Lending Glossary

A
amortization: The process of fully paying off indebtedness by installments of principal and earned interest over a definite time.
APR: Annual Percentage Rate. The cost of credit on a yearly basis expressed as a percentage.
appraisal fee: The charge for estimating the value of property offered as security.
Automated underwriting or automated underwriting service: A service that enables lenders to obtain a risk classification without traditional manual underwriting. Freddie Mac’s service, Loan Prospector, is statistically based on the performance of past loans; others are rules based.

B
balloon payment: A large extra payment that may be charged at the end of a loan or lease.
buydown: A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of some or all of the consumer's periodic payments to repay the indebtedness.

C
charge-off: When an account is considered uncollectable, a creditor will write it off as a bad debt or "charge off." Depending on each creditor's policy, a charge off will occur between 90 to 180 days after you become delinquent. However, a creditor can still pursue collection of the debt and it will also be reported to the credit bureaus.
closed-end credit: Generally, any loan or credit sale agreement in which the amounts advanced, plus any finance charges, are expected to be repaid in full over a definite time. Most real estate and automobile loans are closed- end agreements.
collateral: Also referred to as security. Property that is offered to secure a loan or other credit and that becomes subject to seizure on default.
commercial credit: Credit usually extended for business purposes.
conforming loan: A loan which meets the standards of the lender. Opposite of non-conforming loan. A loan which has underwriting criteria consistent with (i.e., conforming to) those strict guidelines of Fannie Mae, Freddie Mac, FHA or VA. These are typically the lowest interest rate loans with very good terms. (See definitions of "Fannie Mae", "Freddie Mac", "FHA", "VA" and "underwriting" below.)
conforming loan amount: A Fannie Mae (FNMA) established, maximum loan amount based on the property's legal number of units (1-family, 2-family, etc.). Loan amounts up to this maximum dollar amount are considered "conforming loans."
conventional loan: A conforming loan with no government guarantee; that is, a Fannie Mae or Freddie Mac loan.
consumer credit: Credit that is given to individuals, families, and for household purposes.
cosigner: Another person who signs for a loan and assumes equal liability for it.
CRA: Consumer Reporting Agencies. Your credit payment history is recorded in a file or report. These files or reports are maintained and sold by "consumer reporting agencies" (CRAs). One type of CRA is commonly known as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance, or a job. Your credit record contains information about your income, debts, and credit payment history. It also indicates whether you have been sued, arrested, or have filed for bankruptcy.
CRA: Community Reinvestment Act. This act encourages banks to help meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes. The banks are also expected to maintain safe and sound operations.
credit: The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.
creditworthiness: A creditor's measure of a consumer's or company's past and future ability and willingness to repay debts.
credit card: Any card, plate, or coupon book that may be used repeatedly to borrow money or buy goods and services on credit.
credit history: A record of how a person or company has borrowed and repaid debts.
credit scoring system: A statistical system used to determine whether or not to grant credit by assigning numerical scores to various characteristics related to creditworthiness.
credit score: A credit score is a number lenders use to help them decide: "If I give this person a loan or credit card, will I get paid back on time?" It is one of several pieces of information that auto, mortgage, credit card and other lenders use when evaluating your application for credit. There are different types of credit scores. Credit bureau scores are based solely on information in consumer credit reports. Other types of scores may also include information from credit applications or bank files. A credit score is calculated by a computer in your bank or at one of the national credit bureaus when a lender requests it. A score is a snapshot of your credit risk picture at a particular point in time. It changes as new information is added to your credit bureau report or bank file. Only information that is proven to be predictive of future credit performance is used.

D
default: Failure to meet the terms of a credit agreement.
discount: An amount deducted from the regular price for those who purchase with cash instead of credit. Don't confuse this with the discount on a bond which is different. See the bonds section.

E
EBT card: Electronic benefits transfer card (food stamps, etc)
EFTA: Electronic Fund Transfer Act.
Equifax: One of the three major credit reporting agencies, headquartered in Atlanta, Georgia.
Experian: One of the three major credit reporting agencies, formerly known as TRW. Experian was formed in 1996 from the merger of CCN (a UK credit reference agency) and TRW Information Systems & Services.

F
Fair Isaac: When you apply for a loan, your bank sends a request to one of the national credit bureaus to run a credit score. The credit bureau then uses Fair, Isaac’s software to calculate a score from your credit bureau information. Once the score is calculated, it is returned to your lender.
FCBA: Fair Credit Billing Act.
FCRA: Fair Credit Reporting Act. The FCRA is designed to help ensure that CRAs furnish correct and complete information to businesses to use when evaluating your applicationA federal law, established in 1971, and revised in 1997, which enables consumers to learn what information Credit Reporting Agencies have on file about them, and to dispute inaccurate data in the file. It also establishes specific permissible purposes for which credit reports may be requested, and places time limits on how long adverse information may be reported.
FDCPA: Fair Debt Collection Practices Act It's a federal law that prohibits a debt collector from disclosing what you owe to anyone but your attorney. This law also protects consumers from harassment or threats made by creditors and prohibits creditors from making false statements. The FDCPA applies to personal, family, and household debts. This includes money owed for the purchase of a car, for medical care, or for charge accounts. The FDCPA prohibits debt collectors from engaging in unfair, deceptive, or abusive practices while collecting these debts.
FHLMC: Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) A quasi-governmental, federally sponsored organization that acts as a secondary market investor to buy and sell mortgage loans. FHLMC sets many of the guidelines for conventional mortgage loans, as does FNMA.
FICO: FICO is the most common type of scoring in the mortgage market. Devised by Fair, Isaac and Co. of San Rafael, Calif., the score represents a statistical evaluation of a borrower's risk of future default. The score ranges from the low 300s to more than 800. The higher the score, the lower the probability of default. The score is produced by running a consumer's credit bureau data through proprietary statistical modeling software marketed by Fair, Isaac. The score isn't generated by the lender; instead, the lender requests it as part of the credit report it obtains from one of the three national credit information companies—Equifax, Trans Union and Experian, formerly TRW Corp.
finance charge: The total dollar amount paid to get credit.
five Cs of credit: Five characteristics that are used to form a judgement about a customer's creditworthiness: character, capacity, capital, collateral, and conditions.
fixed rate: An approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest applied to the principal of a loan or credit agreement.
Fannie Mae: FNMA: Federal National Mortgage Association (Fannie Mae) NYSE: FNM. A private corporation that acts as a secondary market investor to buy and sell mortgage loans. FNMA sets many of the guidelines for conventional mortgage loans, as does FHLMC. The major purpose of this organization is to make mortgage money more affordable and more available. This is a publicly owned and operated, government sponsored corporation who's purpose is to purchase both government backed and conventional mortgages and turn them into securities.
Freddie Mac: (Federal Home Loan Mortgage Association or FHLMC) Created in 1970, Freddie Mac is a corporation, owned by stockholders and chartered by Congress. The FHLMC works to increase the funds supplied to mortgage lenders, such as credit unions, savings institutions and commercial banks, so that the funds can be passed along to homebuyers and multifamily investors. The FHLMC accomplishes this by purchasing mortgages from lenders and packaging them into mortgage securities that are resold to investors in denominations of $25,000. The securities created are fully taxable but are backed by the government, and are therefore considered to be low risk investments.
full subscriber: A full subscriber reports all of your account history both good and bad to a credit bureau, a partial subscriber only reports bad credit history. Don't even consider partial subscribers for opening accounts while your trying to establish credit. (Banks as subscribers to credit bureaus)

G
GNMA: Ginnie Mae Nickname for Government National Mortgage Association (GNMA). Government National Mortgage Association. A government organization that participates in the secondary market, buying, selling and guaranteeing FHA and VA loans.
graduated payment: Repayment terms calling for gradual increases in the payments on a closed-end obligation. Negative amortization is usually associated with a graduated payment loan.

J
judgement: A judgment is a decision issued by the court at the end of a lawsuit. If you are sued and either don't file papers or file papers but eventually lose the case, the person who sued you will get a judgment. To attach your wages or put a lien on your property, most creditors need a court judgment.

L
lender: A bank, savings institution, or mortgage company that offers home loans.
liability on an account: Legal responsibility to repay debt.
Loan Prospector: Freddie Mac’s automated underwriting service.

N
negative amortization: Repayment schedule calling for periodic payments that are insufficient to fully amortize the loan. Earned, but unpaid interest is added to the principal, increasing the debt. At some point in the future, payments must be rescheduled to fully repay the debt.
NFCC: http://www.nfcc.org
No-doc or low-doc loan: These no-documentation or low-documentation loans are designed for the entrepreneur or self-employed, for recent immigrants with money in foreign countries or for borrowers who cannot or choose not to reveal information about their incomes. You need a substantial down payment, excellent credit history and will usually pay a higher interest rate.
No-Doc Loans: A no doc program provides a borrower with the opportunity to secure a mortgage without disclosing any asset or income information. The rates are higher due to the increase in the loan risk. Less information=more risk. A no-doc loan concentrates on the borrowers credit and the value of the property. These loans will typically require equity of 30% or more and an excellent credit history. Borrowers who are between jobs, retired or have recently come into money due to inheritance may explore no-doc lending options with one of our loan officers. [www.goodmortgage.com/bestloantype.htm]
No Income Verification Loan: (NIV).A type of loan generally limited to the self-employed that is underwritten based on the borrower's written representation of their annual income as stated on the loan application. No tax returns, operating statements or other verification of the income is required. Debt ratios are computed based on the stated income. The primary intent of these programs is to allow owners of small businesses to use their actual cash flows rather than the net incomes normally reported in tax filings. Higher interest rates on these products compensate lenders for their higher risks. (See definition of "debt ratio" above.)
non-conforming Loan: Loan which does not meet the standards of the lender, especially a loan not meeting the underwriting requirements of Fannie Mae and Freddie Mac. i.e., the vast majority of loans. Conventional home mortgages not eligible for sale and delivery to either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan amount, loan characteristics or underwriting guidelines. Non-conforming loans usually incur a rate and origination fee premium.

O
open-end credit: Commonly referred to as a line of credit. It may be used repeatedly up to a certain limit, also called a charge account or revolving credit.
open-end lease: Many times referred to as a finance lease. This is a lease that may involve a balloon payment based on the value of the property when it is returned.
overdraft checking account: A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, with a finance charge on the overdraft.

P
points: Finance charges paid by the borrower at the beginning of a loan in addition to monthly interest; each point equals one percent of the loan amount.
portfolio lenders: There are a few "portfolio" lenders who do not even look at credit scoring, at least on their portfolio loans. A portfolio lender is usually a savings & loan institution who originates some adjustable rate mortgages that they intend to keep in their own portfolio instead of selling them in the secondary mortgage market. They may look at home loans differently. Some concentrate on the value of the home. Some may concentrate more on the savings history of the borrower. There are also "sub-prime" lenders, or "B & C paper" lenders, who will provide a home loan, but at a higher interest rate and cost.

R
renegotiable rate: A type of variable rate involving a renewable short-term balloon note. The interest rate on the loan is fixed during the term of the note. However, when the balloon comes due, the lender may refinance it at a higher rate. Periodic refinancing may be necessary in order for the loan to be fully amortized.
revolving account: An account which requires at least a specified minimum payment each month plus a service charge on the balance. As the balance declines, the amount of the service charge, or interest, also declines.

S
secured credit card: A credit card secured by a savings account that has been established in advance by the borrower. The amount in the account usually determines the limit on the credit card. These accounts present no real risk factor for creditors and are therefore much easier to obtain.
smart card: An electronic prepaid cash card, usually sold at banks and exchanged at face value.
security interest: The right right of the creditor to take property or a portion of property offered as security.
seller's points: A lump sum paid by the seller to the buyer's creditor to reduce the cost of the loan to the buyer. This payment is either required by the creditor or volunteered by the seller, usually in a loan to buy real estate. Generally, one point equals one percent of the loan amount.
service charge: A component of some finance charges, such as the fee for triggering an overdraft checking account into use.
service credit: Open-ended credit primarily used by utility and telephone companies, doctors, and hospitals.
surcharge: An extra charge sometimes imposed on the purchase of a product or service. Commonly seen in the past with some credit card purchases. Presently, surcharges for credit card purchases are prohibited.

T
Trans Union: One of the three major Credit Reporting Agencies.

V
variable rate: A variable rate loan or credit agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.