7/23 and 5/25 Mortgages – Mortgages with a one-time rate adjustment after seven years and five years respectively.
3/1, 5/1, 7/1 and 10/1 ARMs – Adjustable-rate mortgages in which rate is fixed for three-year, five-year, seven-year and 10-year periods, respectively, but may adjust annually after that.
Acceleration – The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower), or by using the right vested in the Due-on-Sale Clause.
Acceptance – A buyers or sellers agreement to enter into a contract and be bound by the terms of the offer.
Accrued Interest – Is the interest that has been earned but not paid.
Acquisition Cost – This is the total price and all fees required to obtain a property.
Acquisition Loan – Is a money borrowed for the purpose of purchasing a property.
Addendum – Is something added as an attachment to a contract.
Adjustable rate mortgage (ARM) – Is a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.
Adjusted Basis – The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
Adjustment Date – The date that the interest rate changes on an adjustable-rate mortgage (ARM).
Adjustment interval – On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years depending on the index.
Adjustment Period – The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
Affordability Analysis – An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
Amortization – Means loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
Amortization Term – The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.
Annual percentage rate (A.P.R.) – APR is a measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans.
Appraisal – An estimate of the value of property, made by a qualified professional called an “appraiser”.
Appraised Value – An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
Arrears – Is the mortgage payment includes interest for prior month, or overdue payments in default.
Assessment – A local tax levied against a property for a specific purpose, such as a sewer or street lights.
Assignment – The transfer of a mortgage from one person to another.
As-Is – Accepting in currend condition, without any guarantees as to condition.
Assumable Mortgage – An existing mortgage which allows the next purchaser of a property to be liable for the payments and other obligations of the note and mortgage. Depending on the type of loan, the assumption of the obligation by this next purchaser may or may not require a qualification and approval process and may or may not release the original mortgagor (borrower) from further liability. A written release from the mortgagee (lender) is required to relieve the original mortgagor of responsibility.
Assumability – An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
Assumption – The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will apply.
Assumption Fee – The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.
Backup Contract – Is a contract to buy real estate that becomes effective if a prior contract fails to be consummated.
Balloon Mortgage – A loan which is amortized for a longer period than the term of the loan. Usually this refers to a thirty-year amortization and a five year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.
Balloon Payment – The final lump sum paid at the maturity date of a balloon mortgage.
Basis Point – Is one 100th of 1%.
Beneficiary – Is the person who receives or is to receive the benefits resulting from certain acts.
Bird Dog – Is someone who identifies a potential good real estate investment opportunity and passes that deal on to another investor for a fee.
Biweekly Payment Mortgage – A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.
Blanket Mortgage – A mortgage covering at least two pieces of real estate as security for the same mortgage.
Borrower (Mortgagor) – One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.
Bridge Loan – A second trust that is collateralized by the borrower’s present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as “swing loan.”
Broker – An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
Broker Price Opinion (BPO) – A real estate broker provides an estimated value of a property.
Buy-down – When the lender and/or the home builder subsidized the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.
Carrying Charges – Are the expenses necessary for holding property, such as taxes and interest on idle property or property under construction.
Cash Flow – The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.).
Caps (interest) – Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage which may change per year and/or the life of the loan.
Caps (payment) – Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.
Certificate of Eligibility – The document given to qualified veterans which entitles them to VA guaranteed loans for homes, business and mobile homes. Certificates of eligibility may be obtained by sending form DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility).
Certificate of Occupancy (C.O.) – Is a document issued by a local government or agency permitting the structure to be occupied by members of the public.
Certificate of Reasonable Value (CRV) – An appraisal issued by the Veterans Administration showing the property’s current market value.
Certificate of veteran status – The document given to veterans or reservists who have served 90 days of continuous active duty (including training time) It may be obtained by sending DD 214 to the local VA office with form 26-8261a (request for certificate of veteran status. This document enables veterans to obtain lower down payments on certain FHA insured loans).
Chain of Title – Is the history of conveyances and encumbrances affecting a title from the time that the original patent was granted or as far back as records are available.
Change Frequency – The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).
Clear Title – A marketable title, one free of clouds and disputed interests.
Closing – The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands, also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually are about 3 percent to 6 percent of the mortgage amount.
Closing Costs – These are expenses – over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.
Closing Date – Is the date on which the seller delivers the deed and the buyer pays for the property.
Closing Statement – Is an accounting of funds from a real estate transaction, also known as a HUD-1.
Cloud on Title – Is an outstanding claim or encumbrance that, if valid, would affect or impair the owner’s title.
COFI – Adjustable-rate mortgage with rate that adjusts based on a cost-of-funds index, often the 11th District Cost of Funds.
Collateral – Is the property pledged as security for a debt.
Comparable Sales (or Comps) – As part of the appraisal process, those relatively recently sold properties which will be compared to the subject property (the property being appraised) for the purpose of forming an opinion of value for the subject property. The facts and details of the comparable properties will be compared to those of the subject. In an urban setting, to be of credible assistance in this process, comparable sales must have the same use as the subject, have many similarities to the subject in terms of size of house, size of lot, construction, bedroom count, room count, floor plan, amenities, street traffic and be in the same neighborhood and have been sold in the recent past (preferably no more than six months) by way of an “arms length” transaction (i.e., not sold to a relative or friend and not sold due to a forced sale or distress sale) and be within one mile of the subject property. More liberal standards will apply for rural property and some suburban properties but the basic premise holds, the more similar the comparable sales are to the subject property, the more accurate the value assigned to the subject property will be. Lenders will often compensate for the less precise nature of rural appraised values by allowing only lower loan-to-value ratios than those in urban settings, usually 10% lower. (See definition of “loan-to-value” below.)
Conditions, Covenants, and Restrictions (CCR’s) – These are the promises written into deeds and other instruments agreeing to performance or nonperformance of certain acts, or requiring or prohibiting certain uses of the property.
Construction loan – A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.
Consumer Reporting Agency (or Bureau) – An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources.
Contingency – Is 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 sale or deed – A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.
Contractor – Is one who contracts to provide specific goods or services.
Conventional loan – A mortgage not insured by FHA or guaranteed by the VA.
Conversion Clause – A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
Counteroffer – Is the rejection of an offer with a simultaneous substitute offer.
Credit Line – A loan that allows revolving use of the credit; that is, after funds have been borrowed and repaid they may be borrowed again without applying for a new loan. Typically, a credit limit is established and some or all of the available funds can be optionally disbursed at closing. Undisbursed funds are available for the borrowers use at any time. Payments are required only on the outstanding balance. They are similar in use to a credit card except that they typically use checks to access the funds. They are inexpensive, effective tools for investors.
Credit Report – A report documenting the credit history and current status of a borrower’s credit standing.
Credit Risk Score – A credit risk score is a statistical summary of the information contained in a consumer’s credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.
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. See housing expenses-to-income ratio.
Deed in Lieu of Foreclosure – Is the act of giving property back to the lender without foreclosure.
Deed of trust – In many states, this document is used in place of a mortgage to secure the payment of a note.
Default – Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
Deferred interest – When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization.
Delinquency – Failure to make payments on time. This can lead to foreclosure.
Department of Veterans Affairs (VA) – An independent agency of the federal government which guarantees long-term, low-or no-down payment mortgages to eligible veterans.
Discount Point – See Points.
Down Payment – Money paid to make up the difference between the purchase price and the mortgage amount.
Draw – Is a periodic advance of funds from a lender.
Due-on-Sale-Clause – A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
Earnest Money – Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Encumbrance – Is any right to or interest in land that affects its value, including mortgage loans, unpaid taxes, easements, junior liens, or deed restrictions.
Entitlement – The VA home loan benefit is called an entitlement (i.e. entitlement for a VA guaranteed home loan). This is also known as eligibility.
Equal Credit Opportunity Act (ECOA) – Is 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 – The difference between the fair market value and current indebtedness, also referred to as the owner’s interest. The value an owner has in real estate over and above the obligation against the property.
Escrow – An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing.
Escrow Disbursements – The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
Escrow Payment – The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
Eviction – Is the legal proceeding by a lessor (landlord) to recover possession of property.
Facade – Is the outside front wall of a building.
Fannie Mae – see Federal National Mortgage Association.
Farmers Home Administration (FmHA) – Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
Federal Home Loan Bank Board (FHLBB) – The former name for the regulatory and supervisory agency for federally chartered savings institutions. Agency is now called the Office of Thrift Supervision
Federal Home Loan Mortgage Corporation(FHLMC) also called “Freddie Mac” – Is a quasi-governmental agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA) – A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.
Federal National Mortgage Association (FNMA) also know as “Fannie Mae” – A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
FHA loan – A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately-priced homes almost anywhere in the country.
FHA mortgage insurance – Requires a fee (up to 2.25 percent of the loan amount) paid at closing to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.
FHLMC – The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans. Also known as “Freddie Mac.”
Fiduciary Responsibility – An obligation to act in the best interest of another party. This type of obligation typically exists when one person places special trust and confidence in another person and that responsibility is accepted.
Firm Commitment – A promise by FHA to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan.
First Mortgage – The primary lien against a property.
Fixed Installment – The monthly payment due on a mortgage loan including payment of both principal and interest.
Fixed Rate Mortgage – The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
Fully Amortized ARM – An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
FNMA – The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as “Fannie Mae.”
Forbearance – Is a course of action a lender may pursue to delay foreclosure or legal action against a delinquent borrower.
Foreclosure – A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.
FSBO – Is for sale by owner.
Freddie Mac – see Federal Home Loan Mortgage Corporation.
Gable Roof – Is one with a triangle, with the ridge forming an angle at the top and each eave forming an angle at the bottom.
General Contractor – Is one who constructs a building or other improvement for the owner or developer.
General Warranty Deed – A deed in which the grantor agrees to protect the grantee against any other claim to title of the property.
Ginnie Mae – see Government National Mortgage Association.
Government National Mortgage Association (GNMA) – Also known as “Ginnie Mae,” provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.
Graduated Payment Mortgage (GPM) – A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.
Grantee – Is the party to whom title to real property is conveyed. Grantor – Is the party who gives the deed.
Growing-Equity Mortgage (GEM) – A fixed-rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.
Guaranty – A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
Guarantee Mortgage – A mortgage that is guaranteed by a third party.
Hard Money Loan – A loan that is underwritten with the condition and value of the property as the primary criteria for approval. Secondary issues may include the credit of the borrower, the ability of the borrower to repay the loan and/or the ability of the borrower to manage the property or successfully complete a rehab and sell the property. Owner occupancy, debt ratios and other issues are seldom a factor. Appraisals rather than purchase prices are used to determine value. Cash out purchases are often allowed and are another key benefit. These loans are usually approved within days and are often funded in two weeks or under with times as short as two or three days not uncommon. The cost for the benefits of speed of funding, lax underwriting and other advantages is typically a moderately high interest rate (usually low to mid teens) and high points (usually 5 to 10). (See definition of “underwriting” below.)
Hazard Insurance – A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
HELOC – Stands for Home Equity Line of Credit, see Home Equity Loan below.
Home Equity Loan – In the most literal sense, this expression applies to virtually all loans (first mortgages and second mortgages, fixed and adjustable interest rates, credit lines and fully amortizing loans, etc.) placed on an owner occupied property when the loan-to-value after the Home Equity Loan closes is no higher than 100%. That is, it is a loan secured by the available equity of an owner occupied residential property.
Homeowner Association (HOA) – An organization of the homeowners in a particular subdivision, planned unit development, or condominium created to enforce deed restrictions and manage common elements of the development.
Homeowners’ Warranty – A special insurance policy that covers certain home repairs for a specified amount of time.
Homeowner’s Insurance (Hazard Insurance) – Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards. The policy typically combines personal liability insurance and property hazard insurance coverage for a dwelling and its contents. See also homeowner’s insurance.
Homestead – Is the status provided to a homeowner’s principal residence by some state statutes to protect the home against judgments up to specified amounts.
Homestead Exemption – In some jurisdictions a reduction in the assessed value allowed for one’s personal residence.
Housing and Urban Development (HUD) – - a federal government agency established to implement certain federal housing and community development programs.
Housing Expenses-to-Income Ratio – The ratio, expressed as a percentage, which results when a borrower’s housing expenses are divided by his/her gross monthly income. See debt-to-income ratio.
HUD-1 statement – A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.
Impound – That portion of a borrower’s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
Index – A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.
Indexed rate – The sum of the published index plus the margin. For example if the index were 9% and the margin 2.75%, the indexed rate would be 11.75%. Often, lenders charge less than the indexed rate the first year of an adjustable-rate mortgage.
Initial Interest Rate – This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It’s also known as “start rate” or “teaser.”
Installment – The regular periodic payment that a borrower agrees to make to a lender.
Insured Mortgage – A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).
Interest – The fee charged for borrowing money.
Interest Accrual Rate – The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.
Interest Rate – The percentage of the loan amount charged for borrowing money; i.e., the cost of the money expressed as a percentage.
Interest Rate Buydown Plan – An arrangement that allows the property seller to deposit money to an account. That money is then released each month to reduce the mortgagor’s monthly payments during the early years of a mortgage.
Interest Rate Ceiling – For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.
Interest Rate Floor – For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.
Interim Financing – A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.
Internal Rate of Return (IRR) – Is the rate of return or yield used in capital budgeting to measure and compare the profitability of investment capital each year it remains invested in the investment. Generally speaking, the higher a project’s IRR, the more desirable it is to undertake the project. A simple way to compute and to compare is to use the annual cash flows during a given period of time (return on investment) divided by initial investment or sale price to calculate yield.
Investor – A money source for a lender.
Judgment Lien – Is the claim upon the property of a debtor resulting from recording a judgment.
Judicial Foreclosure – Having a defaulted debtor’s property sold where the court ratifies the price paid.
Jumbo Loan – A loan which is larger (more than $359,650 as of 1/1/05) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Land Trust – A revocable, living trust primarily used to hold title to real estate for privacy and anonymity. Also known as an Illinois Land Trust or Nominee Trust. The land trustee is a nominal title holder, with the beneficiaries having the exclusive right to direct and control the actions of the trustee.
Late Charge – The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
Lease – Is a contract in which, for a rent payment, the one entitled to the possession of the real property (lessor) transfers those rights to another (lessee) for a specified period of time.
Lease Option – Is a lease combined with an option agreement that gives the lessee (tenant) the right to purchase the property under specified conditions.
Lease Purchase – A lease combined with a purchase agreement that obligates the lessee (tenant) to purchase the property under specified conditions.
Lease-Purchase Mortgage Loan – An alternative financing option that allows low- and moderate-income home buyers to lease a home with an option to buy. Each month’s rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a down payment.
Legal Description – Is the legally acceptable identification of real estate by government survey, metes and bounds, or recorded plat.
Lessee – Is the person to whom property is rented under a lease.
Lessor – Is the one who rents property to another under a lease.
Letter of Intent – Is the written expression of desire to enter into a contract without actually doing so.
Liabilities – A person’s financial obligations. Liabilities include long-term and short-term debt.
Liability Insurance – Is 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. See also homeowners insurance.
Lien – A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Lifetime Payment Cap – For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.
Lifetime Rate Cap – For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See Cap.
Line Of Credit – Is an agreement by a lender to extend credit up to a certain amount for a certain time without the need for the borrower to file another application.
Lis Pendens – Latin for “suit pending”, recorded notice of the filing of a lawsuit, the outcome of which may affect title to real property.
Listing – - written agreement between a principal and an agent authorizing the agent to perform services for the principal involving the principal’s property.
Loan – A sum of borrowed money (principal) that is generally repaid with interest.
Loan Application (1003) – - A loan application that is required for conforming loans. It has become the standard application for most residential loans, even non-conforming loans.
Loan Origination Fee – - Most lenders charge borrowers an origination fee–or points–for processing a loan. A point is 1 percent of the total loan amount.
Loan Package – - The organized group of documents that contains all of the information required to obtain an underwriting decision of loan approval or loan denial. Depending on the type of loan and the particular lender, a package may contain some or all of the following as well as other documents: loan application, statement of use of funds, statement of net worth, P & L statements, tax returns, pay stubs, statements from various types of banking and investment accounts, property appraisal, letters of explanation, credit report, verification of employment, verification of housing payments, purchase agreement, etc. (See definition of “underwriting” below.)
Loan-to-Value Ratio – The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
Lock – Lender’s guarantee that the mortgage rate quoted will be good for a specific number of days from day of application.
Lot and Block – Is the method of identifying legal description of property, see Legal Description.
Lot Line – A line bounding a lot as described in a property survey.
Management Agreement – A contract between the owner of property and someone who agrees to manage it.
Margin – The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Market Value – The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
Maturity – The date on which the principal balance of a loan becomes due and payable.
Mechanic’s Lien – Is a lien given by law upon a building or other improvement upon land as security for the payment of labor and materials furnished for improvement.
MIP (Mortgage Insurance Premium) – It is insurance from FHA to the lender against incurring a loss on account of the borrower’s default.
Monthly Fixed Installment – That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn’t cover all of the interest. The loan balance therefore increases instead of decreasing.
Monthly Mortgage Insurance (MI) Payment – Is the portion of monthly payment that covers the cost of Private Mortgage Insurance.
Monthly Payment (P&I) – This is the monthly mortgage payment on a home loan, this includes principal and interest, but excludes any amounts that are applied to taxes and insurance.
Monthly Principal & Interest (P&I) Payment – Is the portion of monthly payment that covers the principal and interest due on the loan.
Monthly Taxes & Insurance (T&I) Payment – - portion of monthly payment that funds the escrow or impound account for taxes and insurance.
Mortgage – A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Banker – A company that originates mortgages exclusively for resale in the secondary mortgage market.
Mortgage Broker – An individual or company that charges a service fee to bring borrowers and lenders together for the purpose of loan origination.
Mortgagee – The lender.
Mortgage Insurance – Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.
Mortgage-Interest Deduction – The tax write-off that the Internal Revenue Service allows most owners to claim for annual interest payments made on real estate loans. Mortgagee.
Mortgage Life Insurance – A type of term life insurance In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.
Mortgagor – The borrower or homeowner.
Multi-Dwelling Property – A property that contains individual units for several households but carries only one mortgage.
Negative Amortization – Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.
Net Cash Flow – Investment property that generates income after expenses such as principal, interest, taxes and insurance are subtracted.
Net Operating Income (NOI) – From income producing property, the gross income minus the total of all expenses except for debt service. Cash flow is defined as NOI minus the total of all debt service payments.
Net Effective Income – The borrower’s gross income minus federal income tax.
Non Assumption Clause – A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Note: The signed obligation to pay a debt, as a mortgage note.
Non-Recurring Closing Costs – Costs that are one-time only fees for such items as an appraisal, loan points, credit report, title insurance and a home inspection.
Note – A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Notice of Default – A lender’s initial action when a mortgage payment is late and attempts to reconcile the issue out of court have failed.
Obligee – The person in whose favor an obligation is entered into.
Obligor – The person who binds himself or herself to another.
Office of Thrift Supervision (OTS) – The regulatory and supervisory agency for federally chartered savings institutions. Formally known as Federal Home Loan Bank Board.
One-year adjustable – Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.
Origination Fee – The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.
Originator – An individual who works with a borrower to start a loan. Usually an employee of a financial institution, an employee of a broker or an independent contractor affiliated with several brokers, the originator determines the type of loan a borrower probably qualifies for, helps complete an accurate application, gathers documents necessary to get an approval and acts as an intermediary between the borrower and the underwriter.
Owner Financing (Seller Financing) – A property purchase transaction in which the party selling the property provides all or part of the financing.
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 adjustment date.
Periodic Payment Cap – A limit on the amount that payments can increase or decrease during any one adjustment period.
Periodic Rate Cap – 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.
Permanent Loan – A long term mortgage, usually ten years or more. Also called an “end loan.”
PITI – Principal, Interest, Taxes and Insurance. Also called monthly housing expense.
Pledged account Mortgage (PAM) – Money is placed in a pledged savings account and this fund plus earned interest is gradually used to reduce mortgage payments.
Points (Loan Discount Points) – Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).
Power of Attorney – A legal document authorizing one person to act on behalf of another.
Pre-Approval – The process of determining how much money you will be eligible to borrow before you apply for a loan.
Prepaid Expenses – Necessary to create an escrow account or to adjust the seller’s existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
Prepayment – A privilege in a mortgage permitting the borrower to make payments in advance of their due date.
Prepayment Penalty – Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.
Primary Mortgage Market – Lenders, such as savings and loan associations, commercial banks, and mortgage companies, who make mortgage loans directly to borrowers. These lenders sometimes sell their mortgages to the secondary mortgage markets such as to FNMA or GNMA, etc.
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 not including interest or any other charges.
Principal, Interest, Taxes, and Insurance (PITI) – The four components of a monthly mortgage payment. 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 monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.
Private Mortgage Insurance (PMI) – In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment – as low as 3 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan’s structure.
Promissory Note – Is the promise to pay a specified sum to a specified person under specified terms
Qualifying Ratios – Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
Quitclaim Deed – A deed that conveys only the grantor’s rights or interest in a property, without stating the nature of the rights or interest and with no warranties of ownership.
Rate Cap – The maximum interest rate charge allowed on the monthly payment of an adjustable rate mortgage during an adjustment period.
Rate Lock – A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
Real Property – Is the rights to use real estate.
Realtor – A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
Real Estate Agent – A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
Real Estate Settlement Procedures Act (RESPA) – A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Recission – The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.
Recission Period – Is the federally mandated period of three business days (beginning on the day after a loan closes) during which the borrower may cancel the new loan, waiting period only applies to loans which are to be secured by a mortgage on a personal residence for which the borrower is in title at the time of loan origination, right to cancel does not apply to loans used for the purchase of property.
Recording Fees – Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
Recourse – The ability of lender to make claims against borrower personally in addition to the collateral.
Redemption Period – Is the period during which a former owner can reclaim foreclosed property.
Refinance – Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.
Regulation Z – Is the federal regulation requiring creditors to provide full disclosure of the terms of a loan.
Renegotiable Rate Mortgage – A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.
REO – Is property acquired through a lender through foreclosure and held in inventory.
RESPA – Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.
Residential Service Contract – A home warranty or insurance contract, generally for one year, covering plumbing, electrical, and mechanical systems of the home.
Reverse Annuity Mortgage (RAM) – A form of mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as collateral for and repayment of the loan.
Revolving Liability – 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.
Right of First Refusal – Is the opportunity of a party to match the terms of a proposed contract before the contract is executed.
Sale Leaseback – Is the sale of property by seller and simultaneous leasing of the same property by seller.
Sandwich Lease – A lease held by a lessee (tenant) who becomes a lessor (landlord) by subletting to another lessee (subtenant), typically the sandwich leaseholder is neither the owner nor the user of the property.
Satisfaction of Mortgage – The document issued by the mortgagee when the mortgage loan is paid in full. Also called a “release of mortgage.”
Seasoning – A loan which has been in force for a period of time thus establishing the borrower’s payment history, loans are tyically deemed to be seasoned after either six months or one year.
Second Mortgage – A mortgage made subsequent to another mortgage and subordinate to the first one.
Secondary Mortgage Market – The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.
Section 1031 – The section of the Internal Revenue Code dealing with tax-free exchanges of like-kind property.
Section 8 – A privately owned rental dwelling units participating in the low-income rental assistance program created by 1974 amendments to Section 8 of the 1937 Housing Act.
Security – The property that will be pledged as collateral for a loan.
Security Deposit – The cash payment required by landlord to be held during the term of the lease to offset damages incurred due to actions of the tenant.
Seller Carry-back – An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See owner financing.
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 – All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.
Settlement/Settlement Costs – See Closing or Closing costs.
Settlement Statement – Also known as Closing Statement or HUD-1.
Shared Appreciation Mortgage (SAM) – A mortgage in which a borrower receives a below-market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgage where the borrowers shares the monthly principal and interest payments with another party in exchange for part of the appreciation.
Short Sale – A sale of a house in which the proceeds fall short of what the owner still owes on the mortgage. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what he owes.
Simple Interest – Interest which is computed only on the principle balance.
Special Warranty Deed – Is a deed in which the grantor limits the title warranty given to the grantee, does not warrant against title defects arising from conditions that existed before grantor owned the property.
Standard Payment Calculation – The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
Step-Rate Mortgage – A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.
Subject To – The buyer takes title to mortgaged real property but is not personally liable for the payment of the amount due, buyer must make payments in order to keep the property.
Subordination – A clause or document that permits a mortgage recorded at a later date to take priority over an existing lien.
Survey – A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.
Sweat Equity – Equity created by a purchaser performing work on a property being purchased.
Tax and Insurance Escrow – An account required by a mortgage lender to fund annual property tax assessments and hazard insurance premiums, funded through monthly contributions by the mortgagor.
Tax Lien – Is a debt attached to the property for failing to pay taxes.
Terms – The conditions and arrangements specified within a contract.
Third-party Origination – When 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.
Time is of the Essence – A phrase that, when inserted in a contract, requires that all references to specific dates and times of day noted in the contract be interpreted exactly, in its absence extreme delays might be acceptable.
Title – A document that gives evidence of an individual’s ownership of property.
Title Defect – An unresolved claim against the ownership of property, prevents seller from providing buyer clear title to the property.
Title Insurance – Is an insurance policy that protects the holder from loss sustained by defects in the title.
Title Search – An examination of the public records to determine the ownership and encumbrances affecting real property.
Title Insurance – A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender’s interests.
Title Search – An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Total Expense Ratio – Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
Transactional Funding – Short term financing or a bridge loan you use to buy a property. Investor arranges for a short-term loan to fund the purchase and then resells the property to earn the profit margin, using the proceeds to repay the loan. Generally done within 45 days and issued in the name of a business entity. Generally less expensive than traditional hard money loans and costs of borrowing are assessed by paying points and processing fees.
Triple Net Lease – Is a lease in which the tenant is to pay all operating expenses of the property so that the landlord receives net rent, frequently used to mean tenant pays taxes, insurance, and maintenance in addition to normal operating expenses.
Trust – An arrangement whereby property is transferred to a trusted third party trustee by a grantor/trustor, trustee holds the property for the benefit of the beneficiary.
Trust Deed – Is the conveyance of real estate to a third party to be held for the benefit of another, commonly used in some states in place of mortgages that conditionally convey title to the lender, same as Deed of Trust.
Trustee – Is the one who holds property in trust for another to secure performance of an obligation, the neutral party in a trust deed transaction.
Truth-In-Lending – A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z.
Two-Step Mortgage – A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. the lender sometimes has the option to call the loan due with 30 days notice at the end of seven or 10 years. also called “Super Seven” or “Premier” mortgage.
U.S. Department. of Housing and Urban Development (HUD) – A federal agency that oversees the Federal Housing Administration and a variety of housing and community development programs
Underwriting – The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
Unencumbered Property – Is real estate that is owned free and clear.
Unrecorded Deed – An instrument that transfers title from one party (grantor) to another party (grantee) without providing public notice of the change in ownership.
Usury – Interest charged in excess of the legal rate established by law.
Utility Easement – Is the use of another’s property for the purpose of laying gas, water, electric and sewer lines.
VA Loan – A long-term, low- or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee – A premium of up to 1-7/8 percent (depending on the size of the down payment) paid on a VA-backed loan. On a $75,000 fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed.
Variable Interest Rate – An amount of compensation to a lender that is allowed to vary over the maturity of a loan, typically governed by an appopriate index.
Variable Rate Mortgage (VRM) – See Adjustable Rate Mortgage.
Vendee – A buyer of real estate.
Vendee’s Lien – Is a lien against property under a contract of sale to secure the deposit paid by the purchaser.
Vendor – Is a seller of real estate.
Veneer – Is the wood or brick exterior that covers a less attractive and less expensive surface.
Verification of Deposit (VOD) – A document signed by the borrower’s financial institution verifying the status and balance of his/her financial accounts.
Verification of Employment (VOE) – A document signed by the borrower’s employer verifying his/her position and salary.
Warehouse Fee – Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee.
Waiver – The voluntary renunciation, abandonment, or surrender of some claim, right or privilege.
Warranty Deed – Is the deed that contains a covenant that the grantor will protect the grantee against any and all claims; usually contains covenants ensuring good title, freedom from encumbrances, and quiet enjoyment.
Wholesale – To contract a property with the intention of reselling it quickly at a higher price.
Wild Deed – An improperly recorded deed.
Without Recourse – Are the words used in endorsing a note to denote the note holder is not to look to the debtor personally in the event of nonpayment.
Wraparound mortgage – Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.
Zero Lot Line – A form of cluster housing development in which individual dwelling units are placed on separately platted lots, but are attached to each other.
Zoning – Is the legal mechanism for local governments to regulate the use of privately owned real estate to prevent conflicting land uses and promote orderly development.