Definitions

A

Acceleration clause
A clause in your mortgage which allows the lender to demand payment of the
outstanding loan balance for various reasons. The most common reasons for
accelerating a loan are if the borrower defaults on the loan or transfers title to another
individual without informing the lender.

Adjustable-rate mortgage (ARM)
A mortgage in which the interest changes periodically, according to corresponding
fluctuations in an index. All ARMs are tied to indexes.

Adjustment date
The date the interest rate changes on an adjustable-rate mortgage.

Amortization
The loan payment consists of a portion which will be applied to pay the accruing
interest on a loan, with the remainder being applied to the principal. Over time, the
interest portion decreases as the loan balance decreases, and the amount applied to
principal increases so that the loan is paid off (amortized) in the specified time.

Amortization schedule
A table which shows how much of each payment will be applied toward principal and
how much toward interest over the life of the loan. It also shows the gradual decrease
of the loan balance until it reaches zero.

Annual percentage rate (APR)
This is not the note rate on your loan. It is a value created according to a government
formula intended to reflect the true annual cost of borrowing, expressed as a
percentage. It works sort of like this, but not exactly, so only use this as a guideline:
deduct the closing costs from your loan amount, then using your actual loan payment,
calculate what the interest rate would be on this amount instead of your actual loan
amount. You will come up with a number close to the APR. Because you are using the
same payment on a smaller amount, the APR is always higher than the actual note rate
on your loan.

Application
The form used to apply for a mortgage loan, containing information about a borrower’s
income, savings, assets, debts, and more.

Appraisal
A written justification of the price paid for a property, primarily based on an analysis of
comparable sales of similar homes nearby. (top)

Appraised value
An opinion of a property’s fair market value, based on an appraiser’s knowledge,
experience, and analysis of the property. Since an appraisal is based primarily on
comparable sales, and the most recent sale is the one on the property in question, the
appraisal usually comes out at the purchase price.

Appraiser
An individual qualified by education, training, and experience to estimate the value of
real property and personal property. Although some appraisers work directly for
mortgage lenders, most are independent.

Appreciation
The increase in the value of a property due to changes in market conditions, inflation,
or other causes. (top)

assessed value
The valuation placed on property by a public tax assessor for purposes of taxation.

Assessment
The placing of a value on property for the purpose of taxation.

Assessor
A public official who establishes the value of a property for taxation purposes.

Asset
Items of value owned by an individual. Assets that can be quickly converted into cash
are considered “liquid assets.” These include bank accounts, stocks, bonds, mutual
funds, and so on. Other assets include real estate, personal property, and debts owed
to an individual by others.

Assignment
When ownership of your mortgage is transferred from one company or individual to
another, it is called an assignment.

Assumable mortgage
A mortgage that can be assumed by the buyer when a home is sold. Usually, the
borrower must “qualify” in order to assume the loan.

Assumption
The term applied when a buyer assumes the seller’s mortgage. (Top)

B
Balloon mortgage
A mortgage loan that requires the remaining principal balance be paid at a specific
point in time. For example, a loan may be amortized as if it would be paid over a thirty
year period, but requires that at the end of the tenth year the entire remaining balance
must be paid.

Balloon payment
The final lump sum payment that is due at the termination of a balloon mortgage.

Bankruptcy
By filing in federal bankruptcy court, an individual or individuals can restructure or
relieve themselves of debts and liabilities. Bankruptcies are of various types, but the
most common for an individual seem to be a “Chapter 7 No Asset” bankruptcy which
relieves the borrower of most types of debts. A borrower cannot usually qualify for an
“A” paper loan for a period of two years after the bankruptcy has been discharged and
requires the re-establishment of an ability to repay debt.

Bill of sale
A written document that transfers title to personal property. For example, when selling
an automobile to acquire funds which will be used as a source of down payment or for
closing costs, the lender will usually require the bill of sale (in addition to other items) to
help document this source of funds.

Bi-weekly mortgage
A mortgage in which you make payments every two weeks instead of once a month.
The basic result is that instead of making twelve monthly payments during the year, you
make thirteen. The extra payment reduces the principal, substantially reducing the time
it takes to pay off a thirty year mortgage. Note: there are independent companies that
encourage you to set up bi-weekly payment schedules with them on your thirty year
mortgage. They charge a set-up fee and a transfer fee for every payment. Your funds
are deposited into a trust account from which your monthly payment is then made, and
the excess funds then remain in the trust account until enough has accrued to make
the additional payment which will then be paid to reduce your principle. You could save
money by doing the same thing yourself, plus you have to have faith that once you
transfer money to them that they will actually transfer your funds to your lender.

Bond market
Usually refers to the daily buying and selling of thirty year treasury bonds. Lenders
follow this market intensely because as the yields of bonds go up and down, fixed rate
mortgages do approximately the same thing. The same factors that affect the Treasury
Bond market also affect mortgage rates at the same time. That is why rates change
daily, and in a volatile market can and do change during the day as well. (top)

Bridge loan
Not used much anymore, bridge loans are obtained by those who have not yet sold
their previous property, but must close on a purchase property. The bridge loan
becomes the source of their funds for the down payment. One reason for their fall from
favor is that there are more and more second mortgage lenders now that will lend at a
high loan to value. In addition, sellers often prefer to accept offers from buyers who
have already sold their property.

Broker
Broker has several meanings in different situations. Most Realtors are “agents” who
work under a “broker.” Some agents are brokers as well, either working form
themselves or under another broker. In the mortgage industry, broker usually refers to
a company or individual that does not lend the money for the loans themselves, but
broker loans to larger lenders or investors. (See the Home Loan Library that discusses
the different types of lenders). As a normal definition, a broker is anyone who acts as
an agent, bringing two parties together for any type of transaction and earns a fee for
doing so.

Buydown
Usually refers to a fixed rate mortgage where the interest rate is “bought down” for a
temporary period, usually one to three years. After that time and for the remainder of
the term, the borrower’s payment is calculated at the note rate. In order to buy down
the initial rate for the temporary payment, a lump sum is paid and held in an account
used to supplement the borrower’s monthly payment. These funds usually come from
the seller (or some other source) as a financial incentive to induce someone to buy
their property. A “lender funded buydown” is when the lender pays the initial lump sum.
They can accomplish this because the note rate on the loan (after the buydown
adjustments) will be higher than the current market rate. One reason for doing this is
because the borrower may get to “qualify” at the start rate and can qualify for a higher
loan amount. Another reason is that a borrower may expect his earnings to go up
substantially in the near future, but wants a lower payment right now.

C

Call option
Similar to the acceleration clause.

Cap
Adjustable Rate Mortgages have fluctuating interest rates, but those fluctuations are
usually limited to a certain amount. Those limitations may apply to how much the loan
may adjust over a six month period, an annual period, and over the life of the loan, and
are referred to as “caps.” Some ARMs, although they may have a life cap, allow the
interest rate to fluctuate freely, but require a certain minimum payment which can
change once a year. There is a limit on how much that payment can change each year,
and that limit is also referred to as a cap.

Cash-out refinance
When a borrower refinances his mortgage at a higher amount than the current loan
balance with the intention of pulling out money for personal use, it is referred to as a
“cash out refinance.” (top)

Certificate of deposit
A time deposit held in a bank which pays a certain amount of interest to the depositor.
(top)

Certificate of deposit index
One of the indexes used for determining interest rate changes on some adjustable rate
mortgages. It is an average of what banks are paying on certificates of deposit. (top)

Certificate of Eligibility
A document issued by the Veterans Administration that certifies a veteran’s eligibility for
a VA loan.

Certificate of Reasonable Value (CRV)
Once the appraisal has been performed on a property being bought with a VA loan, the
Veterans Administration issues a CRV.

Chain of title
An analysis of the transfers of title to a piece of property over the years.

Clear title
A title that is free of liens or legal questions as to ownership of the property.

Closing
This has different meanings in different states. In some states a real estate transaction
is not consider “closed” until the documents record at the local recorders office. In
others, the “closing” is a meeting where all of the documents are signed and money
changes hands.

Closing costs
Closing costs are separated into what are called “non-recurring closing costs” and
“pre-paid items.” Non-recurring closing costs are any items which are paid just once as
a result of buying the property or obtaining a loan. “Pre-paids” are items which recur
over time, such as property taxes and homeowners insurance. A lender makes an
attempt to estimate the amount of non-recurring closing costs and prepaid items on the
Good Faith Estimate which they must issue to the borrower within three days of
receiving a home loan application. (top)

Closing statement
See Settlement Statement.

Cloud on title
Any conditions revealed by a title search that adversely affect the title to real estate.
Usually clouds on title cannot be removed except by deed, release, or court action.

Co-borrower
IAn additional individual who is both obligated on the loan and is on title to the property.

Collateral
In a home loan, the property is the collateral. The borrower risks losing the property if
the loan is not repaid according to the terms of the mortgage or deed of trust. (top)

Collection
When a borrower falls behind, the lender contacts them in an effort to bring the loan
current. The loan goes to “collection.” As part of the collection effort, the lender must
mail and record certain documents in case they are eventually required to foreclose on
the property.

Commission
Most salespeople earn commissions for the work that they do and there are many sales
professionals involved in each transaction, including Realtors, loan officers, title
representatives, attorneys, escrow representative, and representatives for pest
companies, home warranty companies, home inspection companies, insurance agents,
and more. The commissions are paid out of the charges paid by the seller or buyer in
the purchase transaction. Realtors generally earn the largest commissions, followed by
lenders, then the others.(top)

Common area assessments
In some areas they are called Homeowners Association Fees. They are charges paid to
the Homeowners Association by the owners of the individual units in a condominium or
planned unit development (PUD) and are generally used to maintain the property and
common areas. (top)

Common areas
Those portions of a building, land, and amenities owned (or managed) by a planned
unit development (PUD) or condominium project’s homeowners’ association (or a
cooperative project’s cooperative corporation) that are used by all of the unit owners,
who share in the common expenses of their operation and maintenance. Common
areas include swimming pools, tennis courts, and other recreational facilities, as well as
common corridors of buildings, parking areas, means of ingress and egress, etc. (top)

Common law
An unwritten body of law based on general custom in England and used to an extent in
some states.

Community property
In some states, especially the southwest, property acquired by a married couple during
their marriage is considered to be owned jointly, except under special circumstances.
This is an outgrowth of the Spanish and Mexican heritage of the area.

Comparable sales
Recent sales of similar properties in nearby areas and used to help determine the
market value of a property. Also referred to as “comps.”

Condominium
A type of ownership in real property where all of the owners own the property, common
areas and buildings together, with the exception of the interior of the unit to which they
have title. Often mistakenly referred to as a type of construction or development, it
actually refers to the type of ownership. (top)

Condominium conversion
Changing the ownership of an existing building (usually a rental project) to the
condominium form of ownership.

Condominium hotel
A condominium project that has rental or registration desks, short-term occupancy,
food and telephone services, and daily cleaning services and that is operated as a
commercial hotel even though the units are individually owned. These are often found
in resort areas like Hawaii.

Construction loan
A short-term, interim loan for financing the cost of construction. The lender makes
payments to the builder at periodic intervals as the work progresses.

Contingency
A condition that must be met before a contract is legally binding. For example, home
purchasers often include a contingency that specifies that the contract is not binding
until the purchaser obtains a satisfactory home inspection report from a qualified home
inspector. (top)

Contract
An oral or written agreement to do or not to do a certain thing.

Conventional mortgage
Refers to home loans other than government loans (VA and FHA).

Convertible ARM
An adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-rate
mortgage within a specific time.

Cooperative (co-op)
A type of multiple ownership in which the residents of a multiunit housing complex own
shares in the cooperative corporation that owns the property, giving each resident the
right to occupy a specific apartment or unit. (top)

Cost of funds index (COFI)
One of the indexes that is used to determine interest rate changes for certain
adjustable-rate mortgages. It represents the weighted-average cost of savings,
borrowings, and advances of the financial institutions such as banks and savings &
loans, in the 11th District of the Federal Home Loan Bank.

Credit
An agreement in which a borrower receives something of value in exchange for a
promise to repay the lender at a later date. (top)

Credit history
A record of an individual’s repayment of debt. Credit histories are reviewed my
mortgage lenders as one of the underwriting criteria in determining credit risk.

Creditor
A person to whom money is owed. (top)

Credit report
A report of an individual’s credit history prepared by a credit bureau and used by a
lender in determining a loan applicant’s creditworthiness.

Credit repository
An organization that gathers, records, updates, and stores financial and public records
information about the payment records of individuals who are being considered for
credit.

D

Debt
An amount owed to another.

Deed
The legal document conveying title to a property. (top)

Deed-in-lieu
Short for “deed in lieu of foreclosure,” this conveys title to the lender when the borrower
is in default and wants to avoid foreclosure. The lender may or may not cease
foreclosure activities if a borrower asks to provide a deed-in-lieu. Regardless of
whether the lender accepts the deed-in-lieu, the avoidance and non-repayment of debt
will most likely show on a credit history. What a deed-in-lieu may prevent is having the
documents preparatory to a foreclosure being recorded and become a matter of public
record.

Deed of trust
Some states, like California, do not record mortgages. Instead, they record a deed of
trust which is essentially the same thing.

Default
Failure to make the mortgage payment within a specified period of time. For first
mortgages or first trust deeds, if a payment has still not been made within 30 days of
the due date, the loan is considered to be in default. (top)

Delinquency
Failure to make mortgage payments when mortgage payments are due. For most
mortgages, payments are due on the first day of the month. Even though they may not
charge a “late fee” for a number of days, the payment is still considered to be late and
the loan delinquent. When a loan payment is more than 30 days late, most lenders
report the late payment to one or more credit bureaus.

Deposit
A sum of money given in advance of a larger amount being expected in the future.
Often called in real estate as an “earnest money deposit.”
depreciation
A decline in the value of property; the opposite of appreciation. Depreciation is also an
accounting term which shows the declining monetary value of an asset and is used as
an expense to reduce taxable income. Since this is not a true expense where money is
actually paid, lenders will add back depreciation expense for self-employed borrowers
and count it as income.

Discount points
In the mortgage industry, this term is usually used in only in reference to government
loans, meaning FHA and VA loans. Discount points refer to any “points” paid in addition
to the one percent loan origination fee. A “point” is one percent of the loan amount.
(top)

Down payment
The part of the purchase price of a property that the buyer pays in cash and does not
finance with a mortgage.

Due-on-sale provision
A provision in a mortgage that allows the lender to demand repayment in full if the
borrower sells the property that serves as security for the mortgage.

E

Earnest money deposit
A deposit made by the potential home buyer to show that he or she is serious about
buying the house.

Easement
A right of way giving persons other than the owner access to or over a property. (top)

Effective age
An appraiser’s estimate of the physical condition of a building. The actual age of a
building may be shorter or longer than its effective age.

Eminent domain
The right of a government to take private property for public use upon payment of its
fair market value. Eminent domain is the basis for condemnation proceedings.

Encroachment
An improvement that intrudes illegally on another’s property.

Encumbrance
Anything that affects or limits the fee simple title to a property, such as mortgages,
leases, easements, or restrictions. (top)

Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available
without discrimination based on race, color, religion, national origin, age, sex, marital
status, or receipt of income from public assistance programs.

Equity
A homeowner’s financial interest in a property. Equity is the difference between the fair
market value of the property and the amount still owed on its mortgage and other liens.

Escrow
An item of value, money, or documents deposited with a third party to be delivered
upon the fulfillment of a condition. For example, the earnest money deposit is put into
escrow until delivered to the seller when the transaction is closed.

Escrow account
Once you close your purchase transaction, you may have an escrow account or
impound account with your lender. This means the amount you pay each month
includes an amount above what would be required if you were only paying your
principal and interest. The extra money is held in your impound account (escrow
account) for the payment of items like property taxes and homeowner’s insurance when
they come due. The lender pays them with your money instead of you paying them
yourself. (top)

Escrow analysis
Once each year your lender will perform an “escrow analysis” to make sure they are
collecting the correct amount of money for the anticipated expenditures.

Escrow disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage
insurance, and other property expenses as they become due.

Estate
The ownership interest of an individual in real property. The sum total of all the real
property and personal property owned by an individual at time of death.

Eviction
The lawful expulsion of an occupant from real property. (top)

Examination of title
The report on the title of a property from the public records or an abstract of the title.

Exclusive listing
A written contract that gives a licensed real estate agent the exclusive right to sell a
property for a specified time.

Executor
A person named in a will to administer an estate. The court will appoint an administrator
if no executor is named. “Executrix” is the feminine form.

F

Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by
consumer/credit reporting agencies and establishes procedures for correcting mistakes
on one’s credit record. (top)

Fair market value
The highest price that a buyer, willing but not compelled to buy, would pay, and the
lowest a seller, willing but not compelled to sell, would accept.

Fannie Mae (FNMA)
The Federal National Mortgage Association, which is a congressionally chartered,
shareholder-owned company that is the nation’s largest supplier of home mortgage
funds. For a discussion of the roles of Fannie Mae, Freddie Mac (FHLMC), and Ginnie
Mae (GNMA)

Fannie Mae’s Community Home Buyer’s Program
An income-based community lending model, under which mortgage insurers and
Fannie Mae offer flexible underwriting guidelines to increase a low- or moderate-income
family’s buying power and to decrease the total amount of cash needed to purchase a
home. Borrowers who participate in this model are required to attend pre-purchase
home-buyer education sessions.

Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development (HUD). Its main
activity is the insuring of residential mortgage loans made by private lenders. The FHA
sets standards for construction and underwriting but does not lend money or plan or
construct housing. (top)

Fee simple
The greatest possible interest a person can have in real estate.

Fee simple estate
An unconditional, unlimited estate of inheritance that represents the greatest estate
and most extensive interest in land that can be enjoyed. It is of perpetual duration.
When the real estate is in a condominium project, the unit owner is the exclusive owner
only of the air space within his or her portion of the building (the unit) and is an owner
in common with respect to the land and other common portions of the property.

FHA mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Along with VA
loans, an FHA loan will often be referred to as a government loan.

Firm commitment
A lender’s agreement to make a loan to a specific borrower on a specific property. (top)

First mortgage
The mortgage that is in first place among any loans recorded against a property.
Usually refers to the date in which loans are recorded, but there are exceptions.

Fixed-rate mortgage
A mortgage in which the interest rate does not change during the entire term of the
loan.

Fixture
Personal property that becomes real property when attached in a permanent manner to
real estate.
flood insurance
Insurance that compensates for physical property damage resulting from flooding. It is
required for properties located in federally designated flood areas.

Foreclosure
The legal process by which a borrower in default under a mortgage is deprived of his or
her interest in the mortgaged property. This usually involves a forced sale of the
property at public auction with the proceeds of the sale being applied to the mortgage
debt. (top)

G

Government loan (mortgage)
A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed
by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS).
Mortgages that are not government loans are classified as conventional loans. (top)

Government National Mortgage Association (Ginnie Mae)
A government-owned corporation within the U.S. Department of Housing and Urban
Development (HUD). Created by Congress on September 1, 1968, GNMA performs the
same role as Fannie Mae and Freddie Mac in providing funds to lenders for making
home loans. The difference is that Ginnie Mae provides funds for government loans
(FHA and VA)

Grantee
The person to whom an interest in real property is conveyed.

Grantor
The person conveying an interest in real property. (top)

H

Hazard insurance
Insurance coverage that in the event of physical damage to a property from fire, wind,
vandalism, or other hazards.

Home Equity Conversion Mortgage (HECM)
Usually referred to as a reverse annuity mortgage, what makes this type of mortgage
unique is that instead of making payments to a lender, the lender makes payments to
you. It enables older home owners to convert the equity they have in their homes into
cash, usually in the form of monthly payments. Unlike traditional home equity loans, a
borrower does not qualify on the basis of income but on the value of his or her home. In
addition, the loan does not have to be repaid until the borrower no longer occupies the
property.

Home equity line of credit
A mortgage loan, usually in second position, that allows the borrower to obtain cash
drawn against the equity of his home, up to a predetermined amount.

Home inspection
A thorough inspection by a professional that evaluates the structural and mechanical
condition of a property. A satisfactory home inspection is often included as a
contingency by the purchaser. (top)

Homeowners’ association
A nonprofit association that manages the common areas of a planned unit development
(PUD) or condominium project. In a condominium project, it has no ownership interest in
the common elements. In a PUD project, it holds title to the common elements.

Homeowner’s insurance
An insurance policy that combines personal liability insurance and hazard insurance
coverage for a dwelling and its contents.

Homeowner’s warranty
A type of insurance often purchased by homebuyers that will cover repairs to certain
items, such as heating or air conditioning, should they break down within the coverage
period. The buyer often requests the seller to pay for this coverage as a condition of
the sale, but either party can pay. (top)

HUD median income
Median family income for a particular county or metropolitan statistical area (MSA), as
estimated by the Department of Housing and Urban Development (HUD).

HUD-1 settlement statement (top)
A document that provides an itemized listing of the funds that were paid at closing.
Items that appear on the statement include real estate commissions, loan fees, points,
and initial escrow (impound) amounts. Each type of expense goes on a specific
numbered line on the sheet. The totals at the bottom of the HUD-1 statement define the
seller’s net proceeds and the buyer’s net payment at closing. It is called a HUD1
because the form is printed by the Department of Housing and Urban Development
(HUD). The HUD1 statement is also known as the “closing statement” or “settlement
sheet.”

J

Joint tenancy
A form of ownership or taking title to property which means each party owns the whole
property and that ownership is not separate. In the event of the death of one party, the
survivor owns the property in its entirety.

Judgment
A decision made by a court of law. In judgments that require the repayment of a debt,
the court may place a lien against the debtor’s real property as collateral for the
judgment’s creditor.

Judicial foreclosure
A type of foreclosure proceeding used in some states that is handled as a civil lawsuit
and conducted entirely under the auspices of a court. Other states use non-judicial
foreclosure.

Jumbo loan
A loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits. Also called a
nonconforming loan. Freddie Mac and Fannie Mae loans are referred to as conforming
loans.

K

401(k)/403(b)
An employer-sponsored investment plan that allows individuals to set aside
tax-deferred income for retirement or emergency purposes. 401(k) plans are provided
by employers that are private corporations. 403(b) plans are provided by employers
that are not for profit organizations.

401(k)/403(b) loan
Some administrators of 401(k)/403(b) plans allow for loans against the monies you
have accumulated in these plans. Loans against 401K plans are an acceptable source
of down payment for most types of loans.

L

Late charge (top)
The penalty a borrower must pay when a payment is made a stated number of days.
On a first trust deed or mortgage, this is usually fifteen days.

Lease
A written agreement between the property owner and a tenant that stipulates the
payment and conditions under which the tenant may possess the real estate for a
specified period of time.

Leasehold estate
A way of holding title to a property wherein the mortgagor does not actually own the
property but rather has a recorded long-term lease on it.

Lease option
An alternative financing option that allows home buyers to lease a home with an option
to buy. Each month’s rent payment may consist of not only the rent, but an additional
amount which can be applied toward the down payment on an already specified price.

Legal description
A property description, recognized by law, that is sufficient to locate and identify the
property without oral testimony.

Lender
A term which can refer to the institution making the loan or to the individual
representing the firm. For example, loan officers are often referred to as “lenders.”

Liabilities (top)
A person’s financial obligations. Liabilities include long-term and short-term debt, as
well as any other amounts that are owed to others.

Liability insurance
Insurance coverage that offers protection against claims alleging that a property
owner’s negligence or inappropriate action resulted in bodily injury or property damage
to another party. It is usually part of a homeowner’s insurance policy.

Lien
A legal claim against a property that must be paid off when the property is sold. A
mortgage or first trust deed is considered a lien.

Life cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the enterest rate
can increase or decrease over the life of the mortgage.

Line of credit
An agreement by a commercial bank or other financial institution to extend credit up to
a certain amount for a certain time to a specified borrower.

Liquid asset
A cash asset or an asset that is easily converted into cash.

Loan (top)
A sum of borrowed money (principal) that is generally repaid with interest.

Loan officer
Also referred to by a variety of other terms, such as lender, loan representative, loan
“rep,” account executive, and others. The loan officer serves several functions and has
various responsibilities: they solicit loans, they are the representative of the lending
institution, and they represent the borrower to the lending institution.

Loan origination
How a lender refers to the process of obtaining new loans.

Loan servicing
After you obtain a loan, the company you make the payments to is “servicing” your
loan. They process payments, send statements, manage the escrow/impound account,
provide collection efforts on delinquent loans, ensure that insurance and property taxes
are made on the property, handle pay-offs and assumptions, and provide a variety of
other services.

Loan-to-value (LTV)
The percentage relationship between the amount of the loan and the appraised value
or sales price (whichever is lower).

Lock-in (top)
An agreement in which the lender guarantees a specified interest rate for a certain
amount of time at a certain cost.
lock-in period. The time period during which the lender has guaranteed an interest rate
to a borrower.

M

Margin
The difference between the interest rate and the index on an adjustable rate mortgage.
The margin remains stable over the life of the loan. It is the index which moves up and
down.

Maturity
The date on which the principal balance of a loan, bond, or other financial instrument
becomes due and payable.

Merged credit report
A credit report which reports the raw data pulled from two or more of the major credit
repositories. Contrast with a Residential Mortgage Credit Report (RMCR) or a standard
factual credit report.

Modification
Occasionally, a lender will agree to modify the terms of your mortgage without requiring
you t refinance. If any changes are made, it is called a modification.

Mortgage
A legal document that pledges a property to the lender as security for payment of a
debt. Instead of mortgages, some states use First Trust Deeds.

Mortgage banker (top)
For a more complete discussion of mortgage banker, see “Types of Lenders.” A
mortgage banker is generally assumed to originate and fund their own loans, which are
then sold on the secondary market, usually to Fannie Mae, Freddie Mac, or Ginnie
Mae. However, firms rather loosely apply this term to themselves, whether they are true
mortgage bankers or simply mortgage brokers or correspondents.

Mortgage broker
A mortgage company that originates loans, then places those loans with a variety of
other lending institutions with whom they usually have pre-established relationships.

Mortgagee
The lender in a mortgage agreement.

Mortgage insurance (MI)
Insurance that covers the lender against some of the losses incurred as a result of a
default on a home loan. Often mistakenly referred to as PMI, which is actually the name
of one of the larger mortgage insurers. Mortgage insurance is usually required in one
form or another on all loans that have a loan-to-value higher than eighty percent.
Mortgages above 80% LTV that call themselves “No MI” are usually a made at a higher
interest rate. Instead of the borrower paying the mortgage insurance premiums directly,
they pay a higher interest rate to the lender, which then pays the mortgage insurance
themselves. Also, FHA loans and certain first-time homebuyer programs require
mortgage insurance regardless of the loan-to-value.

Mortgage insurance premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either to a government
agency such as the Federal Housing Administration (FHA) or to a private mortgage
insurance (MI) company.

Mortgage life and disability insurance (top)
A type of term life insurance often bought by borrowers. The amount of coverage
decreases as the principal balance declines. Some policies also cover the borrower in
the event of disability. In the event that the borrower dies while the policy is in force, the
debt is automatically satisfied by insurance proceeds. In the case of disability
insurance, the insurance will make the mortgage payment for a specified amount of
time during the disability. Be careful to read the terms of coverage, however, because
often the coverage does not start immediately upon the disability, but after a specified
period, sometime forty-five days.

Mortgagor
The borrower in a mortgage agreement.

Multidwelling units
Properties that provide separate housing units for more than one family, although they
secure only a single mortgage.

N

Negative amortization
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a
required minimum payment. If a borrower makes the minimum payment it may not cover
all of the interest that would normally be due at the current interest rate. In essence, the
borrower is deferring the interest payment, which is why this is called “deferred
interest.” The deferred interest is added to the balance of the loan and the loan
balance grows larger instead of smaller, which is called negative amortization.

No cash-out refinance
A refinance transaction which is not intended to put cash in the hand of the borrower.
Instead, the new balance is caculated to cover the balance due on the current loan and
any costs associated with obtaining the new mortgage. Often referred to as a “rate and
term refinance.”

No-cost loan (top)
Many lenders offer loans that you can obtain at “no cost.” You should inquire whether
this means there are no “lender” costs associated with the loan, or if it also covers the
other costs you would normally have in a purchase or refinance transactions, such as
title insurance, escrow fees, settlement fees, appraisal, recording fees, notary fees, and
others. These are fees and costs which may be associated with buying a home or
obtaining a loan, but not charged directly by the lender. Keep in mind that, like a
“no-point” loan, the interest rate will be higher than if you obtain a loan that has costs
associated with it.

Note
A legal document that obligates a borrower to repay a mortgage loan at a stated
interest rate during a specified period of time.

Note rate
The interest rate stated on a mortgage note.

Notice of default
A formal written notice to a borrower that a default has occurred and that legal action
may be taken.

O

Original principal balance
The total amount of principal owed on a mortgage before any payments are made.

Origination fee (top)
On a government loan the loan origination fee is one percent of the loan amount, but
additional points may be charged which are called “discount points.” One point equals
one percent of the loan amount. On a conventional loan, the loan origination fee refers
to the total number of points a borrower pays.

Owner financing
A property purchase transaction in which the property seller provides all or part of the
financing.

P

Partial payment
A payment that is not sufficient to cover the scheduled monthly payment on a mortgage
loan. Normally, a lender will not accept a partial payment, but in times of hardship you
can make this request of the loan servicing collection department.

Payment change date
The date when a new monthly payment amount takes effect on an adjustable-rate
mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment
change date occurs in the month immediately after the interest rate adjustment date.

Periodic payment cap
For an adjustable-rate mortgage where the interest rate and the minimum payment
amount fluctuate independently of one another, this is a limit on the amount that
payments can increase or decrease during any one adjustment period.

Periodic rate cap (top)
For an adjustable-rate mortgage, a limit on the amount that the interest rate can
increase or decrease during any one adjustment period, regardless of how high or low
the index might be.

Personal property
Any property that is not real property.

PITI
This stands for principal, interest, taxes and insurance. If you have an “impounded”
loan, then your monthly payment to the lender includes all of these and probably
includes mortgage insurance as well. If you do not have an impounded account, then
the lender still calculates this amount and uses it as part of determining your
debt-to-income ratio.

PITI reserves
A cash amount that a borrower must have on hand after making a down payment and
paying all closing costs for the purchase of a home. The principal, interest, taxes, and
insurance (PITI) reserves must equal the amount that the borrower would have to pay
for PITI for a predefined number of months.

Planned unit development (PUD)
A type of ownership where individuals actually own the building or unit they live in, but
common areas are owned jointly with the other members of the development or
association. Contrast with condominium, where an individual actually owns the airspace
of his unit, but the buildings and common areas are owned jointly with the others in the
development or association.

Point (top)
A point is 1 percent of the amount of the mortgage.

Power of attorney
A legal document that authorizes another person to act on one’s behalf. A power of
attorney can grant complete authority or can be limited to certain acts and/or certain
periods of time.

Pre-approval
A loosely used term which is generally taken to mean that a borrower has completed a
loan application and provided debt, income, and savings documentation which an
underwriter has reviewed and approved. A pre-approval is usually done at a certain
loan amount and making assumptions about what the interest rate will actually be at the
time the loan is actually made, as well as estimates for the amount that will be paid for
property taxes, insurance and others. A pre-approval applies only to the borrower.
Once a property is chosen, it must also meet the underwriting guidelines of the lender.
Contrast with pre-qualification

Prepayment
Any amount paid to reduce the principal balance of a loan before the due date.
Payment in full on a mortgage that may result from a sale of the property, the owner’s
decision to pay off the loan in full, or a foreclosure. In each case, prepayment means
payment occurs before the loan has been fully amortized.

Prepayment penalty (top)
A fee that may be charged to a borrower who pays off a loan before it is due.

Pre-qualification
This usually refers to the loan officer’s written opinion of the ability of a borrower to
qualify for a home loan, after the loan officer has made inquiries about debt, income,
and savings. The information provided to the loan officer may have been presented
verbally or in the form of documentation, and the loan officer may or may not have
reviewed a credit report on the borrower.

Prime rate
The interest rate that banks charge to their preferred customers. Changes in the prime
rate are widely publicized in the news media and are used as the indexes in some
adjustable rate mortgages, especially home equity lines of credit. Changes in the prime
rate do not directly affect other types of mortgages, but the same factors that influence
the prime rate also affect the interest rates of mortgage loans.

Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that
reduces the remaining balance of a mortgage.

Principal balance
The outstanding balance of principal on a mortgage. The principal balance does not
include interest or any other charges. See remaining balance.

Principal, interest, taxes, and insurance (PITI) (top)
The four components of a monthly mortgage payment on impounded loans. Principal
refers to the part of the monthly payment that reduces the remaining balance of the
mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer
to the amounts that are paid into an escrow account each month for property taxes and
mortgage and hazard insurance.

Private mortgage insurance (MI)
Mortgage insurance that is provided by a private mortgage insurance company to
protect lenders against loss if a borrower defaults. Most lenders generally require MI for
a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Promissory note
A written promise to repay a specified amount over a specified period of time.

Public auction
A meeting in an announced public location to sell property to repay a mortgage that is
in default.

Planned Unit Development (PUD)
A project or subdivision that includes common property that is owned and maintained
by a homeowners’ association for the benefit and use of the individual PUD unit owners.

Purchase agreement
A written contract signed by the buyer and seller stating the terms and conditions under
which a property will be sold.

Purchase money transaction (top)
The acquisition of property through the payment of money or its equivalent.

Q

Qualifying ratios
Calculations that are used in determining whether a borrower can qualify for a
mortgage. There are two ratios. The “top” or “front” ratio is a calculation of the
borrower’s monthly housing costs (principle, taxes, insurance, mortgage insurance,
homeowner’s association fees) as a percentage of monthly income. The “back” or
“bottom” ratio includes housing costs as will as all other monthly debt.

Quitclaim deed
A deed that transfers without warranty whatever interest or title a grantor may have at
the time the conveyance is made.

R

Rate lock
A commitment issued by a lender to a borrower or other mortgage originator
guaranteeing a specified interest rate for a specified period of time at a specific cost.

Real estate agent
A person licensed to negotiate and transact the sale of real estate.

Real Estate Settlement Procedures Act (RESPA) (top)
A consumer protection law that requires lenders to give borrowers advance notice of
closing costs.
real property. Land and appurtenances, including anything of a permanent nature such
as structures, trees, minerals, and the interest, benefits, and inherent rights thereof.

Realtor®
A real estate agent, broker or an associate who holds active membership in a local real
estate board that is affiliated with the National Association of Realtors.

Recorder
The public official who keeps records of transactions that affect real property in the
area. Sometimes known as a “Registrar of Deeds” or “County Clerk.”

Recording
The noting in the registrar’s office of the details of a properly executed legal document,
such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of
mortgage, thereby making it a part of the public record.

Refinance transaction
The process of paying off one loan with the proceeds from a new loan using the same
property as security.

Remaining balance
The amount of principal that has not yet been repaid. See principal balance.

Remaining term (top)
The original amortization term minus the number of payments that have been applied.

Rent loss insurance
Insurance that protects a landlord against loss of rent or rental value due to fire or
other casualty that renders the leased premises unavailable for use and as a result of
which the tenant is excused from paying rent.

Repayment plan
An arrangement made to repay delinquent installments or advances.

Replacement reserve fund
A fund set aside for replacement of common property in a condominium, PUD, or
cooperative project — particularly that which has a short life expectancy, such as
carpeting, furniture, etc.

Revolving debt
A credit arrangement, such as a credit card, that allows a customer to borrow against a
preapproved line of credit when purchasing goods and services. The borrower is billed
for the amount that is actually borrowed plus any interest due.

Right of first refusal
A provision in an agreement that requires the owner of a property to give another party
the first opportunity to purchase or lease the property before he or she offers it for sale
or lease to others.

Right of ingress or egress (top)
The right to enter or leave designated premises.

Right of survivorship
In joint tenancy, the right of survivors to acquire the interest of a deceased joint tenant.

S

Sale-leaseback
A technique in which a seller deeds property to a buyer for a consideration, and the
buyer simultaneously leases the property back to the seller.

Second mortgage
A mortgage that has a lien position subordinate to the first mortgage.

Secondary market
The buying and selling of existing mortgages, usually as part of a “pool” of mortgages.

Secured loan
A loan that is backed by collateral.

Security
The property that will be pledged as collateral for a loan.

Seller carry-back (top)
An agreement in which the owner of a property provides financing, often in combination
with an assumable mortgage.

Servicer
An organization that collects principal and interest payments from borrowers and
manages borrowers’ escrow accounts. The servicer often services mortgages that have
been purchased by an investor in the secondary mortgage market.

Servicing
The collection of mortgage payments from borrowers and related responsibilities of a
loan servicer.

Settlement statement
See HUD1 Settlement Statement

Subdivision
A housing development that is created by dividing a tract of land into individual lots for
sale or lease.

Subordinate financing
Any mortgage or other lien that has a priority that is lower than that of the first
mortgage.

Survey (top)
A drawing or map showing the precise legal boundaries of a property, the location of
improvements, easements, rights of way, encroachments, and other physical features.

Sweat equity
Contribution to the construction or rehabilitation of a property in the form of labor or
services rather than cash.

T

Tenancy in common
As opposed to joint tenancy, when there are two or more individuals on title to a piece
of property, this type of ownership does not pass ownership to the others in the event
of death.

Third-party origination
A process by which a lender uses another party to completely or partially originate,
process, underwrite, close, fund, or package the mortgages it plans to deliver to the
secondary mortgage market.

Title
A legal document evidencing a person’s right to or ownership of a property.

Ttle company
A company that specializes in examining and insuring titles to real estate.

Title insurance (top)
Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against
loss arising from disputes over ownership of a property.

Title search
A check of the title records to ensure that the seller is the legal owner of the property
and that there are no liens or other claims outstanding.

Transfer of ownership
Any means by which the ownership of a property changes hands. Lenders consider all
of the following situations to be a transfer of ownership: the purchase of a property
“subject to” the mortgage, the assumption of the mortgage debt by the property
purchaser, and any exchange of possession of the property under a land sales
contract or any other land trust device.

Transfer tax
State or local tax payable when title passes from one owner to another.

Treasury index (top)
An index that is used to determine interest rate changes for certain adjustable-rate
mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury
holds for its Treasury bills and securities or is derived from the U.S. Treasury’s daily
yield curve, which is based on the closing market bid yields on actively traded Treasury
securities in the over-the-counter market.

Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the terms and conditions
of a mortgage, including the annual percentage rate (APR) and other charges.

Two-step mortgage
An adjustable-rate mortgage (ARM) that has one interest rate for the first five or seven
years of its mortgage term and a different interest rate for the remainder of the
amortization term.

Two- to four-family property
A property that consists of a structure that provides living space (dwelling units) for two
to four families, although ownership of the structure is evidenced by a single deed.

Trustee (top)
A fiduciary who holds or controls property for the benefit of another.

V

VA mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA).

Vested
Having the right to use a portion of a fund such as an individual retirement fund. For
example, individuals who are 100 percent vested can withdraw all of the funds that are
set aside for them in a retirement fund. However, taxes may be due on any funds that
are actually withdrawn.

Veterans Administration (VA) (top)
An agency of the federal government that guarantees residential mortgages made to
eligible veterans of the military services. The guarantee protects the lender against loss
and thus encourages lenders to make mortgages to veterans.

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