* Local laws, as well as custom and use in various areas or regions of the country, may modify or completely change the meanings of certain terms defined.
A
Abstract of Title: A summary of recorded transactions concerning a property. An attorney or title insurance company examines an abstract of title for any title defects that must be cleared before a buyer can purchase clear, marketable, and insurable title.
Acceleration Clause: Condition in a mortgage that gives the lender the right to require immediate repayment of the loan balance if regular mortgage payments are not made, or for breach of other conditions of the mortgage.
Accrued Interest: Interest earned but not yet paid.
Adjustable Rate: An interest rate that changes periodically according to an index.
Adjustable Rate Mortgage (ARM): A mortgage with an interest rate that changes over time in line with movements in the index. ARMS are also referred to as AMLs (adjustable mortgage loans) or VRMs (variable rate mortgages).
Adjustment Period: The length of time between interest rate changes on an ARM. For example, a loan with an adjustment period of one year is called a one-year ARM, which means that the interest rate can change once a year.
Agreement of Sale: Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.
Alternative Documentation: A method of documenting a loan that relies on information the borrower is likely able to provide instead of waiting as a substitute for verification sent to third parties to confirm statements made in the loan application. For example, traditional full documentation calls for the lender to get a written verification of bank balance directly from the borrower’s bank. Under alternative documentation, the lender instead relies upon copies of bank statements provided by the borrower.
Amortization: Repayment of a loan in installments of principal and interest, rather than interest-only payments.
Annual Percentage Rate (APR): The total finance charge (interest, loan fees, points) expressed as a percentage of the loan amount.
Application: An initial statement of personal and financial information required to approve a loan, provided by the borrower and necessary to initiate the approval process for a loan.
Application Fee: Fees charged by lender at loan closing to cover the initial cost of processing a loan application.
Appraisal: A written estimate of a property’s current market value, based on recent sales information for similar properties, the condition of the property and the neighborhood’s impact on future property value.
Appraisal Fee: A fee charged by a licensed, certified appraiser to render an opinion of market value as of a specific date.
Assessment: A local tax levied against a property for a specific purpose, such as road or sidewalk construction or sewer or street light installation.
Assignment: The transfer of property rights by one person, the assignor, to another, the assignee.
Assumability: A loan feature that allows the loan to be transferred to the new purchaser of a home. Assumable mortgages can help attract buyers since assumption of a loan requires fees and/or qualifying standards lower than a new loan.
Assumption of Mortgage: A buyer’s agreement to assume the liability under an existing note that is secured by a mortgage or deed of trust. The lender must approve the buyer in order to release the original borrower (usually the seller) from liability.
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B
Balance Sheet: A document showing the financial situation – assets, liabilities and net worth – of a company at a specific point in time.
Balloon Mortgage: Periodic installments of principal and interest that do not fully liquidate the loan. At the end of the term, the balance of the mortgage is due in lump sum.
Balloon Payment: A lump sum principal payment due at the end of some mortgages or other long-term loans.
Bankruptcy: Proclamation by a court of an individual’s (or organization’s) state of insolvency, or inability to pay debts. Petition may be brought by an individual or creditors, with a goal of orderly and equitable settlement of obligations.
Bearer: The legal owner of a piece of property.
Bequest: A gift of personal property by will.
Bill of Sale: A document by which one transfers ownership of goods to another.
Binder: Sometimes known as an offer to purchase or an earnest money receipt. A binder is the acknowledgment of a deposit along with a brief written agreement to enter into a contract for the sale of real estate.
Bi-Weekly Mortgage: A payment plan under which the borrower pays one half of a monthly mortgage payment every two weeks.
Blanket Mortgage: A mortgage covering at least two or more pieces of real estate, which together serve as collateral for the loan.
Bona Fide: In good faith.
Bond: A document representing a right to certain payments on underlying collateral.
Borrower (Mortgagor): An individual who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.
Broker: An individual who assists in arranging funding or negotiating contracts for a client but does not loan money themselves.
Buydown: A situation in which the seller contributes money, allowing the lender to give the buyer a lower rate and payment, usually in exchange for an increase in sales price.
Buyer’s Broker: An agent hired by a buyer to locate a property for purchase and to represent the buyer in negotiations with the seller’s broker.
Building Line or Setback: Distance from the sides and/or ends of the lot past which construction may not extend. Building lines are established by a filed plat of subdivision, restrictive covenants in deeds or leases, building codes or zoning ordinances.
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C
Call Option: A loan feature that allows the lender to require repayment of the loan in full before the term of the loan is up.
Cap: The limit on how much an interest rate or monthly payment can change, either at each adjustment or over the life of the mortgage.
Cash Out: A refinance for more than the balance of the original mortgage so that the excess money taken out reduces the borrower’s equity built up in the house property.
Cashier’s Check (Bank Check): A check whose payment is guaranteed because it was paid for in advance and is drawn on the bank’s account instead of the customer’s.
CC&Rs: Covenants, conditions and restrictions. A document that controls the use, requirements and restrictions of a property.
Ceiling: The maximum allowable interest rate of an adjustable rate mortgage.
Certificate of Eligibility: Document issued by the Veterans Administration to qualified veterans which entitles them to VA-guaranteed loans. Obtainable through local VA offices by submitting for DD-214 (Separation Paper) and VA form 1880 (Request for Certificate of Eligibility).
Certificate of Occupancy (CO): Document issued by local government agency stating that a property meets the requirements of health and building codes.
Certificate of Reasonable Value (CRV): A document that establishes the maximum value and loan amount for a VA guaranteed mortgage.
Certificate of Title: Written opinion of the status of title to a property given by an attorney or title company. This certificate does not offer the protection given by title insurance.
Certificate of Veteran Status: Document given to veterans or reservists who have served 90 days of continuous active duty (including training time) which enables them to obtain lower down payments on certain FHA-insured loans. Obtainable through local VA offices by submitting for DD-214 (Separation Paper) and form 26-8261a (Request for Certificate of Veteran Status).
Certified Check: A check drawn on the issuer’s account for funds that have been segregated by the bank, thus guaranteeing sufficient funds for payment.
Chain of Title: The chronological order of conveyance of a property from the original owner to the present owner.
Clear Title: A marketable title, free of clouds and disputes.
Closing (Settlement): Meeting between the buyer, seller and lender or their agents at which property and funds legally change hands.
Closing Costs: Fees incurred in a real estate or mortgage transaction and paid by the borrower and/or seller during the closing of the mortgage loan. These typically include a loan origination fee, discount points, attorney’s fees, title insurance, appraisal, survey and any items which must be pre-paid, such as taxes and insurance escrow payments. The costs of closing are usually 2-6% of the mortgage amount. The agreement of sale negotiated previously between the buyer and seller may state in writing who will pay each of the following costs.
BUYERS’ EXPENSES
1. Appraisal and Inspection
2. Attorney’s Fee
3. Documentary Stamps on Notes
4. Escrow Fees
5. Recording Deed and Mortgage
6. Survey Charge
7. Title Insurance
SELLERS’ EXPENSES
1. Attorney's Fee
2. Cost of Abstract
3. Documentary Stamps on Deed
4. Escrow Fees
5. Real Estate Commission
6. Recording Mortgage
7. Survey Charge
* Each closing is unique. Closing costs may vary.
Closing Statement: The financial disclosure statement that accounts for all of the funds received and expected at the closing, including deposits for taxes, hazard insurance and mortgage insurance.
Cloud on Title: An outstanding claim or encumbrance that, if valid, would affect or impair the owner’s title.
Collateral: Assets that back a mortgage loan (real property in the case of a mortgage loan).
Commission: Money paid to a real estate agent or broker by the seller (usually 6-7% of the sale price of the house on houses, 10% on land).
Condemnation: The repossession of private property for public use by a government unit, against the will of the owner, but with payment of just compensation under the government's power of eminent domain. Condemnation also may be a determination by a governmental agency that a particular building is unsafe or unfit.
Condominium: A form of real estate ownership where the owner receives title to a particular unit and has a proportionate interest in certain common areas. The unit itself is generally a separately owned space whose interior surfaces (walls, floors and ceilings) serve as its boundaries.
Conforming Loan: A mortgage loan meeting the requirements set down by Fannie Mae and Freddie Mac including, most importantly, the requirement that the original loan balance not exceed specified limits under the maximum amount of loans FNMA and FHLMC are legally allowed to buy.
Construction Loan: A short-term interim loan to fund the construction of buildings or homes, which usually advances to money to the builder in installments as work progresses. After completion, a permanent loan is used to pay off the construction loan.
Contingency: A condition that must be satisfied before a contract is binding. For instance, a sales agreement may be contingent upon the buyer obtaining financing.
Contract of Sale: The agreement between the buyer and seller on the purchase price, terms and conditions of a sale.
Contractor: One who contracts to erect buildings or portions of them. There are also contractors for each phase of construction: heating, electrical, plumbing, air conditioning, road building, bridge and dam erection and others
Conventional Mortgage: A mortgage not insured by the FHA or guaranteed by the VA.
Conversion Clause: A provision in some ARMS that enables you to change an ARM to a fixed-rate loan, usually after the first adjustment period. The new fixed rate is generally set at the prevailing interest rate for fixed-rate mortgages. This conversion feature may cost extra.
Convertible ARMs: ARMs with the option of conversion to a fixed loan during a given period of time (see “Conversion Clause”).
Conveyance: The transfer of deed, lease or mortgage.
Cooperative: A form of multiple ownership in which a corporation or business trust entity holds title to a property and grants occupancy rights to shareholders by means of proprietary leases or similar arrangements.
Co-signer: A person who signs a legal instrument, thus individually and jointly liable for repayment or performance of an obligation.
Cost of Funds Index (COFI): A common index used in adjustable rate loans and based on the weighted-average interest rate paid by a defined group of savings institutions for sources of funds, usually by members of the 11th Federal Home Loan Bank District.
CRB (Certified Residential Broker): A certified broker must be a member of the National Association of Realtors®, have five years of experience as a licensed broker and have completed required Residential Division courses.
Credit Report: A report detailing the credit history of a prospective borrower, used to help determine creditworthiness.
Credit Risk: The possibility that the borrower may default on financial obligations to the investor.
CRS: Certified Residential Specialist.
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D
Debt-to-Income Ratio: The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her gross monthly income.
Deed: Legal document by which title to a property is transferred from one owner to another. The deed contains a description of the property, and is signed, witnessed and delivered to the buyer at closing.
Deed of Trust: Agreement to pledge property as security for a loan, and used in many states in place of a mortgage. In such an arrangement, the borrower transfers legal title to a trustee who holds the property in trust as security for the repayment of the debt. The deed of trust becomes void if the debt is repaid, but if the borrower defaults on the loan, the trustee may sell the property to pay the debt.
Default: Failure to meet legal obligations in a contract, including failure to make payments on a loan. A mortgage is generally considered to be in default when a payment is 30 days past due.
Deferred Interest: Interest added to the balance of a loan when monthly payments are not sufficient to cover it (see “Negative Amortization”).
Delinquency: Failure to make required payments on time.
Deposit: Cash paid to the seller when a formal sales contract is signed.
Depreciation: Decline in property value.
Discount Points (Points): Money paid to a lender at closing in exchange for lower interest rates. Each point is equal to 1% of the loan amount.
Documentary Stamps: A state tax, in the form of stamps, required on deeds and mortgages when real estate title passes from one owner to another.
Document Review: Fee charged by lender for review of documents necessary to fund a loan.
Down Payment: Money paid for a house from the buyer’s funds at closing. The down payment is the difference between the purchase price and the mortgage amount.
Draw System: Scheduled payment to a builder during the phases of home construction. Between each draw, the appraiser must inspect the home to ensure construction is proceeding as planned.
Due-On-Sale Clause: An acceleration clause that requires full payment of a mortgage or deed of trust when the secured property changes ownership.
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E
Earnest Money: The portion of the down payment delivered to the seller or escrow agent by the purchaser with a written offer as evidence of good faith.
Effective Interest Rate: The cost of a mortgage expressed as a yearly rate, usually higher than the interest rate on the mortgage since this figure factors in the up-front costs of acquiring the loan.
Easement Rights: A right-of-way granted to a person or company authorizing access to or over the owner's land.
Eminent Domain: Governmental right to take private property for public use upon payment of its fair value.
Encroachment: An obstruction, building, or part of a building that intrudes beyond a legal boundary onto neighboring private or public land, or a building extending beyond the building line.
Encumbrance: A legal right or interest in a property that affects title and lessens the property value. Encumbrances can take the form of claims, liens, unpaid taxes, etc. These usually must be resolved before a buyer purchases the property.
Equal Credit Opportunity Act (ECOA): Federal law requiring creditors to make credit equally available without discriminating based on race, sex, color, age, religion, national origin, marital status or receipt of income from public assistance programs.
Equity: The percentage of property value held by the owner; the difference between the current market value of a property and the outstanding mortgage balance.
Equity Loan: A loan based on the borrower’s equity in his or her home.
Escrow: A procedure in which a third party acts as a stakeholder for both the buyer and the seller, carrying out both parties’ instructions and assuming responsibility for handling all of the paperwork and distribution of funds.
Escrow Payment: Portion of a mortgagor's monthly payment held by the lender to pay for taxes, lease payments, hazard insurance, mortgage insurance and other items as they become due.
Exclusive Right to Sell (Listing) - A written contract giving a licensed real estate agent the exclusive right to sell a property for a specified time. The owner agrees to pay a full commission to the broker even though the owner may sell the property.
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F
Fair Market Value: The price at which property is transferred between a willing buyer and a willing seller. Both parties have reasonable knowledge of all pertinent data and neither one is under any compulsion to buy or sell.
Farmer’s Home Administration (FmHA): An agency of the U.S. Department of Agriculture that provides financing for purchasers of homes and farms in small towns and rural areas.
Federal Deposit Insurance Corporation (FDIC): Independent deposit insurance agency created by Congress to maintain stability and public confidence in the nation’s banking system.
Federal Home Loan Bank Board (FHLBB): Former name for the regulatory and supervisory agency of federally chartered savings institutions, now called the Office of Thrift Supervision.
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac): Quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA): Government agency, division of the Department of Housing and Urban Development, which insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans.
Federal National Mortgage Association (FNMA): Popularly known as Fannie Mae. A privately owned corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA or guaranteed by the VA, as well as conventional home mortgages.
Federal Reserve: Central bank of the United States and major regulatory agency for many commercial banks.
Fee Simple: An estate in which the owner has unrestricted power to dispose of the property as he wishes, including leaving by will or inheritance. It is the greatest interest a person can have in real estate.
FHA Loan: A loan insured by the Federal Housing Administration (of the Department of Housing and Urban Development).
Fiduciary: A person in a position of trust and confidence for another.
Firm Commitment: A lender's agreement to make a loan to a specific borrower of a specific property.
Finance Charge: The total cost a borrower must pay, directly or indirectly, to obtain credit according to Regulation.
First Mortgage: A mortgage that is in first lien position, taking priority over all other liens. In the case of a foreclosure, the first mortgage will be paid before any other mortgage.
Fixed Rate: An interest rate that is fixed for the term of the loan.
Fixed-Rate Mortgage: A mortgage whose interest rate does not change for the life of the loan. The payments are also fixed.
Flood Insurance: A form of hazard insurance required by lenders to cover property damage or loss in flood zones.
Floor: The minimum rate of interest payable on an adjustable-rate mortgage.
Forbearance: Grace period given when a lender postpones foreclosure to give the borrower time to catch up on overdue payments.
Foreclosure (Repossession): Legal process by which the lender forces the sale of a property when the borrower has not met the mortgage terms.
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G
General Warranty Deed: A deed that conveys all the grantor's interests in and title to the property to the grantee, and warrants that if the title is defective or has a "cloud" on it (such as mortgage claims, tax liens, title claims, judgments or mechanic's liens against it) the grantee may hold the grantor liable.
Good Faith Estimate: Written estimate of costs the borrower must pay at closing, provided by a lender within three days of a loan application.
Government National Mortgage Association (GNMA or Ginnie Mae): Government agency that provides funds for VA and FHA loans.
Grace Period: Period of time during which a loan payment may be made after its due date without incurring a late penalty.
Graduated Payment Mortgage: A residential mortgage with monthly payments that start at a low level and increase at a predetermined rate.
Grantee: The party in the deed who is the buyer or recipient.
Grantor: The party in the deed who is the seller or giver.
GRI: Graduate, Realtors Institute. A professional designation granted to a member of the National Association of Realtors® who has successfully completed courses covering Law, Finance and Principles of Real Estate.
Gross Income: Total income before taxes or expenses are deducted.
Gross Monthly Income: The total amount earned by the borrower each month.
Growing Equity Mortgage: A fixed-rate loan in which payments increase by a predetermined amount each year, reducing the outstanding balance of the loan. This accelerated payment plan allows repayment of a 30-year loan in 15 to 20 years.
Guarantee or Guaranty: A promise by one party to pay a debt or perform an obligation contracted by another in the event of that person’s death.
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H
Hazard Insurance: A policy that protects the insured against loss due to fire or other natural disaster in exchange for a premium paid to the insurer.
Holdback: The portion of a loan commitment not funded until some additional requirement such as rental or completion is attained. In construction it is a percentage of the contractor's draw held back to provide additional protection for the interim lender.
Home Equity Loan: A loan secured by the equity in a home and sought for a variety of purposes, including home improvements, major purchases or expenses, or debt consolidation. A portion or all of the interest paid may be tax deductible.
Home Inspection Report: A qualified inspector’s report on a property’s overall condition. The report usually includes an evaluation of both the structure and mechanical systems.
Home Warranty Plan: Protection against failure of mechanical systems within the property. Usually includes plumbing, electrical, heating systems and installed appliances.
Housing and Urban Development (HUD): A U.S. government agency established to implement federal housing and community development programs; oversees the Federal Housing Administration.
Housing Code: Local government ordinance that sets minimum standards of safety and sanitation for existing residential buildings.
Housing Expense-to-Income Ratio: The ratio, expressed as a percentage, is the result of dividing a borrower’s housing expenses by his or her gross monthly income.
HUD-I Settlement Statement: A form that itemizes the closing costs associated with purchasing a home.
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I
Impound (Reserves): Portion of a borrower’s monthly payments held by the lender to pay for taxes, insurance and other items as they become due.
Impound Account: Savings: account for accumulating that portion of a borrower’s monthly payments designated for future payments of taxes and insurance. This is required by lenders for certain types of financing.
Index: A measure of interest rate changes used to determine changes in an ARM’s interest rate over the term of the loan.
Initial Rate: The rate charged during the first interval of an ARM.
Insolvency: Condition of a person unable to pay debts as they fall due.
Interest: Charge paid for borrowing money.
Interest Rate: The periodic charge, generally expressed as a percentage per annum of the outstanding balance, for use of credit.
Interest Rate Cap: A safeguard built into ARMs to prevent drastic changes in interest rates.
Investor: Person or institution investing in mortgages.
Involuntary Lien: Lien imposed against a property without consent of an owner.
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J
Joint Liability: Liability shared among two or more people, each of whom is liable for the full debt.
Joint Tenancy: An equal undivided ownership of property by two or more persons. Upon the death of any owner, the survivors take the decedent’s interest in the property.
Jumbo Loan: A mortgage larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (currently $240,000 for a single-family home in most areas). Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Junior Mortgage: A mortgage subordinate or secondary to another mortgage. In the case of a foreclosure, a senior mortgage will be paid first.
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L
Land contract: A contract ordinarily used in connection with the sale of property in cases where the seller does not wish to convey title until all or a certain part of the purchase price is paid by the buyer. This financing vehicle is often used when property is sold on a small down payment.
Lease: A document containing conditions under which the possession and use of real or personal property are given by the owner to another for a period and with specified considerations.
Legal Description: Property description recognized by law which is sufficient to locate and identify property without oral testimony.
Lessee, Tenant: Person or persons holding rights of possession and use of property under terms of a lease.
Lessor, Landlord: The person leasing property to a lessee.
Licensed Mortgage Broker: The licensed person who, for a commission or a fee, brings parties together and assists in negotiating contracts between them. A firm or individual bringing the borrower and lender together and receiving a commission. A mortgage broker does not retain servicing.
Lease-Purchase Mortgage Loan: An alternative financing option that allows low- and moderate-income homebuyers to lease a home from a nonprofit organization with an option to buy. Monthly rental payments cover mortgage payments and include an additional amount that is saved toward a down payment.
Lender: The bank, mortgage company or mortgage broker offering the loan.
LIBOR (London Interbank Offered Rate): The interest rate charged among banks for short-term Eurodollar loans, and a common index for ARMs.
Lien: A legal hold or claim on property as security for a debt or charge.
Limited partnership: A partnership that consists of one or more partners who are fully liable and one or more limited partners who are liable only for the amount of the investment.
Loan: A sum of money loaned at interest to be repaid.
Loan Administration (Loan Servicing): The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans and remitting payments to investors).
Loan Application: Document required by lenders prior to loan approval containing detailed information about the borrower and property.
Loan Application Fee: A fee paid by prospective buyer to the lender when applying for a mortgage.
Loan Commitment: A written promise to make a loan for a specified amount on specified terms.
Loan Origination Fee: Fee charged by a lender that compensates for the work in evaluating and processing the loan.
Limited Partnership: A partnership that consists of one or more general partners who are fully liable and one or more limited partners who are liable only for the amount of their investment.
Loan Servicing (Loan Administration): The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans and remitting payments to investors).
Loan-To-Value Ratio: The relationship between the amount of the mortgage and the appraised value of the property, expressed as a percentage of the appraised value.
Lock (Lock In): A lender’s guarantee of an interest rate and related points for a set period of time, usually between loan application and loan closing. Protects borrower against rate increases during that time.
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M
Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Marketable Title: A title that is free and clear of all liens, clouds or other defects which would prevent the sale of the property.
Market Value: The value that a willing seller would accept and a willing buyer would offer given a reasonable time for the seller to market a property.
Metes and bounds: A description in a deed of the land location where boundaries are defined by direction and distance.
Monthly Housing Expense: Total monthly expenses of principal, interest, taxes and insurance.
Mortgagee: The lender in a mortgage loan transaction.
Mortgage: Document creating a lien on a property as security for the payment of a debt.
Mortgage Banker: An entity that originates and funds, then sells and services mortgage loans.
Mortgage Broker: A person or entity that arranges financing for borrowers, but places loans with lenders rather than funding them with broker’s own money.
Mortgage Commitment: A written notice from a bank or lending institution saying it will advance mortgage funds in a specified amount to enable a buyer to purchase a property.
Mortgage Insurance: Insurance purchased by a buyer to cover the lender’s risk of loss. Lenders generally require mortgage insurance when the down payment is less than 20 percent of the purchase price.
MIP (Mortgage Insurance Premium): Insurance purchased by borrower to insure against default on government (FHA or VA) loans.
Mortgage Life Insurance: A type of term life insurance often bought by home buyers . The coverage decreases as the mortgage balance declines. If the borrower dies while the policy is in force, the mortgage debt is automatically covered by insurance proceeds.
Mortgage Loan: A loan for which real estate serves as collateral to provide for repayment in case of default.
Mortgage Note: Legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time. The agreement is secured by a mortgage.
Mortgagor: The borrower in a mortgage loan transaction.
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N
Negative Amortization: Negative amortization occurs when monthly payments fail to cover the interest cost. The interest that isn’t covered is added to the unpaid principal balance, which means that even after several payments you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments that aren’t high enough to cover the interest.
Net: After taxes.
Net Effective Income: Gross income minus federal income tax.
Non-Assumption Clause: A statement in a mortgage contract forbidding the assumption of the mortgage by another borrower without the prior approval of the lender.
Non-Dischargeable Debt: Debt, such as taxes, that cannot be forgiven in bankruptcy liquidation.
Note: Legal document stating the terms of a debt and a promise to repay it.
Notice of Default: Written notice to a borrower that default has occurred and that legal action may be taken.
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O
Office of Comptroller of the Currency: The oldest federal financial regulatory body, which oversees the nation’s federally chartered banks.
Office of Thrift Supervision: Regulatory and supervisory agency for federally chartered savings institutions.
Origination: The process of originating mortgages. Solicitation may be from individual borrowers, builders or brokers.
Origination Fee: A fee or charge for work involved in evaluating, preparing, and submitting a proposed mortgage loan. The fee is limited to 1 percent for FHA and VA loans.
Owner Financing: A purchase in which the seller provides all or part of the financing.
Originator: One who solicits builders, brokers and others to obtain applications for mortgage loans.
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P
Payment Cap: Limit on the amount by which a borrower’s ARM payments may increase, regardless of rise in interest rates. May result in negative amortization.
Per Diem Interest: Interest calculated per day. Depending on the day of the month on which closing takes place, the borrower pays interest from the date of closing to the end of the month. The first mortgage payment of a loan is generally due the first of the following month.
Permanent Loan: A long-term mortgage of ten years or more.
PITI: Principal, Interest, Taxes and Insurance. The principal and interest payment on most loans is fixed for the term of the loan. The tax and insurance portion may be adjusted to reflect changes in takes or insurance costs.
Plans and Specifications: Architectural and engineering drawings and specifications for construction of a building or project, including a description of materials how they are to be applied.
Plot : A map or chart of a lot, subdivision or community drawn by a surveyor showing boundary lines, buildings, improvements on the land and easements.
Planned Unit Development (PUD): A zoning designation for property developed at the same or slightly greater overall density than conventional development, sometimes with improvements clustered between open, common areas. Uses may be residential, commercial or industrial.
Pledged Account Mortgage (PAM): Money is placed in a pledged savings account. This fund, plus earned interest, is used to gradually reduce mortgage payments.
Point: An amount equal to 1 percent of the principal amount of the investment or note. The lender assesses loan discount points at closing to increase the yield on the mortgage to a position competitive with other types of investments.
Power of Attorney: Legal document authorizing one person to act on behalf of another.
Preclosing: A transaction preceding the formal closing to settle outstanding issues.
Prepaid Expenses: Taxes, insurance and assessments paid in advance of due dates, including at closing.
Prepaid Interest: Interest charged to a borrower at closing to cover interest on the loan between closing and the end of the month in which the loan closes.
Prepayment: Full or partial payment of the principal before the due date. This might occur if the borrower makes extra payments, sells the property or refinances the existing loan.
Prepayment Penalty: A fee charged to a borrower who pays a loan before it is due. Not allowed for FHA or VA loans.
Pre-Qualification: The process of determining how much money a prospective buyer will be eligible to borrower prior to application for a loan.
Primary Mortgage Market: Includes banks, savings and loan, credit unions and mortgage banks that make mortgage loans directly to borrowers. These lenders sometimes sell their mortgages to lenders such as FNMA in the secondary mortgage market.
Prime Rate: Lowest commercial interest rate charged by a bank on short-term loans to its most creditworthy customers.
Principal: The amount of debt, not counting interest, left on a loan.
Profit and Loss Statement: Financial statement showing sales, expenses and profits over a period of time.
Property Tax: A government tax based on the market value of the property.
Purchase Agreement: A written document in which the purchaser agrees to buy certain real estate and the seller agrees to sell under stated terms and conditions. Also called a sales contract, earnest money contract or agreement for sale.
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Q
Qualifying Ratio: Comparison of a borrower’s expenses (housing or total debt) to income.
Quitclaim Deed: A deed that transfers whatever interest the deed maker may have in the particular parcel of land, given to clear the title when the grantor's interest in a property is questionable. By accepting such a deed the buyer assumes all risks.
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R
Real Estate Broker: An agent who represents a buyer or seller in a real estate transaction.
Real Estate Settlement Procedures Act: Law requiring lenders to give borrowers advance notice of closing costs.
Real Property: Land and everything that is permanently affixed to it.
Realtor®: A real estate broker or associate active in a local real estate board affiliated with the National Association of Realtors®.
Recision: The cancellation of a mortgage loan, permitted by law, within three days of signing when the loan is not used to refinance a home.
Reclamation: The right of the person with title to a property to recover it from the debtor in event of a bankruptcy.
Reconveyance: The transfer of property back to the owner when a mortgage is fully repaid.
Recording: The act of entering documents concerning title to a property into public record.
Recording Fee: Money paid to an agent for entering the sale of a property into the public record.
Redemption Period: The period of time in which a foreclosed mortgagor has to buy back their property by paying principal amount, and interest and fees.
Refinancing: The process of paying off one loan with the proceeds from a new loan secured by the same property.
Regulation Z: The set of rules governing consumer lending issued by the Federal Reserve Board of Governors in accordance with the Consumer Protection Act.
Repossession (Foreclosure): Legal process by which the lender forces the sale of a property because the borrower has not met the mortgage terms.
Release of Lien: An instrument discharging secured property from a lien.
Restrictive Covenants: Private restrictions limiting the use of real property.
Right of Survivorship: In joint tenancy, the right of survivors to acquire the interest of a deceased joint tenant.
Right-of-Way: A privilege operating as an easement upon land, whereby a land owner, by grant or agreement, gives another the right to pass over land.
Reverse Annuity Mortgage (RAM): Type of mortgage applicable to senior citizens in which the lender makes periodic payments to the borrower from the borrower’s equity in their home, thus providing the borrower with a cash annuity.
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S
Sale Agreement: Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.
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, usually on a long-term basis.
Sales Contract: Another name for a sales agreement or purchase agreement.
Satisfaction: The payment of a debt, which satisfies an obligation.
Secondary Mortgage Market: The market into which primary mortgage lenders sell the mortgages to obtain funds to originate more new loans. Includes investors like Fannie Mae and Freddie Mac.
Second Mortgage: A subordinate mortgage made in addition to a first mortgage.
Servicing (Loan Administration): The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans and remitting payments to investors).
Settlement (Closing): Meeting between buyer, seller and lender or their agents at which property funds legally change hands.
Settlement Cost (HUD Guide): Booklet that provides an overview of the lending process, given to consumers after completing their loan application.
Settlement Sheet: The computation of costs payable at closing which determines the seller’s net proceeds and the buyer’s net payment.
Shared Appreciation Mortgage (SAM): Loan in which the borrower is given a below-market interest rate and the lender receives a portion of the future appreciation of the property value.
Simple Interest: Interest computed only on the principle balance.
Special Assessments: A special tax imposed on property, individual lots or all property in the immediate area, for road construction, sidewalks, sewers, street lights, etc.
Special Lien: A lien that binds a specified piece of property, unlike a general lien, which is levied against all one's assets.
Special Warranty Deed: A deed in which the grantor conveys title to the grantee and agrees to protect the grantee against title defects or claims asserted by the grantor and those persons whose right to assert a claim against the title arose during the period the grantor held title to the property.
Survey: A map or plat made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and its relationship to surrounding tracts of land. A survey is often required by the lender to assure him that a building is actually sited on the land according to its legal description.
Subsidized Second Mortgage: Alternative financing option for low- and moderate-income households that also includes a down payment and a first mortgage, with funds for the second mortgage provided by city, county or state housing agencies, foundations or nonprofit corporations. Payment on the second mortgage is often deferred and carries a low interest rate (if any). Part of the debt may be forgiven each year the family remains in the home.
Survey: A measurement of land, prepared by a licensed surveyor, showing a property’s boundaries, elevations, improvements and relationship to surrounding tracts.
Sweat Equity: Value added to a property by improvements made by the owner.
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T
Takeout commitment: Commonly used to designate a higher cost, shorter term, backup commitment as a support for construction financing until a suitable permanent loan can be secured.
Tax: As applied to real estate, an enforced charge imposed on persons, property or income, to be used to support the state.
Tax Impound: Money paid to and held by a lender for annual tax payments. See Impound Account.
Tax Lien: Claim against a property for unpaid taxes.
Tax Sale: Public sale of property by a government authority as a result of non-payment of taxes.
Tenancy At Will: A holding of real estate that can be terminated at the will of either the lessor or the lessee, usually with notice.
Tenancy by Entirety: Joint ownership of property by a husband and wife where under common law, both are viewed as one person that provides for the right of survivorship.
Tenancy in Common: A type of joint ownership of property by two or more persons with no right of survivorship.
Term: The number of years it will take to pay off a loan.
Title: Document that gives evidence of ownership of a property and the rights of ownership and possession of that property.
Title Company: A company that insures title to property.
Title Insurance Policy: A policy that protects the purchaser, mortgagee or other party against losses.
Title Search: Examination of municipal records to ensure that the seller is the legal owner of a property and that no liens or other claims exist against that property.
Transfer Tax: Tax paid when title passes from one owner to another.
Trust Account: Account maintained by a broker or escrow company to handle all money collected for clients.
Trustee: Someone given legal responsibility to hold property in the best interest of another.
Truth-In-Lending Act: Federal law requiring written disclosure of the terms of a mortgage (including the APR and other charges) by a lender to a borrower after a loan application is made.
Two-Step Mortgage: Mortgage with a low fixed interest rate for 5, 7 or 10 years, which is then adjusted to a new rate for the rest of the loan.
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U
Underwriting: The process of verifying data and evaluating a loan for approval.
Unencumbered property: A property to which the title is free and clear.
Usury: Interest charged in excess of the legal rate established by law.
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V
VA Loans: A loan, made by a private lender, that is partially guaranteed by the Veterans Administration.
Variable Rate: Interest rate that changes periodically in relation to an index.
Variable Rate Mortgage: See Adjustable Rate Mortgage.
Verification of Deposit (VOD): Document signed by the borrower’s bank or other financial institution verifying the borrower’s account balance and history.
Verification of Employment (VOE): Document signed by the borrower’s employer verifying the borrower’s position and salary.
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W
Warehousing: The holding of a mortgage on a short term basis pending either a sale to an investor or other long term financing.
Waiver: Voluntary relinquishment or surrender of some right or privilege.
Walk-Through: A final inspection of a home to check for problems that may need to be corrected before closing.
Warranty Deed: A deed in which the grantor or seller guarantees that good title is being conveyed.
Wraparound Mortgage: Loan arrangement in which an existing loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate.
Z
Zoning Ordinances (Zoning Regulation): Local law establishing building codes and usage regulations for properties in a specified area.
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