Acceleration letter: A notice sent to a homeowner/borrower that declares the entire mortgage amount is due and payable by a specified date, otherwise the lender will file a foreclosure lawsuit. A lender is entitled to accelerate a mortgage before the maturity date based on specific conditions, such as default, listed in the mortgage, usually in the “acceleration clause”. The acceleration clause is enforced by making the entire debt due immediately if the borrower defaults on an installment payment or other covenant. Once the mortgage has been accelerated, the lender is no longer compelled to accept arrears, though it may still do so.
Accrued interest: Interest earned for the period of time that has elapsed since interest was last paid.
Adjustable-rate mortgage (ARM): A mortgage that does not have a fixed interest rate. An adjustable-rate mortgage, often referred to as an ARM, is a loan with an interest rate that fluctuates based on a specified financial index, such as constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). The initial interest rate is normally fixed for a period of time after which it is reset periodically–every month, quarter, year, 3 years, or 5 years. The interest rate paid by the borrower will be based on a benchmark (one of the above-mentioned financial indexes) plus an additional spread, called an ARM margin. The mortgage holder is protected by a maximum interest rate (called a ceiling). ARMs usually start with better rates than fixed rate mortgages, in order to compensate the borrower for the additional risk that future interest rate fluctuations will create. An adjustable rate mortgage may also be known as a “variable-rate mortgage” or a “floating-rate mortgage”.
Amortization: The repayment of debt in regular installments over a period of time, i.e. the process by which loan principal decreases over the life of the loan.
Amortization schedule: A complete schedule of loan payments, showing the amount of principal and the amount of interest that comprise each payment so that the loan will be paid off at the end of its term. Early in the schedule, the majority of each periodic payment is interest. Later in the schedule, the majority of each periodic payment is put toward the principal.
Amount Financed: The actual amount of credit made available to a borrower in a loan, as defined by Regulation Z disclosure requirements of the Truth-In-Lending Act. Specifically, it is the amount of the loan principal, less prepaid finance charges (loan origination fees, so-called points, adjusted interest, etc.) and any required deposit balance. The amount financed is used to calculate the annual percentage rate.
Annual percentage rate (APR): The cost of credit expressed as a yearly rate. The APR may or may not include points, broker fees, and other credit charges that the borrower is required to pay such as Private Mortgage Insurance and processing fees. Whether the above fees and charges are included in the APR will impact how accurately it expresses the cost of credit. Calculation and disclosure of APR is governed by the Truth in Lending Act.
Answer: A written pleading filed by a defendant in response to a complaint in a lawsuit filed and served upon that defendant. An answer generally responds to each allegation in the complaint by denying or admitting it, or admitting in part and denying in part. The answer may also contain “affirmative defenses” including allegations which contradict the complaint or contain legal theories which are intended to derail the claims in the complaint. It may also include counterclaims which are claims that arise from the same transaction or occurrence as the original complaint directed back at the plaintiff based on an injury to the defendant. Sometimes the answer is in the form of a “general denial,” denying everything. The answer must be in typed form, follow specific rules of pleading established by law and the courts, and be filed with the court and served on the plaintiff within a specific statutory time (20 or 30 days after service of the complaint, depending upon how the defendant was served). If the complaint is verified as under penalty of perjury, the answer must be also.
Appraisal: A document from a professional that gives an estimate of a property’s fair market value based on the sales of comparable homes in the area and the features of a property; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
ARM margin: The percentage points added to the interest rate index by the lender. The amount of the margin may differ from one lender to another, but it is usually constant over the life of the loan. To set the interest rate on an ARM loan, lenders add a few percentage points to the index rate. The fully indexed rate is equal to the margin plus the index. If the initial rate on the loan is less than the fully indexed rate, it is called a discounted index rate. For example, if the lender uses an index that currently is 4% and adds a 3% margin, the fully indexed rate would be 7%. If the index on this loan rose to 5%, the fully indexed rate would be 8% (5% + 3%). If the index fell to 2%, the fully indexed rate would be 5% (2% + 3%). Some lenders base the amount of the margin on your credit record–the better your credit, the lower the margin they add–and the lower the interest you will have to pay on your mortgage.
Arrears: The amount of back payments, plus late fees and other charges, owed by the borrower to the lender.
Assignment: The transfer of an interest in real property, such as a mortgage or deed of trust, to another party. It is usually formalized by a document showing that the current mortgage holder (assignor) assigned its rights to the new holder (assignee).
Assignee: The purchaser of a loan; an entity that has been assigned ownership of a mortgage or deed of trust. When a mortgage is transferred from one party to another (usually because the loan is purchased for investment purposes), the party that assumes ownership of the mortgage, as well as the rights and responsibilities attached to that mortgage, is known as the “assignee.” An assignee may receive all or part of a security interest.
Assignee Liability: A legal term that means that an assignee may be held liable for legal claims against the original lender. Assignee liability can be important in lawsuits against a foreclosing party for violations of federal or state laws prohibiting predatory lending practices, such as TILA and RESPA. If a predatory lending claim arises, assignee liability ensures that the borrower can pursue legal action.
Assignment: A document showing that ownership of a mortgage or deed of trust (and the underlying promissory note) has been transferred (assigned) from the original owner to a new owner (assignee). In recent times, mortgages have been the subject of many assignments as they have been “securitized” and sold as investments worldwide. In some cases, the assignments have been made electronically, without anything on paper.
Assumption of mortgage: A rare occurrence in which a buyer of a house takes over the seller’s pre-existing mortgage. Most mortgages are not assumable. If a mortgage is assumable, a seller may be able to transfer the mortgage to the new buyer when the home is sold. Lenders generally require a credit review of the new borrower and may charge a fee for the assumption.
Attachment: A legal process that allows a creditor to attach a lien (also called a security interest) to property that you own because of a contract you signed, a money judgment you owe, or a special statute that authorizes the lien, as in the case of a tax lien. If the lien is on your house, it can be enforced by foreclosure.
Auction: A public sale of foreclosed properties. Anyone can place a bid to purchase a property. Properties are sold to the highest bidder. When the entity (in the US, typically a county sheriff or designee) auctions a foreclosed property the note holder may set the starting price as the remaining balance on the mortgage loan. However, there are a number of issues that affect how pricing for properties is considered, including bankruptcy rulings. In a weak market the foreclosing party may set the starting price at a lower amount if it believes the real estate securing the loan is worth less than the remaining principal of the loan. In the case where the remaining mortgage balance is higher than the actual home value the foreclosing party is unlikely to attract auction bids at this price level. A house that went through a foreclosure auction and failed to attract any acceptable bids may remain the property of the owner of the mortgage. That inventory is called REO (real estate owned). In these situations the owner/servicer tries to sell it through standard real estate channels.
Automatic stay: An injunction issued by the bankruptcy court that puts an automatic end to creditor collection activity when someone files for bankruptcy. Filing bankruptcy is the only way to get this protection. It prohibits most creditor collection activities such as filing or continuing lawsuits, making written requests for payment, or notifying credit reporting bureaus of an unpaid debt. If the debtor filed other bankruptcy cases that were dismissed within the previous twelve months, however, she may not get an automatic stay or it may only last for the first thirty days of the bankruptcy case.
Balloon payment: A large lump-sum payment due as the last payment on a loan. For instance, if you borrow $10,000, your note might require you to pay $5,000 of the loan over a three-year period, plus one balloon payment for the rest at the end of that period.
Bankruptcy: A legal process available in all states that allows you to address your debt problems according to a set of special rules while getting protection from continued collection activity. The Bankruptcy code is federal law that governs the operation of the bankruptcy courts and establishes bankruptcy procedures. It’s in Title 11 of the United States Code.
Capitalization: Treating items owed on a loan as part of a new principal balance, i.e. adding certain amounts to the outstanding principal balance of a loan. For example, when missed payments on a mortgage are added to the mortgage principal, to be paid off over time, they are capitalized. If missed payments are capitalized and the loan is reamortized, the lender will recalculate the monthly payment using the existing interest rate and new principal balance.
Chapter 7 bankruptcy: A bankruptcy that requires assets be liquidated in exchange for the cancellation of debt. The trustee sells the debtor’s nonexempt property and distributes the proceeds to the debtor’s creditors. At the end of the case, the debtor receives a discharge of all remaining debts, except those that cannot legally be discharged.
Closed-end loan: A loan with a fixed term which requires that it be paid off within a certain period of time. Loans that don’t have to be paid off within any particular time—for example, credit card debt—are open-ended.
Collateral: Security in the form of money or property pledged for the payment of a loan. If a creditor accepts property as collateral for a loan under a security agreement, and the agreement is properly recorded, the creditor has a lien on the collateral and can repossess it if the conditions of the security agreement (typically, making monthly payments on the loan) aren’t met. For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made.
Complaint: A legal document that begins a lawsuit. It tells the court what outcome the person filing the lawsuit wants. A complaint normally includes a statement of all the claims being raised by the person bringing the lawsuit. It is usually served with a summons on the defendant to begin the case.
Conventional loan: A mortgage loan issued to a borrower with an excellent or very good credit rating. Conventional loans do not include those insured by the federal government or subprime loans.