Glossary
of Terms
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Hazard
Insurance
A form of insurance that protects the
insured property against physical damage
such as fires, tornadoes, earthquakes,
etc. Mortgage lenders often require a
borrower to maintain an amount of hazard
insurance on the property that is equal
to the amount of the mortgage loan.
Home
Equity Line of Credit (HELOC)
A real estate loan, usually in a subordinate
position, that allows a borrower to borrow
against equity in real estate owned with
specific limitations. This is an open
end loan that permits the borrower to
repay and re-borrow the funds available.
Home
Equity Loan
A mortgage on the borrower's principal
residence, usually for the purpose of
making home improvements or consolidating
debt. This is a closed-end loan repayable
in accordance with a fixed schedule.
Home
Owners Association (HOA)
A nonprofit association, whose directors
and officers are elected by the unit owners
of a condominium or PUD project; primary
responsibilities are to manage the common
areas, expenses and services of the project.
Homeowners
Insurance
A form of insurance that protects the
insured property against loss from theft,
liability and most common disasters. Also
referred to as hazard
insurance.
Housing
and Urban Development (HUD)
The U.S. government agency that administers
FHA, GNMA and other housing programs.
Housing
Debt-to-Income Ratio
The sum of all monthly housing mortgage
expenses such as principal, interest,
taxes and insurance (PITI), homeowners
dues, private mortgage insurance and any
special assessments as a percentage of
gross qualifying income.
HUD
See Housing
and Urban Development
HUD-1
Uniform Settlement Statement
A standard form, which itemizes the closing
costs, associated with purchasing a home
or refinancing a loan.
Impound
Account
An account held by the lender to which
the borrower pays monthly installments,
collected as part of the monthly mortgage
payment, for annual expenses such as taxes
and insurance. The lender disburses impound
account funds on behalf of the borrower
when they become due. (Also known as Escrow
Account.)
Index
A published interest rate compiled from
other indicators such as U.S. Treasury
bills or the monthly average interest
rate on loans closed by savings and loan
organizations. Mortgage lenders use the
index figure to establish rates on adjustable
rate mortgages (ARMs).
Initial
Rate
The rate charged during the first interval
of an ARM loan.
Individual
Retirement Account (IRA)
An account that can be established by
individuals who meet IRS qualifications
to build retirement funds, deferring the
tax liability until funds are withdrawn.
Under permitted circumstances, they may
deduct their annual contributions from
their taxable income.
Installment
Debt
Borrowed money that is repaid in successive
payments, usually at regular intervals.
Interest
Charge paid for borrowing money, calculated
as a percentage of the remaining balance
of the amount borrowed.
Interest
Rate
The simple interest rate, stated as a
percentage, charged by a lender on the
principal amount of borrowed money. See
also: Annual Percentage Rate
Interest
Rate Cap
Consumer safeguards that limit the amount
the interest rate on an ARM loan can change
in an adjustment interval and/or over
the life of the loan. For example, if
your per-period cap is 1% and your current
rate is 7%, then your newly adjusted rate
must fall between 6% and 8% regardless
of actual changes in the index.
Interest
Only Loan
A loan with periodic payments of interest
only. The principal amount is due in lump
sum(s) upon maturity or intervals.
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Joint
Liability
Liability shared among two or more people,
each of whom is liable for the full debt.
Joint
Tenancy
A form of ownership of property giving
each person equal interest in the property,
including rights of survivorship.
Jumbo
Loan
A loan that is for a larger dollar amount
than the limits set by the Federal National
Mortgage Association (FNMA) or Federal
Home Loan Mortgage Corporation (FHLMC)
guidelines.
Junior
Mortgage
A mortgage subordinate to the claim of
a prior lien or mortgage. In the case
of a foreclosure, a senior mortgage or
lien will be paid first.
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Keogh
A retirement plan for self-employed individuals.
Similar to an IRA, contributions may be
deductible and the tax liability is deferred
until the funds are withdrawn; sometimes
known as HR 10 plans.
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Late
Charge
Penalty paid by a borrower when a payment
is made after the due date.
Lease
Purchase Agreement
An agreement whereby the buyer signs a
property lease with the intention of purchasing
it at a specified price on specified date
thereafter.
Lender
The bank, mortgage company, or mortgage
broker offering the loan.
LIBOR
(London Interbank Offered Rate)
The interest rate charged among banks
in the foreign market for short term loans
to one another. A common index for ARM
loans.
Lien
A claim against a property for the payment
of a debt. A mortgage is a lien; other
types of liens a property might have include
a tax lien for overdue taxes, or a court
judgment lien, or a mechanics lien for
unpaid debt to a contractor.
Lien
Search
A search on the seller and the co-op corporation
to determine if there are any liens, loans
or judgments which may have an effect
on your ownership of the unit.
Lifetime
cap
A provision of an ARM that limits the
highest rate that can occur over the life
of the loan.
Liquidity
Cash or cash equivalents that a borrower
has accumulated or the ability to readily
convert other assets or investments into
cash; a.k.a. cash reserves.
Loan
Application
An initial statement of personal and financial
information required to apply for a loan.
Loan
Application Fee
Fee charged by a lender to cover the initial
costs of processing a loan application.
The fee may include the cost of obtaining
a property appraisal, a credit report,
and a lock-in fee or other closing costs
incurred during the process, or the fee
may be in addition to these charges.
Loan
Origination Fee
Fee charged by a lender to cover administrative
costs of processing a loan.
Loan-to-Value
Ratio (LTV)
The relationship expressed as a percentage,
between the amount of the proposed loan
and a property's appraised value or purchase
price. For example, a $75,000 loan on
a property appraised at $100,000 is a
75% loan-to-value.
Lock
or Lock-In
A lender's guarantee of an interest rate
for a set period of time. The time period
is usually that between loan application
approval and loan closing. The lock-in
protects you against rate increases during
that time. See: Rate
Lock Policy
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Margin
The amount a lender adds to the index
of an adjustable rate mortgage to establish
an interest rate. For example, a margin
of 1.50 added to a 7 percent index establishes
an interest rate of 8.50 percent. The
margin remains the same throughout the
loan.
Marketable
Title
A title that is free and clear of objectionable
liens, clouds, or other title defects.
A title which enables an owner to sell
his property freely to others and which
others will accept without objection.
Market
Value
A price or price range generally acknowledged
to be the accepted amount that a buyer
would be willing to pay and a seller would
be willing to accept for a property at
a given time. Properties often sell above
or below market value due to special circumstances
in the market or on the part of a buyer
or seller.
Mortgage
A legal instrument in which a lien on
real property is granted as security for
the repayment of a loan. In some states,
a deed of trust is used rather than a
mortgage.
Mortgage
Banker
An individual or company that originates
and/or services mortgage loans.
Mortgage
Broker
An intermediary between a borrower and
a lender. A broker's expertise is to help
borrowers find financing that they might
not otherwise find themselves.
Mortgage
Disability Insurance
A disability insurance policy which will
pay the monthly mortgage payment in the
event of a covered disability of an insured
borrower for a specified period of time.
Mortgage
Commitment
A written notice from the bank or other
lending institution saying it will advance
mortgage funds in a specified amount to
enable a buyer to purchase a property.
Mortgage
Insurance
Insurance to protect the lender in case
you default on your loan. With conventional
loans, mortgage insurance is generally
not required if you make a down payment
of at least 20% of the home's purchase
price. (Note, however, that FHA and VA
loans have different insurance guidelines.)
Mortgage
Loan
A loan for which real estate serves as
collateral to provide for repayment in
case of default.
Mortgage
Note
Legal document obligating a borrower to
repay a loan at a stated interest rate
during a specified period of time. The
agreement is secured by a mortgage or
deed of trust or other security instrument.
Mortgage
(Open-End)
A mortgage with a provision that permits
borrowing additional money in the future
without refinancing the loan or paying
additional financing charges. Open-end
provisions often limit such borrowing
to no more than would raise the balance
to the original loan figure.
Mortgagee
The lender.
Mortgagor
The borrower.
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Negative
Amortization
A situation in which a borrower is paying
less interest than what is actually being
charged for a mortgage loan. The unpaid
interest is added to the loan's principal.
The borrower may end up owing more than
the original amount of the mortgage.
Net
Rental Income
The remaining income generated by an investment
property after deducting all mortgage
related expenses, including HOA fees (if
applicable) and operating expenses from
the gross rental income.
Net
Worth
The amount by which an individual's assets
(or assets of a business) exceed total
liabilities.
Non-assumption
Clause
In a mortgage contract, a statement that
disallows a new buyer to assume a mortgage
payment without the approval of the lender.
Non-conforming
Loan
A loan that does not conform to Federal
National Mortgage Association (FNMA) or
Federal Home Loan Mortgage Corporation
(FHLMC) guidelines either because the
loan amount is too high or FNMA/FHLMC
underwriting or other criteria are not
met. Jumbo loans are non-conforming.
Non-permanent
Resident Alien
A non-U.S. citizen who resides in the
United States on a temporary basis on
a government-issued work visa.
Non-resident
Alien
A non-U.S. citizen who resides outside
of the United States.
Note
Legal document obligating a borrower to
repay a loan at a stated interest rate
during a specified period of time. The
agreement is secured by a mortgage or
deed of trust or other security instrument.
Notice
of Default
Written notice to a borrower that default
has occurred and that legal action may
be taken.
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Open-End
Mortgage
See: Mortgage
(Open-End)
Origination
Fee
The amount charged by a lender to originate
and close a mortgage loan. Origination
fees are usually expressed in points.
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Payment
Cap
Consumer safeguards that limit the amount
monthly payments on an adjustable-rate
mortgage may change. Since they do not
limit the amount of interest the lender
is earning, they may cause negative amortization.
Payment
to Income (P/I) Ratio
The ratio of the borrower's total housing
payment (principal, interest, taxes, insurance,
HOA fees, special assessments, and subordinate
financing) that is used to measure the
borrower's capacity to manage the housing
expense; also known as "housing debt-to-income
ratio."
Per
Diem Interest
Interest calculated per day. (Depending
on the day of the month on which closing
takes place, you will have to pay interest
from the date of closing to the end of
the month. Your first mortgage payment
will probably be due the first day of
the following month.)
Permanent
Buy-Down
A permanent reduction to the interest
rate for the life of the loan. The funds
for the buy-down may come from the borrower,
lender, seller or a third party.
PITI
Abbreviation for Principal, Interest,
Taxes and Insurance, the components of
a monthly mortgage payment.
Planned
Unit Development (PUD)
A real estate project in which each unit
owner has title to a residential lot and
building and a non-exclusive easement
on the common areas of the project.
Points
Charges levied by the lender based on
the loan amount. Each point is one percent
of the loan amount; for example, two points
of a $100,000 mortgage is $2,000. Discount
points are used to buy down the interest
rate. Points can also include a loan origination
fee, which is usually one point.
Power
of Attorney
Legal document authorizing one person
to act on behalf of another.
Prepaid
Interest
Interest that is paid in advance of when
it is due. Typically charged to a borrower
at closing to cover interest on the loan
between the closing date and the first
payment date.
Prepaid
Items
Items that generally must be paid for
at the time of closing and are generally
recurring charges. Prepaid items may include
the following: first year premiums for
hazard, flood and mortgage insurance,
as applicable to the transaction; prorated
interest; any special assessments which
must be prepaid (i.e., water/sewer connection,
etc.); escrow accounts for any of the
above.
Prepayment
The borrower's ability to make full or
partial payments on a loan's principal
before they are due. Paying a mortgage
in full or in part before it is due may
incur a penalty if so specified in the
mortgage's prepayment clause.
Pre-qualification
Tentative establishment of a borrower's
qualification for a mortgage loan amount
of a specific amount or ability to make
monthly payments at a certain level, based
solely on debt-to-income ratios. Pre-qualification
is an estimate only and is subject to
debt and income verification, credit history,
property appraisal and other factors.
Prime
Rate
The interest rate designated by a lender
as its prime rate and which serves as
a basis for the interest rate charged
to certain customers.
Principal
The amount of the mortgage loan, not counting
interest.
Private
Mortgage Insurance (PMI)
Insurance to protect the lender in case
you default on your loan. With conventional
loans, mortgage insurance is generally
not required if you make a down payment
of at least 20% of the home's purchase
price. (Note, however, that FHA and VA
loans have different insurance guidelines.)
Prorate
To proportionally divide amounts owed
by the buyer and the seller at closing.
Purchase
Agreement
Contract signed by buyer and seller stating
the terms and conditions under which a
property will be sold.
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Qualification
As determined by a lender, the ability
of the borrower to repay a mortgage loan
based on the borrower's credit history,
employment history, assets, debts, income
and other factors.
Qualifying
Ratios
The percentage of payment to income (P/I)
and debt-to-income (D/I) that is used
to measure the borrower's capacity to
repay the mortgage debt.
Quitclaim
Deed
A deed that 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.
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Real
Estate Settlement Procedures Act (RESPA)
A federal law that requires lenders to
provide mortgage loan borrowers with information
of known or estimated settlement costs.
Real
Property
Land and any improvements permanently
affixed to it, such as buildings.
Realtor
A real estate agent or broker who is a
member of the National Association of
Realtors.
Rebate
Monies paid from the lender/broker towards
the borrower's non-recurring closing costs
which include appraisals, application
fees, underwriting fees, processing fees,
and title.
Recognition
Agreement
An agreement by the co-op that recognizes
specific rights of lenders who finance
the acquisition of interests in a co-op
project.
Reconveyance
The transfer of property back to the owner
when a mortgage loan is fully repaid.
Recording
The act of entering documents concerning
title to a property into the public records.
Recording
Fee
Money paid to an agent for entering the
sale of a property into the public records.
Refinance
Retirement of an existing debt from the
proceeds of a new loan, using the same
collateral as security.
Restrictive
Covenants
Private restrictions limiting the use
of real property. Restrictive covenants
are created by deed and may "run
with the land," binding all subsequent
purchasers of the land, or may be "personal"
and binding only between the original
seller and buyer. The language of the
covenant, the intent of the parties, and
the law in the State where the land is
situated govern the determination whether
a covenant runs with the land or is personal.
Restrictive covenants that run with the
land are encumbrances and may affect the
value and marketability of title. Restrictive
covenants may limit the density of buildings
per acre, regulate size, style or price
range of buildings to be erected, or prevent
particular businesses from operating or
minority groups from owning or occupying
homes in a given area. (This latter discriminatory
covenant is unconstitutional and has been
declared unenforceable by the US Supreme
Court.)
Rental
Income
Income generated by renting property to
a tenant.
Reverse
Annuity Mortgage (RAM)
A mortgage in which the borrower receives
periodic payments from the lender who
uses the borrower's equity in the home
as security.
Reserves
Sometimes referred to as "cash reserves"
or "post closing reserves";
this is the amount of liquid assets the
borrower has remaining after completion
of the mortgage loan transaction and payment
of any other debt(s) that had to be satisfied
in order for the borrower to qualify for
the loan. See: Liquidity
Resident
Alien
A non-U.S. citizen who is granted most
of the rights of a U.S. citizen, including
permanent residency in the United States.
Resident Alien status is usually evidenced
by a "Green Card."
Residential
Mortgage Credit Report
This report is prepared only at the request
of your mortgage lender. This report utilizes
information from at least two of the three
national credit bureaus and information
provided on your loan application. The
report contains verified and updated credit
history, employment and residence information,
as well as public record information.
Revolving
Debt
A debt that does not have a fixed payment,
although repayment is usually a percentage
of the outstanding balance and made at
regular intervals; most common are credit
cards issued by banks or department stores.
Right
to Rescission
Under the provisions of the Truth-in-Lending
Act, the borrower's right, on certain
kinds of loans, to cancel the loan within
three days of signing a mortgage.
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Sales
Agreement
Contract signed by buyer and seller stating
the terms and conditions under which a
property will be sold.
Second
Mortgage
A loan that is junior to a primary or
first mortgage and often has a higher
interest rate and a shorter term.
Second/Vacation
Home
A second home/vacation home that is occupied
by the borrower for some portion of the
year for his/her exclusive use and enjoyment
but which is suitable for year-round occupancy.
It cannot be subject to a mandatory rental
pool and the borrower does not intend
to use the property for income producing
purposes.
Secondary
Market
A market in which investors like GNMA,
FHLMC, FNMA and private organizations
buy large numbers of mortgages from the
primary lenders and either hold them in
a portfolio or package them for sale to
others. By selling loans in the secondary
market, lenders obtain the funds needed
to make new loans.
Self-employed
Borrower
A borrower whose income is derived from
a business in which he/she has an ownership
interest of 25% or more.
Servicing
The responsibility of collecting monthly
mortgage payments and properly crediting
them to the principal, interest, taxes
and insurance, as well as keeping the
borrower informed of any changes in the
status of the loan.
Settlement
(or Closing)
The settlement or closing is the conclusion
of your real estate transaction. It includes
the delivery of your security instrument,
signing of your legal documents and the
disbursement of the funds necessary to
the sale of your home or loan transaction
(refinance).
Settlement
Costs
Also known as closing costs, these costs
are for services that must be performed
before your loan can be initiated. Examples
include title fees, recording fees, appraisal
fee, credit report fee, pest inspection,
attorney's fees, taxes, and surveying
fees.
Shared
Appreciation Mortgage (SAM)
A loan in which a lender offers a below
market interest rate in exchange for a
portion of the future appreciation of
the property.
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 one's assets. It
creates a right to retain something of
value belonging to another person as compensation
for labor, material, or money expended
on that person's behalf. In some localities
it is called "particular" lien
or "specific" lien. See: Lien
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. In
a special warranty deed the grantor guarantees
to the grantee that he has done nothing
during the time he held title to the property
which has, or which might in the future,
impair the grantee's title.
Subdivision
An area of land that is platted and sub-divided
into individual lots.
Survey
A physical measurement of property done
by a registered professional showing the
boundaries, dimensions and location of
any buildings as well as easements, rights
of way, roads, etc.
Sweat
Equity
Value added to a property in the form
of labor or services of the owner rather
than cash.
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Tax
As applied to real estate, an enforced
charge imposed on persons, property or
income, to be used to support the State.
The governing body in turn utilizes the
funds in the best interest of the general
public.
Tax
Impound
Money paid to and held by a lender for
annual tax payments.
Tax
Lien
Claim against a property for unpaid taxes.
Tax
Sale
Public sale of property by a government
authority as a result of non-payment of
taxes.
Temporary
Buy-downs
A loan on which the interest rate has
been "bought down" for a temporary
period of time at the beginning of the
loan by escrowing funds at the time of
closing, which will be applied to the
total monthly mortgage payment as each
becomes due.
Tenants-in-Common
An undivided interest in property taken
by two or more persons. The interest need
not be equal. Upon death of one or more
persons, there is no right of survivorship.
Term
The period of time between the beginning
loan date on the legal documents and the
date the entire balance of the loan is
due.
Title
A formal document establishing ownership
of property.
Title
Company
A company that insures title to property.
Title
Search
Examination of municipal records to ensure
that the seller is the legal owner of
a property and that there are no liens
or other claims against the property.
Townhouse
An architectural type of construction;
a row house on a small lot that has exterior
limits common to other similar units;
title to the unit and its lot is vested
in the individual owner with a fractional
interest in common areas, if any.
Transfer
Tax
Tax paid when title passes from one owner
to another.
Trustee
A party who is given legal responsibility
to hold property in the best interest
of or "for the benefit of" another.
The trustee is one placed in a position
of responsibility for another, a responsibility
enforceable in a court of law.
Truth-in-Lending
The Truth-in-Lending Act requires lenders
to disclose the cost of credit and other
loan terms to consumers, and also provides
a 3 day right of rescission on refinancing
of owner occupied primary residences.
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UCC-1
Financing Statement required by the lender
when you are financing a co-op. It is
filed in the county in which the co-op
is located.
Underwriter
A professional who approves or denies
a loan to a potential homebuyer based
on the homebuyer's credit history, employment
history, assets, debts, property appraisal
and other factors such as loan guidelines.
Underwriting
In mortgage lending, the process of determining
the risks involved in a particular loan
and establishing suitable terms and conditions
for the loan.
Usury
Interest charged in excess of the legal
rate established by law.
Uniform
Settlement Statement
A standard document prescribed by the
Real Estate Settlement Procedures Act
disclosing all costs paid in connection
with the settlement of a real estate transaction.
Also called a HUD-1.
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Variable
Rate
Interest rate that changes periodically
in relation to an index.
Verification
of Deposit (VOD)
Document signed by the borrower's bank
or other financial institution verifying
the borrower's account balance and history.
Verification
of Employment (VOE)
Document signed by the borrower's employer
verifying the borrower's position and
salary.
Veterans
Administration (VA)
The federal agencies responsible for the
VA loan guarantee program as well as other
services for eligible veterans. In general,
qualified veterans can apply for home
loans with no down payment and a mortgage
insurance premium of 1 percent of the
loan amount.
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Waiver
Voluntary relinquishment or surrender
of some right or privilege.
Walk-Through
An inspection of a property by the prospective
buyer prior to closing on a mortgage.
Warranty
Deed
A document protecting a homebuyer against
any and all claims to the property.
Wraparound
Mortgage
A junior mortgage taken back by the seller
for the amount of the properties purchase
price less the buyer's down payment. The
existing loan is retained and combined
with a new, larger loan and the interest
rate is set somewhere between the old
rate and the current market rate. A typical
wraparound is an interest only loan with
a 5-year balloon or less.
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Yield
The ratio of investment income to the
total amount invested over a given period
of time; also known as "return on
investment" or ROI.
Zoning
The ability of local governments to specify
the use of property in order to control
development within designated areas of
land. For example, some areas of a neighborhood
may be designated only for residential
use and others for commercial use such
as stores, gas stations, etc.
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