The following is a list of basic terms used within the finance and real estate world. This is not designed so you sit here for countless hours trying to jam all of these terms into you brain. Use this merely as a point of reference to become familiar with words or terms that cross your path.

This list will constantly be updated and your input is priceless to us. If there is a term that you would like defined or explained, please email or call us. Not only will we educate you, but we will also place it here on our list.

The industry is ever changing and though we try to stay on top of all the new emerging terms we need your help to educate the general public. Enjoy!

A

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. You may also see ARMs referred to as AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

Adjustment Period

This is the length of time for which the interest rate is fixed on an adjustable rate mortgage. After that period it will be adjusted. Typically once or twice a year depending on the index.

Amortization

A payment plan which enables the borrower to reduce his debt gradually through monthly payments of principal.

Annual Percentage Rate (APR)

A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans.

Appraisal

An expert judgment or estimate of the quality or value of real estate as of a given date.

 

B

Binder or “Offer to Purchase”

A preliminary agreement, secured by the payment of earnest money, between a buyer and seller as an offer to purchase real estate. A binder secures the right to purchase real estate upon agreed terms for a limited period of time. If the buyer changes his mind or is unable to purchase, the earnest money is forfeited unless the binder expressly provides that it is to be refunded.

Buydown

With a buydown, the seller pays an amount to the lender so that the lender can give you a lower rate and lower payments, usually for an early period in an ARM. The seller may increase the sales price to cover the cost of the buydown. Buydowns can occur in all types of mortgages, not just ARMs.

 

C

Certificate of Occupancy

Document issued by a local governmental agency that states a property meets the local building standards for occupancy.

Cleared to Close

The bank clears the deal to close, all conditions have been met

Closing Costs

The numerous expenses which buyers and sellers normally incur to complete a transaction in the transfer of ownership of real estate. These costs are in addition to price of the property and are items prepaid at the closing day.

The agreement of sale negotiated previously between the buyer and the seller may state in writing who will pay each of the above costs.

Closing Day

The day on which the formalities of a real estate sale are concluded. The certificate of title, abstract, and deed are generally prepared for the closing by an attorney and this cost charged to the buyer. The buyer signs the mortgage, and closing costs are paid. The final closing merely confirms the original agreement reached in the agreement of sale.

Commitment

A written agreement between a lender and a borrower to loan money on specific terms or conditions.

Condominium

Individual ownership of a dwelling unit and an individual interest in the common areas and facilities which serve the multi-unit project.

Contract of Purchase

See Agreement of Sale

Contractor

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.

Conventional Mortgage

A mortgage loan not insured by HUD or guaranteed by the Veterans’ Administration. It is subject to conditions established by the lending institution and State statutes. The mortgage rates may vary with different institutions and between States. (States have various interest limits.)

Co-op

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 him to occupy a unit in the building or property owned by the cooperative. While the resident does not own his unit, he has an absolute right to occupy his unit for as long as he owns the stock.

Credit Report

A report documenting the history of how you paid back the companies you have borrowed money from, or how you have met other financial obligations.

 

D

Deed

A formal written instrument by which title to real property is transferred from one owner to another. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the State where the property is located, and should be delivered to the purchaser at closing day. There are two parties to a deed: the grantor and the grantee. (See also Deed of Trust, General Warranty Deed, Quitclaim Deed, and Special Warranty Deed)

Default

Failure to make mortgage payments as agreed to in a commitment based on the terms and at the designated time set forth in the mortgage or deed of trust

Depreciation

Decline in value of a house due to wear and tear, adverse changes in the neighborhood, or any other reason.

Discount

In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to give you a lower rate and lower payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate will probably go up depending on the index rate.

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.

Down payment

The amount of money to be paid by the purchaser to the seller upon the signing of the agreement of sale. The agreement of sale will refer to the downpayment amount and will acknowledge receipt of the downpayment. Down payment is the difference between the sales price and maximum mortgage amount. The downpayment may not be refundable if the purchaser fails to buy the property without good cause. If the purchaser wants the downpayment to be refundable, he should insert a clause in the agreement of sale specifying the conditions under which the deposit will be refunded, if the agreement does not already contain such clause. If the seller cannot deliver good title, the agreement of sale usually requires the seller to return the downpayment and to pay interest and expenses incurred by the purchaser.

Due-on-Sale Clause

A clause in the Deed of Trust or Mortgage that states that the entire loan is due upon the sale of the property.

 

E

Earnest Money

The deposit money given to the seller or his agent by the potential buyer upon the signing of the agreement of sale to show that he is serious about buying the house. If the sale goes through, the earnest money is applied against the downpayment. If the sale does not go through, the earnest money will be forfeited or lost unless the binder or offer to purchase expressly provides that it is refundable.

Equal Credit Opportunity Act

Prohibits discrimination in any aspect of a credit transaction on the basis of race, religion, age, color, national origin, receipt of public assistance funds, sex, or marital status. Text.

Equity

The value of a homeowner’s unencumbered interest in real estate. Equity is computed by subtracting from the property’s fair market value the total of the unpaid mortgage balance and any outstanding liens or other debts against the property. A homeowner’s equity increases as he pays off his mortgage or as the property appreciates in value. When the mortgage and all other debts against the property are paid in full the homeowner has 100% equity in his property.

Escrow

Funds paid by one party to another (the escrow agent) to hold until the occurrence of a specified event, after which the funds are released to a designated individual. In FHA mortgage transactions an escrow account usually refers to the funds a mortgagor pays the lender at the time of the periodic mortgage payments. The money is held in a trust fund, provided by the lender for the buyer. Such funds should be adequate to cover yearly anticipated expenditures for mortgage insurance premiums, taxes, hazard insurance premiums, and special assessments. See also Escrow Account.

 

F

Fair Housing Act

Prohibits discrimination in housing sales or loans on the basis of race, religion, color, national origin, sex, familial status, or handicap.

Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac)

A stockholder-owned corporation chartered by Congress to create a continuous flow of funds to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages from lenders and packages them into securities that are sold to investors.

Federal Housing Administration (FHA)

A part of the U.S. Department of Housing and Urban Development (HUD). FHA assists first-time home buyers and others who might not be able to meet down payment requirements for conventional loans by providing mortgage insurance to private lenders. It also insures loans for home improvements and buying manufactured (mobile) homes. These programs operate through FHA approved lending institutions which submit applications to have the property appraised and have the buyer’s credit approved.

Federal National Mortgage Association (FNMA, Fannie Mae)

A stockholder-owned federally chartered corporation. Fannie Mae purchases residential home loans from mortgage lending institutions, packages the mortgages into securities and sells the securities to investors. The largest source of residential mortgage funds in the United States.

FHA Loan

A loan insured by the Federal Housing Administration open to all qualified home purchasers. Interest rates on FHA loans are generally market rates, while down payment requirements are lower than for conventional loans. FHA loans cannot exceed the statutory limit.

Firm Commitment

A lender’s agreement to make a loan to a specific borrower on a specific property.

First Mortgage

A mortgage that has priority as a lien over all other mortgages.

Fixed Installment

The monthly payment due on a mortgage loan. The fixed installment includes payment of both principal and interest.

Flood Insurance

Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.

Foreclosure

A legal term applied to any of the various methods of enforcing payment of the debt secured by a mortgage, or deed of trust, by taking and selling the mortgaged property, and depriving the mortgagor of possession.

FSBO

For sale by owner.

 

G

Government National Mortgage Association (GNMA, Ginnie Mae)

A wholly-owned government corporation within the U.S. Dept. of Housing and Urban Development helping to finance government-assisted housing programs. Ginnie Mae guarantees securities backed by pools of mortgages. The mortgages are insured by the Federal Housing Administration (FHA), or guaranteed by the Veterans Administration (VA) or by the Rural Housing Service (RHS). Ginnie Mae securities are bought and sold through financial institutions that trade government securities.

Graduated Payment Mortgage

A type of a mortgage that has lower payments initially and then payments increase each year until the loan is fully amortized.

Grantee

That party in the deed who is the buyer or recipient.

Grantor

That party in the deed who is the seller or giver.

 

H

Hazard Insurance

Protects against damages caused to property by fire, windstorms, and other common hazards.

Homestead Exemption

The assessed value of a owner-occupied residential property may be reduced by the amount of the exemption for the purposes of calculating property tax. Available in some states.

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.

HUD-1 Settlement Statement

A standard form that shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement.

I

Impound (Escrows)

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.

Index

A published measure of economic conditions usually relative to other financial instruments such as Treasury notes or Treasury bills. The lender uses a particular index to calculate the interest rate on an adjustable rate mortgage (ARM) by adding a fixed margin to the index.

Interest

A charge paid for borrowing money

Joint Tenancy

Joint tenancy is one of the methods available for two or more people to hold title to real estate or personal property. It includes a right of survivorship, meaning that on the death of one joint tenant, his/her interests transfer to the remaining joint tenants.

Jumbo Loan

A loan that is larger than the conforming loan limit established by Fannie Mae or Freddie Mac. It often has interest rates a little higher than conforming loan.

J

K

L

Lien

A claim by one person on the property of another as security for money owed. Such claims may include obligations not met or satisfied, judgments, unpaid taxes, materials, or labor. See also Special Lien

Loan-to-Value Ratio (LTV) - VERY IMPORTANT

The relationship between the amount of the mortgage loan and the value of the real property expressed as a percentage. For purchase loans the value of the property is the appraised value or the purchase price, whichever is less. For refinance loans the value is the appraised value.

A LTV of 90% means that you can borrow a maximum of 90% of the property value. If a LTV exceeds 80%, a Private Mortgage Insurance (PMI) — that insures the lender in the event a borrower defaults — is generally required.

Downpayment is the difference between the purchase price and the mortgage amount.

Lock

A lender’s promise to hold a certain interest rate and points for you, for a given number of days, while your loan application is processed. The interest rates quoted to you may stay the same, decrease, or increase from the day you apply for your mortgage. Lock-ins on rates and points might offer you a way to ensure that what you shop for is what you get.

However, a locked-in rate could also prevent you from taking advantage of rate decreases. If you think that rates will remain level or even go down, you may choose to bet on interest rates decreasing by electing to float until you go to closing.

Lock-ins of 30-60 days are common. If your lock-in period expires before you go to closing, you might lose the interest rate and the number of points you had locked-in. You may ask lender for a longer lock-in period. But bear in mind that lenders may charge you a fee for a longer lock-in period. Request information from the lender regarding lock procedures.

 

M

Mortgage

A lien or claim against real property given by the buyer to the lender as security for money borrowed. Under government-insured or loan-guarantee provisions, the payments may include escrow amounts covering taxes, hazard insurance, water charges, and special assessments. Mortgages generally run from 10 to 30 years, during which the loan is to be paid off.

Mortgage Broker

A person (not an employee of a lender) who brings a borrower and a lender together to obtain a federally-related mortgage loan. A mortgage broker has access to a variety of lenders and often offers the most choice in loan programs. Mortgage brokers are paid a fee by the borrower or the lender when a loan closes.

Mortgage Commitment

A written notice from the bank or other lending institution saying it will advance mortgage funds in a specified amount to enable a buyer to purchase a house.

Mortgage Insurance Premium (aka PMI –Privatized Mortgage Insurance)

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 one percent paid by the mortgagor on a monthly basis.

Mortgage Note

A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of an 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.

Multiple Listing Service (MLS)

A service offered to participating real estate brokers that lists available homes for sale. The listings are published and distributed among the member brokers to assist in sales efforts.

 

N

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 that isn’t covered 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 (an option ARM, for example) has a payment cap that results in monthly payments not high enough to cover the interest due.

Non-conforming loan (Sub-Prime)

Loans that do not comply with Fannie Mae or Freddie Mac guidelines. These guidelines establish the maximum loan amount, down payment, borrower credit and income requirements, and suitable properties. Loans that does conform to these guidelines may be sold to Fannie Mae or Freddie Mac.

O

P

PITI

Principal, Interest, Taxes and Insurance. These components are usually included in the monthly mortgage payment.

Points

Sometimes called “discount points.” A point is one percent of the amount of the mortgage loan. For example, if a loan is for $25,000, one point is $250. Points are charged by a lender to raise the yield on his loan at a time when money is tight, interest rates are high, and there is a legal limit to the interest rate that can be charged on a mortgage. Buyers are prohibited from paying points on HUD or Veterans’ Administration guaranteed loans (sellers can pay, however). On a conventional mortgage, points may be paid by either buyer or seller or split between them.

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.

Prepayment

Payment of mortgage loan, or part of it, before due date. Mortgage agreements often restrict the right of prepayment either by limiting the amount that can be prepaid in any one year or charging a penalty for prepayment. Lenders who impose prepayment penalties will charge borrowers a fee if they wish to repay part or all of their loan in advance of the regular schedule. The Federal Housing Administration does not permit such restrictions in FHA insured mortgages.

Principal

The basic element of the loan as distinguished from interest and mortgage insurance premium. In other words, principal is the amount upon which interest is paid.

Private Mortgage Insurance (PMI)

An insurance policy the borrower buys to protect the lender from non-payment of the loan.

Q

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

Qualifying Ratios

Lenders use certain guidelines to determine a potential borrower’s credit-worthiness. The two guidelines used are the housing and debt ratios. They are expressed as two numbers like 28/36 where 28 would be the housing ratio and 36 would be the debt ratio. It means that:

1. Your housing expenses should not exceed 28 percent of your gross monthly income and
2. Housing expenses plus long- term debt should not exceed 36 percent of your gross monthly income.

The housing expenses include monthly mortgage principal, interest payments, property taxes and homeowner’s insurance. There may be other expenses, such as condominium fees, homeowners fees, special assessments, etc., that are included. Long-term debt is defined as monthly expenses extending more than 10 months into the future. The qualifying ratios may vary from lender to lender.

Please note that qualifying ratios are only a rough guidelines and underwriters consider many variables in their analysis. Many times, borrowers fall outside the guidelines, but have strong compensating factors that reflect low credit risk. Some compensating factors are history of savings, long-term job stability, a substantial down payment or excellent credit history will influence the decision to approve or deny a particular loan.

 

R

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 Settlement Procedures Act (RESPA)

A consumer protection statute designed to help consumers be better shoppers in the home buying process. It requires that borrowers receive disclosures at various times. RESPA also prohibits certain practices that increase the cost of settlement services. More about RESPA

Recorder

The public official who keeps records of transactions that affect real property in the area. Sometimes known as a “Registrar of Deeds” or “County Clerk.”

Refinancing

The process of the same mortgagor paying off one loan with the proceeds from another loan.

Rescission

The cancellation of a contract. When you use your home as collateral for a loan, you generally have the right to cancel the credit transaction within three business days. This is called your “right of rescission,” and it is guaranteed by the Federal Truth in Lending Act. See FTC publication Getting a Loan: Your Home as Security

Reverse Mortgage

A special type of home loan that lets elderly homeowners convert the equity in their home into cash.

 

S

Sales Agreement

See Agreement of Sale

Second Home (or Vacation Home)

This home is not rented and is occupied occasionally by the owners.

Second mortgage

A mortgage in addition to the first mortgage. Home equity loans, credit lines, home improvement loans are second mortgage loans. Second mortgage is subordinate to the first one. Second mortgage loans are non-conforming loans, so, they usually carry a higher interest rate, and they often are for a shorter time.

Secondary (subordinate) financing

Borrowing additional money toward the down payment. If it is acceptable, usually subject to a maximum combined LTV. Secondary financing is used as an alternative to obtaining Private Mortgage Insurance

Servicing

Servicing means the collection of payments, handling your escrow accounts and management of operational procedures, related to mortgages, that a lender performs.

Survey

A map or plat made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and its relationship to surrounding tracts of land. A survey is often required by the lender to assure him that a building is actually sited on the land according to its legal description.

 

T

Tax

As applied to real estate, an enforced charge imposed on persons, property or income, to be used to support the State. The governing body in turn utilizes the funds in the best interest of the general public.

 

Taxable Assessed Value

The assessed value of a parcel against which the tax rate is applied to compute the tax due. In case of a partial exemption, the exempt amount is subtracted from the assessed value in order to determine the taxable assessed value.

Title

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.

Title Insurance

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 he desires the protection of title insurance.

Title Insurance Binder

Written commitment of a title insurance company to insure title to the property under the conditions stated in the binder.

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.

Trustee

A party who is given legal responsibility to hold property in the best interest of or “for the benefit of” another. The trustee is one placed in a position of responsibility for another, a responsibility enforceable in a court of law. See Deed of Trust

Truth-In-Lending Act ( TIL, also called Regulation Z)

Under this act a lender is required to provide you with a disclosure estimating the costs of the loan you have applied for, including your total finance charge and the Annual Percentage Rate (APR) within three business days of your application for a loan.

U

Underwriting

A process of deciding whether to make a loan based on your credit reputation, income, debt, appraised value of the house and other factors.

 

V

VA Loan

A mortgage for veterans and service persons guaranteed by the Department of Veterans Affairs (VA), requiring very low or no downpayments and with generous requirements for qualification.

 

W

Wraparound Mortgage

A loan arrangement whereby the existing loan is retained and a new loan is added to the property. Full payments on both mortgages are made to the wraparound mortgagee, who then forwards the payments on the first mortgage to the first mortgagee.

X

Y

Z

Zoning

A local government authority’s specifications for the use of property in certain areas.

Zoning Ordinances

The acts of an authorized local government establishing building codes, and setting forth regulations for property land usage.

www.mortgage-x.com contains a more detailed dictionary