Your Guide to the Mortgage Process
Every term you need to know along the way.
The mortgage process can be confusing – even for the most experienced of homebuyers. To help guide you along the way, we’ve created this handy, comprehensive mortgage dictionary.
Not sure of a term in your paperwork? Need help understanding your realtor or lender? Use this dictionary to light the way.
Abstract (of Title)
A summary of the public records relating to the title to a particular piece of land. An attorney or title insurance company reviews an abstract of title to determine whether there are any title defects that must be cleared before a buyer can purchase a clear, marketable, and insurable title.
Condition in a mortgage that may require the balance of the loan to become due immediately, if regular mortgage payments are not made or for breach of other conditions of the mortgage.
An offeree’s consent to enter into a contract and be bound by the terms of the offer.
Additional Principal Payment
A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining balance on the loan.
Adjustable Mortgage Loan
Any mortgage that does not have a fixed interest rate and a fixed payment for the term of the loan, or does not amortize to zero at the end of the set term, when required payments are made on time.
Adjustable Rate Mortgage
A mortgage in which the interest rate is adjusted periodically according to the movement in a preselected index.
The original cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
The date on which the interest rate changes for an adjustable rate mortgage (ARM).
For an adjustable rate mortgage, the time between changes in the interest rate charged. The most common adjustment intervals are one, three, or five years.
The period that elapses between the adjustment dates for an adjustable rate mortgage (ARM).
A person appointed by a probate court to administer the estate of a person who died intestate.
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 certain specific terms and conditions spelled out in writing and signed by both parties.
A feature of real property that enhances its attractiveness and increases the occupant’s or user’s satisfaction, although the feature is not essential to the property’s use. Natural amenities include a pleasant or desirable location near water, scenic views of the surrounding area, etc. Human-made amenities include swimming pools, tennis courts, community buildings, and other recreational facilities.
Amortization means paying off a loan with regular payments over time, so that the amount you owe decreases with each payment. Most home loans amortize, but some mortgage loans do not fully amortize, meaning that you would still owe money after making all of your payments.
A timetable for payment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made.
The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months.
Reduce a debt by regular payments of both principal and interest.
Annual Percentage Rate
An annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. The APR reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.
An amount paid yearly or at other regular intervals, often on a guaranteed dollar basis.
A form used to apply for a mortgage loan and to record pertinent information concerning a prospective mortgagor and the proposed security.
The fee charged by the lender to the borrower for applying for a loan.
The estimated value of a property based on a qualified appraiser’s written analysis. Banks typically require appraisals before issuing loans, to ensure the estimated value of the property adequately exceeds the amount borrowed.
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
A person qualified by education, training, and experience to estimate the value of real property and personal property.
An increase in the value of a house due to changes in market conditions or other causes.
The valuation placed upon property by a public tax assessor for purposes of taxation.
The process of placing a value on property for the strict purpose of taxation. May also refer to a levy against property for a special purpose, such as a sewer assessment.
A public official who establishes the value of a property for taxation purposes.
Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).
The transfer of a mortgage from one person to another.
These loans may be passed on from a seller of a home to the buyer. The buyer “assumes” all outstanding payments.
A provision in an assumable mortgage that allows a buyer to assume responsibility for the mortgage from the seller. The loan does not need to be paid in full by the original borrower upon sale or transfer of the property.
The fee paid to a lender (usually by the purchaser of real property) resulting from the assumption of an existing mortgage.
Assumption of Mortgage
An obligation undertaken by the purchaser of property to be personally liable for payment of an existing mortgage. In an assumption, the purchaser is substituted for the original mortgagor in the mortgage instrument, and the original mortgagor is to be released from further liability in the assumption. The mortgagee’s consent is usually required. The original mortgagor should always obtain a written release from further liability if they desire to be fully released under the assumption. Failure to obtain such a release renders the original mortgagor liable if the person assuming the mortgage fails to make the monthly payments. An “Assumption of Mortgage” is often confused with “Purchasing Subject to a Mortgage.” When one purchases subject to a mortgage, the purchaser agrees to make the monthly mortgage payments on an existing mortgage, but the original mortgagor remains personally liable if the purchaser fails to make the monthly payments. Since the original mortgagor remains liable in the event of default, the mortgagee’s consent is not required to a sale subject to a mortgage. Both “Assumption of Mortgage” and “Purchasing Subject to a Mortgage” are used to finance the sale of property. They may also be used when a mortgagor is in financial difficulty and desires to sell the property to avoid foreclosure.
One who holds a power of attorney from another to execute documents on behalf of the grantor of the power.
A financial statement that shows assets, liabilities, and net worth as of a specific date.
Income before taxes are deducted.
The person designated to receive the income from a trust, estate, or a deed of trust.
Bill of Sale
A written document that transfers title to personal property.
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 their mind or is unable to purchase, the earnest money is forfeited unless the binder expressly provides that it is to be refunded.
Blanket Insurance Policy
A policy that covers more than one type of property at one location, the same type at various locations, or multiple types at multiples locations. It allows the policyholder to extend the coverage of a basic homeowner’s policy.
An interest-bearing certificate of debt with a maturity date. An obligation of a government or business corporation. A real estate bond is a written obligation usually secured by a mortgage or a deed of trust.
One who receives funds with the expressed or implied intention of repaying the loan in full.
A form of second trust that is collateralized by the borrower’s present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold.
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money. Brokers usually charge a fee or receive a commission for their services. See Real Estate Broker.
Local regulations that control design, construction, and materials used in construction. Building codes are based on safety and health standards.
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 established by a filed plat of subdivision, by restrictive covenants in deeds or leases, by building codes, or by zoning ordinances.
Money advanced by an individual (seller, builder, etc.) to reduce monthly payments for a home mortgage either during the entire term or for an initial period of years.
A provision in the mortgage that gives the mortgagee the right to call the mortgage due and payable at the end of a specified period for whatever reason.
A provision of an adjustable rate mortgage (ARM) limiting how much the interest rate or mortgage payments may increase.
Money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.
Any structure or component erected as a permanent improvement to real property that adds to its value and useful life.
A loan transaction in which the borrower receives funds at the time of closing.
A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens.
Certificate of Deposit
A document written by a bank or other financial institution that is evidence of a deposit, with the issuer’s promise to return the deposit plus earnings at a specified interest rate within a specified time period.
Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value
A Certificate of Reasonable Value (CRV) is a document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
Certificate of Title
A certificate issued by a title company or a written opinion rendered by an attorney that the seller has good marketable and insurable title to the property, which they are offering for sale. A certificate of title offers no protection against any hidden defects in the title, which an examination of the records could not reveal. The issuer of a certificate of title is liable only for damages due to negligence. The protection offered a homeowner under a certificate of title is not as great as that offered in a title insurance policy.
Chain of Title
The history of all of the documents that have transferred title to a parcel of real property, starting with the earliest of existing document and ending with the most recent.
The frequency (in months) of payment and/or interest rate changes in an adjustable rate mortgage (ARM).
Another name for personal property.
An amount requested of an insurer, by a policyholder or a claimant, for an insured loss.
A title that is free of liens or legal questions as to ownership of the property
On a real estate transaction it is the process of completing a financial transaction. If there is a mortgage on the property, the process includes signing final mortgage documents, disbursing funds, and, if applicable, transferring ownership of the property.
The fees charged in connection with a mortgage loan transaction. Money paid by a buyer (and/or seller or other third party, if applicable) to effect the closing of a mortgage loan, generally including, but not limited to a loan origination fee, title examination and insurance, survey, attorney’s fee, and prepaid items, such as escrow deposits for taxes and insurance.
Closing Cost Item
A fee or amount that a homebuyer must pay at closing for a single service, tax, or product.
A required five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage.
Cloud (on Title)
An outstanding claim or encumbrance, which adversely affects the marketability of title.
An additional borrower on a loan. A co-borrower’s obligations on a loan are the same as all other borrowers.
A sharing of insurance risk between the insurer and the insured. Coinsurance depends on the relationship between the amount of the policy and a specified percentage of the actual value of the property insured at the time of the loss.
A provision in a hazard insurance policy that states the amount of coverage that must be maintained – as a percentage of the total value of the property – for the insured to collect the full amount of a loss.
An asset (such as a car or a home) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.
The efforts used to bring a delinquent mortgage current and to file the necessary notices to proceed with foreclosure when necessary.
A person who signs a promissory note along with the borrower. A co-maker’s signature guarantees that the loan will be repaid because the borrower and the co-maker are equally responsible for the repayment.
Money paid to a real estate agent or broker by the seller as compensation for finding a buyer and completing the sale.
A written letter of agreement detailing the terms and conditions by which the lender will lend and the borrower will borrow funds to finance a home.
A formal offer by a lender stating the terms under which it agrees to loan money to a homebuyer.
Common Area Assessments
Levies against individual unit owners in a condominium or planned unit development (PUD) project for additional capital to defray homeowners’ association costs and expenses and to repair, replace, maintain, improve, or operate the common areas of the project.
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.
An unwritten body of law based on general custom in England and used to an extent in the United States.
In some western and southwestern states, a form of ownership under which property acquired during a marriage is presumed to be owned jointly unless acquired as separate property of either spouse.
An abbreviation for “comparable properties,” which are used as a comparison in determining the current value of a property that is being appraised.
Interest paid on the original principal balance and the accrued and unpaid interest.
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.
Individual ownership of a dwelling unit and an individual interest in the common areas and facilities, which serve the multi-unit project.
Changing the ownership of an existing building (usually a rental project) to the condominium form of ownership.
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.
A short-term loan for funding the cost of construction. The lender advances funds to the builder as the work progresses.
Consumer Reporting Agency (or Bureau)
An organization that prepares reports that are used by lenders to determine a potential borrower’s credit history. The agency obtains data for these reports from a credit repository as well as from other sources.
A condition that must be met before a contract is legally binding.
An oral or written agreement to do or not to do a certain thing.
In the construction industry, a contractor is one who contracts to erect buildings or portions of them. There are also contractors for each phase of construction: heating, electrical, plumbing, air conditioning, road building, bridge and dam erection, and others.
Any mortgage that is not insured or guaranteed by the federal government.
A provision in some adjustable rate mortgages (ARMs) that allows the borrower to change the ARM to a fixed rate mortgage at a specified time.
An adjustable-rate mortgage (ARM) that can be converted to a fixed rate mortgage under specified conditions.
A type of multiple ownership in which the residents of a multi-unit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.
A business trust entity that holds title to a cooperative project and grants occupancy rights to particular apartments or units to shareholders through proprietary leases or similar arrangements.
An apartment building or a group of dwellings owned by a corporation, the stockholders of which are the residents of the dwellings. It is operated for their benefit by their elected board of directors. In a cooperative, the corporation or association owns title to the real estate. A resident purchases stock in the corporation, which entitles them to occupy a unit in the building or property owned by the cooperative. While the resident does not own their unit, they have an absolute right to occupy their unit for as long as they own the stock.
Mortgages related to a cooperative project.
A residential or mixed-use building wherein a corporation or trust holds title to the property and sells shares of stock representing the value of a single apartment unit to individuals who, in turn, receive a proprietary lease as evidence of title.
Arrangements under which an employer moves an employee to another area as part of the employer’s normal course of business or under which it transfers a substantial part or all of its operations and employees to another area because it is relocating its headquarters or expanding its office capacity.
Cost of Funds Index
A Cost of Funds Index (COFI) is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It represents the weighted-average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco.
A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.
The amount of protection, usually expressed in a percentage of the total claim amount, an insured receives under a certificate.
A record of an individual’s open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.
Credit Life Insurance
A type of insurance often bought by mortgagors because it will pay off the mortgage debt if the mortgagor dies while the policy is in force.
A person to whom money is owed.
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.
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.
A loan that is removed from a delinquency status with no loss to the insurer.
A deed given by a mortgagor to the mortgagee to satisfy a debt and avoid foreclosure. Also called a Voluntary Conveyance.
Deed of Trust
A legal document in which the borrower transfers the title to a third party (trustee) to hold as security for the lender. When the loan is paid in full, the trustee transfers title back to the borrower. If the borrower defaults on the loan the trustee will sell the property and pay the lender the mortgage debt.
Failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage.
A court order to pay the balance owed on a loan if the proceeds from the sale of the security are insufficient to pay off the loan. Deficiency judgments are not allowed in all states.
A loan in which a payment is overdue but not yet in default.
A decline in the value of a property; the opposite of “appreciation.”
A state tax, in the forms of stamps, required on deeds and mortgages when real estate title passes from one owner to another. The amount of stamps required varies with each state.
The rights of a widow in the property of her husband at his death.
The amount you pay toward the home upfront. You put a percentage of the home’s value down and borrow the rest through your mortgage loan.
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.
This terminology is usually used for second mortgages.
Earnest Money Deposit
A deposit a buyer pays to show good faith on a signed contract agreement to buy a home. The deposit is held by a third party like a real estate agent or title company. If the home sale is finalized or “closed” the earnest money may be applied to closing costs. If the contract is terminated for a permissible reason, the earnest money is returned to the buyer. If the buyer does not perform in good faith, the earnest money may be forfeited and paid out to the seller.
A right-of-way granted to a person or company authorizing access to or over the owner’s land. An electric company obtaining a right-of-way across private property is a common example.
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.
Effective Gross Income
Normal annual income including overtime that is regular or guaranteed. The income may be from more than one source. Salary is generally the principal source, but other income may qualify if it is significant and stable.
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.
A special Fannie Mae housing initiative that offers several different ways for employers to work with local lenders to develop plans to assist their employees in purchasing homes.
An obstruction, building, or part of a building that intrudes beyond a legal boundary onto neighboring private or public land, or a building extending beyond the building line.
A legal right or interest in land that affects a good or clear title and diminishes the land’s value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, pending legal action, unpaid taxes, or restrictive covenants. An encumbrance does not legally prevent the transfer of the property to another. A title search is all that is usually done to reveal the existence of such encumbrances, and it is up to the buyer to determine whether they want to purchase with the encumbrance or what can be done to remove it.
A person who signs ownership interest over to another party. Contrast with co-maker.
Equal Credit Opportunity Act
The Equal Credit Opportunity Act (ECOA) is a federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
The difference between the market value of a property and the homeowner’s outstanding mortgage balance.
A loan based on the borrower’s equity in his or her home, in which the loan amount is determined by the value of the property.
An account set up by your mortgage lender to pay certain property-related expenses, like property taxes and homeowner’s insurance. A portion of your monthly payment goes into the account.
The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.
Funds collected by the servicer and set aside in an escrow account to pay the borrower’s property taxes, mortgage insurance, and hazard insurance.
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
The portion of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
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 the time of death.
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.
A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time, but reserving the owner’s right to sell the property alone without the payment of a commission.
A person named in a will to administer an estate.
Fair Credit Reporting Act
A consumer protection law that regulates the accuracy, fairness, and privacy when it comes to the information in a person’s credit report.
Fair Market Value
The determined price that a property will sell for in an open market. The Fair Market Value is agreed upon between a willing buyer and seller, both of whom are reasonably knowledgeable about the property in question.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system.
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 airspace within their 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 loans are loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA).
Government loans are loans that are guaranteed or purchased by government organizations. Two of the most popular government loans are the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA).
The Federal Housing Finance Board (FHFB) oversees the credit functions of the 12 regional Federal Home Loan Banks.
The Federal Home Loan Bank Board (FHLBB) is a regulatory and supervisory agency for federally charted savings institutions, which oversees the operations of the FSLIC and FHLMC. This agency was abolished by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (see FIRREA).
The Federal Home Loan Mortgage Corporation (Freddie Mac) is a private corporation founded by Congress. Its mission is to promote stability and affordability in the housing market by purchasing mortgages from banks and other loan makers. The corporation is currently under conservatorship, under the direction of the Federal Housing Finance Agency (FHFA).
The total dollar amount the loan will cost the borrower. It includes all interest payments for the life of the loan, any interest paid at closing, the origination fee, and any other charges paid to the lender and/or broker. Appraisal, credit report, and title search fees are not included in the finance charge calculation.
A fee or commission paid to a mortgage broker for finding a mortgage loan for a prospective borrower.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) is an act signed into law in August 1989 by President George H.W. Bush that restructured the thrift regulatory and insurance system.
A lender’s agreement to make a loan to a specific borrower on a specific property.
The mortgage that has first claim in the event of default.
The monthly payment due on a mortgage loan.
Fixed Rate Mortgage
A fixed rate mortgage (FRM) is a mortgage in which the interest rate does not change during the entire term of the loan.
Personal property that becomes real property when attached permanently to real estate.
Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.
The Federal National Mortgage Association (Fannie Mae) purchases and guarantees mortgages from lending institutions in an effort to increase affordable lending. Fannie Mae is not a federal agency. It is a government-sponsored enterprise under the conservatorship of the Federal Housing Finance Agency (FHFA).
The process by which a mortgaged property may be sold when a mortgage is in default.
The loss of money, property, rights, or privileges due to a breach of legal obligation.
Setting the principal and interest (P&I) payments to the level that will fully amortize the loan’s outstanding balance over the remaining term using the fully indexed accrual rate at the recasting point.
Fully Indexed Accrual Rate
The interest (accrual) rate resulting from the index at closing (or at another point in the loan) plus the lender’s full spread, rounded as prescribed in the loan documents (often to the nearest one-eighth of 1 percent).
General Warranty Deed
A deed that conveys not only all the grantor’s interests in and title to the property to the grantee, but also warrants that if the title is defective or has a “cloud” on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic’s liens against it), the grantee may hold the grantor liable.
Government loans are loans that are guaranteed or purchased by government organizations. Two of the most popular government loans are the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA).
Graduated Payment Mortgage
A graduated payment mortgage (GPM) is a mortgage where the payments are scheduled to increase, usually annually, for a set number of years, and then level off. GPM can be used with either a fixed or adjustable interest rate, and usually has a 30-year term.
That party in the deed who is the buyer or recipient.
A person or institution that conveys ownership of a 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.
Growing Equity Mortgage
A growing equity mortgage (GEM) is a fixed-rate graduated payment mortgage with small initial payments that increase each year so that the loan pays off in a shortened term, usually 15 years.
Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism, or other hazards.
An insurance policy that combines liability coverage and hazard insurance.
Insurance offered by a seller that covers certain home repairs and fixtures for a specified period of time.
The ratio of the monthly housing payment to total gross monthly income. Also called Payment-to-Income Ratio or Front-End Ratio.
The Department of Housing and Urban Development (HUD) is a cabinet department responsible for the implementation and administration of government housing and urban development programs.
Real estate developed or improved to produce income.
A regularly published rate, independent of the lending institution, that measures the prevailing cost of funds and is used periodically with the margin to set adjustable mortgage loan (AML) accrual rates. Also called Rate Index.
An increase in the amount of money or credit available in relation to the number of goods or services available, which causes an increase in the general price level of goods and services. Over time, inflation reduces the purchasing power of a dollar, making it worth less.
Initial Borrower Interest Rate
The rate on which the borrower’s first payment is calculated.
Initial Borrower Payment Rate
The annual interest rate used to calculate the borrower’s initial cash payment.
Initial Interest Rate
The original interest rate of the mortgage at the time of closing.
The regular periodic payment that a borrower agrees to make to a lender.
Borrowed money that is repaid in equal payments, known as installments. A furniture loan is often paid for as an installment loan.
A property title that a title insurance company agrees to insure against defects and disputes.
A contract that provides compensation for specific losses in exchange for a periodic payment. An individual contract is known as an insurance policy, and the periodic payment is known as an insurance premium.
A document that states that insurance is temporarily in effect. Because the coverage will expire by a specified date, a permanent policy must be obtained before the expiration date.
The fee charged for borrowing money.
Interest Accrual Rate
The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments, although it is not used for an adjustable rate mortgage (ARM) with payment change limitations.
The percentage of an amount of money, which is paid for its use for a specified time.
Interest Rate Cap
The maximum interest rate increase that can occur annually for an adjustable rate mortgage (ARM) even if the rate would have increased more under market interest rates.
Interest Rate Ceiling
For an adjustable rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.
Interest Rate Floor
For an adjustable rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.
A property that is not occupied by the owner.
An Individual Retirement Account (IRA) allows individuals to make tax-deferred contributions to a personal retirement fund. Individuals can place IRA funds in bank accounts or in other forms of investment such as stocks, bonds, or mutual funds.
A form of co-ownership that gives each tenant equal interest and equal rights in the property, including the right of survivorship.
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.
A lien on the property of a debtor resulting from the decree of a court.
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.
Jumbo, or non-conforming, is a term used to describe a loan that does not conform to Fannie Mae or Freddie Mac guidelines.
The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
A written agreement between the property owner and a tenant that stipulates the conditions under which the tenant may possess the real estate for a specified period of time and rent.
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.
A property description recognized by law that is sufficient to locate and identify the property without oral testimony.
An institution that makes loans to borrowers on real estate.
A person’s financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others.
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.
A legal claim against a property that must be paid when the property is sold.
A provision of an adjustable rate mortgage (ARM) that limits the total increase in interest rates over the life of the loan.
Lifetime Payment Cap
For an adjustable rate mortgage (ARM), a limit on the amount that payments 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.
A cash asset or an asset that is easily converted into cash.
A sum of borrowed money (principal) that is generally repaid with interest.
The formal offer by a lender stating the terms under which it agrees to loan money to a homebuyer.
A three-page form that you receive after applying for a mortgage. The form provides you with important information, including estimated interest rate, monthly payment, and total closing costs for the loan. It also gives information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future.
The process by which a mortgage lender brings into existence a mortgage secured by real property.
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
The loan-to-value (LTV) ratio is the original loan amount divided by the lower of the sales price or the appraised value.
A rate lock on a mortgage loan means that your interest rate won’t change between the offer and closing, as long as you close within the specified time frame and there are no changes to your application.
The time period during which the lender has guaranteed an interest rate to a borrower.
The amount the lender adds to the index to determine the Fully Indexed Accrual Rate. Also called Spread.
A title that is free and clear of objectionable liens, clouds, or other title defects. A title that enables an owner to sell their property freely to others and which others will accept without objection.
A homeowners’ association in a large condominium or planned unit development (PUD) project that is made up of representatives from associations covering specific areas within the project. In effect, it is a “second-level” association that handles matters affecting the entire development, while the “first-level” associations handle matters affecting their particular portions of the project.
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 that contains information from three credit repositories. When the report is created, the information is compared for duplicate entries. Any duplicates are combined to provide a summary of a borrower’s credit.
Money Market Account
A savings account that provides bank depositors with many of the advantages of a money market fund. Certain regulatory restrictions apply to the withdrawal of funds from a money market account.
Money Market Fund
A mutual fund that allows individuals to participate in managed investments in short-term debt securities, such as certificates of deposit and Treasury bills.
Monthly Housing Expense
Total principal, interest, taxes, and insurance paid by the borrower on a monthly basis. Used with gross income to determine affordability.
Monthly Payment Mortgage
A mortgage that requires payments to reduce the debt once a month.
A legal document that pledges a property to the lender as security for a payment of a debt.
A company that originates mortgages exclusively for resale in the secondary market.
A company that for a fee matches borrowers with lenders.
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 house.
The lender in a mortgage agreement.
Mortgage Insurance Premium
The payment made by a borrower to the lender for transmittal to HUD to help defray the cost of the FHA mortgage insurance program and to provide a reserve fund to protect lenders against loss in insured mortgage transactions. In FHA-insured mortgages, this represents an annual rate of one-half of 1 percent paid by the mortgagor on a monthly basis.
Mortgage Life Insurance
A type of term life insurance often bought by mortgagors. The amount of coverage decreases as the principal balance declines. If the borrower dies while the policy is in force, the debt is automatically satisfied by insurance proceeds.
A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of indebtedness, and states the manner in which it shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment.
The borrower in a mortgage agreement.
Properties that provide separate housing units for more than one family, although they secure only a single mortgage.
A residential mortgage on a dwelling that is designed to house more than four families, such as a high-rise apartment complex.
A gradual increase in mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the remaining balance to create “negative” amortization. Also called Deferred Interest.
Net Cash Flow
The income that remains for an investment property after the monthly operating income is reduced by the monthly housing expense, which includes principal, interest, taxes, and insurance (PITI) for the mortgage, homeowners’ association dues, leasehold payments, and subordinate financing payments.
Net Effective Income
Gross income less federal income tax.
The value of all assets, including cash, less total liabilities.
No Cash-Out Refinance
A refinance transaction in which the new mortgage amount is limited to the sum of the remaining balance of the existing first mortgage, closing costs (including prepaid items), points, the amount required to satisfy any mortgage liens that are more than one year old (if the borrower chooses to satisfy them), and other funds for the borrower’s use (as long as the amount does not exceed 1 percent of the principal amount of the new mortgage).
An asset that cannot easily be converted into cash.
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
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.
Original Principal Balance
The total amount of principal owed on a mortgage before any payments are made.
A fee paid to a lender for processing a loan application.
The Office of Thrift Supervision (OTC) charters federal thrifts, serves as the primary federal examiner and regulator of federal and state-chartered savings associations and administers laws governing savings and loan holding companies.
A property purchase transaction in which the property seller provides all or part of the financing.
Owner-occupied means the property is the owner’s primary residence.
Payment Adjustment Period
The length of time (typically a year) between changes to the borrower’s principal and interest (P&I) payment.
Payment Buy Down
Payment buy downs occur when a third party, typically a builder, pays part of the initial principal and interest (P&I) payments for a year or two so that the borrower has smaller payments and can qualify for the loan.
A limit on the amount the payment can be changed at the end of each payment adjustment period.
In a payment discount, the lender reduces the first year’s interest rate to make the mortgagor more attractive to borrowers.
Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any one adjustment period.
Periodic Rate Cap
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.
Any property that is not real property.
Principal, Interest, Taxes, and Insurance, known as PITI, are the four basic elements of a monthly mortgage payment.
Planned Unit Development
A planned unit development (PUD) is 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.
A map or chart of a lot, subdivision, or community drawn by a surveyor showing boundary lines, buildings, improvements on the land, and easements.
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.
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.
Payment of mortgage loan, or part of it, before due date.
The process of determining how much money a prospective homebuyer will be eligible to borrow before application.
The interest rates that banks charge to their preferred customers.
The amount borrowed or remaining unpaid. Also, that part of the monthly payment that reduces the outstanding balance of a mortgage.
Private Mortgage Insurance
Insurance provided by nongovernmental insurers that protect lenders against loss if a borrower defaults.
A written promise to repay a specified amount over a specified period of time.
A tax levied on real estate based on a property’s value, as determined by local officials.
A meeting in an announced public location to sell property to repay a mortgage that is in default.
See Agreement of Sale.
Purchase Money Transaction
The acquisition of property through the payment of money or its equivalent.
Guidelines applied by lenders to determine how large a loan to grant a homebuyer.
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.
A radioactive gas found in some homes that in sufficient concentrations could cause health problems.
A limit on the amount of which the interest rate charged to the borrower can be changed. Also called Interest Rate Caps.
Real Estate Broker
A middle man or agent who buys and sells real estate for a company, firm, or individual on a commission basis. The broker does not have title to the property but generally represents the owner.
Real Estate Owned
Real Estate Owned (REO) is a term applied to foreclosed properties where ownership has transferred to the bank or lender.
RESPA seeks to reduce unnecessarily high settlement costs by requiring disclosures to homebuyers and sellers, and by prohibiting abusive practices in the real estate settlement process. All borrowers must be given information about real estate transactions, settlement services, and relevant consumer protection laws, as well as the possibility of mortgage servicing being transferred. Borrowers are entitled to initial and annual escrow account statements, as well as itemized statements of actual settlement costs. RESPA outlaws kickbacks, referral fees, and unearned fees, prohibits sellers from requiring borrowers to purchase title insurance from specific companies, and does not allow loan servicers to require excessively large escrow accounts.
Land and appurtenances, including anything of a permanent nature such as structures, trees, minerals, and the interest, benefits, and inherent rights thereof.
A real estate broker or an associate who holds active membership in a local real estate board that is affiliated with the National Association of Realtors.
The cancellation or annulment of a transaction or contract by the operation of a law or by mutual consent.
The public official who keeps records of transactions that affect real property in the area.
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, mortgage note, satisfaction of mortgage, or extension of mortgage, thereby making it a part of the public record. The process of the same mortgagor paying off one loan with the proceeds from another loan.
A mortgage created to cover the costs of repairing, improving, and sometimes acquiring an existing property.
The amount of principal that has not yet been repaid.
The original amortization term minus the number of payments that have been applied.
An arrangement made to repay delinquent installments or advances. Lenders’ formal repayment plans are called Relief Provisions.
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.
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 determination whether a covenant runs with the land or is personal is governed by the language of the covenant, the intent of the parties, and the law in the state where the land is situated. 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 U.S. Supreme Court.)
A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved 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 First 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 they offer it for sale or lease to others.
Right of Ingress or Egress
The right to enter or leave designated premises.
Right of Survivorship
In joint tenancy, the right of survivors to acquire the interest of a deceased joint tenant.
The Resolution Trust Corporation (RTC) was formed to resolve thrift failures between 1989 and mid-1995 and dispose of their assets and liabilities. In 1995, the Resolution Trust Corporation’s duties were transferred to the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC). In 2006, the SAIF and its sister fund for banks – the Bank Insurance Fund (BIF) – also administered by the FDIC, were combined to form the Deposit Insurance Fund (DIF) under the provisions of the Federal Deposit Insurance Reform Act of 2005.
See Agreement of Sale.
A mortgage that has rights that are subordinate to the rights of the first mortgage holders.
Secondary Mortgage Market
The buying and selling of existing mortgages.
Seller-provided funds include all transaction costs paid by the seller except the real estate agent’s (or broker’s) fee. Also called Seller Contributions.
The party who has entered into an agreement with the insured to service a loan.
See Closing Costs.
A premium that provides coverage for more than a year.
A special tax imposed on property, individual lots or all property in the immediate area, for road construction, sidewalks, sewers, streetlights, etc.
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 in 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 they have done nothing during the time they held title to the property which has, or which might in the future, impair the grantee’s title.
A map or plat made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and relationship to surrounding tracts of land. A survey is often required by the lender to assure that a building is actually sited on the land according to its legal description.
A claim against real estate for the amount of its unpaid taxes.
Similar to a Payment Discount, but implies either an unusually large initial rate discount or an attempt by the lender to lure an otherwise unqualified borrower into the mortgage.
Tenancy by the Entirety
A type of joint tenancy of property that provides right of survivorship and is available only to a husband and wife. Contrast with Tenancy in Common.
Tenancy in Common
A type of joint tenancy in a property without right of survivorship. Contrast with Tenancy by the Entirety and Joint Tenancy.
The obligee for a cooperative share loan, who is both a stockholder in a cooperative corporation and a tenant of the unit under a proprietary lease or occupancy agreement.
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.
As generally used, the rights of ownership and possession of particular property. In real estate usage, title may refer to the instruments or documents by which a right of ownership is established (title documents), or it may refer to the ownership interest one has in the real estate.
A company that specializes in examining and insuring titles to real estate.
Protects lenders or homeowners against loss of their interest in property due to legal defects in title. Title insurance may be issued to a “mortgagee’s title policy.” Insurance benefits will be paid only to the “named insured” in the title policy, so it is important that an owner purchase an “owner’s title policy,” if they desire the protection of title insurance.
Title Search or Examination
A check of the title records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title.
Total Debt Ratio
Monthly debt and housing payments divided by gross monthly income. Also known as Back-End Ratio.
Total Expense Ratio
Total obligations as a percentage of gross monthly income. The total expense ratio includes monthly housing expenses plus other monthly debts.
Equity that results from a property purchaser giving their existing property (or an asset other than real estate) as trade as all or part of the down payment for the property that is being purchased.
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. In cases in which an inter vivos revocable trust is the borrower, lenders also consider any transfer of a beneficial interest in the trust to be a transfer of ownership.
State or local tax payable when title passes from one owner to another.
An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans.
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 (TIL) is 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.
The process used to determine loan approval. It involves evaluating the property, the borrower’s credit and ability to pay the mortgage.
A loan that is not backed by collateral.
A VA loan is a loan program offered by the Department of Veterans Affairs (VA) to help servicemembers, veterans, and eligible surviving spouses buy homes. The VA does not make the loans but sets the rules for who may qualify and the mortgage terms. The VA guarantees a portion of the loan to reduce the risk of loss to the lender. The loans generally are only available for a primary residence.
Having the right to use a portion of a fund such as an individual retirement fund.
A mortgage that includes the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the wraparound mortgagee, who then forwards the payments on the first mortgage to the first mortgagee.
The acts of an authorized local government establishing building codes and setting forth districts to divide a town, city, village, or county into separate residential, commercial, and industrial uses. Zoning controls population density and preserves certain aesthetic ideals.