Glossary
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Abstract (of Title)
A summation
of the public records relating to the ownership of a particular
parcel of land. Any title inconsistencies must be cleared before
a buyer can purchase a home with a clear, marketable, and insurable
title.
Acceleration
Clause
Allows the lender
to expedite the rate at which the borrower's loan comes due or demand immediate
payment of the entire balance of the loan in the event the borrower defaults.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on an index. Also known as a variable rate mortgage.
Adjustment Interval
On an adjustable
rate mortgage, the time between changes in the interest rate and/or
monthly payment.
Agreement of Sale
Known by various
names, such as contract of sale, purchase agreement, or sales agreement
according to location or jurisdiction. A contract in which a seller
agrees to sell and a buyer agrees to buy, under specific written
terms and executed by both parties.
Amortization
Loan payment
calculated to pay off the debt at the end of a fixed period, including
interest on the outstanding balance.
Annual Percentage
Rate (APR)
The cost of
credit expressed as a yearly rate. The percentage results from an
equation factoring in the total amount financed, the finance charges,
and the term of the loan. Will typically differ from the interest rate. See INTEREST.
Appraisal
Written analysis
of the value of property, prepared by a professional appraiser.
Appraisal
Fee
The amount charged
for estimating the value of a property.
Asset
Property that
one owns, net of any liens against it; a liquid asset used
to repay debt, such as bank accounts, stocks, mutual funds and bonds,
or an automobile.
Assumption
The agreement
between the buyer, seller, and mortgagee where the buyer takes over
the payments on an existing mortgage from the seller.
Balloon (Payment) Mortgage
Usually a short-term fixed rate loan involving smaller payments for a period of time and one large payment for the remaining balance at a specific time.
Binder or Offer to Purchase
A preliminary agreement, secured by the payment of earnest money, between a buyer and seller as an offer to purchase real estate.
Broker
A person who, for a fee or commission, assists in arranging, funding, or negotiating contracts for a client. A mortgage broker does not loan money but arranges financing.
Business Days
Any day in which a business is open to the public for business activities.
Buydown
A fee to subsidize the mortgage by reducing the interest rate or payment during the first few years of the loan. While the payments are initially low, they will increase upon expiration of the subsidy.
Caps (Interest)
A limit to the amount an interest rate may change on an adjustable rate mortgage, either per adjustment or over the life of the loan.
Caps (Payment)
A limit to the amount monthly payments on an adjustable rate mortgage may increase.
Certificate of Title
A statement provided by an abstract company, title company or attorney stating that the title to real estate is held legally by the current owner.
Closing
The concluding meeting between the buyer, seller, and lender where the property and funds legally change hands. Also called settlement.
Closing Costs
Expenses incurred by buyers and sellers when transferring ownership of a property. The closing costs usually are about 2 percent to 6 percent of the mortgage amount.
Closing Day
The day on which the formalities of a real estate sale are finalized. The buyer executes the mortgage, and closing costs are paid. The final closing merely reiterates the original agreement reached in the agreement of sale.
Cloud (on Title)
An outstanding claim which adversely affects the ability to transfer title to property free and clear of any questions about prior ownership.
Collateral
An asset that is used to secure a loan. Generally, this asset will be seized and liquidated if a loan goes into default.
Commission
Money paid to a real estate agent or broker by the seller as compensation for locating a buyer and helping negotiate a sale.
Commitment
A written agreement between a lender and a borrower to loan money at a future date subject to the stated conditions.
Condemnation
A determination by a governmental agency that a particular building is unsafe or unfit for habitability.
Condominium
Individual ownership (title) of a unit and an individual interest in the common areas and facilities which serve the project.
Construction Loan
A short-term interim loan for financing the cost of construction. The lender makes payments to the builder as the work progresses.
Contractor
A person who contracts to construct buildings. Generally, there are contractors for each phase of construction: heating, electrical, plumbing, air conditioning, road building, and others.
Conventional Loan
A mortgage not insured or guaranteed by the federal government.
Cooperative Housing
An apartment building or a group of dwellings owned by a corporation, the stockholders of which are the residents of the dwellings. It is operated for their benefit by their elected board of directors. In a cooperative, the corporation or association owns title to the real estate. A resident purchases stock in the corporation that entitles him or her to occupy a unit in the building or property owned by the cooperative. While the resident does not own his or her unit, the resident has an absolute right to occupy the unit for as long as he owns the stock.
Cosigner
Another person who signs your loan and assumes equal responsibility for its repayment.
Credit Bureau
An agency that keeps consumers' credit records in its database.
Credit History
The record of how a consumer has borrowed and repaid debts.
Credit Ratio
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her income. See HOUSING EXPENSES-TO-INCOME RATIO.
Credit-Related Insurance
Health, life, or accident insurance designed to pay the outstanding balance of debt in the event of a catastrophe.
Credit Scoring System
A statistical system used to profile individuals pursuant to various characteristics relevant to creditworthiness.
Creditor
A person or business to whom money is owed.
Creditworthiness
Ability and willingness to repay debts.
Deed
A formal written instrument which serves as proof that title to real property is vested in an individual, group or entity.
Deed of Trust
In some states, this document is used in lieu of a mortgage to secure the payment of a note.
Default
Failure to repay a loan or otherwise meet the terms of a credit agreement.
Deferred Interest
Delinquency
Failure to make required payments on time, which can lead to default or foreclosure.
Department of Rural Economic and Community Development, formerly the Farmers Home Administration (FmHA)
Provides financing to farmers and other qualified borrowers.
Department of Veterans Affairs (VA)
An independent agency of the federal government that guarantees long-term, low-, or no-down payment mortgages to eligible veterans.
Depreciation
Decline in value of a house due to wear and tear, negative changes in the neighborhood, or any other reason.
Disclosures
Data that must be given to consumers about their financial dealings.
Discount Points
Prepaid interest charged 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).
Documentary Stamps
A state tax, in the forms of stamps, required on deeds and mortgages when real estate title passes from one owner to another.
Down Payment
Money paid to make up the difference between the purchase price and mortgage amount.
Due-on-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the remaining balance if the mortgage or holder sells the home.
Earnest Money
Money given by a buyer to a seller as part of the purchase price to bind a transaction.
Easement Rights
A right-of-way granted to a person or company granting access for a specific reason over the real property of another.
Elderly Applicant
As defined in the Equal Credit Opportunity Act, a person 62 or older.
Encroachment
An improvement that intrudes on another's property.
Encumbrance
A legal right or interest in land that affects a good or clear title and diminishes the land's value.
Equal Credit Opportunity Act (ECOA)
A federal law requiring 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 market value and current indebtedness.
Equity Line of Credit
A form of open-end credit in which the home serves as collateral and against which the creditor may draw funds in the future.
Escrow
Refers to a neutral third party that follows 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
Fannie Mae is a financial services company on the New York Stock Exchange (FNM/NYSE) serving the American home mortgage industry. Fannie Mae offers banks and other mortgage lenders financing, credit guarantees, technology and services so lenders can make more home loans to more consumers.
Federal Home Loan Mortgage Corporation (FHLMC)
Also called Freddie Mac. A quasi-governmental 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 to insure residential mortgage loans made by private lenders.
Federal National Mortgage Association (FNMA)
A tax-paying 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 affordable. Also called Fannie Mae.
FHA Loan
A loan insured by the Federal Housing Administration.
FHA Mortgage Insurance
Protects the lender against loss in the event of consumer default.
Finance Charge
The total dollar amount that credit will cost the borrower.
Fixed Rate Mortgage
A mortgage on which the interest rate is set (fixed) for the term of the loan.
Foreclosure
A legal process by which a property securing a mortgage is seized by the lender after a borrower defaults.
Freddie Mac
General Warranty Deed
A deed which conveys both the grantor's interests in and title to the property to the grantee, but also warrants that if the title is defective or has a cloud on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic's liens against it), the grantee may hold the grantor liable.
Ginnie Mae
See GOVERNMENT NATIONAL MORTGAGE ASSOCIATION.
Government National Mortgage Association (GNMA)
Also known as Ginnie Mae. Provides sources of funds for residential mortgages insured or guaranteed by FHA or VA.
Grantee
The party to the transaction who is the buyer or recipient.
Grantor
The party to the transaction who is the seller or giver.
Gross Monthly Income
The total amount the borrower earns per month.
Guarantee
A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a binding contract.
Hazard Insurance (Homeowner's Insurance)
Insures against loss from catastrophic events. As each policy is different, it is important to review which events are involved.
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his or her income.
HUD
U.S. Department of Housing and Urban Development.
Impound
That portion of a borrower's monthly payment that is held by the lender to pay taxes, hazard insurance, mortgage insurance, and other items as they become due.
Index
A published interest rate which is used to adjust the interest rate for an ARM.
Interest
The fee charged for borrowing money.
Investor
Source of money for a lender.
Joint Account
A credit account held by two or more people so that they can use the account and assume legal responsibility to repay.
Jumbo Loan
A loan that is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Since jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Late Payment
A payment made later than agreed upon in a credit contract and on which additional charges may be imposed. (Also known as late fees.)
Lessee
A person who executes a lease to get temporary use of a property.
Lessor
An entity that provides temporary use of a property typically in return for periodic payment.
Liability on an Account
Legal responsibility to repay debt.
Lien
A legal claim upon a piece of property that must be satisfied in order to transfer title.
Loan-to-Value Ratio
The relationship between the mortgage amount and the sale price or appraised value of a property, expressed as a percentage.
Lock Term
A lender's guarantee of an interest rate for a set period of time.
Margin
The amount added to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Market Value
The highest price that a willing buyer would pay and the lowest price a willing seller would accept for a property.
Marketable Title
A title that is free and clear of liens, clouds, or other title defects.
Mortgage
A lien or claim against real property given by the buyer to the lender as security for money borrowed.
Mortgage Commitment
A written notice from the bank or other lending institution stating it will advance mortgage funds in a specified amount, under specific terms, which will enable a buyer to purchase a house.
Mortgage Insurance
A contract that insures the lender against loss caused by a mortgagor's default. See PRIVATE MORTGAGE INSURANCE or FHA MORTGAGE INSURANCE.
Mortgage Insurance Premium
The payment made by a borrower to HUD to help defray the cost of the FHA mortgage insurance program.
Mortgage Note
A legal document that obligates a borrower to repay a loan.
Mortgage (Open-Ended)
A mortgage with a provision that allows borrowing additional money in the future without refinancing the loan or paying additional financing charges.
Mortgagee
The lender. Also known as the granter of Credit.
Mortgagor
The borrower or homeowner. Also known as the receiver of credit.
Negative Amortization
Occurs when the borrower's 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.
Net Effective Income
The borrower's gross income less federal income tax.
Non-Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.
Open-End Credit
A line of credit that may be used continuously; includes credit cards, overdraft credit accounts, and home equity lines.
Open-End Lease
A lease that may involve a balloon payment based on the value of the property when it is surrendered.
Origination Fee
A fee charged by a lender for processing a loan application.
PITI
Principal, interest, taxes, and insurance. Also known as monthly housing expense.
Plat
A map or chart of a lot, subdivision, or community drafted by a surveyor showing boundary lines, buildings, improvements on the land, and easements.
Points
See DISCOUNT POINTS.
Power of Attorney
A legal document authorizing a person to act on behalf of someone else.
Prepaids
Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Includes taxes, hazard insurance, private mortgage insurance, and special assessments, as applicable.
Prepayment
A privilege in a mortgage allowing the borrower to make payments in advance of their actual due date.
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)
Protects lenders against loss if a borrower defaults. Most lenders generally require mortgage insurance with less than a 20% down payment.
Quitclaim Deed
A deed that transfers whatever interest the maker of the deed has 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 uncertain. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has.
Rate
See INTEREST.
Real Estate Broker
A licensed person who negotiates and transacts the sale of real estate on behalf of the property owner.
Real Estate Settlement Procedures Act (RESPA)
A federal law that governs certain aspects of a real estate transaction.
REALTOR®
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of REALTORS®.
Recording Fees
Fee paid to the recorder of deeds to record the title transfer, the mortgage, and its assignment to a third party, if appropriate.
Refinancing
The process of the same mortgagor paying off one loan with the proceeds from another mortgage, in some cases taking cash out.
Rescission
With respect to mortgage refinancing, a law giving the homeowner three business days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.
Restrictive Covenants
Restrictions limiting the use of real property.
Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security.
Security
Property pledged to the creditor in the event of a default on a loan; see COLLATERAL.
Security Interest
The creditor's right to seize property or a portion of property offered as security.
Servicing
All the steps and operations lenders perform to maintain a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections, etc.
Settlement
See CLOSING.
Settlement Costs
See CLOSING COSTS.
Special Assessments
A special tax imposed on property, individual lots or all property in the immediate area, for road construction, sidewalks, sewers, streetlights, etc.
Special Lien
A lien that binds a specified piece of property, unlike a general lien, which is levied against all of one's assets.
Special Warranty Deed
A deed in which the grantor conveys title to the grantee and agrees to protect the grantee against title defects or claims asserted by the grantor and those persons whose right to assert a claim against the title arose during the period the grantor held title to the property.
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.
Tax
As applied to real estate, an enforced charge imposed on persons, property, or income, to be used to support the municipality.
Term
The period of time between the date the loan obligation is incurred and the date the entire balance of the loan is due in full.
Term Mortgage
See BALLOON (PAYMENT) MORTGAGE.
Title
A document that gives proof of an individual's ownership of property.
Title Insurance
A policy which insures a mortgagor or home buyer against errors in the title search.
Title Search
An examination of municipal records to determine the legal ownership of property, as is performed by a title company.
Trustee
A party who is given legal responsibility to hold property in the best interest of or for the benefit of another.
Truth-in-Lending
A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for a loan.
Two-Step Mortgage
A mortgage program in which the borrower receives a below-market interest rate for a specified number of years (most often 7 or 10 years), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan, due within 30 days' notice at the end of 7 or 10 years.
Underwriting
The decision whether to make a loan to a potential home buyer based on risk factors such as credit, employment, assets, collateral, and the matching of this risk to an appropriate rate, term, or loan amount.
VA Loan
A low- or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee
A premium of up to 2 percent (depending on the size of the down payment) paid pursuant to a VA-backed loan.
Variable Rate Mortgage (VRM)
Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his or her financial accounts.
Verification of Employment
A document signed by the borrower's employer verifying his or her position, salary, and other data.
Zoning Ordinances
The acts of an authorized local government establishing building codes and setting forth regulations for property land usage.
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