost loan guaranteed by the Department of Veterans Affairs. Restricted to those who qualify based on military service or other factors. Variable-rate mortgage See Adjustable-Rate Mortgage. W Wraparound mortgage Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. Payments on both mortgages are made to the second lender, who then forwards the appropriate payments to the first lender. back to top

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