Mortgage Glossary
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Abstract (of title)
A historical summary of all the recorded transactions that affect the title to the property.
Acceleration clause
A provision in a mortgage that gives the lender the right to demand payment of the entire principal balance if a monthly payment is missed.
Adjustable-rate mortgage (ARM)
A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.
Adjustment period
The period that elapses between the adjustment dates for an adjustable-rate mortgage (ARM).
Amortization
The gradual repayment of a mortgage loan by installments.
Amortization schedule
A timetable for payment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made.
Annual percentage rate (APR)
The cost of credit expressed as an annual rate. It must be calculated by using a formula set by federal law and disclosed to the borrower to aid in comparing different credit plans. All finance charges imposed by a lender are included in this calculation, and an APR is always higher than the simple interest rate when such finance charges like points, origination fees or mortgage insurance are charged by a lender.
Appraisal
A written analysis of the estimated value of a property prepared by a qualified appraiser.
Assessment
The process of placing a value on property for the strict purpose of taxation. May also refer to a levy against property for a special purpose, such as a sewer assessment.
Assumable mortgage
A mortgage that can be taken over ("assumed") by the buyer when a home is sold.
Attorney-in-fact
One who holds a power of attorney from another to execute documents on behalf of the grantor of the power.
Balloon mortgage
A mortgage that has level monthly payments that will amortize it over a stated term but that provides for a lump sum payment to be due at the end of an earlier specified term.
Balloon payment
The final lump sum payment that is made at the maturity date of a balloon mortgage.
Bankruptcy
A proceeding in a federal court in which a debtor who owes more than his or her assets can relieve the debts by transferring his or her assets to a trustee.
Beneficiary
The person designated to receive the income from a trust, estate, or a deed of trust.
Binder
A preliminary agreement, secured by the payment of an earnest money deposit, under which a buyer offers to purchase real estate.
Biweekly payment mortgage
A mortgage that requires payments to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment that would be required if the loan were a standard 30-year fixed-rate mortgage, and they are usually drafted from the borrower’s bank account. The result for the borrower is a substantial savings in interest.
Blanket mortgage
The mortgage that is secured by a cooperative project, as opposed to the share loans on individual units within the project.
Bond
An interest-bearing certificate of debt with a maturity date. An obligation of a government or business corporation. A real estate bond is a written obligation usually secured by a mortgage or a deed of trust.
Borrower
One who applies for a loan secured by real estate and is responsible for repaying the loan.
Bridge loan
A form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as "swing loan."
Broker
A person who, for a commission or a fee, brings parties together and assists in negotiating contracts between them. See mortgage broker.
Buydown mortgage
Obtaining a lower interest rate (buying down the rate) by paying additional points to the lender. The lower rate may apply for the full duration of the loan or for just the first few years. A buydown may be used to qualify a borrower who would otherwise not qualify. This is because a buydown results in lower payments which are easier to qualify for.
Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV)
A document issued by the Veterans Administration (VA) that establishes the maximum value and loan amount for a VA mortgage.
Certificate of title
A statement provided by an abstract company, title company, or attorney stating that the title to real estate is legally held by the current owner.
Chain of title
The history of all of the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent.
Clear title
A title that is free of liens or legal questions as to ownership of the property.
Closing
A meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called "settlement."
Closing costs
Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney's fee, taxes, an amount placed in escrow, and charges for obtaining title insurance and a survey. Closing costs are usually about 1% to 2% of the mortgage amount.
Closing statement
See HUD-1 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 a quitclaim deed, release, or court action.
Commitment letter
An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork and compliance with stated conditions.
Condemnation
The determination that a building is not fit for use or is dangerous and must be destroyed; the taking of private property for a public purpose through an exercise of the right of eminent domain.
Condominium
A real estate project in which each unit owner has title to a unit in a building, an undivided interest in the common areas of the project, and sometimes the exclusive use of certain limited common areas.
Construction loan
A short-term, interim loan for financing the cost of construction. The lender advances funds 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
A mortgage that is not insured or guaranteed by the federal government. Contrast with government mortgage.
Convertible ARM
An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under specified conditions.
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.
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. See merged credit report.
Debt-to-income ratio
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by the gross monthly income.
Deed
The legal document conveying title to a property.
Deed of trust
The document used in some states instead of a mortgage; title is conveyed to a trustee.
Default
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Depreciation
A decline in the value of property; the opposite of appreciation.
Discount points
Fees paid to lenders. Each point is equal to 1% of the loan amount. On a $100,000 loan 1 point is $1000. Points may be further classified into origination points or discount points.
Dower
The rights of a widow in the property of her husband at his death.
Down payment
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage. Down payments are usually 5% to 20% of the sales price on conventional loans.
Due-on-sale clause
A provision in the Deed of Trust or mortgage that states the entire loan is due upon the sale of the property.
Earnest Money
A deposit made by a buyer of real estate towards the down payment to evidence good faith. This money is typically held by the real estate brokers or the escrow company.
Easement
The right to use the land of another for a specific purpose. Easements may be temporary or permanent. Example : The utility company may need an easement to run electric lines.
Eminent Domain
The right of the government or a public utility to acquire property for necessary public use by condemnation, with proper compensation to the owner.
Encroachment
A building, a part of a building, or an obstruction (e.g.. a fence or a wall) that physically intrudes upon or overlaps into the property of another.
Encumbrance
A legal right or interest in land that affects a good or clear title, and diminishes the land's value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes, or restrictive covenants. An encumbrance does not legally prevent transfer of the property to another. A title search is all that is usually done to reveal the existence of such encumbrances, and it is up to the buyer to determine whether he wants to purchase with the encumbrance, or what can be done to remove it.
Equity
The difference between the fair market value and current indebtedness; also referred to as the owner's interest.
Escrow
Neutral third party that handles all funds in a real estate transaction. The buyer puts his deposit into escrow, the lender funds the loan into escrow. Escrow pays the real estate brokers commission, pays off any loans/liens against the property, pays real estate taxes and any other fees associated with the transaction and sends the balance of the money to the seller.
Executor
A person named in a will to carry out its provisions for the disposition of the estate.
Federal Home Loan Mortgage Corporation
Also known as "Freddie Mac". Quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA)
An agency within the U.S. Department of Housing and Urban Development (HUD) that administers loan programs, issues loan guarantees to make more housing available.
Federal National Mortgage Association
Also known as "Fannie Mae". Corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA.
Fee Simple
Absolute ownership of real property; owner is entitled to the entire property with unconditional power of disposition during the owners life and upon his death the property descends to the owner's designated heirs.
Fiduciary
A person in a position of trust or responsibility with specific duties to act in the best interest of a client. A real estate broker is a fiduciary for his/her clients.
First Mortgage
A mortgage that has priority as a lien over all other mortgages. In the case of foreclosure the first mortgage will be satisfied before other mortgages. See also second mortgage.
Fixed-Rate Mortgage
A mortgage on which the interest rate is set for the term of the loan.
Fixture
Personal property that becomes real property when attached in a permanent manner to real estate.
Flood Insurance
An insurance policy that covers property damage due to natural flooding. Flood insurance may be required on properties in a flood zone.
Foreclosure (Repossession)
A legal process by which the lender forces a sale of a property because the borrower has not met the terms of the mortgage.
Government National Mortgage Association
Also known as "Ginnie Mae". A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD). Created by Congress, GNMA assumed responsibility for the special assistance loan program formerly administered by Fannie Mae.
Grantee
The person to whom an interest in real property is conveyed.
Grantor
The person conveying an interest in real property.
Gross monthly income
The total amount the borrower earns per month, before any expenses are deducted.
Hazard insurance
Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.
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.
HUD-1 statement
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing. The blank form for the statement is published by the Department of Housing and Urban Development (HUD). The HUD-1 statement is also known as the "closing statement" or "settlement sheet."
Income property
Real estate developed or improved to produce income.
Index
A number used to compute the interest rate for an adjustable-rate mortgage (ARM). The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. A margin is added to the index to determine the interest rate that will be charged on the ARM.. This interest rate is subject to any caps that are associated with the mortgage.
Joint and Several Liability
A creditor can demand full repayment from any and all of those who have borrowed. Each borrower is liable for the full debt, not just the prorated share.
Joint Tenancy
A form of co-ownership that gives each tenant equal interest and equal rights in the property, including the right of survivorship.
Judgment
The decision of a court of law stating that one individual is indebted to another and fixing the amount of indebtedness. Judgments, when recorded, become a lien on real property owned by the defendant.
Judgment Lien
The claim on the property of a debtor resulting from a judgment.
Jumbo Loan
Loan size that is larger than the limit established by Fannie Mae or Freddie Mac.
Junior Mortgage
A mortgage subordinate to another mortgage. In the case of a foreclosure a senior mortgage will be paid prior to a junior mortgage.
Land Contract
A real estate installment selling arrangement whereby the buyer may use and occupy land, but no deed is given by seller until the sales price has been paid.
Lease with Option to Purchase
A lease under which the lessee has the right to purchase the property. The option may run for a portion or for the full length of the lease
Legal Description
A property description, recognized by law, that is sufficient to locate and identify the property without oral testimony.
Lien
A claim against the property for the payment of a debt, judgment, mortgage or taxes.
Life Estate
An estate in real property for the life of a living person. The estate then reverts back to the grantor or to a third party.
Lis Pendens
Latin for "lawsuit pending." Recorded notice that litigation is pending on a property. Most lenders will require the clearance of the Lis Pendens prior to closing.
Loan to Value Ratio (LTV)
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
Loan Servicing
The act of collecting loan payments, handling property tax and insurance escrow's, foreclosing on defaulted loans and remitting payments to the investors.
Market value
The highest price that you would pay and the lowest price the seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
Margin
For an adjustable-rate mortgage (ARM), the amount that is added to the index to establish the interest rate on each adjustment date, subject to any limitations on the interest rate change.
Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage banker
A company that originates mortgages exclusively for resale in the secondary mortgage market.
Mortgage broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination. Mortgage brokers typically require a fee or a commission for their services.
Mortgagee
The lender in a mortgage agreement.
Mortgage insurance
A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency such as the Federal Housing Administration (FHA). Depending on the type of mortgage insurance, the insurance may cover a percentage of or virtually all of the mortgage loan.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage agreement.
Negative amortization
A gradual increase in mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the remaining balance to create "negative" amortization.
Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Notice of default
A formal written notice to a borrower that a default has occurred and that legal action may be taken.
Original principal balance
The total amount of principal owed on a mortgage before any payments are made.
Origination fee
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.
Partial Release
A provision in a mortgage that allows some of the property secured to be freed from serving as collateral.
PITI
Abbreviation for principal, interest, taxes and insurance, which may be combined in a single monthly mortgage payment.
Planned Unit Development (PUD)
A zoning classification that allows flexibility in the design of a subdivision. PUD's include individually owned units as well as some common space that is jointly owned.
Plat
A plan or map of a specific land area.
Points
Fees paid to lenders. Each point is equal to 1% of the loan amount. On a $100,000 loan 1 point is $1000. Points may be further classified into origination points or discount points.
Portfolio Loan
A loan that is held as an investment by a bank or savings and loan, and NOT sold on the secondary market to investors.
Power of Attorney
A written document authorizing a person to act on the behalf of another person. That person does not have to be an attorney.
Prepaid Interest
Prepaid interest is the interest charged to borrowers at closing to pay for the cost of borrowing for a balance of the month. For example, if a loan closes on the 19th of the month and the first payment is due on the 1st of the following month, the lender will charge 12 days of prepaid interest.
Prepayment
A privilege in a mortgage permitting the borrower to make payment in advance of the due date. This might occur if the borrower makes extra payments, sells the property, or refinances the existing loan.
Prepayment Penalty
Fees paid by the borrower if they pay the loan before its due date.
Primary Mortgage Market
Companies that originate and service mortgage loans (banks, savings & loans, credit unions, mortgage bankers, institutional lenders) make up the primary mortgage market.
Prime Rate
The lowest commercial interest rate charge by a bank on short term loans to their most credit worthy customers.
Principal
The outstanding balance on a loan.
Private Mortgage Insurance (PMI)
May be required by your lender if the loan you apply for cannot be granted because the loan does not meet the normal standards for the lender. The most common reason for this requirement is a smaller down payment than the lender usually requires (around 20%). This insurance protects the lender from loss if the borrower defaults. It does not protect the borrower though it may allow the borrower to qualify for a loan.
Purchase Money Mortgage
A mortgage used to finance the purchase of a property.
Property Tax
A government levy based on the market value (as assessed by the county assessor's office) of the property.
Purchase Agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Quit Claim Deed
A deed which transfers whatever interest the maker of the deed may have in the particular parcel of land. A quitclaim deed is often given to clear the title when the grantor's interest in a property is questionable. By accepting such a deed the buyer assumes all the risks. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has.
Realtor
A real estate professional who is a member of the National Association of Realtors.
Real Estate Settlement Procedure Act (RESPA)
A law that states how mortgage lenders must treat those who apply for real estate loans on property with 1-4 units. Example : A lender is required to provide a good faith estimate of closing costs within 3 days of an application being filed.
Redlining
The practice of refusing to provide loans or insurance in a certain neighborhood.
Refinancing
Repaying an existing loan from the proceeds of a new loan on the same property.
Recording
The act of entering into a book of public records instruments affecting title to the real property. A lender requires that a deed of trust or a mortgage be recorded to evidence the debt against the property.
Recision
The cancellation of a contract. When refinancing a mortgage on a principal residence the law gives the homeowner three days to cancel the contract
Recourse
The right of the holder of a note secured by a mortgage or deed of trust to claim money from the borrower in default in addition to the property pledged as a collateral.
Real Estate Investment Trusts (REIT)
A trust that uses investors money to purchase and manage real estate. Investors realize some of the tax advantages in owning real estate.
Reverse Mortgage
A mortgage used by the elderly that provides income as long as they live in exchange. Payments made cause the loan principal to increase.
Second mortgage
A mortgage that has a lien position subordinate to the first mortgage.
Secondary mortgage market
The buying and selling of existing mortgages.
Security
The property that serves as collateral for a loan.
Servicing
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Settlement
See closing.
Settlement sheet
See HUD-1 statement.
Sheriff's Deed
A deed given at the sheriff's sale in the foreclosure of a mortgage.
Subdivision
A housing development that is created by dividing a tract of land into individual lots for sale or lease.
Survey
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.
Tenancy by the entirety
A type of joint tenancy of property that provides right of survivorship and is available only to a husband and wife. Contrast with tenancy in common.
Tenancy in common
A type of joint tenancy in a property without right of survivorship. Contrast with tenancy by the entirety and with joint tenancy.
Title
A legal document that gives evidence of an individual's ownership of property.
Title insurance
Insurance policy 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
An examination of municipal or county records to determine the legal ownership of property, usually performed by a title company.
Transfer tax
State or local tax payable when title passes from one owner to another.
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.
Trustee
A fiduciary who holds or controls property for the benefit of another.
Underwriting
The decision whether to make a loan to a potential home buyer based on credit, income, employment history, assets, etc.
VA mortgage
Home loan guaranteed by the Department of Veterans Affairs (VA), enabling a veteran to buy a home with no money down.
Warranty deed
A deed conveying the title to a property with a warranty of a clear marketable title.
Wraparound mortgage
A loan arrangement whereby the existing first mortgage loan is retained and a new loan is added to the property.
