- acceleration clause
A clause in your mortgage which allows the
lender to demand payment of the outstanding loan balance for
various reasons. The most common reasons for accelerating a loan
are if the borrower defaults on the loan or transfers title to
another individual without informing the lender.
adjustable-rate mortgage
(ARM)
A mortgage in which the interest changes
periodically, according to corresponding fluctuations in an index.
All ARMs are tied to indexes.
adjustment date
The
date the interest rate changes on an adjustable-rate mortgage
amortization
The loan
payment consists of a portion which will be applied to pay the
accruing interest on a loan, with the remainder being applied to the
principal. Over time, the interest portion decreases as the loan
balance decreases, and the amount applied to principal increases so
that the loan is paid off (amortized) in the specified
time.
amortization
schedule
A table which shows how much of each
payment will be applied toward principal and how much toward
interest over the life of the loan. It also shows the gradual
decrease of the loan balance until it reaches zero.
annual percentage rate
(APR)
This is not the note rate on your loan. It is
a value created according to a government formula intended to
reflect the true annual cost of borrowing, expressed as a
percentage. It works sort of like this, but not exactly, so only use
this as a guideline: deduct the closing costs from your loan amount,
then using your actual loan payment, calculate what the interest
rate would be on this amount instead of your actual loan amount. You
will come up with a number close to the APR. Because you are using
the same payment on a smaller amount, the APR is always higher than
the actual not rate on your loan.
application
The form used to
apply for a mortgage loan, containing information about a borrower’s
income, savings, assets, debts, and more.
appraisal
A written
justification of the price paid for a property, primarily based on
an analysis of comparable sales of similar homes
nearby.
appraised value
An
opinion of a property's fair market value, based on an appraiser's
knowledge, experience, and analysis of the property. Since an
appraisal is based primarily on comparable sales, and the most
recent sale is the one on the property in question, the appraisal
usually comes out at the purchase price.
appraiser
An individual
qualified by education, training, and experience to estimate the
value of real property and personal property. Although some
appraisers work directly for mortgage lenders, most are
independent.
appreciation
The increase in
the value of a property due to changes in market conditions,
inflation, or other causes.
assessed value
The
valuation placed on property by a public tax assessor for purposes
of taxation.
assessment
The placing of a
value on property for the purpose of taxation.
assessor
A public official who
establishes the value of a property for taxation
purposes.
asset
Items of value owned by an
individual. Assets that can be quickly converted into cash are
considered "liquid assets." These include bank accounts, stocks,
bonds, mutual funds, and so on. Other assets include real estate,
personal property, and debts owed to an individual by
others.
assignment
When ownership of
your mortgage is transferred from one company or individual to
another, it is called an assignment.
assumable mortgage
A
mortgage that can be assumed by the buyer when a home is sold.
Usually, the borrower must "qualify" in order to assume the loan.
assumption
The term applied
when a buyer assumes the seller’s mortgage.
balloon mortgage
A
mortgage loan that requires the remaining principal balance be paid
at a specific point in time. For example, a loan may be amortized as
if it would be paid over a thirty year period, but requires that at
the end of the tenth year the entire remaining balance must be
paid.
balloon payment
The
final lump sum payment that is due at the termination of a balloon
mortgage.
bankruptcy
By filing
in federal bankruptcy court, an individual or individuals can
restructure or relieve themselves of debts and liabilities.
Bankruptcies are of various types, but the most common for an
individual seem to be a "Chapter 7 No Asset" bankruptcy which
relieves the borrower of most types of debts. A borrower cannot
usually qualify for an "A" paper loan for a period of two years
after the bankruptcy has been discharged and requires the
re-establishment of an ability to repay debt.
bill of sale
A written
document that transfers title to personal property. For example,
when selling an automobile to acquire funds which will be used as a
source of down payment or for closing costs, the lender will usually
require the bill of sale (in addition to other items) to help
document this source of funds.
biweekly mortgage
A
mortgage in which you make payments every two weeks instead of once
a month. The basic result is that instead of making twelve monthly
payments during the year, you make thirteen. The extra payment
reduces the principal, substantially reducing the time it takes to
pay off a thirty year mortgage. Note: there are
independent companies that encourage you to set up bi-weekly payment
schedules with them on your thirty year mortgage. They charge a
set-up fee and a transfer fee for every payment. Your funds are
deposited into a trust account from which your monthly payment is
then made, and the excess funds then remain in the trust account
until enough has accrued to make the additional payment which will
then be paid to reduce your principle. You could save money by doing
the same thing yourself, plus you have to have faith that once you
transfer money to them that they will actually transfer your funds
to your lender.
bond market
Usually
refers to the daily buying and selling of thirty year treasury
bonds. Lenders follow this market intensely because as the yields of
bonds go up and down, fixed rate mortgages do approximately the same
thing. The same factors that affect the Treasury Bond market also
affect mortgage rates at the same time. That is why rates change
daily, and in a volatile market can and do change during the day as
well.
bridge loan
Not
used much anymore, bridge loans are obtained by those who have not
yet sold their previous property, but must close on a purchase
property. The bridge loan becomes the source of their funds for the
down payment. One reason for their fall from favor is that there are
more and more second mortgage lenders now that will lend at a high
loan to value. In addition, sellers often prefer to accept offers
from buyers who have already sold their property.
broker
Broker has several meanings
in different situations. Most Realtors are "agents" who work under a
"broker." Some agents are brokers as well, either working form
themselves or under another broker. In the mortgage industry, broker
usually refers to a company or individual that does not lend the
money for the loans themselves, but broker loans to larger lenders
or investors. (See the Home Loan Library that discusses the
different types of lenders). As a normal definition, a broker is
anyone who acts as an agent, bringing two parties together for any
type of transaction and earns a fee for doing so.
buydown
Usually refers to a fixed
rate mortgage where the interest rate is "bought down" for a
temporary period, usually one to three years. After that time and
for the remainder of the term, the borrower’s payment is calculated
at the note rate. In order to buy down the initial rate for the
temporary payment, a lump sum is paid and held in an account used to
supplement the borrower’s monthly payment. These funds usually come
from the seller (or some other source) as a financial incentive to
induce someone to buy their property. A "lender funded buydown" is
when the lender pays the initial lump sum. They can accomplish this
because the note rate on the loan (after the buydown adjustments)
will be higher than the current market rate. One reason for doing
this is because the borrower may get to "qualify" at the start rate
and can qualify for a higher loan amount. Another reason is that a
borrower may expect his earnings to go up substantially in the near
future, but wants a lower payment right now.
call option
Similar to the
acceleration clause.
cap
Adjustable Rate Mortgages have
fluctuating interest rates, but those fluctuations are usually
limited to a certain amount. Those limitations may apply to how much
the loan may adjust over a six month period, an annual period, and
over the life of the loan, and are referred to as "caps." Some ARMs,
although they may have a life cap, allow the interest rate to
fluctuate freely, but require a certain minimum payment which can
change once a year. There is a limit on how much that payment can
change each year, and that limit is also referred to as a cap.
cash-out
refinance
When a borrower refinances his mortgage at
a higher amount than the current loan balance with the intention of
pulling out money for personal use, it is referred to as a "cash out
refinance."
certificate of
deposit
A time deposit held in a bank which pays a
certain amount of interest to the depositor.
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.
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.
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
An
additional individual who is both obligated on the loan and is on
title to the property.
collateral
In a home loan, the
property is the collateral. The borrower risks losing the property
if the loan is not repaid according to the terms of the mortgage or
deed of trust.
collection
When a borrower
falls behind, the lender contacts them in an effort to bring the
loan current. The loan goes to "collection." As part of the
collection effort, the lender must mail and record certain documents
in case they are eventually required to foreclose on the
property.
commission
Most salespeople
earn commissions for the work that they do and there are many sales
professionals involved in each transaction, including Realtors, loan
officers, title representatives, attorneys, escrow representative,
and representatives for pest companies, home warranty companies,
home inspection companies, insurance agents, and more. The
commissions are paid out of the charges paid by the seller or buyer
in the purchase transaction. Realtors generally earn the largest
commissions, followed by lenders, then the others.
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.
common areas
Those
portions of a building, land, and amenities owned (or managed) by a
planned unit development (PUD) or condominium project's homeowners'
association (or a cooperative project's cooperative corporation)
that are used by all of the unit owners, who share in the common
expenses of their operation and maintenance. Common areas include
swimming pools, tennis courts, and other recreational facilities, as
well as common corridors of buildings, parking areas, means of
ingress and egress, etc.
common law
An unwritten body
of law based on general custom in England and used to an extent in
some states.
community
property
In some states, especially the southwest,
property acquired by a married couple during their marriage is
considered to be owned jointly, except under special circumstances.
This is an outgrowth of the Spanish and Mexican heritage of the
area.
comparable
sales
Recent sales of similar properties in nearby
areas and used to help determine the market value of a property.
Also referred to as "comps."
condominium
A type of
ownership in real property where all of the owners own the property,
common areas and buildings together, with the exception of the
interior of the unit to which they have title. Often mistakenly
referred to as a type of construction or development, it actually
refers to the type of ownership.
condominium
conversion
Changing the ownership of an existing
building (usually a rental project) to the condominium form of
ownership.
condominium hotel
A
condominium project that has rental or registration desks,
short-term occupancy, food and telephone services, and daily
cleaning services and that is operated as a commercial hotel even
though the units are individually owned. These are often found in
resort areas like Hawaii.
construction loan
A
short-term, interim loan for financing the cost of construction. The
lender makes payments to the builder at periodic intervals as the
work progresses.
contingency
A condition that
must be met before a contract is legally binding. For example, home
purchasers often include a contingency that specifies that the
contract is not binding until the purchaser obtains a satisfactory
home inspection report from a qualified home inspector.
contract
An oral or written
agreement to do or not to do a certain thing.
conventional
mortgage
Refers to home loans other than government
loans (VA and FHA).
convertible
ARM
IAn adjustable-rate mortgage that allows the
borrower to change the ARM to a fixed-rate mortgage within a
specific time.
cooperative
(co-op)
A type of multiple ownership in which the
residents of a multiunit housing complex own shares in the
cooperative corporation that owns the property, giving each resident
the right to occupy a specific apartment or unit.
cost of funds index
(COFI)
One of the indexes that is used to determine
interest rate changes for certain adjustable-rate mortgages. It
represents the weighted-average cost of savings, borrowings, and
advances of the financial institutions such as banks and savings
& loans, in the 11th District of the Federal Home Loan Bank.
credit
An agreement in which a
borrower receives something of value in exchange for a promise to
repay the lender at a later date.
credit history
A record
of an individual's repayment of debt. Credit histories are reviewed
my mortgage lenders as one of the underwriting criteria in
determining credit risk.
creditor
A person to whom money
is owed.
credit report
A report of
an individual's credit history prepared by a credit bureau and used
by a lender in determining a loan applicant's creditworthiness.
credit repository
An
organization that gathers, records, updates, and stores financial
and public records information about the payment records of
individuals who are being considered for credit.
debt
An amount owed to
another.
deed
The legal document conveying
title to a property.
deed-in-lieu
Short for "deed
in lieu of foreclosure," this conveys title to the lender when the
borrower is in default and wants to avoid foreclosure. The lender
may or may not cease foreclosure activities if a borrower asks to
provide a deed-in-lieu. Regardless of whether the lender accepts the
deed-in-lieu, the avoidance and non-repayment of debt will most
likely show on a credit history. What a deed-in-lieu may prevent is
having the documents preparatory to a foreclosure being recorded and
become a matter of public record.
deed of trust
Some
states, like California, do not record mortgages. Instead, they
record a deed of trust which is essentially the same
thing.
default
Failure to make the
mortgage payment within a specified period of time. For first
mortgages or first trust deeds, if a payment has still not been made
within 30 days of the due date, the loan is considered to be in
default.
delinquency
Failure to make
mortgage payments when mortgage payments are due. For most
mortgages, payments are due on the first day of the month. Even
though they may not charge a "late fee" for a number of days, the
payment is still considered to be late and the loan delinquent. When
a loan payment is more than 30 days late, most lenders report the
late payment to one or more credit bureaus.
deposit
A sum of money given in
advance of a larger amount being expected in the future. Often
called in real estate as an "earnest money deposit."
depreciation
A decline in
the value of property; the opposite of appreciation. Depreciation is
also an accounting term which shows the declining monetary value of
an asset and is used as an expense to reduce taxable income. Since
this is not a true expense where money is actually paid, lenders
will add back depreciation expense for self-employed borrowers and
count it as income.
discount
points
In the mortgage industry, this term is
usually used in only in reference to government loans, meaning FHA
and VA loans. Discount points refer to any "points" paid in addition
to the one percent loan origination fee. A "point" is one percent of
the loan amount.
down payment
The
part of the purchase price of a property that the buyer pays in cash
and does not finance with a mortgage.
due-on-sale
provision
A provision in a mortgage that allows the
lender to demand repayment in full if the borrower sells the
property that serves as security for the mortgage.
earnest money
deposit
A deposit made by the potential home buyer
to show that he or she is serious about buying the
house.
easement
A right of way giving
persons other than the owner access to or over a
property.
effective age
An
appraiser’s estimate of the physical condition of a building. The
actual age of a building may be shorter or longer than its effective
age.
eminent domain
The right
of a government to take private property for public use upon payment
of its fair market value. Eminent domain is the basis for
condemnation proceedings.
encroachment
An improvement
that intrudes illegally on another’s property.
encumbrance
Anything that
affects or limits the fee simple title to a property, such as
mortgages, leases, easements, or restrictions.
Equal Credit
Opportunity Act (ECOA)
A federal law that requires
lenders and other creditors to make credit equally available without
discrimination based on race, color, religion, national origin, age,
sex, marital status, or receipt of income from public assistance
programs.
equity
A homeowner's financial
interest in a property. Equity is the difference between the fair
market value of the property and the amount still owed on its
mortgage and other liens.
escrow
An item of value, money, or
documents deposited with a third party to be delivered upon the
fulfillment of a condition. For example, the earnest money deposit
is put into escrow until delivered to the seller when the
transaction is closed.
escrow account
Once you
close your purchase transaction, you may have an escrow account or
impound account with your lender. This means the amount you pay each
month includes an amount above what would be required if you were
only paying your principal and interest. The extra money is held in
your impound account (escrow account) for the payment of items like
property taxes and homeowner’s insurance when they come due. The
lender pays them with your money instead of you paying them
yourself.
escrow analysis
Once
each year your lender will perform an "escrow analysis" to make sure
they are collecting the correct amount of money for the anticipated
expenditures.
escrow
disbursements
The use of escrow funds to pay real
estate taxes, hazard insurance, mortgage insurance, and other
property expenses as they become due.
estate
The ownership interest of
an individual in real property. The sum total of all the real
property and personal property owned by an individual at time of
death.
eviction
The lawful expulsion of
an occupant from real property.
examination of
title
The report on the title of a property from the
public records or an abstract of the title.
exclusive listing
A
written contract that gives a licensed real estate agent the
exclusive right to sell a property for a specified time.
executor
A person named in a
will to administer an estate. The court will appoint an
administrator if no executor is named. "Executrix" is the feminine
form.
Fair Credit Reporting
Act
A consumer protection law that regulates the
disclosure of consumer credit reports by consumer/credit reporting
agencies and establishes procedures for correcting mistakes on one's
credit record.
fair market value
The
highest price that a buyer, willing but not compelled to buy, would
pay, and the lowest a seller, willing but not compelled to sell,
would accept.
Fannie Mae (FNMA)
The
Federal National Mortgage Association, which is a congressionally
chartered, shareholder-owned company that is the nation's largest
supplier of home mortgage funds. For a discussion of the roles of
Fannie Mae, Freddie Mac (FHLMC), and Ginnie Mae (GNMA), see your
local library.
Fannie
Mae's Community Home Buyer's Program
An income-based
community lending model, under which mortgage insurers and Fannie
Mae offer flexible underwriting guidelines to increase a low- or
moderate-income family's buying power and to decrease the total
amount of cash needed to purchase a home. Borrowers who participate
in this model are required to attend pre-purchase home-buyer
education sessions.
Federal Housing
Administration (FHA)
An agency of the U.S.
Department of Housing and Urban Development (HUD). Its main activity
is the insuring of residential mortgage loans made by private
lenders. The FHA sets standards for construction and underwriting
but does not lend money or plan or construct housing.
fee simple
The greatest
possible interest a person can have in real estate.
fee simple estate
An
unconditional, unlimited estate of inheritance that represents the
greatest estate and most extensive interest in land that can be
enjoyed. It is of perpetual duration. When the real estate is in a
condominium project, the unit owner is the exclusive owner only of
the air space within his or her portion of the building (the unit)
and is an owner in common with respect to the land and other common
portions of the property.
FHA mortgage
A mortgage
that is insured by the Federal Housing Administration (FHA). Along
with VA loans, an FHA loan will often be referred to as a government
loan.
firm commitment
A
lender’s agreement to make a loan to a specific borrower on a
specific property.
first mortgage
The
mortgage that is in first place among any loans recorded against a
property. Usually refers to the date in which loans are recorded,
but there are exceptions.
fixed-rate
mortgage
A mortgage in which the interest rate does
not change during the entire term of the loan.
fixture
Personal property that
becomes real property when attached in a permanent manner to real
estate.
flood
insurance
Insurance that compensates for physical
property damage resulting from flooding. It is required for
properties located in federally designated flood areas.
foreclosure
The legal process
by which a borrower in default under a mortgage is deprived of his
or her interest in the mortgaged property. This usually involves a
forced sale of the property at public auction with the proceeds of
the sale being applied to the mortgage debt.
401(k)/403(b)
An
employer-sponsored investment plan that allows individuals to set
aside tax-deferred income for retirement or emergency purposes.
401(k) plans are provided by employers that are private
corporations. 403(b) plans are provided by employers that are not
for profit organizations.
401(k)/403(b)
loan
Some administrators of 401(k)/403(b) plans
allow for loans against the monies you have accumulated in these
plans. Loans against 401K plans are an acceptable source of down
payment for most types of loans.
government loan
(mortgage)
A mortgage that is insured by the Federal
Housing Administration (FHA) or guaranteed by the Department of
Veterans Affairs (VA) or the Rural Housing Service (RHS). Mortgages
that are not government loans are classified as conventional
loans.
Government
National Mortgage Association (Ginnie Mae)
A
government-owned corporation within the U.S. Department of Housing
and Urban Development (HUD). Created by Congress on September 1,
1968, GNMA performs the same role as Fannie Mae and Freddie Mac in
providing funds to lenders for making home loans. The difference is
that Ginnie Mae provides funds for government loans (FHA and
VA)
grantee
The person to whom an
interest in real property is conveyed.
grantor
The person conveying an
interest in real property.
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