Glossary of Terms

Acceleration
The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower), or by using the right vested in the Due-on-Sale Clause.

Acre
A unit of area used in land measurement and equal to 160 square rods, 4,840 square yards, or 43,560 square feet.

Addendum
A form or document added to a contract or agreement also known as a Rider.

Adjustable rate mortgage (ARM)
A mortgage where the interest rate is not fixed, but changes during the life of the loan in line with movements in an index rate. Also referred to as the variable rate mortgage, renegotiable rate mortgage or the Canadian rollover mortgage.

Adjustment Interval
As related to an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index.

Agency
A business or service officially acting for others.

Agent
One that acts as the representative of another.

Alienation Clause
A clause calling for a debt under a mortgage or deed of trust to be due in its entirety upon transfer of ownership of the secured property.

Amortization
Loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

Annual Percentage Rate (A.P.R.)
The interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account point and other credit cost. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan.

Appraisal
An official evaluation of the property value, made by a qualified professional called an “appraiser.”

Appurtenance
A right, privilege, or property considered incident to the principal property for purposes such as passage of title, conveyance, or inheritance.

Arrears
The state of being behind in fulfilling contracted obligations or payments. Interest is said to be paid in arrears since it is paid to the date of payment rather than in advance.

Assessment
A local tax levied against a property for a specific purpose, such as sewer or street lights.

Assign
To transfer property, rights or interests.

Assignee
One to whom a transfer of property, rights or interests is made.

Assignor
One who makes an assignment.

Assumption
The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will apply.

Balloon (payment) Mortgage
Usually a short-term, fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

Binder
A payment or written statement making an agreement legally binding until the completion of a formal contract.

Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same mortgage.

Borrower (Mortgagor)
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client buy who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

Buy-down
When the lender and/or the home builder subsidized the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

Buyer’s Market
Market where there is more properties available for sale than interested buyers.

Cash Flow
The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.).

Caps (interest)
Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan.

Caps (payment)
Consumer safeguards which limit the amount monthly payments may change on an adjustable rate mortgage.

Caveat Emptor
The buyer must inspect the property and satisfy himself that it is in sufficient shape. The seller is not obligated to disclose defects but may not conceal a known defect or lie if asked.

Certificate of Eligibility
The document given to qualified veterans which entitles them to VA loans for homes, business, and mobile homes. Certificates of eligibility may be obtained by sending DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility).

Certificate of Occupancy
A certificate issued by the local government stating that the building is in condition to be occupied.

Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans Administration showing the property’s current market value.

Certificate of Satisfaction
A document signed by the Noteholder and recorded in the land records noting release of a Deed of Trust, Mortgage or other lien on the property.

Certificate of Veteran Status
The document given to veterans or reservists who have served 90 days of continuous active duty (including training time). It may be obtained by sending DD-214 to the local VA office with form 26-8261a (request for Certificate of Veteran Status. This document enables veterans to obtain lower down payments on certain FHA insured loans).

Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually is about 3 percent to 6 percent of the mortgage amount.

Commitment
A promise by a lender to make a loan on specific terms or conditions to a borrower or builder. A promise by an investor to purchase mortgages from a lender with specific terms or conditions. An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

Construction Loan
A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he progresses.

Contract Sale or Deed:
A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.

Conventional Loan
A mortgage not insured by FHA or guaranteed by the VA.

Credit Report
A report documenting the credit history and current status of a borrower’s credit standing.

Debt-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her gross monthly income. See Housing Expenses-to-Income Ratio.

Deed
The written document conveying real property.

Deed of Trust
In many states, this document is used in place of a mortgage to secure the payment of a note.

Default
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

Deferred Interest
When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See Negative Amortization.

Delinquency
Failure to make payments on time. This can lead to foreclosure.

Discount Point
See points.

Down Payment
Money paid to make up the difference between the purchase price and the mortgage amount.

Due-on-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

Earnest Money
Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

Easement
A right, as a right of way, afforded a person to make limited use of another’s real property. Examples may include utility lines and driveways.

Eminent Domain
A government’s right to take private property for public use, usually with compensation to the owner.

Encroachment
The physical intrusion of a structure or improvement beyond proper or prescribed limits.

Encumbrance
A lien or claim on the property.

Entitlement
The VA home loan benefit is called entitlement. This is also known as eligibility.

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
The money value of a property beyond any mortgage or liabilities existing on it.

Escrow
An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing.

Fannie Mae
See Federal National Mortgage Association.

Farmers Home Administration (FmHA)
Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

Federal Home Loan Bank Board (FHLBB)
The former name for the regulatory and supervisory agency for federally chartered savings institutions. The agency is now called the Office of Thrift Supervision.

Federal Home Loan Mortgage Corporation(FHLMC)
Also called “Freddie Mac.” A quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

Federal Housing Administration (FHA)
A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

Federal National Mortgage Association (FNMA)
Also known as “Fannie Mae.” A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

FHA Loan
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, ($155,250 as of 1/1/96), they are generous enough to handle moderately-priced homes almost anywhere in the country.

FHA Mortgage Insurance
A required fee (up to 2.25 percent of the loan amount) paid at closing to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.

Firm Commitment
A promise by FHA to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan.

Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages throughout the term of the loan for the original borrower.

Foreclosure
A legal process by which the mortgagor is deprived of his right to redeem the mortgaged property the borrower has not met the terms of the mortgage. Also known as a repossession of property.

Fully Indexed Note Rate
As related to adjustable rate mortgages, the index value at the time of application plus the gross margin stated in the note.

Ginnie Mae (GNMA)
Government National Mortgage Association. A federal association working with FHA which offers special assistance in obtaining mortgages, and purchases mortgages in a secondary capacity.

Graduated Payment Mortgage (GPM)
A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

Grandfather Clause
The clause in some laws creating exemption because of conditions existing before enactment of the legislation.

Grantee
The person receiving an interest in the property.

Grantor
The person granting, selling or giving up an interest in property.

Graduated Payment Mortgage (GPM)
A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off.

Gross Income
Total income before deductions.

Gross Margin
As related to adjustable rate mortgages, an amount expressed as percentage points, stated in the note which is added to the current index value on the rate adjustment date to establish a new note rate.

Ground Rent
Rent paid for vacant land. If the property is improved, ground rent is the portion attributable to the land only.

Guaranty
An agreement by which one party assumes the responsibility of assuring payment or fulfillment of another party’s debts or obligations.

Hazard Insurance
A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.

Homeowner Association
An association of people who own homes in a given area for the purpose of improving or maintaining the quality of the area.

Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower’s housing expenses are divided by his/her gross monthly income. See debt-to-income ratio.

Impound
That portion of a borrower’s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

Index
A published interest rate against which lenders measure the differencebetween 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.

Initial Note Rate
As related to adjustable rate mortgages, the note rate at the time of origination.

Interim Financing
A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.

Investor
A money source for a lender.

Jumbo Loan
A loan which is larger (more than $207,000 as of 1/1/96) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Letter of Intent
A formal method of stating that a prospective developer, buyer or lessee, is interested in property.

Lien
A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

Life Cap
As related to adjustable rate mortgages, the ceiling in which the note rate may not exceed over the life of the loan.

Loan-to-Value Ratio (LTV)
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

Margin
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

Market Value
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

Mechanic’s Liens
A lien created by statue for the purpose of securing priority of payment for the price of value of work performed and materials furnished in construction of repair of improvements to land, and which attached to the land as well as the improvements.

Metes and Bounds
A method of describing boundaries of land using directions and distances instead of referring to a lot number. This method is often used before land has been subdivided.

MIP (Mortgage Insurance Premium)
Insurance from FHA to the lender against incurring a loss on account of the borrower’s default.

Mortgage
A temporary and conditional pledge of property to a creditor as security for the performance of an obligation or repaying of a debt.

Mortgage broker
One who for a fee, brings together a borrower and lender, and handles the necessary applications for the borrower to obtain a loan against real property by giving a mortgage or deed of trust as security. Also known as a loan broker.

Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.

Mortgagee
The lender.

Mortgagor
The borrower or homeowner.

Negative Amortization
Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost which is not covered by the payment is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results if monthly payments not high enough to cover the interest due.

Net Effective Income
The borrower’s gross income minus federal income tax.

Net Worth
The difference between total assets and total liabilities.

Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Note: The signed obligation to pay a debt, as a mortgage note.

Note
A written promise to repay a certain sum of money on specified terms.

Office of Thrift Supervision (OTS)
The regulatory and supervisory agency for federally chartered savings institutions. Formally known as Federal Home Loan Bank.

Origination Fee
The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.

Partial Release
A release of a portion of property covered by a mortgage.

Permanent Loan
A long term mortgage, usually ten years or more. Also called an “end loan.”

PITI
Principal, Interest, Taxes and Insurance. Also called monthly housing expense.

Pledged Account Mortgage (PAM):
Money is placed in a pledged savings account, and this fund plus earned interest is gradually used to reduce mortgage payments.

Points (loan discount points)
Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

Power of Attorney
A legal document authorizing one person to act on behalf of another.

Prepaid Expenses
Necessary to create an escrow account or to adjust the seller’s existing escrow account. May include taxes, hazard insurance, private mortgage insurance and special assessments.

Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.

Primary Mortgage Market
Lenders making mortgage loans directly to borrower’s such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets such as to FNMA or GNMA, etc.

Prime Rate
The lowest rate of interest on bank loans at a given time and place, offered to qualified borrowers.

Principal
The sum of money owed as a debt, on which interest is figured.

Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment – as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan’s structure.

Property Tax
Generally, tax levied on both real and personal property.

Realtor
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

Recision
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

Recording Fees
Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

Refinance
Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.

Renegotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.

RESPA
Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.

Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as Satisfaction of Mortgage: The document issued by the mortgagee when the mortgage loan is paid in full. Also called a “release of mortgage.”

Rider
An amendment or addition to a document or record.

Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one.

Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.

Servicing
All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

Settlement
See closing.

Shared Appreciation Mortgage (SAM)
A mortgage in which a borrower receives a below-market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgage where the borrower shares the monthly principal and interest payments with another party in exchange for part of the appreciation.

Simple Interest
Interest which is computed only on the principle balance.

Survey
A measurement of land reported on a map showing the location of the land with reference to the boundaries, area or elevations of land or structures.

Sweat Equity
Equity created by a purchaser performing work on a property being purchased.

Tenants by Entirety
A husband and wife own the property with the common law right of survivorship so, if one dies, the other automatically inherits.

Tenants In Common
Two or more persons own the property with no right of survivorship. If one dies, his interest passes to his heirs, not necessarily the co-owner. Either party, or a creditor of one, may sue to partition the property.

Title
A document that gives evidence of an individual’s ownership of property.

Title Insurance
A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender’s interests.

Title Search
An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Truth-In-Lending
A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z.

Two-Step Mortgage
A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of seven or 10 years. Also called “Super Seven” or “Premier” mortgage.

Underwriting
The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

Usury
An exorbitant or illegal rate of interest.

Veterans Affairs, Department of (VA)
An independent agency of the federal government which guarantees long-term, low-or no-down payment mortgages to eligible veterans.

VA Loan
A long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

VA Mortgage Funding Fee
A premium of up to 1-7/8 percent (depending on the size of the down payment) paid on a VA-backed loan. On a $75,000 fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed.

Variable Rate Mortgage (VRM)
See adjustable rate mortgage.

Verification of Deposit (VOD)
A document signed by the borrower’s financial institution verifying the status and balance of his/her financial accounts.

Verification of Employment (VOE)
A document signed by the borrower’s employer verifying his/her position and salary.

Warehouse Fee
Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee.

Wraparound Mortgage
An existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.