An employer-sponsored
investment plan that allows individuals to set aside tax-deferred
income for retirement or emergency purposes. 401(k) plans are provided
by employers that are private corporations. 403(b) plans are provided
by employers that are not for profit organizations.
401(k)/403(b) loan
Some
administrators of 401(k)/403(b) plans allow for loans against the
monies you have accumulated in these plans. Loans against 401K plans
are an acceptable source of down payment for most types of loans.
- A -
Abstract (of Title)
A summary of the
public records relating to the title to a particular piece of land. If
there are any title defects they must be cleared before a buyer can
purchase clear, marketable, and insurable title.
Acceleration Clause
A acceleration
clause is a clause in which your mortgage which allows the lender to
demand payment of the outstanding loan balance for various reasons. The
most common reasons for accelerating a loan are if the borrower
defaults on the loan or transfers title to another individual without
informing the lender.
Accessed Value
Accessed value is the valuation placed on property by a public tax assessor for purposes of taxation.
Adjustable-Rate Mortgage (ARM)
An
adjustable rate mortgage is a mortgage in which the interest changes
periodically, according to corresponding fluctuations in an index. All
ARMs are tied to indexes.
Adjustment Interval
On an adjustable
rate mortgage, the time between changes in the interest rate and/or
monthly payment, usually one, three or five years.
Affiliate
An entity related to a
Seller that is subject to common operating control and that is operated
as part of the same system or enterprise. The Seller typically owns
less than a majority of the voting stock or the Seller and the entity
are subsidiaries of a third party.
Affordable Seconds
Subsidized
secondary financing or other financial assistance provided under an
established, documented secondary financing or financial assistance
program that has formal procedures in place to provide applicant
qualification, loan processing, and loan program administration on an
ongoing basis.
Agreement of Sale
Known by various
names, such as contract of purchase, 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 terms
spelled out in writing and signed by both parties.
Amortization
The loan payment
consists of a portion which will be applied to pay the accruing
interest on a loan, with the remainder being applied to the principal.
Over time, the interest portion decreases as the loan balance
decreases, and the amount applied to principal increases so that the
loan is paid off (amortized) in the specified time.
Amortization Schedule
An
amortization schedule is a table which shows how much of each payment
will be applied toward principal and how much toward interest over the
life of the loan. It also shows the gradual decrease of the loan
balance until it reaches zero.
Annual Percentage Rate (APR)
This is
not the note rate on your loan. It is a value created according to a
government formula intended to reflect the true annual cost of
borrowing, expressed as a percentage. It works sort of like this, but
not exactly, so only use this as a guideline: deduct the closing costs
from your loan amount, then using your actual loan payment, calculate
what the interest rate would be on this amount instead of your actual
loan amount. You will come up with a number close to the APR. Because
you are using the same payment on a smaller amount, the APR is always
higher than the actual not rate on your loan.
Application
The form used to apply for a mortgage loan, containing information about a borrower.s income, savings, assets, debts, and more.
Appraisal
An appraisal is a written
justification of the price paid for a property, primarily based on an
analysis of comparable sales of similar homes nearby.
Appraised Value
Appraised value is
an opinion of a property's fair market value, based on an appraiser's
knowledge, experience, and analysis of the property. Since an appraisal
is based primarily on comparable sales, and the most recent sale is the
one on the property in question, the appraisal usually comes out at the
purchase price.
Appraiser
An appraiser is an
individual qualified by education, training, and experience to estimate
the value of real property and personal property. Although some
appraisers work directly for mortgage lenders, most are independent.
Appreciation
Appreciation is the increase in the value of a property due to changes in market conditions, inflation, or other causes.
Assessment
The placing of a value on property for the purpose of taxation.
Assessment Report
Report that
appraisers use to record property values, marketability analyses and
any pertinent comments regarding the subject property. Assessment
reports are classified as appraisal reports or inspection reports.
Assessor
A public official who establishes the value of a property for taxation purposes.
Asset
Items of value owned by an
individual. Assets that can be quickly converted into cash are
considered "liquid assets." These include bank accounts, stocks, bonds,
mutual funds, and so on. Other assets include real estate, personal
property, and debts owed to an individual by others.
Assignment
When ownership of your mortgage is transferred from one company or individual to another, it is called an assignment.
Assumable Mortgage
A mortgage that
can be assumed by the buyer when a home is sold. Usually, the borrower
must "qualify" in order to assume the loan.
Assumption
The term applied when a buyer assumes the seller.s mortgage.
- B -
Balloon Mortgage
A mortgage loan
that requires the remaining principal balance be paid at a specific
point in time. For example, a loan may be amortized as if it would be
paid over a thirty year period, but requires that at the end of the
tenth year the entire remaining balance must be paid.
Balloon Payment
The final lump sum payment that is due at the termination of a balloon mortgage.
Bank Draft
A payment method where
your loan payment is automatically deducted from your checking or
savings account, so you don't have to mail in your payment each month.
Bankruptcy
By filing in federal
bankruptcy court, an individual or individuals can restructure or
relieve themselves of debts and liabilities. Bankruptcies are of
various types, but the most common for an individual seem to be a
"Chapter 7 No Asset" bankruptcy, which relieves the borrower of most
types of debts. A borrower cannot usually qualify for an "A" paper loan
for a period of two years after the bankruptcy has been discharged and
requires the re-establishment of an ability to repay debt.
Best Faith Estimate
An estimate of the total costs for securing a real estate loan, that is given to borrowers prior to closing.
Bi-Weekly Mortgage
A mortgage in
which you make payments every two weeks instead of once a month. The
basic result is that instead of making twelve monthly payments during
the year, you make thirteen. The extra payment reduces the principal,
substantially reducing the time it takes to pay off a thirty year
mortgage. Note: there are independent companies that encourage you to
set up bi-weekly payment schedules with them on your thirty year
mortgage. They charge a set-up fee and a transfer fee for every
payment. Your funds are deposited into a trust account from which your
monthly payment is then made, and the excess funds then remain in the
trust account until enough has accrued to make the additional payment
which will then be paid to reduce your principle. You could save money
by doing the same thing yourself, plus you have to have faith that once
you transfer money to them that they will actually transfer your funds
to your lender.
Bill of Sale
A written document that
transfers title to personal property. For example, when selling an
automobile to acquire funds, which will be used as a source of down
payment or for closing costs, the lender will usually require the bill
of sale (in addition to other items) to help document this source of
funds.
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. A binder
secures the right to purchase real estate upon agreed terms for a
limited period of time. If the buyer changes his mind or is unable to
purchase, the earnest money is forfeited unless the binder expressly
provides that it is to be refunded.
Bond Market
Usually refers to the
daily buying and selling of thirty year treasury bonds. Lenders follow
this market intensely because as the yields of bonds go up and down,
fixed rate mortgages do approximately the same thing. The same factors
that affect the Treasury Bond market also affect mortgage rates at the
same time. That is why rates change daily, and in a volatile market can
and do change during the day as well.
Bridge Loan
Not used much anymore,
bridge loans are obtained by those who have not yet sold their previous
property, but must close on a purchase property. The bridge loan
becomes the source of their funds for the down payment. One reason for
their fall from favor is that there are more and more second mortgage
lenders now that will lend at a high loan to value. In addition,
sellers often prefer to accept offers from buyers who have already sold
their property.
Broker
Broker has several meanings
in different situations. Most Realtors are "agents" who work under a
"broker." Some agents are brokers as well, either working for
themselves or under another broker. In the mortgage industry, a broker
usually refers to a company or individual that does not lend the money
for the loans themselves, but broker loans to larger lenders or
investors. (See the Home Loan Library that discusses the different
types of lenders). As a normal definition, a broker is anyone who acts
as an agent, bringing two parties together for any type of transaction
and earns a fee for doing so.
Building Line or Setback
Distances
from the ends and/or sides of the lot beyond which construction may not
extend. The building line may be set by a filed plat of subdivision, by
restrictive covenants in deeds or leases, by building codes, or by
zoning ordinances.
Buydown
Usually refers to a fixed
rate mortgage where the interest rate is "bought down" for a temporary
period, usually one to three years. After that time and for the
remainder of the term, the borrower.s payment is calculated at the note
rate. In order to buy down the initial rate for the temporary payment,
a lump sum is paid and held in an account used to supplement the
borrower.s monthly payment. These funds usually come from the seller
(or some other source) as a financial incentive to induce someone to
buy their property. A "lender funded buydown" is when the lender pays
the initial lump sum. They can accomplish this because the note rate on
the loan (after the buydown adjustments) will be higher than the
current market rate. One reason for doing this is because the borrower
may get to "qualify" at the start rate and can qualify for a higher
loan amount. Another reason is that a borrower may expect his earnings
to go up substantially in the near future, but wants a lower payment
right now.
- C -
Call Option
Similar to the acceleration clause.
Cap
Adjustable Rate Mortgages have
fluctuating interest rates, but those fluctuations are usually limited
to a certain amount. Those limitations may apply to how much the loan
may adjust over a six month period, an annual period, and over the life
of the loan, and are referred to as "caps." Some ARMs, although they
may have a life cap, allow the interest rate to fluctuate freely, but
require a certain minimum payment which can change once a year. There
is a limit on how much that payment can change each year, and that
limit is also referred to as a cap.
Cash-Out Refinance
When a borrower
refinances his mortgage at a higher amount than the current loan
balance with the intention of pulling out money for personal use, it is
referred to as a "cash out refinance."
Certificate of Deposit
A time deposit held in a bank which pays a certain amount of interest to the depositor.
Certificate of Deposit Index
One of
the indexes used for determining interest rate changes on some
adjustable rate mortgages. It is an average of what banks are paying on
certificates of deposit.
Certificate of Eligibility
A document issued by the Veterans Administration that certifies a veteran.s eligibility for a VA loan.
Certificate of Reasonable Value (CSV)
Once the appraisal has been performed on a property being bought with a VA loan, the Veterans Administration issues a CRV.
Chain of Title
An analysis of the transfers of title to a piece of property over the years.
Clear Title
A title that is free of liens or legal questions as to ownership of the property.
Closing
This has different meanings
in different states. In some states a real estate transaction is not
consider "closed" until the documents record at the local recorders
office. In others, the "closing" is a meeting where all of the
documents are signed and money changes hands.
Closing Costs
Closing costs are
separated into what are called "non-recurring closing costs" and
"pre-paid items." Non-recurring closing costs are any items which are
paid just once as a result of buying the property or obtaining a loan.
"Pre-paids" are items which recur over time, such as property taxes and
homeowners insurance. A lender makes an attempt to estimate the amount
of non-recurring closing costs and prepaid items on the Good Faith
Estimate which they must issue to the borrower within three days of
receiving a home loan application.
Closing Statement
See Settlement Statement.
Cloud On Title
Any conditions
revealed by a title search that adversely affect the title to real
estate. Usually clouds on title cannot be removed except by deed,
release, or court action.
Co-Borrower
An additional individual who is both obligated on the loan and is on title to the property.
Collateral
In a home loan, the
property is the collateral. The borrower risks losing the property if
the loan is not repaid according to the terms of the mortgage or deed
of trust.
Collection
When a borrower falls
behind, the lender contacts them in an effort to bring the loan
current. The loan goes to "collection." As part of the collection
effort, the lender must mail and record certain documents in case they
are eventually required to foreclose on the property.
Commission
Most salespeople earn
commissions for the work that they do and there are many sales
professionals involved in each transaction, including Realtors, loan
officers, title representatives, attorneys, escrow representative, and
representatives for pest companies, home warranty companies, home
inspection companies, insurance agents, and more. The commissions are
paid out of the charges paid by the seller or buyer in the purchase
transaction. Realtors generally earn the largest commissions, followed
by lenders, then the others.
Common Area Assessments
In some
areas they are called Homeowners Association Fees. They are charges
paid to the Homeowners Association by the owners of the individual
units in a condominium or planned unit development (PUD) and are
generally used to maintain the property and common areas.
Common Areas
Those portions of a
building, land, and amenities owned (or managed) by a planned unit
development (PUD) or condominium project's homeowners' association (or
a cooperative project's cooperative corporation) that are used by all
of the unit owners, who share in the common expenses of their operation
and maintenance. Common areas include swimming pools, tennis courts,
and other recreational facilities, as well as common corridors of
buildings, parking areas, means of ingress and egress, etc.
Common Law
An unwritten body of law based on general custom in England and used to an extent in some states.
Community Property
In some states,
especially the southwest, property acquired by a married couple during
their marriage is considered to be owned jointly, except under special
circumstances. This is an outgrowth of the Spanish and Mexican heritage
of the area.
Comparable Sales (COMPS)
Recent
sales of similar properties in nearby areas and used to help determine
the market value of a property. Also referred to as "comps."
Condominium
A type of ownership in
real property where all of the owners own the property, common areas
and buildings together, with the exception of the interior of the unit
to which they have title. Often mistakenly referred to as a type of
construction or development, it actually refers to the type of
ownership.
Condominium Conversion
Changing the ownership of an existing building (usually a rental project) to the condominium form of ownership.
Condominium Hotel
A condominium
project that has rental or registration desks, short-term occupancy,
food and telephone services, and daily cleaning services and that is
operated as a commercial hotel even though the units are individually
owned. These are often found in resort areas like Hawaii.
Conforming Loan
A mortgage loan for up to $322,700 in the continental United States (Alaska and Hawaii limits are higher).
Consolidation Loans
Get debt relief through credit counseling and debt consolidation.
Construction Loan
A short-term,
interim loan for financing the cost of construction. The lender makes
payments to the builder at periodic intervals as the work progresses.
Contingency
A condition that must be
met before a contract is legally binding. For example, home purchasers
often include a contingency that specifies that the contract is not
binding until the purchaser obtains a satisfactory home inspection
report from a qualified home inspector.
Contract
An oral or written agreement to do or not to do a certain thing.
Conventional Mortgage
Refers to home loans other than government loans (VA and FHA).
Convertible ARM
An adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-rate mortgage within a specific time.
Cooperative (co-op)
A type of
multiple ownership in which the residents of a multiunit housing
complex own shares in the cooperative corporation that owns the
property, giving each resident the right to occupy a specific apartment
or unit.
Cost of Funds Index (COFI)
One of
the indexes that is used to determine interest rate changes for certain
adjustable-rate mortgages. It represents the weighted-average cost of
savings, borrowings, and advances of the financial institutions such as
banks and savings & loans, in the 11th District of the Federal Home
Loan Bank.
Credit
An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.
Credit History
A record of an
individual's repayment of debt. Credit histories are reviewed my
mortgage lenders as one of the underwriting criteria in determining
credit risk.
Credit Rating
Borrowers are rated by
lenders according to the borrower's credit-worthiness or risk profile.
Credit ratings are expressed as letter grades such as A-, B, or C+.
These ratings are based on various factors such as a borrower's payment
history, foreclosures, bankruptcies and charge-offs. There is no exact
science to rating a borrower's credit, and different lenders may assign
different grades to the same borrower.
Credit Report
A report of an
individual's credit history prepared by a credit bureau and used by a
lender in determining a loan applicant's creditworthiness.
Credit Repository
An organization
that gathers, records, updates, and stores financial and public records
information about the payment records of individuals who are being
considered for credit.
Creditor
A person to whom money is owed.
- D -
Debt
An amount owed to another.
Deed
The legal document conveying title to a property.
Deed of Trust
Some states, like California, do not record mortgages. Instead, they record a deed of trust which is essentially the same thing.
Deed-In-Lieu
Short for "deed in lieu
of foreclosure," this conveys title to the lender when the borrower is
in default and wants to avoid foreclosure. The lender may or may not
cease foreclosure activities if a borrower asks to provide a
deed-in-lieu. Regardless of whether the lender accepts the
deed-in-lieu, the avoidance and non-repayment of debt will most likely
show on a credit history. What a deed-in-lieu may prevent is having the
documents preparatory to a foreclosure being recorded and become a
matter of public record.
Default
Failure to make the mortgage
payment within a specified period of time. For first mortgages or first
trust deeds, if a payment has still not been made within 30 days of the
due date, the loan is considered to be in default.
Delinquency
Failure to make mortgage
payments when mortgage payments are due. For most mortgages, payments
are due on the first day of the month. Even though they may not charge
a "late fee" for a number of days, the payment is still considered to
be late and the loan delinquent. When a loan payment is more than 30
days late, most lenders report the late payment to one or more credit
bureaus.
Deposit
A sum of money given in
advance of a larger amount being expected in the future. Often called
in real estate as an "earnest money deposit."
Depreciation
A decline in the value
of property; the opposite of appreciation. Depreciation is also an
accounting term which shows the declining monetary value of an asset
and is used as an expense to reduce taxable income. Since this is not a
true expense where money is actually paid, lenders will add back
depreciation expense for self-employed borrowers and count it as income.
Discount
Difference between the face amount of a note or mortgage and the price at which the instrument is sold in the secondary market.
Discount Points
In the mortgage
industry, this term is usually used in only in reference to government
loans, meaning FHA and VA loans. Discount points refer to any "points"
paid in addition to the one percent loan origination fee. A "point" is
one percent of the loan amount.
Down Payment
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
Due-On-Sale Provision
A provision in
a mortgage that allows the lender to demand repayment in full if the
borrower sells the property that serves as security for the mortgage.
- E -
Earnest Money Deposit
A deposit made by the potential home buyer to show that he or she is serious about buying the house.
Easement
A right of way giving persons other than the owner access to or over a property.
Effective Age
An appraiser's
estimate of the physical condition of a building. The actual age of a
building may be shorter or longer than its effective age.
Eminent Domain
The right of a
government to take private property for public use upon payment of its
fair market value. Eminent domain is the basis for condemnation
proceedings.
Encroachment
An improvement that intrudes illegally on another.s property.
Encumbrance
Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions.
Equal Credit Opportunity Act (ECOA)
A
federal law that requires lenders and other creditors to make credit
equally available without discrimination based on race, color,
religion, national origin, age, sex, marital status, or receipt of
income from public assistance programs.
Equity
A homeowner's financial
interest in a property. Equity is the difference between the fair
market value of the property and the amount still owed on its mortgage
and other liens.
Escrow
An item of value, money, or
documents deposited with a third party to be delivered upon the
fulfillment of a condition. For example, the earnest money deposit is
put into escrow until delivered to the seller when the transaction is
closed.
Escrow Account
Once you close your
purchase transaction, you may have an escrow account or impound account
with your lender. This means the amount you pay each month includes an
amount above what would be required if you were only paying your
principal and interest. The extra money is held in your impound account
(escrow account) for the payment of items like property taxes and
homeowner.s insurance when they come due. The lender pays them with
your money instead of you paying them yourself.
Escrow Analysis
Once each year your
lender will perform an "escrow analysis" to make sure they are
collecting the correct amount of money for the anticipated expenditures.
Escrow Disbursements
The use of
escrow funds to pay real estate taxes, hazard insurance, mortgage
insurance, and other property expenses as they become due.
Estate
The ownership interest of an
individual in real property. The sum total of all the real property and
personal property owned by an individual at time of death.
Eviction
The lawful expulsion of an occupant from real property.
Examination of Title
The report on the title of a property from the public records or an abstract of the title.
Exclusive Listing
A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time.
Executor
A person named in a will to
administer an estate. The court will appoint an administrator if no
executor is named. "Executrix" is the feminine form.
- F -
Fair Credit Reporting Act
A consumer
protection law that regulates the disclosure of consumer credit reports
by consumer/credit reporting agencies and establishes procedures for
correcting mistakes on one's credit record.
Fair Market Value
The highest price
that a buyer, willing but not compelled to buy, would pay, and the
lowest a seller, willing but not compelled to sell, would accept.
Fannie Mae (FNMA)
The Federal
National Mortgage Association, which is a congressionally chartered,
shareholder-owned company that is the nation's largest supplier of home
mortgage funds. For a discussion of the roles of Fannie Mae, Freddie
Mac (FHLMC), and Ginnie Mae (GNMA), see the Library.
Fannie Mae's Community Home Buyer's Program
An
income-based community lending model, under which mortgage insurers and
Fannie Mae offer flexible underwriting guidelines to increase a low- or
moderate-income family's buying power and to decrease the total amount
of cash needed to purchase a home. Borrowers who participate in this
model are required to attend pre-purchase home-buyer education sessions.
Federal Housing Association (FHA)
An
agency of the U.S. Department of Housing and Urban Development (HUD).
Its main activity is the insuring of residential mortgage loans made by
private lenders. The FHA sets standards for construction and
underwriting but does not lend money or plan or construct housing.
Fee Simple
The greatest possible interest a person can have in real estate.
Fee Simple Estate
An unconditional,
unlimited estate of inheritance that represents the greatest estate and
most extensive interest in land that can be enjoyed. It is of perpetual
duration. When the real estate is in a condominium project, the unit
owner is the exclusive owner only of the air space within his or her
portion of the building (the unit) and is an owner in common with
respect to the land and other common portions of the property.
FHA Mortgage
A mortgage that is
insured by the Federal Housing Administration (FHA). Along with VA
loans, an FHA loan will often be referred to as a government loan.
Firm Commitment
A lenders agreement to make a loan to a specific borrower on a specific property.
First Mortgage
The mortgage that is
in first place among any loans recorded against a property. Usually
refers to the date in which loans are recorded, but there are
exceptions.
Fixed-Rate Mortgage
A mortgage in which the interest rate does not change during the entire term of the loan.
Fixture
Personal property that becomes real property when attached in a permanent manner to real estate.
Flood Insurance
Insurance that
compensates for physical property damage resulting from flooding. It is
required for properties located in federally designated flood areas.
Foreclosure
The legal process by
which a borrower in default under a mortgage is deprived of his or her
interest in the mortgaged property. This usually involves a forced sale
of the property at public auction with the proceeds of the sale being
applied to the mortgage debt.
- G -
Good Faith Estimate
An estimate of charges which a borrower is likely to incur in connection with a loan closing.
Government Loan
A mortgage that is
insured by the Federal Housing Administration (FHA) or guaranteed by
the Department of Veterans Affairs (VA) or the Rural Housing Service
(RHS). Mortgages that are not government loans are classified as
conventional loans.
Government National Mortgage Association
A
government-owned corporation within the U.S. Department of Housing and
Urban Development (HUD). Created by Congress on September 1, 1968, GNMA
performs the same role as Fannie Mae and Freddie Mac in providing funds
to lenders for making home loans. The difference is that Ginnie Mae
provides funds for government loans (FHA and VA)
Grace Period
A time allowed, usually 15 days, for making late payments without a penalty.
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, not counting any taxes or
expenses. Often used in calculations to determine whether a borrower
qualifies for a particular loan.
- H -
Hard-Money Mortgage
Cash loan to a borrower.
Hazard Insurance
Insurance coverage that in the event of physical damage to a property from fire, wind, vandalism, or other hazards.
Home Equity Conversion Mortgage
Usually
referred to as a reverse annuity mortgage, what makes this type of
mortgage unique is that instead of making payments to a lender, the
lender makes payments to you. It enables older home owners to convert
the equity they have in their homes into cash, usually in the form of
monthly payments. Unlike traditional home equity loans, a borrower does
not qualify on the basis of income but on the value of his or her home.
In addition, the loan does not have to be repaid until the borrower no
longer occupies the property.
Home Equity Line of Credit
A
mortgage loan, usually in second position, that allows the borrower to
obtain cash drawn against the equity of his home, up to a predetermined
amount.
Home Inspection
A thorough
inspection by a professional that evaluates the structural and
mechanical condition of a property. A satisfactory home inspection is
often included as a contingency by the purchaser.
Homeowner's 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.
Homeowner's Insurance
An insurance policy that combines personal liability insurance and hazard insurance coverage for a dwelling and its contents.
Homeowner's Warranty
A type of
insurance often purchased by homebuyers that will cover repairs to
certain items, such as heating or air conditioning, should they break
down within the coverage period. The buyer often requests the seller to
pay for this coverage as a condition of the sale, but either party can
pay.
HUD Median Income
Median family
income for a particular county or metropolitan statistical area (MSA),
as estimated by the Department of Housing and Urban Development (HUD).
HUD-1 Settlement Statement
A
document that provides an itemized listing of the funds that were paid
at closing. Items that appear on the statement include real estate
commissions, loan fees, points, and initial escrow (impound) amounts.
Each type of expense goes on a specific numbered line on the sheet. The
totals at the bottom of the HUD-1 statement define the seller's net
proceeds and the buyer's net payment at closing. It is called a HUD1
because the form is printed by the Department of Housing and Urban
Development (HUD). The HUD1 statement is also known as the "closing
statement" or "settlement sheet."
Hybrid Financing
The joining
together of two forms of finance, such as combining a convertible loan
with a participation loan, under which the lender has the right at loan
maturity to convert the debt to a 50 percent ownership in the property.
- I -
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 U.S. Treasury Security
yields, the monthly average interest rate on loans closed by savings
and loan institutions, and the monthly average Costs-of-Funds incurred
by savings and loans), which is then used to adjust the interest rate
on an adjustable mortgage up or down.
Interest
Consideration in the form
of money paid for the use of money, usually expressed as an annual
percentage. Also, a right, share, or title in property.
Interest Only Loan
A term loan arrangement calling for payments of interest only, not to include any amount for principal.
Interest Rate
The percentage of an amount of money that's paid for its use over a specified time period.
Interest Rate Swap
A transaction
between two parties, in which each agrees to exchange payments tied to
different interest rates or indices for a specified period of time.
Intermediate-Term Mortgage
A mortgage loan with a stated maturity at the time of purchase that it is equal to or less than 20 years.
- J -
Joint Tenancy
A form of ownership or
taking title to property which means each party owns the whole property
and that ownership is not separate. In the event of the death of one
party, the survivor owns the property in its entirety.
Judgment
A decision made by a court
of law. In judgments that require the repayment of a debt, the court
may place a lien against the debtor's real property as collateral for
the judgment's creditor. Alternative spelling is "judgment."
Judicial Foreclosure
A type of
foreclosure proceeding used in some states that is handled as a civil
lawsuit and conducted entirely under the auspices of a court. Other
states use non-judicial foreclosure.
Jumbo Loan
A loan that exceeds
Fannie Mae.s and Freddie Mac.s loan limits, currently at $252,700. Also
called a nonconforming loan. Freddie Mac and Fannie Mae loans are
referred to as conforming loans.
- K -
- L -
Lease
A written agreement between
the property owner and a tenant that stipulates the payment and
conditions under which the tenant may possess the real estate for a
specified period of time.
Lease Description
A property description, recognized by law, that is sufficient to locate and identify the property without oral testimony.
Lease Option
An alternative
financing option that allows home buyers to lease a home with an option
to buy. Each month's rent payment may consist of not only the rent, but
an additional amount which can be applied toward the down payment on an
already specified price.
Leasehold Estate
A way of holding
title to a property wherein the mortgagor does not actually own the
property but rather has a recorded long-term lease on it.
Lender
A term which can refer to the
institution making the loan or to the individual representing the firm.
For example, loan officers are often referred to as "lenders."
Leverage
Using someone else's money for the purchase of property.
Liabilities
A person's financial
obligations. Liabilities include long-term and short-term debt, as well
as any other amounts that are owed to others.
Liability Insurance
Insurance
coverage that offers protection against claims alleging that a property
owner's negligence or inappropriate action resulted in bodily injury or
property damage to another party. It is usually part of a homeowner.s
insurance policy.
LIBOR
The London Interbank Offered
Rate Index (LIBOR) is an average of the interest rates that major
international banks charge each other to borrow U.S. dollars in the
London money market. Like the U.S. treasury the CD indexes, LIBOR tends
to move and adjust quite rapidly to changes in interest rates.
Lien
A legal claim against a
property that must be paid off when the property is sold. A mortgage or
first trust deed is considered a lien.
Life Cap
For an adjustable-rate
mortgage (ARM), a limit on the amount that the interest rate can
increase or decrease over the life of the mortgage.
Line of Credit
An agreement by a
commercial bank or other financial institution to extend credit up to a
certain amount for a certain time to a specified borrower.
Liquid Asset
A cash asset or an asset that is easily converted into cash.
Loan
A sum of borrowed money (principal) that is generally repaid with interest.
Loan Officer
Also referred to by a
variety of other terms, such as lender, loan representative, loan
"rep," account executive, and others. The loan officer serves several
functions and has various responsibilities: they solicit loans, they
are the representative of the lending institution, and they represent
the borrower to the lending institution.
Loan Origination
How a lender refers to the process of obtaining new loans
Loan Servicing
After you obtain a
loan, the company you make the payments to is "servicing" your loan.
They process payments, send statements, manage the escrow/impound
account, provide collection efforts on delinquent loans, ensure that
insurance and property taxes are made on the property, handle pay-offs
and assumptions, and provide a variety of other services.
Loan-To-Value (LTV)
The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower).
Lock-In
An agreement in which the lender guarantees a specified interest rate for a certain amount of time at a certain cost.
Lock-In Period
The time period during which the lender has guaranteed an interest rate to a borrower.
- M -
Margin
The difference between the
interest rate and the index on an adjustable rate mortgage. The margin
remains stable over the life of the loan. It is the index which moves
up and down.
Maturity
The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable.
Merged Credit Report
A credit report
which reports the raw data pulled from two or more of the major credit
repositories. Contrast with a Residential Mortgage Credit Report (RMCR)
or a standard factual credit report.
Modification
Occasionally, a lender
will agree to modify the terms of your mortgage without requiring you t
refinance. If any changes are made, it is called a modification.
Mortgage
A legal document that
pledges a property to the lender as security for payment of a debt.
Instead of mortgages, some states use First Trust Deeds.
Mortgage Banker
For a more complete
discussion of mortgage banker, see "Types of Lenders." A mortgage
banker is generally assumed to originate and fund their own loans,
which are then sold on the secondary market, usually to Fannie Mae,
Freddie Mac, or Ginnie Mae. However, firms rather loosely apply this
term to themselves, whether they are true mortgage bankers or simply
mortgage brokers or correspondents.
Mortgage Broker
A mortgage company
that originates loans, then places those loans with a variety of other
lending institutions with whom they usually have pre-established
relationships.
Mortgage Constant
The factor used for rapid computation of the annual payment needed to amortize a loan.
Mortgage Insurance
Insurance that
covers the lender against some of the losses incurred as a result of a
default on a home loan. Often mistakenly referred to as PMI, which is
actually the name of one of the larger mortgage insurers. Mortgage
insurance is usually required in one form or another on all loans that
have a loan-to-value higher than eighty percent. Mortgages above 80%
LTV that call themselves "No MI" are usually a made at a higher
interest rate. Instead of the borrower paying the mortgage insurance
premiums directly, they pay a higher interest rate to the lender, which
then pays the mortgage insurance themselves. Also, FHA loans and
certain first-time homebuyer programs require mortgage insurance
regardless of the loan-to-value.
Mortgage Insurance Premium
The
amount paid by a mortgagor for mortgage insurance, either to a
government agency such as the Federal Housing Administration (FHA) or
to a private mortgage insurance (MI) company.
Mortgage Life and Disability Insurance
A
type of term life insurance often bought by borrowers. The amount of
coverage decreases as the principal balance declines. Some policies
also cover the borrower in the event of disability. In the event that
the borrower dies while the policy is in force, the debt is
automatically satisfied by insurance proceeds. In the case of
disability insurance, the insurance will make the mortgage payment for
a specified amount of time during the disability. Be careful to read
the terms of coverage, however, because often the coverage does not
start immediately upon the disability, but after a specified period,
sometime forty-five days.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage agreement.
Multi-dwelling Units
Properties that provide separate housing units for more than one family, although they secure only a single mortgage.
- N -
Negative Amortization
Some
adjustable rate mortgages allow the interest rate to fluctuate
independently of a required minimum payment. If a borrower makes the
minimum payment it may not cover all of the interest that would
normally be due at the current interest rate. In essence, the borrower
is deferring the interest payment, which is why this is called
"deferred interest." The deferred interest is added to the balance of
the loan and the loan balance grows larger instead of smaller, which is
called negative amortization.
Net Effective Income
Gross income less federal income tax.
No Cash-Out Refinance
A refinance
transaction which is not intended to put cash in the hand of the
borrower. Instead, the new balance is calculated to cover the balance
due on the current loan and any costs associated with obtaining the new
mortgage. Often referred to as a "rate and term refinance."
No-Cost Loan
Many lenders offer
loans that you can obtain at "no cost." You should inquire whether this
means there are no "lender" costs associated with the loan, or if it
also covers the other costs you would normally have in a purchase or
refinance transactions, such as title insurance, escrow fees,
settlement fees, appraisal, recording fees, notary fees, and others.
These are fees and costs which may be associated with buying a home or
obtaining a loan, but not charged directly by the lender. Keep in mind
that, like a "no-point" loan, the interest rate will be higher than if
you obtain a loan that has costs associated with it.
Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Note Rate
The interest rate stated on a mortgage note.
Notice of Default
A formal written notice to a borrower that a default has occurred and that legal action may be taken.
- O -
Original Principle Balance
The total amount of principal owed on a mortgage before any payments are made.
Origination Fee
On a government loan
the loan origination fee is one percent of the loan amount, but
additional points may be charged which are called "discount points."
One point equals one percent of the loan amount. On a conventional
loan, the loan origination fee refers to the total number of points a
borrower pays.
Owner Financing
A property purchase transaction in which the property seller provides all or part of the financing.
Owner's Title Policy
A policy protecting the buyer for the amount of the purchase price in the event of a future title dispute.
- P -
Package Mortgage
A mortgage that /includes equipment and appliances located on the premises in addition to the real property itself.
Partial Payment
A payment that is
not sufficient to cover the scheduled monthly payment on a mortgage
loan. Normally, a lender will not accept a partial payment, but in
times of hardship you can make this request of the loan servicing
collection department.
Payment Change Date
The date when a
new monthly payment amount takes effect on an adjustable-rate mortgage
(ARM) or a graduated-payment mortgage (GPM). Generally, the payment
change date occurs in the month immediately after the interest rate
adjustment date.
Periodic Payment Cap
For an
adjustable-rate mortgage where the interest rate and the minimum
payment amount fluctuate independently of one another, this is a limit
on the amount that payments can increase or decrease during any one
adjustment period.
Periodic Rate Cap
For an
adjustable-rate mortgage, a limit on the amount that the interest rate
can increase or decrease during any one adjustment period, regardless
of how high or low the index might be.
Personal Property
Any property that is not real property.
PITI Reserves
A cash amount that a
borrower must have on hand after making a down payment and paying all
closing costs for the purchase of a home. The principal, interest,
taxes, and insurance (PITI) reserves must equal the amount that the
borrower would have to pay for PITI for a predefined number of months.
Planned Unit Development
A type of
ownership where individuals actually own the building or unit they live
in, but common areas are owned jointly with the other members of the
development or association. Contrast with condominium, where an
individual actually owns the airspace of his unit, but the buildings
and common areas are owned jointly with the others in the development
or association.
Planned Unit Development
A project
or subdivision that includes common property that is owned and
maintained by a homeowners' association for the benefit and use of the
individual PUD unit owners.
Point(s)
A point is 1 percent of the amount of the mortgage.
Power of Attorney
A legal document
that authorizes another person to act on one.s behalf. A power of
attorney can grant complete authority or can be limited to certain acts
and/or certain periods of time.
Pre-Approval
A loosely used term
which is generally taken to mean that a borrower has completed a loan
application and provided debt, income, and savings documentation which
an underwriter has reviewed and approved. A pre-approval is usually
done at a certain loan amount and making assumptions about what the
interest rate will actually be at the time the loan is actually made,
as well as estimates for the amount that will be paid for property
taxes, insurance and others. A pre-approval applies only to the
borrower. Once a property is chosen, it must also meet the underwriting
guidelines of the lender. Contrast with pre-qualification.
Pre-Payment
Any amount paid to
reduce the principal balance of a loan before the due date. Payment in
full on a mortgage that may result from a sale of the property, the
owner's decision to pay off the loan in full, or a foreclosure. In each
case, prepayment means payment occurs before the loan has been fully
amortized.
Pre-Payment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.
Pre-Qualification
This usually
refers to the loan officer.s written opinion of the ability of a
borrower to qualify for a home loan, after the loan officer has made
inquiries about debt, income, and savings. The information provided to
the loan officer may have been presented verbally or in the form of
documentation, and the loan officer may or may not have reviewed a
credit report on the borrower.
Prime Rate
The interest rate that
banks charge to their preferred customers. Changes in the prime rate
are widely publicized in the news media and are used as the indexes in
some adjustable rate mortgages, especially home equity lines of credit.
Changes in the prime rate do not directly affect other types of
mortgages, but the same factors that influence the prime rate also
affect the interest rates of mortgage loans.
Principle
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
Principle Balance
The outstanding
balance of principal on a mortgage. The principal balance does not
include interest or any other charges. See remaining balance.
Principle, Interest, Taxes, and Insurance (PITI)
This
stands for principal, interest, taxes and insurance. If you have an
"impounded" loan, then your monthly payment to the lender includes all
of these and probably includes mortgage insurance as well. If you do
not have an impounded account, then the lender still calculates this
amount and uses it as part of determining your debt-to-income ratio.
Private Mortgage Insurance
Mortgage
insurance that is provided by a private mortgage insurance company to
protect lenders against loss if a borrower defaults. Most lenders
generally require MI for a loan with a loan-to-value (LTV) percentage
in excess of 80 percent.
Promissory Note
A written promise to repay a specified amount over a specified period of time.
Prorations
The allocation of charges
and credits to the appropriate parties at a real estate sale and/or
loan closing at a real-estate sale and/or loan closing.
Public Auction
A meeting in an announced public location to sell property to repay a mortgage that is in default.
Purchase Agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Purchase Money Mortgage
Mortgage given by a borrower to the seller as part of the purchase price of the property.
Purchase Money Transaction
The acquisition of property through the payment of money or its equivalent.
- Q -
Qualifying Ratios
Calculations that
are used in determining whether a borrower can qualify for a mortgage.
There are two ratios. The "top" or "front" ratio is a calculation of
the borrower.s monthly housing costs (principle, taxes, insurance,
mortgage insurance, homeowner.s association fees) as a percentage of
monthly income. The "back" or "bottom" ratio includes housing costs as
will as all other monthly debt.
Quitclaim Deed
A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.
- R -
Rate Lock
A commitment issued by a
lender to a borrower or other mortgage originator guaranteeing a
specified interest rate for a specified period of time at a specific
cost.
Real Estate Agent
A real estate agent is a person licensed to negotiate and transact the sale of real estate
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Real Property
Land and
appurtenances, including anything of a permanent nature such as
structures, trees, minerals, and the interest, benefits, and inherent
rights thereof.
Realtor.
A real estate agent, broker
or an associate who holds active membership in a local real estate
board that is affiliated with the National Association of Realtors.
Reconveyance Clause
The clause in a trust deed that gives the title back to the borrower when the loan is paid in full.
Recorder
The public official who
keeps records of transactions that affect real property in the area.
Sometimes known as a "Registrar of Deeds" or "County Clerk."
Recording
The noting in the
registrar.s office of the details of a properly executed legal
document, such as a deed, a mortgage note, a satisfaction of mortgage,
or an extension of mortgage, thereby making it a part of the public
record.
Refinance Transaction
The process of paying off one loan with the proceeds from a new loan using the same property as security.
Repayment Plan
An arrangement made to repay delinquent installments or advances.
Replacement Reserve Fund
A fund set
aside for replacement of common property in a condominium, PUD, or
cooperative project -- particularly that which has a short life
expectancy, such as carpeting, furniture, etc.
Revolving Debt
A credit arrangement,
such as a credit card, that allows a customer to borrow against a
pre-approved line of credit when purchasing goods and services. The
borrower is billed for the amount that is actually borrowed plus any
interest due.
Right of Ingress or Egress
The right to enter or leave designated premises.
Right of Refusal
A provision in an
agreement that requires the owner of a property to give another party
the first opportunity to purchase or lease the property before he or
she offers it for sale or lease to others.
Regulation Z
A truth-in-lending provision that requires lenders to reveal the actual costs of borrowing.
Remaining Balance
The amount of principal that has not yet been repaid. See principal balance.
Remaining Term
The original amortization term minus the number of payments that have been applied.
Rent Loss Insurance
Insurance that
protects a landlord against loss of rent or rental value due to fire or
other casualty that renders the leased premises unavailable for use and
as a result of which the tenant is excused from paying rent.
Rent-Loss Insurance
Insurance that
protects a landlord against loss of rent or rental value due to fire or
other casualty, resulting in the tenant being excused from paying rent.
Right of Survivorship
In joint tenancy, the right of survivors to acquire the interest of a deceased joint tenant.
- S -
Sale-Leaseback
A technique in which
a seller deeds property to a buyer for a consideration, and the buyer
simultaneously leases the property back to the seller.
Second Mortgage
A mortgage that has a lien position subordinate to the first mortgage.
Secondary Market
The buying and selling of existing mortgages, usually as part of a "pool" of mortgages.
Secured Loan
A loan that is backed by collateral.
Security
The property that will be pledged as collateral for a loan.
Seller Carry-Back
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage.
Servicer
An organization that
collects principal and interest payments from borrowers and manages
borrowers. escrow accounts. The servicer often services mortgages that
have been purchased by an investor in the secondary mortgage market.
Servicing
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Settlement Statement
See HUD1 Settlement Statement
Subdivision
A housing development that is created by dividing a tract of land into individual lots for sale or lease.
Subordinate Financing
Any mortgage or other lien that has a priority that is lower than that of the first mortgage.
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.
- T -
Takeout Mortgage
A permanent
mortgage, obtained by pre-arrangement between a builder and a financial
institution, to repay the interim mortgagee at the completion of
construction.
Tax Lien
A claim against real estate for the amount of its unpaid taxes.
Tenancy in Common
As opposed to
joint tenancy, when there are two or more individuals on title to a
piece of property, this type of ownership does not pass ownership to
the others in the event of death.
Third Party Organization
A process
by which a lender uses another party to completely or partially
originate, process, underwrite, close, fund, or package the mortgages
it plans to deliver to the secondary mortgage market.
Title
A legal document evidencing a person's right to or ownership of a property.
Title Company
A company that specializes in examining and insuring titles to real estate.
Title Insurance
Insurance 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
A check of the title
records to ensure that the seller is the legal owner of the property
and that there are no liens or other claims outstanding.
Transfer of Ownership
Any means by
which the ownership of a property changes hands. Lenders consider all
of the following situations to be a transfer of ownership: the purchase
of a property "subject to" the mortgage, the assumption of the mortgage
debt by the property purchaser, and any exchange of possession of the
property under a land sales contract or any other land trust device.
Transfer Tax
State or local tax payable when title passes from one owner to another.
Treasury Index
An index that is used
to determine interest rate changes for certain adjustable-rate mortgage
(ARM) plans. It is based on the results of auctions that the U.S.
Treasury holds for its Treasury bills and securities or is derived from
the U.S. Treasury's daily yield curve, which is based on the closing
market bid yields on actively traded Treasury securities in the
over-the-counter market.
Trustee
A fiduciary who holds or controls property for the benefit of 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 to four-family property
A
property that consists of a structure that provides living space
(dwelling units) for two to four families, although ownership of the
structure is evidenced by a single deed.
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.
- U -
- V -
VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA).
Vested
Having the right to use a
portion of a fund such as an individual retirement fund. For example,
individuals who are 100 percent vested can withdraw all of the funds
that are set aside for them in a retirement fund. However, taxes may be
due on any funds that are actually withdrawn.
Veterans Administration (VA)
An
agency of the federal government that guarantees residential mortgages
made to eligible veterans of the military services. The guarantee
protects the lender against loss and thus encourages lenders to make
mortgages to veterans.
- W -
- X -
- Y -
- Z -
Zero Percent Financing
A loan with no interest in the contract. The IRS imputes 10 percent for both borrower and lender.
Zoning
The right of a community, under its police power, to dictate the use of property within its boundaries.