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Glossary
& Definitions
Acceleration Clause
A clause in your mortgage which allows the lender to demand payment of the
outstanding loan balance for various reasons. The most common reasons for
accelerating a loan are if the borrower defaults on the loan or transfers
title to another individual without informing the lender.
Adjustable-Rate Mortgage (ARM)
A mortgage in which the interest changes periodically, according to
corresponding fluctuations in an index. All ARMs are tied to indexes.
Adjustment Date
The date the interest rate changes on an adjustable-rate mortgage
Amortization
The loan payment consists of a portion which will be applied to pay the
accruing interest on a loan, with the remainder being applied to the
principal. Over time, the interest portion decreases as the loan balance
decreases, and the amount applied to principal increases so that the loan
is paid off (amortized) in the specified time.
Amortization Schedule
A table which shows how much of each payment will be applied toward
principal and how much toward interest over the life of the loan. It also
shows the gradual decrease of the loan balance until it reaches zero.
Annual Percentage Rate (APR)
This is not the note rate on your loan. It is a value created according to
a government formula intended to reflect the true annual cost of
borrowing, expressed as a percentage. It works sort of like this, but not
exactly, so only use this as a guideline: deduct the closing costs from
your loan amount, then using your actual loan payment, calculate what the
interest rate would be on this amount instead of your actual loan amount.
You will come up with a number close to the APR. Because you are using the
same payment on a smaller amount, the APR is always higher than the actual
not rate on your loan.
Application
The form used to apply for a mortgage loan, containing information about a
borrower’s income, savings, assets, debts, and more.
Appraisal
A written justification of the price paid for a property, primarily based
on an analysis of comparable sales of similar homes nearby.
Appraised Value
An opinion of a property's fair market value, based on an appraiser's
knowledge, experience, and analysis of the property. Since an appraisal is
based primarily on comparable sales, and the most recent sale is the one
on the property in question, the appraisal usually comes out at the
purchase price.
Appraiser
An individual qualified by education, training, and experience to estimate
the value of real property and personal property. Although some appraisers
work directly for mortgage lenders, most are independent.
Appreciation
The increase in the value of a property due to changes in market
conditions, inflation, or other causes.
Assessed value
The valuation placed on property by a public tax assessor for purposes of
taxation.
Assessment
The placing of a value on property for the purpose of taxation.
Assessor
A public official who establishes the value of a property for taxation
purposes.
Asset
Items of value owned by an individual. Assets that can be quickly
converted into cash are considered "liquid assets." These include bank
accounts, stocks, bonds, mutual funds, and so on. Other assets include
real estate, personal property, and debts owed to an individual by others.
Assignment
When ownership of your mortgage is transferred from one company or
individual to another, it is called an assignment.
Assumable mortgage
A mortgage that can be assumed by the buyer when a home is sold. Usually,
the borrower must "qualify" in order to assume the loan.
Assumption
The term applied when a buyer assumes the seller’s mortgage.
balloon mortgage
A mortgage loan that requires the remaining principal balance be paid at a
specific point in time. For example, a loan may be amortized as if it
would be paid over a thirty year period, but requires that at the end of
the tenth year the entire remaining balance must be paid.
balloon payment
The final lump sum payment that is due at the termination of a balloon
mortgage.
bankruptcy
By filing in federal bankruptcy court, an individual or individuals can
restructure or relieve themselves of debts and liabilities. Bankruptcies
are of various types, but the most common for an individual seem to be a
"Chapter 7 No Asset" bankruptcy which relieves the borrower of most types
of debts. A borrower cannot usually qualify for an "A" paper loan for a
period of two years after the bankruptcy has been discharged and requires
the re-establishment of an ability to repay debt.
bill of sale
A written document that transfers title to personal property. For example,
when selling an automobile to acquire funds which will be used as a source
of down payment or for closing costs, the lender will usually require the
bill of sale (in addition to other items) to help document this source of
funds.
biweekly mortgage
A mortgage in which you make payments every two weeks instead of once a
month. The basic result is that instead of making twelve monthly payments
during the year, you make thirteen. The extra payment reduces the
principal, substantially reducing the time it takes to pay off a thirty
year mortgage. Note: there are independent companies that encourage you to
set up bi-weekly payment schedules with them on your thirty year mortgage.
They charge a set-up fee and a transfer fee for every payment. Your funds
are deposited into a trust account from which your monthly payment is then
made, and the excess funds then remain in the trust account until enough
has accrued to make the additional payment which will then be paid to
reduce your principle. You could save money by doing the same thing
yourself, plus you have to have faith that once you transfer money to them
that they will actually transfer your funds to your lender.
bond market
Usually refers to the daily buying and selling of thirty year treasury
bonds. Lenders follow this market intensely because as the yields of bonds
go up and down, fixed rate mortgages do approximately the same thing. The
same factors that affect the Treasury Bond market also affect mortgage
rates at the same time. That is why rates change daily, and in a volatile
market can and do change during the day as well.
bridge loan
Not used much anymore, bridge loans are obtained by those who have not yet
sold their previous property, but must close on a purchase property. The
bridge loan becomes the source of their funds for the down payment. One
reason for their fall from favor is that there are more and more second
mortgage lenders now that will lend at a high loan to value. In addition,
sellers often prefer to accept offers from buyers who have already sold
their property.
broker
Broker has several meanings in different situations. Most Realtors are
"agents" who work under a "broker." Some agents are brokers as well,
either working form themselves or under another broker. In the mortgage
industry, broker usually refers to a company or individual that does not
lend the money for the loans themselves, but broker loans to larger
lenders or investors. (See the Home Loan Library that discusses the
different types of lenders). As a normal definition, a broker is anyone
who acts as an agent, bringing two parties together for any type of
transaction and earns a fee for doing so.
buydown
Usually refers to a fixed rate mortgage where the interest rate is "bought
down" for a temporary period, usually one to three years. After that time
and for the remainder of the term, the borrower’s payment is calculated at
the note rate. In order to buy down the initial rate for the temporary
payment, a lump sum is paid and held in an account used to supplement the
borrower’s monthly payment. These funds usually come from the seller (or
some other source) as a financial incentive to induce someone to buy their
property. A "lender funded buydown" is when the lender pays the initial
lump sum. They can accomplish this because the note rate on the loan
(after the buydown adjustments) will be higher than the current market
rate. One reason for doing this is because the borrower may get to
"qualify" at the start rate and can qualify for a higher loan amount.
Another reason is that a borrower may expect his earnings to go up
substantially in the near future, but wants a lower payment right now.
call option
Similar to the acceleration clause.
cap
Adjustable Rate Mortgages have fluctuating interest rates, but those
fluctuations are usually limited to a certain amount. Those limitations
may apply to how much the loan may adjust over a six month period, an
annual period, and over the life of the loan, and are referred to as
"caps." Some ARMs, although they may have a life cap, allow the interest
rate to fluctuate freely, but require a certain minimum payment which can
change once a year. There is a limit on how much that payment can change
each year, and that limit is also referred to as a cap.
cash-out refinance
When a borrower refinances his mortgage at a higher amount than the
current loan balance with the intention of pulling out money for personal
use, it is referred to as a "cash out refinance. " (top)
certificate of deposit
A time deposit held in a bank which pays a certain amount of interest to
the depositor. (top)
certificate of deposit index
One of the indexes used for determining interest rate changes on some
adjustable rate mortgages. It is an average of what banks are paying on
certificates of deposit. (top)
Certificate of Eligibility
A document issued by the Veterans Administration that certifies a
veteran’s eligibility for a VA loan.(top)
Certificate of Reasonable Value (CRV)
Once the appraisal has been performed on a property being bought with a VA
loan, the Veterans Administration issues a CRV.
chain of title
An analysis of the transfers of title to a piece of property over the
years.
clear title
A title that is free of liens or legal questions as to ownership of the
property.
closing
This has different meanings in different states. In some states a real
estate transaction is not consider "closed" until the documents record at
the local recorders office. In others, the "closing" is a meeting where
all of the documents are signed and money changes hands.
closing costs
Closing costs are separated into what are called "non-recurring closing
costs" and "pre-paid items." Non-recurring closing costs are any items
which are paid just once as a result of buying the property or obtaining a
loan. "Pre-paids" are items which recur over time, such as property taxes
and homeowners insurance. A lender makes an attempt to estimate the amount
of non-recurring closing costs and prepaid items on the Good Faith
Estimate which they must issue to the borrower within three days of
receiving a home loan application.
closing statement
See Settlement Statement.
cloud on title
Any conditions revealed by a title search that adversely affect the title
to real estate. Usually clouds on title cannot be removed except by deed,
release, or court action.
co-borrower
IAn additional individual who is both obligated on the loan and is on
title to the property.
collateral
In a home loan, the property is the collateral. The borrower risks losing
the property if the loan is not repaid according to the terms of the
mortgage or deed of trust.
collection
When a borrower falls behind, the lender contacts them in an effort to
bring the loan current. The loan goes to "collection." As part of the
collection effort, the lender must mail and record certain documents in
case they are eventually required to foreclose on the property.
commission
Most salespeople earn commissions for the work that they do and there are
many sales professionals involved in each transaction, including Realtors,
loan officers, title representatives, attorneys, escrow representative,
and representatives for pest companies, home warranty companies, home
inspection companies, insurance agents, and more. The commissions are paid
out of the charges paid by the seller or buyer in the purchase
transaction. Realtors generally earn the largest commissions, followed by
lenders, then the others.(top)
common area assessments
In some areas they are called Homeowners Association Fees. They are
charges paid to the Homeowners Association by the owners of the individual
units in a condominium or planned unit development (PUD) and are generally
used to maintain the property and common areas. (top)
common areas
Those portions of a building, land, and amenities owned (or managed) by a
planned unit development (PUD) or condominium project's homeowners'
association (or a cooperative project's cooperative corporation) that are
used by all of the unit owners, who share in the common expenses of their
operation and maintenance. Common areas include swimming pools, tennis
courts, and other recreational facilities, as well as common corridors of
buildings, parking areas, means of ingress and egress, etc.
common law
An unwritten body of law based on general custom in England and used to an
extent in some states.
community property
In some states, especially the southwest, property acquired by a married
couple during their marriage is considered to be owned jointly, except
under special circumstances. This is an outgrowth of the Spanish and
Mexican heritage of the area.
comparable sales
Recent sales of similar properties in nearby areas and used to help
determine the market value of a property. Also referred to as "comps."
condominium
A type of ownership in real property where all of the owners own the
property, common areas and buildings together, with the exception of the
interior of the unit to which they have title. Often mistakenly referred
to as a type of construction or development, it actually refers to the
type of ownership.
condominium conversion
Changing the ownership of an existing building (usually a rental project)
to the condominium form of ownership.
condominium hotel
A condominium project that has rental or registration desks, short-term
occupancy, food and telephone services, and daily cleaning services and
that is operated as a commercial hotel even though the units are
individually owned. These are often found in resort areas like Hawaii.
construction loan
A short-term, interim loan for financing the cost of construction. The
lender makes payments to the builder at periodic intervals as the work
progresses.
contingency
A condition that must be met before a contract is legally binding. For
example, home purchasers often include a contingency that specifies that
the contract is not binding until the purchaser obtains a satisfactory
home inspection report from a qualified home inspector.
contract
An oral or written agreement to do or not to do a certain thing.
conventional mortgage
Refers to home loans other than government loans (VA and FHA).
convertible ARM
IAn adjustable-rate mortgage that allows the borrower to change the ARM to
a fixed-rate mortgage within a specific time.
cooperative (co-op)
A type of multiple ownership in which the residents of a multiunit housing
complex own shares in the cooperative corporation that owns the property,
giving each resident the right to occupy a specific apartment or unit.
cost of funds index (COFI)
One of the indexes that is used to determine interest rate changes for
certain adjustable-rate mortgages. It represents the weighted-average cost
of savings, borrowings, and advances of the financial institutions such as
banks and savings & loans, in the 11th District of the Federal Home Loan
Bank.
credit
An agreement in which a borrower receives something of value in exchange
for a promise to repay the lender at a later date. (top)
credit history
A record of an individual's repayment of debt. Credit histories are
reviewed my mortgage lenders as one of the underwriting criteria in
determining credit risk.
creditor
A person to whom money is owed.
credit report
A report of an individual's credit history prepared by a credit bureau and
used by a lender in determining a loan applicant's creditworthiness.
credit repository
An organization that gathers, records, updates, and stores financial and
public records information about the payment records of individuals who
are being considered for credit.
debt
An amount owed to another.
deed
The legal document conveying title to a property.
deed-in-lieu
Short for "deed in lieu of foreclosure," this conveys title to the lender
when the borrower is in default and wants to avoid foreclosure. The lender
may or may not cease foreclosure activities if a borrower asks to provide
a deed-in-lieu. Regardless of whether the lender accepts the deed-in-lieu,
the avoidance and non-repayment of debt will most likely show on a credit
history. What a deed-in-lieu may prevent is having the documents
preparatory to a foreclosure being recorded and become a matter of public
record.
deed of trust
Some states, like California, do not record mortgages. Instead, they
record a deed of trust which is essentially the same thing.
default
Failure to make the mortgage payment within a specified period of time.
For first mortgages or first trust deeds, if a payment has still not been
made within 30 days of the due date, the loan is considered to be in
default.
delinquency
Failure to make mortgage payments when mortgage payments are due. For most
mortgages, payments are due on the first day of the month. Even though
they may not charge a "late fee" for a number of days, the payment is
still considered to be late and the loan delinquent. When a loan payment
is more than 30 days late, most lenders report the late payment to one or
more credit bureaus.
deposit
A sum of money given in advance of a larger amount being expected in the
future. Often called in real estate as an "earnest money deposit. "
depreciation
A decline in the value of property; the opposite of appreciation.
Depreciation is also an accounting term which shows the declining monetary
value of an asset and is used as an expense to reduce taxable income.
Since this is not a true expense where money is actually paid, lenders
will add back depreciation expense for self-employed borrowers and count
it as income.
discount points
In the mortgage industry, this term is usually used in only in reference
to government loans, meaning FHA and VA loans. Discount points refer to
any "points" paid in addition to the one percent loan origination fee. A
"point" is one percent of the loan amount.
down payment
The part of the purchase price of a property that the buyer pays in cash
and does not finance with a mortgage.
due-on-sale provision
A provision in a mortgage that allows the lender to demand repayment in
full if the borrower sells the property that serves as security for the
mortgage.
earnest money deposit
A deposit made by the potential home buyer to show that he or she is
serious about buying the house.
easement
A right of way giving persons other than the owner access to or over a
property.
effective age
An appraiser’s estimate of the physical condition of a building. The
actual age of a building may be shorter or longer than its effective age.
eminent domain
The right of a government to take private property for public use upon
payment of its fair market value. Eminent domain is the basis for
condemnation proceedings.
encroachment
An improvement that intrudes illegally on another’s property.
encumbrance
Anything that affects or limits the fee simple title to a property, such
as mortgages, leases, easements, or restrictions.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit
equally available without discrimination based on race, color, religion,
national origin, age, sex, marital status, or receipt of income from
public assistance programs.
equity
A homeowner's financial interest in a property. Equity is the difference
between the fair market value of the property and the amount still owed on
its mortgage and other liens.
escrow
An item of value, money, or documents deposited with a third party to be
delivered upon the fulfillment of a condition. For example, the earnest
money deposit is put into escrow until delivered to the seller when the
transaction is closed.
escrow account
Once you close your purchase transaction, you may have an escrow account
or impound account with your lender. This means the amount you pay each
month includes an amount above what would be required if you were only
paying your principal and interest. The extra money is held in your
impound account (escrow account) for the payment of items like property
taxes and homeowner’s insurance when they come due. The lender pays them
with your money instead of you paying them yourself.
escrow analysis
Once each year your lender will perform an "escrow analysis" to make sure
they are collecting the correct amount of money for the anticipated
expenditures.
escrow disbursements
The use of escrow funds to pay real estate taxes, hazard insurance,
mortgage insurance, and other property expenses as they become due.
estate
The ownership interest of an individual in real property. The sum total of
all the real property and personal property owned by an individual at time
of death.
eviction
The lawful expulsion of an occupant from real property.
examination of title
The report on the title of a property from the public records or an
abstract of the title.
exclusive listing
A written contract that gives a licensed real estate agent the exclusive
right to sell a property for a specified time.
executor
A person named in a will to administer an estate. The court will appoint
an administrator if no executor is named. "Executrix" is the feminine
form. (
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit
reports by consumer/credit reporting agencies and establishes procedures
for correcting mistakes on one's credit record.
fair market value
The highest price that a buyer, willing but not compelled to buy, would
pay, and the lowest a seller, willing but not compelled to sell, would
accept.
Fannie Mae (FNMA)
The Federal National Mortgage Association, which is a congressionally
chartered, shareholder-owned company that is the nation's largest supplier
of home mortgage funds. For a discussion of the roles of Fannie Mae,
Freddie Mac (FHLMC), and Ginnie Mae (GNMA), see the Library.
Fannie Mae's Community Home Buyer's Program
An income-based community lending model, under which mortgage insurers and
Fannie Mae offer flexible underwriting guidelines to increase a low- or
moderate-income family's buying power and to decrease the total amount of
cash needed to purchase a home. Borrowers who participate in this model
are required to attend pre-purchase home-buyer education sessions.
Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development (HUD).
Its main activity is the insuring of residential mortgage loans made by
private lenders. The FHA sets standards for construction and underwriting
but does not lend money or plan or construct housing. top)
fee simple
The greatest possible interest a person can have in real estate.
fee simple estate
An unconditional, unlimited estate of inheritance that represents the
greatest estate and most extensive interest in land that can be enjoyed.
It is of perpetual duration. When the real estate is in a condominium
project, the unit owner is the exclusive owner only of the air space
within his or her portion of the building (the unit) and is an owner in
common with respect to the land and other common portions of the property.
FHA mortgage
A mortgage that is insured by the Federal Housing Administration (FHA).
Along with VA loans, an FHA loan will often be referred to as a government
loan.
firm commitment
A lender’s agreement to make a loan to a specific borrower on a specific
property.
first mortgage
The mortgage that is in first place among any loans recorded against a
property. Usually refers to the date in which loans are recorded, but
there are exceptions.
fixed-rate mortgage
A mortgage in which the interest rate does not change during the entire
term of the loan.
fixture
Personal property that becomes real property when attached in a permanent
manner to real estate.
flood insurance
Insurance that compensates for physical property damage resulting from
flooding. It is required for properties located in federally designated
flood areas.
foreclosure
The legal process by which a borrower in default under a mortgage is
deprived of his or her interest in the mortgaged property. This usually
involves a forced sale of the property at public auction with the proceeds
of the sale being applied to the mortgage debt.
401(k)/403(b)
An employer-sponsored investment plan that allows individuals to set aside
tax-deferred income for retirement or emergency purposes. 401(k) plans are
provided by employers that are private corporations. 403(b) plans are
provided by employers that are not for profit organizations.
401(k)/403(b) loan
Some administrators of 401(k)/403(b) plans allow for loans against the
monies you have accumulated in these plans. Loans against 401K plans are
an acceptable source of down payment for most types of loans.
government loan (mortgage)
A mortgage that is insured by the Federal Housing Administration (FHA) or
guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing
Service (RHS). Mortgages that are not government loans are classified as
conventional loans.
Government National Mortgage Association (Ginnie Mae)
A government-owned corporation within the U.S. Department of Housing and
Urban Development (HUD). Created by Congress on September 1, 1968, GNMA
performs the same role as Fannie Mae and Freddie Mac in providing funds to
lenders for making home loans. The difference is that Ginnie Mae provides
funds for government loans (FHA and VA)
grantee
The person to whom an interest in real property is conveyed.
grantor
The person conveying an interest in real property.
hazard insurance
Insurance coverage that in the event of physical damage to a property from
fire, wind, vandalism, or other hazards.
Home Equity Conversion Mortgage (HECM)
Usually referred to as a reverse annuity mortgage, what makes this type of
mortgage unique is that instead of making payments to a lender, the lender
makes payments to you. It enables older home owners to convert the equity
they have in their homes into cash, usually in the form of monthly
payments. Unlike traditional home equity loans, a borrower does not
qualify on the basis of income but on the value of his or her home. In
addition, the loan does not have to be repaid until the borrower no longer
occupies the property.
home equity line of credit
A mortgage loan, usually in second position, that allows the borrower to
obtain cash drawn against the equity of his home, up to a predetermined
amount.
home inspection
A thorough inspection by a professional that evaluates the structural and
mechanical condition of a property. A satisfactory home inspection is
often included as a contingency by the purchaser.
homeowners' association
A nonprofit association that manages the common areas of a planned unit
development (PUD) or condominium project. In a condominium project, it has
no ownership interest in the common elements. In a PUD project, it holds
title to the common elements.
homeowner's insurance
An insurance policy that combines personal liability insurance and hazard
insurance coverage for a dwelling and its contents.
homeowner's warranty
A type of insurance often purchased by homebuyers that will cover repairs
to certain items, such as heating or air conditioning, should they break
down within the coverage period. The buyer often requests the seller to
pay for this coverage as a condition of the sale, but either party can
pay.
HUD median income
Median family income for a particular county or metropolitan statistical
area (MSA), as estimated by the Department of Housing and Urban
Development (HUD).
HUD-1 settlement statement
A document that provides an itemized listing of the funds that were paid
at closing. Items that appear on the statement include real estate
commissions, loan fees, points, and initial escrow (impound) amounts. Each
type of expense goes on a specific numbered line on the sheet. The totals
at the bottom of the HUD-1 statement define the seller's net proceeds and
the buyer's net payment at closing. It is called a HUD1 because the form
is printed by the Department of Housing and Urban Development (HUD). The
HUD1 statement is also known as the "closing statement " or "settlement
sheet."
joint tenancy
A form of ownership or taking title to property which means each party
owns the whole property and that ownership is not separate. In the event
of the death of one party, the survivor owns the property in its entirety.
judgment
A decision made by a court of law. In judgments that require the repayment
of a debt, the court may place a lien against the debtor's real property
as collateral for the judgment's creditor.[Top]
judicial foreclosure
A type of foreclosure proceeding used in some states that is handled as a
civil lawsuit and conducted entirely under the auspices of a court. Other
states use non-judicial foreclosure.
jumbo loan
A loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits, currently
at $227,150. Also called a nonconforming loan. Freddie Mac and Fannie Mae
loans are referred to as conforming loans.
late charge
The penalty a borrower must pay when a payment is made a stated number of
days. On a first trust deed or mortgage, this is usually fifteen days.
lease
A written agreement between the property owner and a tenant that
stipulates the payment and conditions under which the tenant may possess
the real estate for a specified period of time. [Top]
leasehold estate
A way of holding title to a property wherein the mortgagor does not
actually own the property but rather has a recorded long-term lease on it.
[Top]
lease option
An alternative financing option that allows home buyers to lease a home
with an option to buy. Each month's rent payment may consist of not only
the rent, but an additional amount which can be applied toward the down
payment on an already specified price.
legal description
A property description, recognized by law, that is sufficient to locate
and identify the property without oral testimony.
lender
A term which can refer to the institution making the loan or to the
individual representing the firm. For example, loan officers are often
referred to as "lenders."
liabilities
A person's financial obligations. Liabilities include long-term and
short-term debt, as well as any other amounts that are owed to others.
liability insurance
Insurance coverage that offers protection against claims alleging that a
property owner's negligence or inappropriate action resulted in bodily
injury or property damage to another party. It is usually part of a
homeowner’s insurance policy.
lien
A legal claim against a property that must be paid off when the property
is sold. A mortgage or first trust deed is considered a lien.
life cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the
enterest rate can increase or decrease over the life of the mortgage.
line of credit
An agreement by a commercial bank or other financial institution to extend
credit up to a certain amount for a certain time to a specified borrower.
liquid asset
A cash asset or an asset that is easily converted into cash.
loan
A sum of borrowed money (principal) that is generally repaid with
interest.
loan officer
Also referred to by a variety of other terms, such as lender, loan
representative, loan "rep," account executive, and others. The loan
officer serves several functions and has various responsibilities: they
solicit loans, they are the representative of the lending institution, and
they represent the borrower to the lending institution.
loan origination
How a lender refers to the process of obtaining new loans.
loan servicing
After you obtain a loan, the company you make the payments to is
"servicing" your loan. They process payments, send statements, manage the
escrow/impound account, provide collection efforts on delinquent loans,
ensure that insurance and property taxes are made on the property, handle
pay-offs and assumptions, and provide a variety of other services.
loan-to-value (LTV)
The percentage relationship between the amount of the loan and the
appraised value or sales price (whichever is lower).
lock-in
An agreement in which the lender guarantees a specified interest rate for
a certain amount of time at a certain cost.
lock-in period
The time period during which the lender has guaranteed an interest rate to
a borrower.
margin
The difference between the interest rate and the index on an adjustable
rate mortgage. The margin remains stable over the life of the loan. It is
the index which moves up and down.
maturity
The date on which the principal balance of a loan, bond, or other
financial instrument becomes due and payable.[Top]
merged credit report
A credit report which reports the raw data pulled from two or more of the
major credit repositories. Contrast with a Residential Mortgage Credit
Report (RMCR) or a standard factual credit report.
modification
Occasionally, a lender will agree to modify the terms of your mortgage
without requiring you t refinance. If any changes are made, it is called a
modification.
mortgage
A legal document that pledges a property to the lender as security for
payment of a debt. Instead of mortgages, some states use First Trust
Deeds.[
mortgage banker
For a more complete discussion of mortgage banker, see "Types of Lenders."
A mortgage banker is generally assumed to originate and fund their own
loans, which are then sold on the secondary market, usually to Fannie Mae,
Freddie Mac, or Ginnie Mae. However, firms rather loosely apply this term
to themselves, whether they are true mortgage bankers or simply mortgage
brokers or correspondents.
mortgage broker
A mortgage company that originates loans, then places those loans with a
variety of other lending institutions with whom they usually have
pre-established relationships.
mortgagee
The lender in a mortgage agreement.
mortgage insurance (MI)
Insurance that covers the lender against some of the losses incurred as a
result of a default on a home loan. Often mistakenly referred to as PMI,
which is actually the name of one of the larger mortgage insurers.
Mortgage insurance is usually required in one form or another on all loans
that have a loan-to-value higher than eighty percent. Mortgages above 80%
LTV that call themselves "No MI" are usually a made at a higher interest
rate. Instead of the borrower paying the mortgage insurance premiums
directly, they pay a higher interest rate to the lender, which then pays
the mortgage insurance themselves. Also, FHA loans and certain first-time
homebuyer programs require mortgage insurance regardless of the
loan-to-value.
mortgage insurance premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either to a
government agency such as the Federal Housing Administration (FHA) or to a
private mortgage insurance (MI) company.
mortgage life and disability insurance
A type of term life insurance often bought by borrowers. The amount of
coverage decreases as the principal balance declines. Some policies also
cover the borrower in the event of disability. In the event that the
borrower dies while the policy is in force, the debt is automatically
satisfied by insurance proceeds. In the case of disability insurance, the
insurance will make the mortgage payment for a specified amount of time
during the disability. Be careful to read the terms of coverage, however,
because often the coverage does not start immediately upon the disability,
but after a specified period, sometime forty-five days.
mortgagor
The borrower in a mortgage agreement.[Top]
multidwelling units
Properties that provide separate housing units for more than one family,
although they secure only a single mortgage.
negative amortization
Some adjustable rate mortgages allow the interest rate to fluctuate
independently of a required minimum payment. If a borrower makes the
minimum payment it may not cover all of the interest that would normally
be due at the current interest rate. In essence, the borrower is deferring
the interest payment, which is why this is called "deferred interest." The
deferred interest is added to the balance of the loan and the loan balance
grows larger instead of smaller, which is called negative amortization.
no cash-out refinance
A refinance transaction which is not intended to put cash in the hand of
the borrower. Instead, the new balance is caculated to cover the balance
due on the current loan and any costs associated with obtaining the new
mortgage. Often referred to as a "rate and term refinance."
no-cost loan
Many lenders offer loans that you can obtain at "no cost." You should
inquire whether this means there are no "lender" costs associated with the
loan, or if it also covers the other costs you would normally have in a
purchase or refinance transactions, such as title insurance, escrow fees,
settlement fees, appraisal, recording fees, notary fees, and others. These
are fees and costs which may be associated with buying a home or obtaining
a loan, but not charged directly by the lender. Keep in mind that, like a
"no-point" loan, the interest rate will be higher than if you obtain a
loan that has costs associated with it.
note
A legal document that obligates a borrower to repay a mortgage loan at a
stated interest rate during a specified period of time.
note rate
The interest rate stated on a mortgage note.
no-cost loan
Almost all lenders offer loans at "no points." You will find the interest
rate on a "no points" loan is approximately a quarter percent higher than
on a loan where you pay one point.
notice of default
A formal written notice to a borrower that a default has occurred and that
legal action may be taken.
original principal balance
The total amount of principal owed on a mortgage before any payments are
made.
origination fee
On a government loan the loan origination fee is one percent of the loan
amount, but additional points may be charged which are called "discount
points." One point equals one percent of the loan amount. On a
conventional loan, the loan origination fee refers to the total number of
points a borrower pays.
owner financing
A property purchase transaction in which the property seller provides all
or part of the financing.
partial payment
A payment that is not sufficient to cover the scheduled monthly payment on
a mortgage loan. Normally, a lender will not accept a partial payment, but
in times of hardship you can make this request of the loan servicing
collection department.
payment change date
The date when a new monthly payment amount takes effect on an
adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM).
Generally, the payment change date occurs in the month immediately after
the interest rate adjustment date.
periodic payment cap
For an adjustable-rate mortgage where the interest rate and the minimum
payment amount fluctuate independently of one another, this is a limit on
the amount that payments can increase or decrease during any one
adjustment period.
periodic rate cap
For an adjustable-rate mortgage, a limit on the amount that the interest
rate can increase or decrease during any one adjustment period, regardless
of how high or low the index might be.
personal property
Any property that is not real property.
PITI
This stands for principal, interest, taxes and insurance. If you have an
"impounded" loan, then your monthly payment to the lender includes all of
these and probably includes mortgage insurance as well. If you do not have
an impounded account, then the lender still calculates this amount and
uses it as part of determining your debt-to-income ratio.
PITI reserves
A cash amount that a borrower must have on hand after making a down
payment and paying all closing costs for the purchase of a home. The
principal, interest, taxes, and insurance (PITI) reserves must equal the
amount that the borrower would have to pay for PITI for a predefined
number of months.
planned unit development (PUD)
A type of ownership where individuals actually own the building or unit
they live in, but common areas are owned jointly with the other members of
the development or association. Contrast with condominium, where an
individual actually owns the airspace of his unit, but the buildings and
common areas are owned jointly with the others in the development or
association.
point
A point is 1 percent of the amount of the mortgage.
power of attorney
A legal document that authorizes another person to act on one’s behalf. A
power of attorney can grant complete authority or can be limited to
certain acts and/or certain periods of time.
pre-approval
A loosely used term which is generally taken to mean that a borrower has
completed a loan application and provided debt, income, and savings
documentation which an underwriter has reviewed and approved. A
pre-approval is usually done at a certain loan amount and making
assumptions about what the interest rate will actually be at the time the
loan is actually made, as well as estimates for the amount that will be
paid for property taxes, insurance and others. A pre-approval applies only
to the borrower. Once a property is chosen, it must also meet the
underwriting guidelines of the lender. Contrast with pre-qualification
prepayment
Any amount paid to reduce the principal balance of a loan before the due
date. Payment in full on a mortgage that may result from a sale of the
property, the owner's decision to pay off the loan in full, or a
foreclosure. In each case, prepayment means payment occurs before the loan
has been fully amortized.
prepayment penalty
A fee that may be charged to a borrower who pays off a loan before it is
due.
pre-qualification
This usually refers to the loan officer’s written opinion of the ability
of a borrower to qualify for a home loan, after the loan officer has made
inquiries about debt, income, and savings. The information provided to the
loan officer may have been presented verbally or in the form of
documentation, and the loan officer may or may not have reviewed a credit
report on the borrower.
prime rate
The interest rate that banks charge to their preferred customers. Changes
in the prime rate are widely publicized in the news media and are used as
the indexes in some adjustable rate mortgages, especially home equity
lines of credit. Changes in the prime rate do not directly affect other
types of mortgages, but the same factors that influence the prime rate
also affect the interest rates of mortgage loans.
principal
The amount borrowed or remaining unpaid. The part of the monthly payment
that reduces the remaining balance of a mortgage.
principal balance
The outstanding balance of principal on a mortgage. The principal balance
does not include interest or any other charges. See remaining balance.
principal, interest, taxes, and insurance (PITI)
The four components of a monthly mortgage payment on impounded loans.
Principal refers to the part of the monthly payment that reduces the
remaining balance of the mortgage. Interest is the fee charged for
borrowing money. Taxes and insurance refer to the amounts that are paid
into an escrow account each month for property taxes and mortgage and
hazard insurance.
private mortgage insurance (MI)
Mortgage insurance that is provided by a private mortgage insurance
company to protect lenders against loss if a borrower defaults. Most
lenders generally require MI for a loan with a loan-to-value (LTV)
percentage in excess of 80 percent.
promissory note
A written promise to repay a specified amount over a specified period of
time.
public auction
A meeting in an announced public location to sell property to repay a
mortgage that is in default.
Planned Unit Development (PUD)
A project or subdivision that includes common property that is owned and
maintained by a homeowners' association for the benefit and use of the
individual PUD unit owners.
purchase agreement
A written contract signed by the buyer and seller stating the terms and
conditions under which a property will be sold.
purchase money transaction
The acquisition of property through the payment of money or its
equivalent.
qualifying ratios
Calculations that are used in determining whether a borrower can qualify
for a mortgage. There are two ratios. The "top" or "front" ratio is a
calculation of the borrower’s monthly housing costs (principle, taxes,
insurance, mortgage insurance, homeowner’s association fees) as a
percentage of monthly income. The "back" or "bottom" ratio includes
housing costs as will as all other monthly debt. [Top]
quitclaim deed
A deed that transfers without warranty whatever interest or title a
grantor may have at the time the conveyance is made.
rate lock
A commitment issued by a lender to a borrower or other mortgage originator
guaranteeing a specified interest rate for a specified period of time at a
specific cost.
real estate agent
A person licensed to negotiate and transact the sale of real estate.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance
notice of closing costs.
real property
Land and appurtenances, including anything of a permanent nature such as
structures, trees, minerals, and the interest, benefits, and inherent
rights thereof.
Realtor®
A real estate agent, broker or an associate who holds active membership in
a local real estate board that is affiliated with the National Association
of Realtors.
recorder
The public official who keeps records of transactions that affect real
property in the area. Sometimes known as a "Registrar of Deeds " or
"County Clerk."
recording
The noting in the registrar’s office of the details of a properly executed
legal document, such as a deed, a mortgage note, a satisfaction of
mortgage, or an extension of mortgage, thereby making it a part of the
public record.
refinance transaction
The process of paying off one loan with the proceeds from a new loan using
the same property as security.
remaining balance
The amount of principal that has not yet been repaid. See principal
balance.
remaining term
The original amortization term minus the number of payments that have been
applied.
rent loss insurance
Insurance that protects a landlord against loss of rent or rental value
due to fire or other casualty that renders the leased premises unavailable
for use and as a result of which the tenant is excused from paying rent.
repayment plan
An arrangement made to repay delinquent installments or advances.
replacement reserve fund
A fund set aside for replacement of common property in a condominium, PUD,
or cooperative project -- particularly that which has a short life
expectancy, such as carpeting, furniture, etc.
revolving debt
A credit arrangement, such as a credit card, that allows a customer to
borrow against a preapproved line of credit when purchasing goods and
services. The borrower is billed for the amount that is actually borrowed
plus any interest due.
right of first refusal
A provision in an agreement that requires the owner of a property to give
another party the first opportunity to purchase or lease the property
before he or she offers it for sale or lease to others.
right of ingress or egress
The right to enter or leave designated premises.
right of survivorship
In joint tenancy, the right of survivors to acquire the interest of a
deceased joint tenant.
sale-leaseback
A technique in which a seller deeds property to a buyer for a
consideration, and the buyer simultaneously leases the property back to
the seller.
second mortgage
A mortgage that has a lien position subordinate to the first mortgage.
secondary market
The buying and selling of existing mortgages, usually as part of a "pool"
of mortgages.
secured loan
A loan that is backed by collateral.
security
The property that will be pledged as collateral for a loan.
seller carry-back
An agreement in which the owner of a property provides financing, often in
combination with an assumable mortgage.
servicer
An organization that collects principal and interest payments from
borrowers and manages borrowers’ escrow accounts. The servicer often
services mortgages that have been purchased by an investor in the
secondary mortgage market.
servicing
The collection of mortgage payments from borrowers and related
responsibilities of a loan servicer.
settlement statement
See HUD1 Settlement Statement
subdivision
A housing development that is created by dividing a tract of land into
individual lots for sale or lease.
subordinate financing
Any mortgage or other lien that has a priority that is lower than that of
the first mortgage.
survey
A drawing or map showing the precise legal boundaries of a property, the
location of improvements, easements, rights of way, encroachments, and
other physical features.
sweat equity
Contribution to the construction or rehabilitation of a property in the
form of labor or services rather than cash.
tenancy in common
As opposed to joint tenancy, when there are two or more individuals on
title to a piece of property, this type of ownership does not pass
ownership to the others in the event of death.
third-party origination
A process by which a lender uses another party to completely or partially
originate, process, underwrite, close, fund, or package the mortgages it
plans to deliver to the secondary mortgage market.
title
A legal document evidencing a person's right to or ownership of a
property.
title company
A company that specializes in examining and insuring titles to real
estate.
title insurance
Insurance that protects the lender (lender's policy) or the buyer (owner's
policy) against loss arising from disputes over ownership of a property.
title search
A check of the title records to ensure that the seller is the legal owner
of the property and that there are no liens or other claims outstanding.
transfer of ownership
Any means by which the ownership of a property changes hands. Lenders
consider all of the following situations to be a transfer of ownership:
the purchase of a property "subject to" the mortgage, the assumption of
the mortgage debt by the property purchaser, and any exchange of
possession of the property under a land sales contract or any other land
trust device.
transfer tax
State or local tax payable when title passes from one owner to another.
Treasury index
An index that is used to determine interest rate changes for certain
adjustable-rate mortgage (ARM) plans. It is based on the results of
auctions that the U.S. Treasury holds for its Treasury bills and
securities or is derived from the U.S. Treasury's daily yield curve, which
is based on the closing market bid yields on actively traded Treasury
securities in the over-the-counter market. [Top]
Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the
terms and conditions of a mortgage, including the annual percentage rate
(APR) and other charges.
two-step mortgage
An adjustable-rate mortgage (ARM) that has one interest rate for the first
five or seven years of its mortgage term and a different interest rate for
the remainder of the amortization term.
two- to four-family property
A property that consists of a structure that provides living space
(dwelling units) for two to four families, although ownership of the
structure is evidenced by a single deed.
trustee
A fiduciary who holds or controls property for the benefit of another.
VA mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA).
vested
Having the right to use a portion of a fund such as an individual
retirement fund. For example, individuals who are 100 percent vested can
withdraw all of the funds that are set aside for them in a retirement
fund. However, taxes may be due on any funds that are actually withdrawn.
Veterans Administration (VA)
An agency of the federal government that guarantees residential mortgages
made to eligible veterans of the military services. The guarantee protects
the lender against loss and thus encourages lenders to make mortgages to
veterans.
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