Acceleration clause. A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.
Accrued interest: Interest earned but not paid since the last due date.
Add-on interest: Interest added to the amount of the loan on the front end, or beginning of the loan repayment period. The balance is then paid by installments. This form of interest is much more expensive than simple interest paid on the entire amount for the entire term of the loan.
Adjustable living expenses: Expenses you can change, such as costs of groceries, utilities, telephone.
Adjustable mortgage ( ARM ) A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.
Affordable Housing Program (AHP): A program of the Federal Home Loan Bank system which allows the Regional Banks of the System to make subsidized funds available through member institutions for the production of affordable housing to serve families below 80 % of their area median income (AMI).
Amenity: A natural or man-made feature that increases the value of property. Examples would be a view of a golf course or the ocean, or a beautifully landscaped yard.
Amortization The gradual repayment of a mortgage by installments, calculated to pay off the obligation at the end of a fixed period of time.
Amortization schedule. A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the balance remaining.
Annual percentage rate (APR). The total cost of a mortgage stated as a yearly rate; includes such items as the base interest rate, loan origination fee (points), commitment fees, prepaid interest and other credit costs which may be paid by the borrower.
Appraisal. A professional opinion or estimate of the marker value of a property.
Appreciation. An increase in the value of a property due to changes in market conditions or other causes.
Appurtenance: An item attributable to the land, such as improvements or an easement. Something that comes from outside the property but is considered part of the property and transfers with the property upon sale or other transfer. A utility easement is an example of an appurtenance
Arrears: At the end of a period. You pay interest on home mortgages in arrears. You pay rent in advance. For example, a mortgage payment due May 1 is for the interest for April; rent due May 1 is for the month of May. The term can pertain to delinquent mortgage payments. A mortgage loan that is three months delinquent can be said to be three months in arrears.
Assessed value. The valuation placed upon property by a public tax assessor that is used to compute property taxes.
As is: Property sold in its present condition with no warranties made about the plumbing, heating, electrical system or infestation of termites is said to be sold “as is.”
Assumable mortgage. A mortgage that can be taken over by the buyer when a home is sold.
Assumption The transfer of the seller’s existing mortgage to the buyer.
Balloon mortgage: A mortgage loan with periodic payments of principal and interest that do not completely amortize the loan. The balance of this type of mortgage loan is due and payable in a lump sum at a specified time in the future. The borrower pays interest regularly, but may or may not make small principal repayments during the loan period. The unpaid balance is due at a specific time in the future as stated in the mortgage or deed of trust. For example, if you borrow $30,000 for 5 years, or 60 months, and the interest rate is 15%, your monthly payments will be only $375. But the payments cover interest only, with the entire principal due at maturity in five years. Thus, the borrower must make 59 equal monthly payments of $375 and a final balloon payment of $30,375 (the principal plus the last interest payment). If the borrower cannot make the final payment, the borrower must refinance (if refinancing is available) or sell the property. Some lenders guarantee refinancing when the balloon payment is due, although they do not commit to a specified interest rate. The rate at refinancing could be much higher than the borrower’s current rate. Other lenders do not offer automatic refinancing. Without such a guarantee, the borrower could be forced to start the whole business of shopping for mortgage funds again, besides paying closing costs and front-end charges a second time. A balloon mortgage can be a senior or junior mortgage; i.e., a first or second mortgage.
Balloon note: A Promissory Note which requires only partial or no amortization (principal reduction.) Balloon Notes result in an eventual Balloon Payment. A Balloon Note may be coupled with an Extendible Rider which allows for the extension of the loan term as long as certain conditions are met. (Such as on 5/25 and 7/23 loans.)
Balloon payment: The final payment in a balloon mortgage. The balloon payment ends the mortgage; the mortgage is paid in full. This final payment is called the balloon or bullet.
Bankruptcy: When a person is declared by a court to be unable to pay her or his debts, that person is in bankruptcy. That person must then turn over any money or properties to a trustee, a person whom the court appoints, for management.
Basis points: A term used in relationship to interest rates. One basis point is equal to 1/100 of 1 percent. Basis points are used to describe the yield of a debt instrument, including mortgages. The difference between 9% and 9.5% is 50 basis points.
Binder. A preliminary agreement between a buyer and seller which includes the price and terms of the contract.
Bona fide: Genuine; sincere; in good faith. The term can be used in a sentence such as, “this is a bona fide offer to purchase your real estate.”
Buydown: With a buydown, the seller or borrower pays an amount to the lender so that the lender can offer a lower rate and lower payments, during the earlier portion of the loan term. If the seller pays, he may increase the sales price to cover the cost of the buydown. Buydowns can occur in all types of mortgages; fixed rate, interim fixed and adjustables.
Clear title. A title that is Free of liens or legal questions as to ownership of property.
Closing A meeting at which a sale of a property is finalized by delivery of a deed from seller to buyer and the buyer signing the mortgage documents and paying closing costs. Also called a settlement.
Closing costs. Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called settlement costs.
Collateral: Assets that are pledged to secure the discharge of an obligation.
Commitment letter . A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer.
Common Area Maintenance: Charges paid by the tenant for the upkeep of areas designated for the use (CAM) and benefit of all tenants.
Common areas and elements: Areas of property used or available for use by multiple parties. Common Areas in office building often include stairways, hallways, restrooms, courtyards, etc.
Condemnation: The taking of private property for public use by a government unit, against the will of the owner, but with payment of just compensation under the government’s power of eminent domain. Condemnation may also be a determination by a governmental agency that a particular building is unsafe or unfit for use.
Condominium A form of property ownership in which the homeowner holds title to an individual dwelling unit , an undivided interest in common areas of a multi-unit project, and sometimes the exclusive use of certain limited common areas.
Contingency A condition that must be in met before a contract is legally binding.
Conventional Mortgage. Any mortgage that is not insured or guaranteed by the federal government.
Convertible ARM. An adjustable rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.
Cooperative A type of multiple ownership in which the residents of a multi-unit housing complex own shares in the corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.
Co-signer: A person who signs loan documents, such as a mortgage note with another person. The co-signer is responsible for making payments, if the borrower does not.
Covenant. A clause in a mortgage that obligates or restricts the borrower and which, if violated, can result in foreclosure.
Credit history: The record of a person’s payment of debt, over years’ time. That record is kept by three national credit bureaus, which send it to businesses, lenders, and creditors-as well as to the credit-holder upon request.
Credit rating: A credit bureau’s ranking of the way a person has repaid his/her debts. lender uses a loan applicant’s credit rating to decide whether or not to make the loan.
Creditor: Any person or company that lends money (extends credit).
Creditworthy: A person with good credit, whom a lender judges will repay a loan, is credit worthy.
Credit report. A report of an individual’s credit history prepared by a credit bureau or consumer reporting agency and used by a lender in determining a loan applicant’s credit worthiness.
Credit Score. A score based statistical method used to predict the relative likelihood that you will repay a credit obligation, such as a mortgage loan. The most well-known credit score In the mortgage industry has been developed by Fair, lsaacs and Company and is often referred to as the FICO score.
Deed. The legal document conveying title to a property.
Deed of trust. The document used in some states instead of a mortgage which gives the lender a security interest in the property. Title is conveyed to a trustee by the borrower (who retains equitable title). When the debt is paid in full, title is reconveyed to the Borrower.
Deed restrictions: Restrictions or limitations to the use of property as noted in a deed.
Default: Failure to make mortgage payments as agreed
Default. The failure to make a mortgage payment on a timely basis or to otherwise comply with other requirements of a mortgage.
Delinquency. A loan in which a payment is overdue but not yet in default.
Deposit See Earnest money.
Depreciation A decline in the value of property; the opposite of appreciation.
Discount points. See Points.
Down Payment. The part of the purchase price which the buyer pays in cash and does nor finance with a mortgage.
Due-On-Sale Clause A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.
Egress: A means of exit from a parcel of land.
Eminent domain: Right of a government agency to take private property for a public purpose. Fair compensation must be paid to the owner whose property is taken.
Encumbrance: Anything that imposes a legal burden on title to land such as liens for security purposes, easements, and restrictive covenants.
Equal Credit Opportunity Act (ECOA). A federal law that prohibits lenders from discriminating on the basis of the borrower’s 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 a property and the amount still owed on the mortgage.
Equity loan. A loan based on the borrower’s equity in his or her home.
Escrow. The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.
Estate sale: A sale held to sell the property of someone who has died. Sometimes houses are sold at estate sales.
Eviction: The physical dispossession by a landlord of a tenant from leased premises.
Exclusive agency listing: A listing agreement between a seller and a broker in which either has a right to sell the property; if sold by the broker a commission will be due
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 credit billing act: A federal law that gives a borrower the right to question credit card bills from companies other than banks. The law lays out a process for a borrower to follow if a credit-card bill is wrong, or appears to be wrong.
Fair debt collection practices act: A federal law that protects consumers from abuse or threats from collection agencies trying to get overdue payments.
Fair housing act: A federal law that states what housing and real estate practices are discriminatory. The law also states in what ways those practices are to be avoided.
Fair market value: The amount an appraiser decides a house is worth. The appraiser compares the house with houses like it that have sold recently in the same area. The physical condition of the house also affects its fair market value.
Fannie Mae and Freddie Mac Both organizations were chartered by Congress to increase the supply of funds that mortgage lenders, such as commercial banks, mortgage bankers, savings institutions and credit unions, can make available to home buyers.
Fannie Mae and Freddie Mac buy mortgages from lenders, packaging the mortgages into securities and selling them to investors. As Fannie Mae and Freddie Mac will only buy loans that meet their guidelines , they play an important role in setting what criteria are used to evaluate a mortgage application.
FHA mortgage. A mortgage that is insured by the Federal Housing Administration. Also referred to as a government mortgage.
FHA (Federal Housing Administration): A division of the U.S. Department of Housing and Urban Development that insures mortgage loans.
FHA loan: A mortgage that is insured by the Federal Housing Administration.
FHA 203(k) Rehabilitation Mortgages. FHA-insured Section 203(k) rehabilitation first mortgages enable borrowers to purchase and rehabilitate homes. With this mortgage product, borrowers can qualify for loan amounts based on the completed value of the property, up to the maximum FHA loan limits
FHA Title I Home Improvement Loans Title I home improvement loans may be used to finance modest home improvements when homeowners have little equity in their property. Title I loans are generally based on the creditworthiness of the borrower, rather than the equity in the home.
FICO Score. See credit Score
First Mortgage A mortgage that has First claim to the secured property in the event of default.
Fixed rate mortgage A mortgage in which the interest rate does not change during the entire term of the loan.
Fixed expenses or fixed payments: Expenses or payments that usually stay the same from month to month, such as rent, a car loan, a student loan, insurance, child support.
Fixed expenses: Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenance.
Flood Insurance. Insurance that compensates For physical property damages resulting from flooding. It is required for properties located in federally designated flood areas.
Forbearance The lenders postponement of foreclosure to give the borrower time to catch up on overdue payments.
Foreclosure. The legal process by which a mortgaged property may be sold when a mortgage is in default
Good faith estimate: A lender is required to give this estimate of a borrower’s closing costs to the borrower within three business days of the loan application.
Graduated payment mortgage. A mortgage that starts with low monthly payments that increase at a predetermined rate for a specified time. The initial monthly payments are set at an amount lower than that required for full amortization of the debt.
Gross income: The total amount of money that a person receives, before taxes and other deductions. This income may include funds from a job or jobs; interest or dividends; alimony; disability payments; or public assistance.
Homestead: Primary residence as declared by the head of a household and filed with the county clerk in order to exempt the homestead from claims of creditors.
Housing expense ratio: The percentage of a person’s gross monthly income that it takes to pay a mortgage loan payment plus interest, property taxes, and insurance. Lenders use this ratio to decide whether or not to make mortgage loans.
HUD: U.S. Department of Housing and Urban Development. Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders and sets minimum standards for such homes.
Homeowner’s Insurance An insurance policy that combines personal liability coverage and hazard insurance coverage for a dwelling and its contents.
Homeowners Warranty A type of insurance that covers repairs to specified parts of a house for a specific period of time. It is provided by the builder or property seller as a condition of the sale.
HUD-1. See Settlement sheet.
Interest. The fee charged for borrowing money.
Interest rate cap. A provision of an ARM limiting how much interest rates may increase per adjustment period or over the life of a mortgage. See also Lifetime cap.
Inspection: When a house is remodeled or rehabbed it must be inspected by an inspector from the local government to be sure all work is done properly.
Installment debt: Debts or accounts that are paid off in monthly payments, or install-ments, such as credit-card accounts.
Interest escalation clause: Provides for variable rate of interest according to a standard index.
Interest rate: The lender’s rate of return on borrowed fund.
Interest-only loan: A method of loan amortization in which interest is paid periodically over the term of the loan and the entire original loan amount is paid at maturity.
Late charge. The penalty a borrower must pay when a payment is made after the due date.
Lease-Purchase Mortgage Loan. A mortgage product that allows low- and moderate Income home buyers to lease a home from a nonprofit organization with an option to buy. Each month’s rent payment consists of PITI payments on the first mortgage, plus an extra amount that is earmarked for deposit to a savings account in which money for a down payment will accumulate.
Lien: A legal claim against a property that must be paid off when the property is sold.
Lease: A contract between landlords and tenants for a possession of space for a specified amount of rent. Leases are used for all types of properties.
Lessee: The person renting or leasing a property. Also referred to as a tenant.
Lessor: A person who rents or leases a property to another. Also referred to as a Landlord.
Liability insurance: Insurance a contractor buys to protect herself and the person who hires her in case someone is hurt or damage is caused during the work she performs on a house.
Lifetime cap. A provision of an ARM that limits the total increase in interest rates over the life of the loan.
Loan commitment See Commitment letter.
Loan or mortgage value: That portion of the value of real property recognized by the lender when used to secure a loan.
Loan origination: The process whereby a lender initiates a loan with a borrower.
Loan point: A charge prepaid by the borrower upon the origination of a loan. One point equals one percent of the loan amount.
Loan servicing: Collecting loan payments, keeping records, following up on delinquencies, and taking foreclosure actions relating to a mortgage loan.
Loan servicing. The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Loan-to-value percentage (LTV). The relationship between the unpaid principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property.
Lock-in. A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.
Mechanic’s lien: A lien that can be filed by mechanics or material suppliers; it is against real property created by statute for the purpose of securing payments for services performed or materials furnished in the construction or repair of buildings or making other improvements to land.
Monthly housing costs: The total of a homeowner’s mortgage loan payment and expenses for utilities, general home repair, and upkeep.
Mortgage agreement: A document signed by a borrower and a lender giving the lender the right to take the borrower’s house if the borrower does not repay the loan
Mortgage. A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage banker A company that originates mortgages exclusively for resale in the secondary market.
Mortgage broker An individual or company that for a fee acts as intermediary between borrowers and lenders.
Mortgage insurance. See Private mortgage insurance
Mortgage insurance premium (MIP). The fee paid by a borrower to FHA or a private insurer For mortgage insurance
Mortgage margin. the set percentage the lender adds to the index value to determine the interest rare of an ARM
Mortgage note. A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the mortgage note is secured by a
Mortgage interest rate. The rate of interest in effect for the monthly payment due.
Mortgagee. The lender in a mortgage agreement.
Mortgagor. The borrower in a mortgage agreement
Negative amortization. A gradual increase in the mortgage debt that occurs when the monthly payment is not large enough to cover the entire amount of principal and interest due . The amount of the shortfall is added to the unpaid principal balance which results in negative amortization
Nontraditional credit history: A record of credit performance shown with receipts and bill and check stubs from payments to landlords, utility companies, child-care providers, and others. A method for loan applicants who do not have a credit history from, for example, car-loan or credit card payments.
Note: A document on which a borrower promises to repay a loan. Also called promissory note.
Notice of default: A formal written notice to a borrower that a default has occurred and that legal action may be taken.
Origination fee. A fee paid to a lender for processing a loan application; it is stated as a
percentage of the mortgage amount
Owner financing. A property purchase transaction in which the property seller provides all or part of the financing.
Payment cap. A provision of some ARMs limiting the amount by which a borrower’s
payments may increase regardless of any interest rate increase; may result in negative amortization. See Adjustable rate mortgage.
PITI. Stands for principal, interest, taxes, and insurance the components of a monthly mortgage payment.
Planned unit developments (PUDs). A planned unit development is a project or subdivision that consists of common property that is owned and maintained by an owners association for the benefit and use of the individual PUD unit owners.
Points. A one-time charge by the lender to increase the yield of the loan; a point is 1 percent of the amount of the mortgage.
Prepaids. Fees collected at closing to cover items such as setting up escrow accounts for property taxes, homeownerâ€™s insurance, and private mortgage insurance premiums.
Prepayment penalty. A fee that may be charged to a borrower who pays off a loan before it is due.
Prequalification. The process of determining how much money a prospective home buyer will be eligible to borrow before a loan is applied for.
Principal. The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.
Private mortgage insurance (PMI). Insurance provided by nongovernment insurers that protects lenders against loss if a borrower defaults. Fannie Mae generally requires private mortgage insurance for loans with loan-to-value (LTV) percentages greater than 80 percent.
Promissory note: A written promise of a person (maker) to pay a specified sum of money to another person (payee) in accordance with terms and conditions agreed upon by the parties.
Proration: A division of taxes, interest, and insurance so that the seller and the buyer pay the portion covering his period of ownership.
Purchase and sale agreement. A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Quiet enjoyment: Right of property owner to use his property without adverse claims of another to title or interest.
Quitclaim deed: A deed which transfers whatever interest the maker of the deed may have in the particular parcel of land. A quitclaim deed is often given to clear the title when the grantor’s interest in a property is questionable. By accepting such a deed the buyer assumes all the risks. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has. (see Deed.)
Rate lock. See Lock-in.
Real estate sales professional. A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
Real Estate Settlement Procedures Act. A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Refinancing. The process of paying off one loan with the proceeds from a new loan using the same property as security.
Rent with option to buy. See Lease-Purchase Mortgage Loan.
Rent: Consideration paid for the use of property.
Repossess: To take back a property, such as a car, when the borrower or owner does not make payments due on the property. Done by a lender or seller.
Right-of-way: The right to cross over or under another person’s property for ingress, egress, utility lines, or sewers.
Rural Development (RD): Formerly the Farmers Home Administration, RD is part of the U. S. Department of Agriculture. It administers grant and loan programs to promote and support housing and essential community facilities development in rural communities.
Second mortgage. A mortgage that has a lien position subordinate to the first mortgage.
Secondary mortgage market. The buying and selling of existing mortgages. See Fannie Mae and Freddie Mac.
Section 8 program: Program of rent supplements developed by HUD and allocated to local governments.
Septic tank: An underground tank used for sewage treatment where city sewerage is not available.
Seller-take-back. An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.
Settlement. See Closing.
Settlement sheet. The computation of costs payable at closing which determines the seller’s net proceeds and the buyer’s net payment (referred to as a HUD-1).
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.
Tenancy by entirety. A type of joint ownership of property that provides rights of survivorship and is available only to a husband and wife.
Tenancy in common. A type of joint ownership in a property without rights of survivorship.
Tenant improvements: A lease provision that obligates the owner to incur a prespecified dollar. Allowance amount to prepare the space for the tenant’s occupancy.
Term: The length of time in which a loan is to be repaid. A 30-year mortgage loan has a 30 year term.
Title company: A company that specializes in insuring title to property.
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 to protect the lender (lender’s policy) or the buyer (owner s policy) against loss arising from disputes over ownership of property.
Title search. An examination of the public records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.
Transfer tax. State or local tax payable when title passes from one owner to another.
Truth in lending act: A federal law that requires lenders to provide complete and correct information, in writing, about how much a borrower owes when payments are due and how much they are, and what interest rates and other charges are.
Underwriting. The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower’s creditworthiness and the quality of the property itself.