Mortgage Basics

Mortgage Glossary

Please select a letter below to skip down the page of mortgage terms:

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Acceleration clause The clause in a mortgage or trust deed that stipulates the entire debt is due immediately if the mortgagee defaults under the terms of the contract.
Acquisition cost Under an FHA loan, the purchase price or appraised value of the property plus the estimated closing costs.
Adjustable Rate Mortgage (ARM) A mortgage in which the interest rate is adjusted periodically based on an index. Also called a variable rate mortgage.
Adjusted book basis The purchase price of a property plus any capital improvements less accrued depreciation, if any, to the date of the sale.
Adjustment Date The date the interest rate changes on an ARM (adjustable rate mortgage).
Adjustment Interval For an adjustable rate mortgage, the time between changes in the interest rate charged. The most common adjustment intervals are one, three or five years.
Amenity a feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, Woods, water) or man-made (like a swimming pool or garden).
Amortization The process of retiring a loan balance through regular installment payments of principal and interest. Payments are based on a schedule that will bring the loan balance to zero at the end of the loan. While the payment is the same for each period, the amount allocated to principal and interest changes, with more interest paid earlier in the loan period.
Amortization Schedule A schedule of payments for a loan, showing the amount of principal and interest allocated to each payment.
Annual Percentage Rate (APR) APR shows the total cost of a loan, expressed as an annual interest rate. The calculation of APR includes the interest rate for the loan, plus any points and other fees associated with the loan. Because these fees are included, APR is useful for comparing loans from different lenders to determine the best value.
Annuity A series of payments over a period of years.
Application A form completed by borrowers as the first step in becoming approved for a loan. Borrowers provide information regarding their income, assets, and debts so that the lender can assess their eligibility for a loan.
Application Fee Some lenders charge borrowers a fee for processing a loan application, which may later be applied to the borrowers closing costs. This fee is paid at the time the application is submitted, however, payment of an application fee does not ensure that the loan will be approved.
Appraisal The assessment of property's fair market value conducted by a licensed appraiser. The appraiser reviews recent sales of similar properties, inspects the property itself and confirms that the property description is accurate (such as number of bedrooms and location). The appraiser provides a written Appraisal Report, so the lender can ensure that the mortgage amount is appropriate for the value of the property.
Appraiser A qualified individual who uses his or her experience and knowledge to prepare Appraisal report. Appraisers are generally licensed.
Appreciation An increases in the value of a property due to rising prices changes in the local market
ARM See Adjustable Rate Mortgage
Assessment Refers to the determination a property's value for tax purposes. An assessment is not the same as appraisal.
Assessor A government official who is responsible for determining the value of a property for the purpose of taxation.
Asset An item of value owned by a person or business, such as stocks and bonds, vehicles or artwork. Liquid assets are those items that can be easily sold for cash, or liquidated.
Assumable Mortgage A loan that may be transferred from one borrower to another. A seller with an assumable loan may transfer that loan to the buyer, who "assumes" responsibility for all outstanding payments. Once a loan is assumed by the buyer, the seller is no longer responsible for repaying it. There may be a fee or credit approval required for the transfer of an assumable mortgage.
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Balloon Mortgage a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.
Balloon Payment A large, lump sum payment required at the end of a loan period in order to pay off the balance of the loan.
Bankruptcy A legal proceeding in which a person who is unable to repay their debts relieves themselves of responsibility for those debts. In bankruptcy, a person's assets are turned over to a trustee for liquidation to pay off outstanding balances. Not all debts are cancelled by bankruptcy. Once an individual has been through the bankruptcy process, they are not must re-establish their credit.
Bill of Sale A written document that transfers a title to personal property.
Biweekly Mortgage A mortgage loan with payments that are made every two weeks, instead of monthly. A bi-weekly mortgage can be paid off faster than a loan with monthly mortgage payments, because the borrower pays the equivalent of thirteen payments each year rather than twelve.
Blanket Mortgage A mortgage secured by the pledging of more than one property or collateral.
Bridge Loan A loan used to bridge the gap between two mortgages. If a buyer has not sold their previous home, they make take out a short term bridge loan in order to close on the new home. When the first home is sold, the proceeds are used to pay off the bridge loan, which is replaced with a new mortgage.
Buydown A mortgage subsidy made to the buyer on behalf of the seller in order to reduce the loan rate for a set period of time, usually from one to five years. This lower rate reduces the mortgage payment so the buyer can qualify more easily for the mortgage. The amount of the buydown funds an escrow account that subsidizes the loan during the first years. The mortgage payments increase once the buydown expires.
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Cap A limit on how much a monthly payment or interest rate can increase or decrease in a given time period. For adjustable rate loans, caps are usually quoted as two numbers, like 2/6. The first number indicates how many percentage points a loan may change at each adjustment period. The second number is the total change in interest rate allowed over the life of the loan. Loans with an initial fixed period, like a 5/1 or 3/1 ARM, have caps quoted with 3 numbers. For example, 3/2/6 which would mean that the first adjustment may be as much as 3%, subsequent adjustments are capped at 2% each, and the lifetime cap is 6%.
Carryback Loan A loan in which a seller agrees to finance a buyer in order to complete a property sale, also known as owner financing.
Cash reserves A cash amount the lender may require the borrower to have on hand in addition to the down payment and closing costs. The amount is determined by the lender.
Cash-out Refinance A refinance transaction that is intended to put cash in the hand of the borrower, by borrowing more than the balance of the existing mortgage.
Certificate of Eligibility A veteran's evidence of entitlement for a VA-guaranteed loan.
Certificate of Reasonable Value (CRV) An appraisal that has been performed on a property that is being paid for with a VA loan. After the property has been appraised, the Veterans Administration issues a CRV.
Certificate of title A document provided by a qualified source, such as a title company, that shows the property legally belongs to the current owner.
Clear Title A title that is free of liens or any legal claims on the ownership of the property. Before title to a property can be transferred at closing, it needs to be clear and free of all liens or other claims.
Closing Completion of final arrangements to transfer title of property from the seller to the buyer, as well as allocate any charges and credits for items like taxes, association dues, and processing fees between the buy and seller. At closing, the borrower takes on the loan obligation and receives title to the property.
Closing costs Customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing. Costs incurred may include a loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee, and credit report charges. These costs vary by geographic location and are detailed to the borrower in a Good Faith Estimate prior to closing.
Cloud An outstanding claim or encumbrance that, if valid, would affect or impair the owner's property title and potentially delay the sale of the property until clear title is established.
Collateral An asset pledged as a security for a loan. For a mortgage loan, the property itself is considered collateral that can be revoked through foreclosure if loan is not repaid according to the terms of the mortgage or deed of trust.
Commission An amount, usually a percentage of the property sales price that is collected by a real estate professional as a fee for negotiating the transaction.
Commitment A written letter of agreement detailing the terms and conditions by which the lender will lend and the borrower will borrow funds to finance a home.
Condominium A form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex. The owners share financial responsibility for common areas such as parking lots, tennis court and swimming pools. These costs are usually covered by an annual or monthly maintenance fee, as well as periodic assessments for major expenses.
Conforming Loan A loan for which the amount borrowed does not exceed the amount that can be insured by Fannie Mae or Freddie Mac. The maximum limit for a conforming loan changes each year. Loans which exceed the limits for a conforming loan are Jumbo Loan.
Construction Loan A short term loan funding the cost of construction on a new property or a renovation. The lender advances funds as the work progresses, based on completion of specific milestones. Once the construction is complete, the loan is refinanced as a mortgage.
Conventional Mortgage A loan from a bank or finance company that is not guaranteed or insured by the U.S. government. A mortgage loan that is obtained without any additional guarantees for repayment, such as FHA insurance, VA guarantees, or private insurance. This is usually given at an 80% loan-to-value ratio.
Conversion The right of a borrower to convert an adjustable or balloon loan into a fixed loan.
Cooperative (Co-op) Residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
Credit History History of an individual's debt payment; lenders use this information to gauge a potential borrower's ability to repay a loan.
Credit Loan A credit loan is a mortgage that is issued on only the financial strength of a borrower, without great regard for collateral.
Credit Rating Borrowers are rated by lenders according to the borrower's credit-worthiness or risk profile. Credit ratings are expressed as letter grades such as A-, B, or C+. These ratings are based on various factors such as a borrower's payment history, foreclosures, bankruptcies and charge-offs. There is no exact science to rating a borrower's credit, and different lenders may assign different grades to the same borrower.
Credit Report A report from one of three major credit bureaus (Equifax, Experian and Trans Union) on the credit standing of a prospective borrower. The credit report lists past and present debts and the timeliness of their repayment. Information regarding late payments, defaults, or bankruptcies will also appear here.
Credit Score A number based on your credit score that lenders use as a guideline to determine your creditworthiness. Also know as a FICO score (for Fair Isaac Corporation, which is the most common scoring system), a credit score can range from 300 - 850. Scores above 700 are considered good credit, and those below 600 indicate a greater level or risk.
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Debt to Income Ratio (DTI) A comparison of monthly gross income to monthly housing and non-housing expenses. Typically, a monthly mortgage payment should be no more than 29% of monthly pre-tax income and total debts (including the mortgage) should not exceed 41% of income.
Deed The document that transfers ownership of a property from the seller to the buyer.
Deed of Trust Synonymous with mortgage, this is the "security instrument" which gives the lender a claim against the property if the borrower fails to live up to the terms of the mortgage note. A deed of trust or mortgage is obtained, depending on the state in which the borrower will reside.
Deed-in-Lieu To avoid foreclosure, a deed is given to the lender to fulfill the obligation to repay the mortgage. This process helps avoid the costs, time, and effort associated with foreclosure by giving the property to the lender.
Default The violation of a loan agreement, such as through failure of a borrower to make payments on a loan.
Delinquency Failure of a borrower to make payments of principal, interest, taxes, or insurance on time under a loan agreement.
Department of Veterans Affairs (VA) A federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.
Depreciation A decline in the value of a property.
Discount Point Normally paid at closing and generally calculated to be equivalent to 1% (or one point) of the total loan amount, discount points are paid to reduce the interest rate on a loan.
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Earnest Money Deposit A lump sum given in advance as security for a future transaction. An earnest money deposit given at the time an offer of purchase is made for a property. The deposit becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.
Easement A right to access a property for a specific use. Common easement are for utilities and similar required access.
Eminent Domain The government right to take private property for public use depending on the payment of its fair market value.
Encumbrance Any lien against a property or any restriction it its use, such as an easement; a right or interest in a property held by one who is not the legal owner.
Equal Credit Opportunity Act (ECOA) The Equal Credit Opportunity Act (ECOA) ensures that all consumers are given an equal chance to obtain credit, regardless of sex, marital status, race, national origin, or religion. Anyone involved in granting credit, such as real estate brokers who arrange financing, is covered by the law. http://www.ftc.gov/bcp/conline/pubs/credit/ecoa.htm
Equity The difference between the current market value of a property and the principal balance of all outstanding loans.
Escalator Clause A clause in a loan providing for increases in payments or interest based on pre-determined schedules or on a specific economic index, such as the consumer price index.
Escrow A third party agent that receives, holds, and/or disburses certain funds or documents upon the performance of certain conditions. For example, an earnest money deposit is put into escrow until the transaction is closed.
Escrow Account A separate account into which the lender puts a portion of each monthly mortgage payment to pay items like property taxes and homeowner's insurance when they are due. The borrower's monthly payment includes an additional amount each month to cover these items. Also known as an Impound Account.
Escrow Analysis An analysis performed by a lender each year to escrow accountholders to ensure that the correct amount of money is being collected to cover anticipated payments.
Escrow Fee These costs cover the preparation and transmission of all home purchased-related documents and funds. Escrow fees range from several hundred to over a thousand dollars, based on the purchase price of your home. Not all states require funds to be put into escrow accounts for closing.
Estate The ownership interest an individual holds in real property. This is also the sum total of all the real property and personal property owned by an individual at time of death.
Eviction The legal removal of real property occupants for unlawful actions carried out by those occupants.
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Fair Credit Reporting Act A law that protects consumer that regulates the reporting of consumer credit by agencies and establishes procedures for correcting errors on an individual record.
Fair Housing Act A law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.
Fair Market Value The price that a willing buyer and seller will agree on for the sale of a property.
Fannie Mae (FNMA) The Federal National Mortgage Association is a congressionally chartered, shareholder-owned company. FNMA purchases residential mortgages and converts them into securities for sale to investors. This organization is the nation's largest supplier of home mortgage funds. Link to the Fannie Mae web site.
Farmers Home Administration (FmHA) Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
Federal Home Loan Mortgage Corporation (FHLMC) See Freddie Mac.
Federal Housing Administration (FHA) A division of the Department of Housing and Urban Development. The FHA was established in 1934 to advance homeownership opportunities for all Americans. FHA provides mortgage insurance to lenders to cover most losses that may occur when a borrower defaults, encouraging lenders to make loans to borrowers who might not qualify for conventional mortgages. FHA also sets the standard for underwriting mortgages. Link to the FHA web site.
Federal National Mortgage Association (FNMA) See Fannie Mae.
Fee Simple The best title that one can obtain; unqualified and conveys the highest bundle of rights.
Fees Up-front costs associated with a loan.
FHA See Federal Housing Administration
FHA Loan A government-backed mortgage loan supported by the FHA and the Department of Housing and Urban Development (HUD).
FHA Mortgage Insurance Requires a small fee (up to 3 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA.
Finance Charge The total dollar amount credit cost you. It includes all interest payments for the life of the loan, any interest paid at closing, your origination fee and any other charges paid to the lender and/or broker. Appraisal, credit report and title search fees are not included in the finance charge calculation.
Financing Concessions Funds originating from an interested party to the transaction used to reduce the mortgage interest rate, subsidize the borrower's monthly payment, contribute to the financing charges (such as discount points, loan fees, commitment and/or origination fees), and pay borrower expenses (such as application fees, homeowner association fees, appraisal fees, transfer taxes, tax stamps, attorney fees, surveys, closing costs, and title insurance).
Firm Commitment A lender's agreement to provide a loan to a specific borrower on a specific property.
First Mortgage A mortgage that has priority over other mortgages.
Fixed Rate Mortgage A mortgage with a set interest rate which does not change over the life of the loan. Typically, fixed rate loans are available with terms ranging from 10 to 40 years, with the moth common being 15 year mortgage and 30 year mortgages. With a fixed rate loan, principal and interest payments stay the same for the duration of the loan term.
Float Between the time of application and closing, a borrower may choose to bet on interest rates decreasing by electing to float. Floating is essentially choosing not to lock the interest rate. Since it is the borrower's responsibility to lock his or her rate before (or at) closing, choosing to float is considered risky and may result in a higher interest rate. Request information from your lender regarding lock procedures.
Float Period The float period refers to the time between when you accept a loan and when you lock-in your rate. During this time the interest rate and points on your loan will fluctuate with the market until you lock.
Flood insurance Insurance that protects homeowners against losses from a flood. If a home is located in a flood plain, the lender will require flood insurance before approving a loan.
Forbearance The postponement for a limited time of a portion or all the payments on a loan when a borrower is delinquent.
Foreclosure A legal procedure in which real estate is sold by the lender to pay a defaulting borrower's debt
Form 1003 See Uniform Residential Loan Application .
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLM) is a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors. This provides lenders with funds for new homebuyers. Link to the Freddie Mac web site.
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Ginnie Mae The Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development. Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment. Like Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders. Link to the Ginnie Mae web site.
Good Faith Estimate An estimate of all closing fees including pre-paid and escrow items as well as lender charges. A Good Faith Estimate must be given to the borrower within three days after submission of a loan application.
Government Loan A type of mortgage insured by the FHA (Federal Housing Authority), VA (Veteran's Administration), or RHS (Rural Housing Authority).
Government National Mortgage Association See Ginnie Mae.
Grace Period A time allowed, usually 15 days, for making late payments without a penalty.
Grantee The person to whom an interest in real property is conveyed.
Grantor The person conveying an interest in real property.
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Hazard Insurance A form of insurance in which the insurance company protects the insured from certain losses, such as fire, vandalism, storms and certain other natural causes.
Home Equity Line of Credit (HELOC) A type of second mortgage that allows a borrower to draw cash as needed against their home equity, up to a certain amount.
Home Equity Loan A second mortgage loan used to borrow against equity in a home.
Home Inspection A thorough assessment by a professional regarding the structural and mechanical condition of a property. The potential homebuyer uses the inspection to learn of any repairs that may be needed prior to closing.
Home Warranty Offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance. Coverage extends over a specific time period and does not cover the home's structure.
Homeowner's Insurance An insurance policy that combines protection against damage to a dwelling and its contents with protection against claims of negligence or inappropriate action that result in someone's injury or property damage.
Housing Ratio The ratio of the monthly housing payment to total gross monthly income. Also called Payment-to-Income Ratio or Front-End Ratio.
HUD The Department of Housing and Urban Development regulates Fannie Mae and Ginny Mae. HUD works to create a decent home and suitable living environment for all Americans by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
HUD-1 This form is required by Federal law and is prepared by the closing agent Also known as the "settlement statement," it itemizes all closing costs; must be given to the borrower at or before closing.
HVAC Heating, Ventilation and Air Conditioning; a home's heating and cooling system.
Hybrid Financing The joining together of two forms of finance, such as combining a convertible loan with a participation loan, under which the lender has the right at loan maturity to convert the debt to a 50 percent ownership in the property.
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Impound Account A separate account into which the lender puts a portion of each monthly mortgage payment to pay items like property taxes and homeowner's insurance when they are due. The borrower's monthly payment includes an additional amount each month to cover these items. Also known as an Escrow Account.
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 U.S. Treasury Security yields, or the monthly average Costs-of-Funds), which is then used to adjust the interest rate on an adjustable mortgage up or down.
Inflation The number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation results in a decrease in the dollar's value.
Insurance Protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.
Interest Money paid for the use of money, usually expressed as an annual percentage. Also, a right, share, or title in property.
Interest Only A term loan arrangement in which the borrower makes payments of interest, but not principal.
Interest Rate The percentage of an amount of money that's paid for its use over a specified time period.
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Judgment A legal decision. When requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source.
Judicial Foreclosure A court procedure used by lenders to secure clear title to a property under a defaulted real estate loan.
Jumbo Loan A loan for an amount greater than the conventional loan limit. This amount changes every year. For 2006, limits are:
  • One-unit properties: $417,000
  • Two-unit properties: $533,850
  • Three-unit properties: $645,300
  • Four-unit properties: $801,950
For properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the loan limits are 50 percent higher. These limits are set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Jumbo loans usually carry a higher interest rate than conventional loans.
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Lease Option A rental agreement indicating a tenant's option to purchase a property. A portion of the monthly payments can be applied towards a down payment on an already established purchase price.
Lease Purchase Same as Lease Option
Leasehold Estate An estate for a fixed length of time, established when a landlord gives up possession of real estate to a tenant, giving the tenant an equitable interest in the property, as defined by lease terms.
Lender The bank, mortgage company, or mortgage broker offering the loan. Many institutions only "originate" loans and then resell the obligation to third parties.
Leverage Using someone else's money for the purchase of property.
Liability Insurance Insurance that protects property owners against claims that allege negligence or inappropriate action that resulted in bodily injury or property damage to another party.
LIBOR The London Interbank Offered Rate Index (LIBOR) is an average of the interest rates that major international banks charge each other to borrow U.S. dollars in the London money market. Like the U.S. treasury the CD indexes, LIBOR tends to move and adjust quite rapidly to changes in interest rates.
Lien A legal claim by one party against the property of another as security for a debt. Must be paid off when property is sold. A mortgage or a first trust deed is a lien.
Life of Loan Cap The maximum interest rate that can be charged during the life of the loan. Also called Lifetime Cap. This value is often expressed as an increment above the initial loan rate. For example, an adjustable rate loan with an initial rate of 7.25% and a 6% lifetime cap will never adjust above a rate of 13.25% (7.25+6.0).
Loan The principal or amount of total borrowed money that is repaid with interest.
Loan Fraud The illegal practice of purposely giving incorrect information on a loan application in order to better qualify for a loan. Conviction may result in civil liability or criminal penalties.
Loan Officer An intermediary between lending institutions and borrowers, loan officers solicit loans, represent creditors to borrowers, and represent borrowers to creditors.
Loan Origination What the process of obtaining new loans is called.
Loan Servicing A service performed by a lender to protect a mortgage investment, including collecting monthly payments from borrowers and dealing with delinquencies.
Loan-to-value (LTV) ratio A percentage calculated by dividing the amount borrowed by the price or appraised value of the home. For purchases, the value of the property is assumed to be the purchase price, for refinances the value is determined by an appraisal. An LTV ratio of 90 means that a borrower is borrowing 90% of the value of the property and paying 10% as a down payment.
Lock The Lock can be either the period, expressed in days, during which a lender will guarantee a rate or the act of committing to a mortgage rate. Some lenders will lock rates at the time of application while others will allow the borrower to lock the rate later. Sometimes a payment is required by the lender to lock the rate or extend the lock period.
Lock-in Clause Clause in a loan agreement that states that the borrower cannot repay a loan prior to a specified date.
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Margin An amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
Maturity The final "Due Date" of a loan, or that date it is to be paid in full.
Modification Any change to the original terms of a mortgage.
Mortgage This is the "security instrument" which gives the lender a claim against the property if the borrower fails to live up to the terms of the mortgage. The term is also used to describe the loan itself. Some states use the term Deed of Trust to refer to mortgage loans.
Mortgage Banker A company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.
Mortgage 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.
Mortgage Broker A firm that originates and processes loans for a number of lenders.
Mortgage Constant The factor used for rapid computation of the annual payment needed to amortize a loan.
Mortgage Insurance Insurance that covers the lender against losses incurred as a result of a default on a home loan. This is usually required on all loans that have a loan-to-value higher than 80%. FHA loans and some first-time homebuyer programs require mortgage insurance regardless of the loan-to-value.
Mortgage Insurance Premium (MIP) A monthly payment usually part of the mortgage payment paid by a borrower for mortgage insurance.
Mortgage Modification A loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.
Mortgagee The lender in a mortgage agreement.
Mortgagor The borrower in a mortgage agreement.
Multi-Dwelling Units Properties that provide separate housing units for more than one family, although only a single mortgage is secured.
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Negative Amortization Essentially occurs when a borrower makes a minimum payment that may not cover the interest that is due. Loan balance then increases as a result.
Net Effective Income Gross income less federal income tax.
No-Cost Loan A no-cost loan can either be 1) a loan that has no "lender costs" associated with it or, 2) a loan that also covers purchases or refinancing costs, which may be incurred in buying a home, obtaining and/or refinancing a loan, but are not directly charged by the lender. The interest rate on this type of loan is higher
Note A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
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Offer Indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.
Origination The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.
Origination fee The charge for originating a loan, generally calculated in the form of points paid at closing. This fee is imposed by a lender to cover certain processing expenses in connection with making a real estate loan.
Owner Financing A property purchase that is partly or wholly financed by the seller.
Owner's Title Policy A policy protecting the buyer for the amount of the purchase price in the event of a future title dispute.
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Package Mortgage A mortgage that /includes equipment and appliances located on the premises in addition to the real property itself.
Partial Claim A loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.
Partial Entitlement Under VA loans, the amount of guarantee still available to an eligible veteran who has used his previous entitlement.
Partial Payment A payment that is less than the monthly payment.
Participation Financing A loan in which more than one mortgagee or more than one mortgagor harbors an interest. It can also be a loan in which the mortgagee receives partial ownership of the property being financed.
Payment Change Date The date when a new monthly payment amount takes effect on an adjustable rate mortgage (ARM). The payment change date occurs the month immediately after the interest rate adjustment date.
Periodic Payment Cap The limit on the amount that payments can increase or decrease during any one adjustment period for an adjustable-rate mortgage (ARM) where the interest rate and principal fluctuate independently of one another.
Periodic Rate Cap The limit on the amount that payments can increase or decrease during any one adjustment period in an ARM (adjustable rate mortgage), regardless of how high or low the index fluctuates.
PITI Principal, Interest, Taxes, and Insurance used for calculating the mortgage costs for the debt-to-income ratio. If the loan has an impound or escrow account, a portion of the payment each month is placed in this account to cover these items when they are due.
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 PITI (principal, interest, taxes, and insurance) must equal the amount that the borrower would have to pay for PITI for a determined number of months.
Planned Unit Development (PUD) A type of ownership where individuals own the building or unit they reside in, but shared areas are owned jointly with the other members of the development or established association.
PMI See Private Mortgage Insurance.
Points One percent of the loan amount. Points are used as a measure of fees associated with a loan, such as Discount Points and Origination Points. Discount points are paid to reduce the interest rate of a loan, with origination points are simply a fee to the lender for originating the loan.
Pre-Approval A term used to mean that a borrower has completed a loan application and provided debt, income, and savings information that has been reviewed and pre-approved by an underwriter.
Pre-Foreclosure Sale A procedure in which the borrower is allowed to sell his or her property to avoid foreclosure, fully satisfying the borrower's debt.
Premium An amount paid on by a policyholder for insurance coverage.
Pre-Paids Expenses such as taxes, insurance, and assessments, which are paid in advance of their due date, and on a prorated basis at closing.
Prepayment Payment of the mortgage loan before the scheduled due date. In cases where the loan is paid in full before maturity, it may be subject to a prepayment penalty.
Prepayment Penalty A fee lenders may charge borrowers if they wish to repay part or all of their loan in advance of the regular payment schedule.
Pre-Qualify An informal determination of the maximum amount an individual is eligible to borrow.
Prime Rate Interest charged by financial institutions to top-rate borrowers.
Principal The total amount borrowed, less any payments, not including interest.
Private Mortgage Insurance (PMI) A mortgage insurance program for qualified borrowers with down payments of less than 20% of a purchase price. PMI is typically charged to the borrower when the Loan-to-Value Ratio is greater than 80%.
Promissory Note A written promise to repay a specified amount over a specified period of time.
Prorations The allocation of charges and credits to the appropriate parties at a real estate sale and/or loan closing at a real-estate sale and/or loan closing.
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 Mortgage Mortgage given by a borrower to the seller as part of the purchase price of the property.
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Quitclaim Deed A deed that transfers, without warranty, whatever interest or title a grantor may have at the time the conveyance is made.
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Real Estate Agent A person licensed to negotiate and transact the sale of real estate.
Real Estate Settlement Procedures Act (RESPA) An act requiring the revelation of all costs involved in a real estate closing to all participants.
Real Estate Settlement Procedures Act (RESPA) A law protecting consumers from abuses during the residential real estate purchase and loan process. The law requires lenders to disclose all settlement costs, practices, and relationships.
Realtor A real estate agent, broker, or associate that holds an active membership in a local real estate board that is affiliated with the National Association of Realtors.
Recast To redesign an existing loan balance into a new loan for the same period or longer, to reduce payments and help a distressed borrower.
Reconciliation Determining the final estimate of value by weighing the results of the various approaches in an appraisal.
Reconveyance Clause The clause in a trust deed that gives the title back to the borrower when the loan is paid in full.
Recording The formal filing of documents affecting a property's title.
Refinancing Paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
Refinancing The process of paying off one loan with the proceeds from a new loan, using the same property as security.
Regulation Z The Federal Reserve Board regulation to enforce the Truth in Lending Act. Regulation Z requires lenders to reveal the actual costs of borrowing. http://www.fdic.gov/regulations/laws/rules/6500-1400.html
Rehabilitation Mortgage A mortgage that covers the costs of rehabilitating (repairing or Improving) a property; some rehabilitation mortgages like the FHA's 203(k) allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.
Rent-Loss Insurance Insurance that protects a landlord against loss of rent or rental value due to fire or other casualty, resulting in the tenant being excused from paying rent.
Repayment Plan An agreement between a lender and a delinquent borrower regarding mortgage payments, in which the borrower agrees to make additional payments to pay down past due amounts while still making scheduled payments.
RESPA See Real Estate Settlement Procedures Act.
Restrictions Rules imposed on the use of real estate in an effort to preserve property values.
Revolving Debt A credit arrangement that allows a customer to borrow against a pre-approved line of credit used to purchase goods and services. The borrower is responsible for the actual amount borrowed plus any interest due.
Right of First Refusal A provision that states that a property to be first offered to a specific person before it can be offered for sale or lease to other parties.
Rollover Loan A loan that /includes a call date earlier than its normal amortization period.
Rule of 78s An alternative to simple interest calculation, Rule of 78 allocates a proportionate amount of interest to each loan payment. In cases where the loan is paid in full before its maturity, the amount of interest paid can be greater than that of a simple interest loan.
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Sale-Buyback A financing arrangement in which an investor buys property from a developer and immediately sells it back under a long-term sales agreement, wherein the investor retains legal title.
Sale-Leaseback A financing arrangement where an investor purchases real estate, then leases the property back to the seller.
Second Mortgage A mortgage that has a lien position subordinate to the first mortgage.
Secondary Mortgage Market A market where mortgage originators may sell them, freeing up funds for continued lending and distributes mortgage funds nationally from money-rich to money poor areas.
Secured Loan A loan that is backed by collateral.
Security Something given, deposited, or pledged to make secure the fulfillment of an obligation, usually the repayment of a debt.
Seller Carry-Back An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage.
Servicer An organization that collects principal and interest payments from borrowers and manages borrowers' escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
Servicing The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Settlement Another term for closing
Special Forbearance A loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.
Stop Date Date on a term loan when the balloon payment is due.
Subordinate To place in a rank of lesser importance or to make one claim secondary to another.
Subordinate Financing Any mortgage or other lien that has a priority lower than that of the first mortgage, or senior loan. See second mortgage.
Survey A drawing or map the shows the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.
Sweat Equity Increase in property value due to improvement by owners.
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Takeout Mortgage A permanent mortgage, obtained by pre-arrangement between a builder and a financial institution, to repay the interim mortgagee at the completion of construction.
Tax Lien A claim against real estate for the amount of its unpaid taxes.
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 showing a person's right to or ownership of a property.
Title 1 An FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don't require a property lien.
Title Company A company that specializes in examining and insuring titles to real estate.
Title insurance Insurance that protects the lender against any claims that arise from arguments about ownership of the property. Title insurance is also available for homebuyers as an Owner's Title Insurance policy. The cost of title insurance is usually a set value per thousand of dollars of the total loan amount.
Title Search A check of public records to be sure that the seller is the legal owner of the property, and that there are no liens or other claims outstanding.
Total Debt Ratio Monthly debt and housing payments divided by gross monthly income. Also known as Back-End Ratio.
Transfer of Ownership The means by which the ownership of a property changes hands. Examples of such include the purchase of a property "subject to" the mortgage, the assumption of the mortgage debt by the property purchases, 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 the title passes from one owner to another.
Truth in Lending Act A federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with a loan. The Truth In Lending Act was originally enacted by Congress in 1968 as a part of the Consumer Protection Act. See Regulation Z.
Truth-in-Lending Statement (TIL) This form is required by law. You will be given an initial TIL shortly after completing the loan application. If there are no changes you may not receive another one at closing. However, if there are significant changes, you must receive a corrected TIL no later than settlement.
Two-Step Mortgage A loan where the interest rate is fixed for a period years and then is adjusted one time for the balance of the loan period.
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Underwriting The process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value.
Uniform Residential Loan Application Also known as Form 1003, this is the standard mortgage application. The lender uses this form to record relevant financial information about an applicant who applies for a conventional one- to four-family mortgage. Download a copy of Form 1003.
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VA Loan A government-backed mortgage loan supported by the US Veterans Administration.
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Zero Percent Financing A loan with no interest in the contract.
Zoning The right of a community, under its police power, to dictate the use of property within its boundaries.