Glossary


Glossary Of Terms

Abstract (Of Title)

A summary of the public records relating to the title to a particular piece of
land. An attorney or title insurance company reviews an abstract of title to determine
whether there are any title defects which must be cleared before a buyer can purchase
clear, marketable, and insurable title.

Acceleration Clause

Condition in a mortgage that may require the balance of the loan to become due
immediately, if regular mortgage payments are not made or the sale of the property.

Accretion

The buildup of land from natural forces such as wind or water.

Acknowledgment

As a verb, the confirmation by a party executing a legal document that this is
his signature and a voluntary act. This confirmation is made to an authorized
officer of the Court or notary public who signs a statement also called an acknowledgment.

Adjustable Rate Mortgage (ARM)

Is a mortgage in which the interest rate is adjusted periodically based on a preselected
index. Also sometimes known as the re-negotiable rate mortgage, the variable rate mortgage.

Adjustment Interval

On an adjustable rate mortgage, the time between changes in the interest rate
an/or monthly payment, typically one, three or five years, depending on the index.

Agency

A relationship in which the agent is given the authority to act on behalf of another person (Principal).

Amortization

Monthly loan payment calculated to pay off the debt at the end of a fixed period,
including accrued interest on the outstanding balance.

Annual Percentage Rate (APR)

An interest rate reflecting the cost of a mortgage as a yearly rate. This rate
is likely to be higher than the stated note rate or advertised rate on the mortgage,
because it takes into account points and other credit costs. The APR allows homebuyers
to compare different types of mortgages based on the total cost for each loan.

Appraisal

An estimate of the value of the property, require the appraiser to be licensed
in that state. To comply with lending requirements, lenders/loan originators must order the appraisal.

Assessment

A local tax levied against a property for a specific purpose, such as a sewer or street lights.

Assumption

The agreement between buyer and seller where the buyer takes over the payments
on an existing mortgage from the seller. Assuming a loan can usually save the
buyer money since this is an existing mortgage debt, unlike a new mortgage where
closing costs and new, possibly high, market-rate interest charges will apply.

Balloon (Payment)

Mortgage usually a short-term fixed-rate loan which involves small payments for
a certain period of time and one large payment for the remaining amount of the
principal at the time specified in the contract.

Beneficiary

A person named to receive a benefit for a TRUST. A contingent beneficiary has
conditions attached to his rights, usually someone else must die first.

Buydown

When the lender and/or the home builder subsidizes the mortgage by lowering the
interest rate during the first few years of the loan. Rates do rise during the
term, however the initial lower rate helps the borrower qualify for an amount
they may otherwise not qualify for. This is an excellent instrument for those
who anticipate the ability to pay slightly increasing payments in subsequent years.

Caps (interest)

Consumer safeguards which limit the amount the interest rate on an adjustable
mortgage may change per year and/or the life of the loan.

Caps (payment)

Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.

Certificate of Eligibility

The document given to qualified veterans which entitles them to VA guaranteed
loans for the homes, businesses, and mobile homes. Certificates of eligibility
may be obtained by sending DD-214 (Separation Paper) to the local VA office with
a VA form 1880 (request for Certificate of Eligibility).

Certificate of Occupancy

A certificate issued by a local government body stating that the building is in a condition to be occupied.

Closing (escrow)

The meeting between the buyer, seller, and lender at the agent’s escrow company
where the property and funds legally change hands. Also called a settlement meeting or escrow closing.

Closing Costs

Usually include an origination fee, discount points, appraisal fee, title search
and insurance, survey, taxes, deed recording fee, credit report charge and other
costs assessed at settlement.

Cloud on Title

An evidence of encumbrances.

Commitment

An agreement, often in writing, between a lender and a borrower to loan money
at a future date subject to the completion of paperwork or compliance with stated
conditions.

CC&R’s

Covenants, conditions, and restrictions. The basic rules establishing the rights
and obligations of owners of real property within a subdivision or other tract
of land in relation to other owners within the same subdivision or tract and in
relation to an association of owners organized for the purpose of operating and
maintaining property commonly owned by the individual owners.

Conventional Loans

A mortgage not insured by FHA or guaranteed by the VA or Farmers Home Administration (FMHA).

Deed

The written document conveying real property. The Deed must be executed (signed),
ACKNOWLEDGED, and DELIVERED to the Grantee. Once recorded at the Courthouse, the
original piece of paper is not needed to convey title in the future.

Deed of Trust

A voluntary lien to secure a debt deeding the property to Trustees who foreclose,
sell the property at public auction, in the event of default on the Note the Deed
of Trust secures.

Default

Failure to meet legal obligations in a contract, specifically, failure to make
the monthly payments on a mortgage.

Delinquency

Failure to make payments on time. This can lead to foreclosure.

Discount Points

Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent
of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).

Down Payment

Money paid to make up the difference between the purchase price and mortgage amount.
Down payments usually are 10 percent to 20 percent of the sales price on Conventional
loans, and no money down up to 5 percent of FHA and VA loans.

Due-On-Sale Clause

A provision in a mortgage or deed of trust that allows the lender to demand immediate
payment of the balance of the mortgage if the mortgage holder sells the home.

Earnest Money

Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

Encumbrance

Any lien, liability or charge against a property.

Equal Credit Opportunity Act (ECOA)

Is a federal law that requires lenders and other creditors to make Credit equally
available without discrimination based on race, color, religion, national origin,
age, sex, marital status, or receipt of income from public assistance programs.

Equity

The difference between the fair near market value and current indebtedness, also
referred to as the owner’s interest.

Escrow

Refers to a neutral third party who carries out the instructions of both the buyer
and seller to handle all the paperwork of settlement or “closing.” Escrow may
also refer to an account held by the lender into which the homebuyer pays money
for tax or insurance payments.

Fannie Mae

See Federal National Mortgage Association

Federal Home Loan Mortgage Corporation (FHLMC)

Also called Freddie Mac, is a quasi-government agency that purchases conventional
mortgages from insured depository institutions and HUD-approved mortgage bankers.

Federal Housing Administration (FHA)

A division of the Department of Housing and Urban Development. Its main activity
is the insuring of residential mortgage loans made by private lenders. FHA also
sets standards for underwriting mortgages.

Federal National Mortgage Association (FNMA)

Also known as Fannie Mae. A taxpaying corporation created by Congress that purchases
and sells conventional residential mortgages as well as those insured by FHA or
guaranteed by VA. This institution, which provides funds for one in seven mortgages,
makes mortgage money more available and more affordable.

Fee Simple

The absolute total interest in real property. An affiliate of the Federal Home
Loan Bank which creates a secondary money market in conventional residential loans
and in FHA and VA loans by purchasing mortgage loans from members of the Federal
Reserve System and the Federal Home Loan Bank Systems.

Fiduciary Relationship

A relationship of trust and confidence between principal and agent; lawyer and
client; doctor and patient; etc.

Fixed-Rate Mortgage

A mortgage on which the interest rate is set for the term of the loan.

Foreclosure

A legal procedure in which property securing debt is sold by the lender to pay
a defaulting borrower’s debt.

Freddie Mac

See Federal Home Loan Mortgage Corporation.

Graduated Payment Mortgage (GPM)

A type of flexible-payment mortgage where the payments increase for a specified
period of time and then level off. This type of mortgage has negative amortization
built into it.

Gross Monthly Income

The total amount the borrower earns per month, before any expenses are deducted.

Home Owners Insurance

A form of insurance in which the insurance company protects the insured from specified
losses, such as fire, windstorm, and the like.

Homestead Deed

A declaration filed in the land records that an individual is asserting his homestead
exemption. That exemption allows one to protect some assets (amount varies by
state) against the claims of creditors.

Housing Expenses-to-income Ratio

The ratio, expressed as a percentage, which results when a borrower’s housing
expenses are divided by his/her net effective income (VA loans) or gross monthly
income (conventional loans).

Impounds

That portion of a borrower’s monthly payments held by the lender or servicer to
pay for taxes, hazard insurance, mortgage insurance, lease payments, and other
items as they become due. Also known as reserves.

Index

A published interest rate against which lenders measure the difference between
the current interest rate on an adjustable rate mortgage and that earned by other
investments (such as one, three, and five year US Treasury Security yields, the
monthly average interest rate on loans closed by savings and loan institutions,
and the monthly average Cost-of-Funds Index), which is then used to adjust the
interest rate on an adjustable mortgage up or down.

Interim Financing

A construction loan made during completion of a building or a project. A permanent
loan usually replaces this loan after completion.

Investor

Money source for a lender.

Joint Tenants

Two or more persons own a property. Joint tenants with the common law right of
survivorship means the survivor inherits the property automatically.

Judgment Lien

A judgment is a lien against all real property owned by the judgment debtor in
the county where the judgment is docketed (recorded).

Jumbo Loan

A loan which is larger than the limits set by the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation. These loans usually carry a slightly
higher interest rate.

Lien

A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

Life Cap

With regard to an adjustable rate mortgage, a ceiling the note rate cannot exceed over the life of the loan.

Lis Pendens

Recorded document showing a pending litigation filed in the court. These show
up on the preliminary title report and must be dealt with when transferring ownership or refinancing.

Loan Application

The loan application is the source of information on which the lender bases a
decision to make the loan; defines the term of the loan, gives the name(s) of
the borrowers(s), place of employment, salary, bank accounts and credit references,
and describes the real estate that is to be mortgaged. It also stipulates the
amount of the loan being applied for and the repayment terms.

Loan Originator

An individual in the business of assisting in arranging funding or negotiating
contracts for a client but who does not loan the money himself. You, the consumer,
typically pay no additional costs for this service.

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.

Margin

The amount a lender adds to the index on an adjustable rate mortgage to establish
the adjusted interest rate.

Market Value

The highest price that a buyer would pay and the lowest price a seller would accept
on a property. Market value may be different from the price a property could actually
be sold for at a given time.

Mortgage

A voluntary lien filed against property to secure a debt, usually a loan. To foreclose,
the lender must often institute a court action and the borrower may have the right
to reclaim the property after foreclosure. Compare, Deed of Trust.

Mortgage Insurance

Money paid to insure the mortgage when the down payment is less than 20 percent.
See Private Mortgage Insurance or PMI Mortgage Insurance.

Mortgagee

The lender.

Mortgagor

The borrower of homeowner.

Negative Amortization

Occurs when your monthly payments are not large enough to pay all the interest
due on the loan. This unpaid interest is added to the unpaid balance of the loan.
The danger of negative amortization is that the homebuyer ends up owing more than
the original amount of the loan.

Note

A written promise to pay a certain sum of money at a certain time. A negotiable
note starts “Pay to the order of” and is transferable by endorsement similar to a check.

Notary Public

One authorized by law to acknowledge and certify documents and signatures.

Origination Fee

The fee charged by a lender to prepare loan documents, make credit checks, inspect
and sometimes appraise a property, usually computed as a percentage of face value
of the loan.

PITI

Principal, interest, taxes, and insurance. Also called monthly housing expenses.

Points (loan discount points)

Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent
of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).

Power of Attorney

A legal document authorizing one person to act on behalf of another.

Prepaids

Expenses necessary to create an escrow account or to adjust the seller’s existing
escrow account. Can include taxes, hazard insurance, private mortgage insurance
and special assessments.

Prepayment Penalty

Money charged for an early repayment of debt. Prepayment penalties are allowed
in some form (but not necessarily imposed) in 36 states and the District of Columbia.

Principal

The amount of debt, not counting interest, left on a loan.

Private Mortgage Insurance (PMI)

In the event that you do not have a 20 percent (set to adjust periodically) down
payment, lenders will allow a smaller down payment – as low as 5 percent in some
cases. With the smaller down payment loans, however, borrowers are usually required
to carry private mortgage insurance. Private mortgage insurance will require an
initial premium payment, and additional monthly fees of from .3 to .5 percent,
depending on your loan’s structure.

Promissory Note

A written unsecured note promising to pay a specified amount of money on demand,
transferable to a third party.

Purchase Money Mortgage (PMM)

Seller financing as a part of the purchase price.

Quitclaim Deed

A deed releasing whatever interest you may hold in a property but making no warranty whatsoever.

RealtorĀ®

A member of National Association of Realtors.

Recision

The cancellation of a contract. With respect to mortgage refinancing, the law
that gives the homeowner three days to cancel a contract in some cases once it
is signed if the transaction uses equity in the home as security.

Recording Fees

Money paid to the lender for recording a home sale with the local authorities,
thereby making it part of public records.

Real Estate Settlement Procedures Act (RESPA)

RESPA is a federal law that allows consumers to review information on known or
estimated settlement costs once before application and once prior to or at settlement.
The law requires lenders to furnish information after application only.

Secondary Market

A market for the purpose of purchase and sale of existing mortgages usually at
discounted prices to provide greater liquidity to the mortgagee/lender.

Servicing

All the steps and operations a lender performs to keep a loan in good standing,
such as collection of payments, payment of taxes, insurance, property inspections
and the like.

Settlement

See Closing.

Settlement Costs

See Closing Costs.

Tenants in Common

Two or more persons own the property with no right of survivorship so, if one
dies, his/her interest passes on to his/her heirs, not necessarily to the co-owner.
One may not sue the other to partition the property. A creditor of one may not
claim the property or the proceeds of sale.

Title

A document that gives evidence of an individual’s ownership of property.

Title Insurance

A policy, usually issued by a Title Insurance company, which insures a homebuyer
against errors in the title search. The cost of the policy is usually a function
of the value of the property, and is often paid by the purchaser and/or seller.

Title Search

An examination of municipal records to determine the legal ownership of property.
Usually is performed by a title company.

Trust

A right to or in property held for the benefit of another. A trust may be written
or implied. An implied trust is called a Constructive Trust.

Truth-in-Lending

A federal law requiring disclosure of the Annual Percentage Rate to homebuyers
shortly after they apply for the loan.

Two-step Mortgage

A mortgage in which the borrower receives a below-market interest rate for a specified
number of years (most often seven or ten years), and then receives a new interest
rate adjusted (within certain limits) to market conditions at that time.

Underwriting

The decision whether to make a loan to a potential homebuyer based on credit,
employment, assets, and other factors and the matching of this risk to an appropriate
rate and term or loan amount.

VA Loan

A long-term, low-or no-down payment loan guaranteed by the Department of Veterans
Affairs. Restricted to individuals qualified by military service or other entitlements.

Variable Rate Mortgage (VRM)

See Adjustable Rate Mortgage.

Verification of Deposit (VOD)

A document signed by the borrower’s financial institution verifying the status
and balance of his/her financial accounts.

Verification of Employment

A document signed by the borrower’s employer verifying the status and balance
of his/her financial accounts.

Zoning

Regulation of private land use and development by local government.