Mortgage Glossary

203(b): an FHA loan program which provides mortgage insurance to protect the lender in the event that the borrower defaults. A 203(b) loan is used to finance the purchase of new or existing one to four family housing. 203(b) insured loans are known for requiring a low down payment, have flexible qualifying guidelines, limited fees, and a limit on the maximum loan amount.

203(k): another FHA loan program that enables homebuyers to finance both the purchase price of a house in addition to the cost of its rehabilitation through the proceeds of a single mortgage loan.

A

Abstract of Title: documents recording the ownership of property throughout time.

Acceleration: the right of the lender to demand payment on the outstanding balance of a loan.

Adjustable-Rate Mortgage (ARM): a mortgage loan that does not have a fixed interest rate. During the life of the loan, the interest rate will change based upon a specified index rate. These loans are also referred to as adjustable mortgage loans (AMLs) or variable rate mortgages (VRMs).

Affidavit: a signed, sworn statement made by the buyer or seller regarding the truth of information provided.

Amenity: a feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use. Amenities may be natural (its location in proximity to woods or water) or manmade (such as a swimming pool or garden).

Amortization: describes the process of reducing your debt gradually through monthly payments.

Annual Mortgagor Statement: the yearly statement provided to borrowers by the lender, which details the remaining principal and amounts paid for taxes and interest.

Annual Percentage Rate (APR): a measure of the cost of credit expressed as a yearly rate. Included in the APR are interest charges as well as other loan charges. Because all lenders, by federal law, 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. The APR is typically a higher rate than the simple interest of the mortgage.

Appraisal: a document/study that gives an estimate of a property’s fair market value based upon the sales of comparable homes in the area and the features of a property. An appraisal is generally required by a lender before a loan approval in order to ensure that the mortgage loan amount is not more than the value of the property.

Appreciation: an increase in property value.

Arbitration: a legal method of resolving a dispute without going to court.

As-is Condition: the purchase or sale of a property in its existing condition without repairs.

Assessed Value: the value that a public official has placed on any asset, which is used to determine taxes.

Assessments: the method of placing value on an asset for taxation purposes.

Assessor: a government official who is responsible for determining the value of a property for the purpose of taxation.

Assets: any item with measurable value.

Assumable Mortgage: describes a mortgage in which upon the sale of a home, the seller may be able to transfer the mortgage to the new buyer. Lenders generally require a credit review of the new borrower and may charge a fee for the loan assumption. Some mortgages contain a due-on-sale clause, which means that the mortgage may not be transferable to a new buyer. Instead, the lender may make you pay the entire balance at the sale. Regardless, an assumable mortgage can help you attract buyers.

Assumption Clause: a provision in the terms of a loan that allows the buyer to take legal responsibility for the mortgage from the seller.

Automated Underwriting: loan processing which is completed through a computer based system that evaluates past credit history to determine if a loan should be approved. This system removes the possibility of personal bias against the buyer.

B

Back End Ratio (Debt Ratio): is a ratio that compares the total of all monthly debt payments (mortgage, real estate taxes and insurance, car loans, and other consumer loans) to the gross monthly income of the borrower.

Balance Sheet: a financial statement that shows the assets, liabilities, and net worth of an individual or company.

Balloon Mortgage: a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or must be refinanced by the borrower.

Bankruptcy: an event whereby a person’s assets are turned over to a trustee and used to pay off outstanding debts.

Biweekly Payment Mortgage: a mortgage paid twice a month instead of once a month, reducing the amount of interest to be paid on the loan by approximately 9 years.

Bridge Loan: a short term loan paid back relatively fast. A bridge loan is normally used until a long term loan can be processed, for example to finance the construction of a new home.

Broker: a licensed individual or firm that charges a fee to serve as the mediator between two parties. Mortgage brokers are individuals in the business of arranging funding or negotiating contracts for a client, but who does not loan the money. A real estate broker is someone who helps find a house.

Building Codes: regulations based upon safety standards within a specific area. Building codes are regulations that significantly play in the determination of the design, construction, and materials used in the construction industry.

C

Callable Debt: a debt security whose issuer has the right to redeem the security at a specified price on or after a specified date, but prior to its stated final maturity.

Cap: a limit, such as one placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage. Payment caps do not limit the amount of interest charged by the lender, so they may cause negative amortization.

Capacity: the ability to make mortgage payments on time, dependent on assets and the amount of income each month as compared to housing costs, debts, and other obligations.

Capital Gain: the profit received based on the difference between the original purchase price and the final sale price.

Capital Improvements: property improvements that either will enhance property value, or will increase the useful life of the property.

Cash-Out Refinance: the situation when a borrower refinances a mortgage at a higher principal balance in order to get additional monies to be used for debt consolidation, home improvement, investment, education, or other expenses. Usually this occurs once a property has appreciated in value.

Casualty Protection: property insurance that covers any damage to the home and personal property either inside or outside the home.

Certificate of Title: a document provided by a qualified source, such as a title company, showing that the property legally belongs to the current owner. Before the title is transferred at closing, it should be clear and free of all liens or other claims.

Chapter 7 Bankruptcy: a bankruptcy that requires assets be liquidated in exchange for the cancellation of debt.

Chapter 13 Bankruptcy: this type of bankruptcy sets a payment plan between the borrower and the creditor, while being monitored by the courts. The homeowner can keep the property, but must make payments according to the court’s terms within a specified time period.

Charge off: the portion of principal and interest due on a loan that is written off when deemed to be uncollectible.

Clear Title: a property title that has no defects. Properties with clear titles are marketable for sale.

Cloud on Title: any condition which affects the clear title to real property.

Co-Borrower: an additional person that is responsible for loan repayment and is listed on the title.

Co-Signed Account: an account signed by someone in addition to the primary borrower, making both people responsible for the amount borrowed.

Collateral: security in the form of money or property pledged for the payment of a loan. For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made.

Collection Account: an unpaid debt which is referred to a collection agency to collect on the bad debt. This type of account is reported to the credit bureau and will show on the borrower’s credit report.

Comparative Market Analysis: a property evaluation technique that determines property value by comparing similar properties sold within the past year.

Compensating Factors: factors that show the ability to repay a loan based upon less traditional criteria, such as employment, rent, and utility payment history.

Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex. The owner also shares financial responsibility for common areas.

Conforming loan: is a loan that does not exceed Fannie Mae and Freddie Mac loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans.

Consideration: an item of value given in exchange for a promise or act.

Construction Loan: a short term loan used to finance the cost of building a new home. The terms of a construction loan allow the lender to pay the builder based on milestones accomplished during the construction process.

Contingency: a clause in a purchase contract outlining conditions that must be fulfilled before a contract is executed. Both buyers and/or sellers may include contingencies in a contract, but both parties must accept each contingency.

Conversion Clause: a provision in some ARMs allowing it to change to a fixed rate loan at some point during the term. Usually conversion clauses are allowed at the end of the first adjustment period. At the time of the conversion, the new fixed rate is generally set at one of the currently prevailing rates for similar fixed rate mortgages.

Convertible ARM: an adjustable rate mortgage containing a provision that gives the borrower the ability to convert to a fixed rate within a specified time.

Cost of Funds Index (COFI): an index used to determine interest rate changes for some adjustable rate mortgages.

Counter Offer: a rejection to all or part of a purchase offer that negotiates different terms to reach an acceptable sales contract.

Covenants: legally enforceable terms that govern the use of property. These terms are transferred with the property deed. Discriminatory covenants are illegal and unenforceable. Covenants are also sometimes known as conditions, restrictions, deed restrictions, or restrictive covenants.

Credit Bureau: an agency that provides financial information and payment history on accounts associated with your social security number.

Credit Counseling: education on how to improve bad credit and how to avoid having more debt than what can be repaid.

Credit History: a record of an individual that lists all debts and a payment history for each liability. The report that is generated from the history is called a credit report. Lenders use this information to gauge a potential borrower’s ability to repay a loan.

Credit Report: a report generated by a credit bureau containing a borrower’s credit history. Lenders utilize information from credit reports in order to determine if a loan will be granted.

Credit Risk: a term used to describe the possibility of loan default by a borrower.

Credit Score: a score calculated by analyzing a person’s payment history and outstanding debt in order to determine the likelihood of a loan being repaid on time. Credit scores range from around 360 – 840, with a lower credit score signifying that a person is a higher credit risk, while a higher score means that there is less risk.

D

Debtor: the person or entity that borrows money. The term debtor may be used interchangeably with the term borrower.

Debt-to-Income Ratio: a comparison of the gross income of a borrower to housing and non-housing related expenses.

Deed: a document that legally transfers ownership of property from one person to another. The deed is recorded in public records with the property description and the owner’s signature.

Deed-in-Lieu: to avoid foreclosure (“in lieu” of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt. This process does not allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with a foreclosure.

Default: the inability to make timely monthly payments or otherwise comply with the terms of a loan. A loan is considered in default when a payment has not been made after about 60 to 90 days. Once in default, the lender can exercise legal rights defined in the contract to begin foreclosure proceedings.

Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement. Generally after ten to fifteen days a late fee may be assessed.

Deposit (Earnest Money): money put down by a potential buyer to show that they are serious about purchasing the home. The deposit becomes part of the down payment if the offer is accepted and is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal. During the contingency period the money may be returned to the buyer if the contingencies are not met to the buyer’s satisfaction.

Depreciation: a decrease in the value or price of a property due to changes in market conditions, wear and tear on the property, or other factors.

Disclosures: the release of relevant information about a property that may influence the final sale, especially if it represents defects or problems. “Full disclosure” usually refers to the responsibility of the seller to voluntarily provide all known information about the property. Some disclosures may be required by law, such as the federal requirement to warn of potential lead based paint hazards in pre-1978 housing. A seller found to have knowingly lied about a defect may face legal penalties.

Discount Point: normally paid at closing and generally calculated to be equivalent to a percentage of the total loan amount, discount points are paid to reduce the interest rate on a loan.

Document Recording: after closing on a loan, certain documents are filed and made public record. Discharges from the prior mortgage holder are filed first followed by the names of the new owner(s) and mortgage company.

Due on Sale Clause: a loan provision allowing the lender to demand full repayment of the loan in the event that a property is sold.

E

Earnest Money (Deposit): the money put down by a potential buyer to show that they are serious about purchasing a home. Eventually the deposit becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal. During the contingency period the money may be returned to the buyer if the contingencies are not met to the buyer’s satisfaction.

Easements: the legal rights that give someone other than the owner access to use the property for a specific purpose. Easements may affect property values and are sometimes part of the deed.

Energy Efficient Mortgage (EEM): an FHA program that helps home buyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase.

Eminent Domain: the process of the government taking over private property for public use. The owner receives payment for its fair market value and property can then proceed to condemnation proceedings.

Encroachments: a structure that extends over the legal property line on to another individual’s property. A property surveyor will note any encroachment on a lot survey done before property transfer. The person who owns the structure in question will typically be asked to alter the issue in order to prevent future problems.

Encumbrance: anything that affects title to a property such as loans, leases, easements, or restrictions.

Equal Credit Opportunity Act (ECOA): a federal law requiring lenders to make credit available equally without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity: an owner’s financial interest in a property, which can be calculated by subtracting the amount owed on the mortgage from the fair market value of the property.

Escape Clause: a provision in a purchase contract that allows either party to cancel part or the entire contract if the other does not respond to changes to the sale terms within a set period. The most common use of the escape clause is if the buyer makes the purchase offer contingent on the sale of another house.

Escrow Account: a separate account into which the lender puts a portion of each monthly mortgage payment to be used for the payment of ongoing expenses such as property taxes, homeowners insurance, and mortgage insurance.

Estate: the ownership interest of a person in real property.

Exclusive Listing: a written contract giving a real estate agent the exclusive right to sell a property over a specific timeframe.

F

Fair Credit Reporting Act: a federal act that was created to ensure that credit bureaus are fair and accurate in their reporting measures. The act also aims to protect the individual’s privacy rights enacted in 1971 and later revised in October 1997.

Fair Housing Act: a law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

Fair Market Value: the hypothetical price that a willing buyer and seller will agree upon while acting freely, carefully, and with complete knowledge of the situation.

Familial Status: HUD uses this term to describe a single person, a pregnant woman, or a household with children under 18 living with parents or legal custodians who might experience housing discrimination.

Fannie Mae: also referred to as the Federal National Mortgage Association (FNMA), is a federally chartered enterprise owned by private stockholders that purchase residential mortgages and convert them into securities for sale to investors. Through purchasing mortgages, Fannie Mae frees up additional funds that lenders may loan to potential homebuyers.

Federal Housing Administration (FHA): the FHA was established in 1934 with the aim of advancing homeownership opportunities for all Americans. The FHA assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults, which in turn encourages lenders to make loans to borrowers who may not otherwise qualify for conventional mortgages.

FICO Score: FICO is an abbreviation for Fair Isaac Corporation and refers to a person’s credit score based on a historical payment history. Lenders and credit card companies use the score to try to predict the person’s reliability in making timely payments.

First Mortgage: the mortgage with first priority if the loan is not paid.

Fixed Expenses: describe payments that do not change from month to month.

Fixed Rate Mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.

Fixture: personal property permanently attached to real estate or real property that becomes a part of real estate.

Float: the act of allowing an interest rate and discount points to fluctuate with changes in the market.

Flood Insurance: is a type of insurance that protects homeowners against losses from a flood. It is important to know if your home lies in a flood zone or not, as lenders will require a policy of flood insurance before approving a loan.

Forbearance: is a situation in which a lender may decide not to take legal action in the event a borrower is late in making mortgage payments. An example of a forbearance is when a borrower sets up a plan that both sides agree on that will bring overdue mortgage payments fully up to date.

Foreclosure: the legal process in which mortgaged property is sold to pay off the loan of the defaulting borrower. Foreclosure laws are based on the various statutes of each state.

For Sale by Owner (FSBO): a home that is offered for sale by the owner without the benefit of a real estate professional.

Freddie Mac: is also known as the Federal Home Loan Mortgage Corporation (FHLM), is a federally chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors. Freddie Mac’s activities in turn provide lenders with available funds to once again lend to other borrowers.

G

Ginnie Mae: is also known as the Government National Mortgage Association (GNMA), is a government owned corporation that is regulated by the U.S. Department of Housing and Urban Development. Ginnie Mae pools FHA insured and VA guaranteed loans to back securities for private investment. As is the case with Fannie Mae and Freddie Mac, the pooling of these loans provides additional funds for lenders to lend to eligible borrowers.

Good Faith Estimate: a document which gives an estimate of all closing costs associated with a mortgage including prepaid and escrow items as well as lender charges. The Good Faith Estimate must be given to the borrower within three days after submission of a loan application.

Graduated Payment Mortgages: are mortgages that begin with lower monthly payments that slowly grow over a period of years, before eventually reaching a fixed level and remaining there for the life of the loan. Graduated payment loans may be good if you expect your annual income to increase in the coming years.

Grantee: an individual to whom an interest in real property is conveyed.

Grantor: an individual conveying an interest in real property.

Gross Income: can also be described as money earned before taxes and other deductions. Sometimes it may include income from self-employment, rental property, alimony, child support, public assistance payments, and retirement benefits.

H

Hazard Insurance: is protection against a specific loss such as fire, wind, or other hazards over a period of time that is secured by the payment of a regularly scheduled premium.

HECM (Reverse Mortgage): reverse mortgages are used by homeowners age 62 and older to convert the equity in their home into monthly streams of income and/or a line of credit.  Repayment of the loan is deferred until the borrower dies, sells the home, moves out of the house, or defaults on other obligations such as taxes or insurance.  A lending institution such as a mortgage lender, bank, credit union, or savings and loan association funds the HECM.

HELP (Homebuyer Education Learning Program): is an educational program provided by the FHA that counsels people about the home buying process. HELP covers topics such as budgeting, finding a home, getting a loan, and home maintenance. In most instances completion of the program may entitle the homebuyer to a reduced initial FHA mortgage insurance premium.

Home Equity Line of Credit: a mortgage loan that is usually taken in the form of a second mortgage, allowing a borrower to obtain cash against the equity of a home, up to a predetermined amount.

Home Equity Loan: a loan backed by the value of a home (real estate). If the borrower defaults or does not pay the loan, the lender has some rights to the property. The borrower can usually claim a home equity loan as a tax deduction.

Home Inspection: a detailed examination of the structural and mechanical systems of a house in order to determine a home’s quality, soundness, and safety. Additionally, the home inspection makes the potential homebuyer aware of any repairs that may be needed. Typically, the home buyer generally pays the home inspection fees.

Home Warranty: offers protection for mechanical systems and attached appliances against unexpected repairs that are not covered by a homeowner’s insurance policy. The policy’s coverage extends over a specific time period and does not cover the home’s structure.

Homeowner’s Insurance: an insurance policy, also called hazard insurance, which combines protection against damage to a dwelling and its contents from hazards including fire, storms, or other adverse events that result in personal injury or property damage. Most lenders require homeowners insurance and may require you to escrow the cost. Flood insurance is generally not included in standard policies and must be purchased separately.

Homestead Credit: a property tax credit program that is offered by some state governments that provides a reduction in property taxes to eligible households.

HUD (the U.S. Department of Housing and Urban Development): established in 1965, the HUD works to create a decent home and suitable living environment for all Americans. It accomplishes its goals by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

HVAC: stands for Heating, Ventilation and Air Conditioning, also known as a home’s heating and cooling system.

I

Index: the measure of interest rate changes used by a lender to determine how much the interest rate of an ARM will change over time.

Inflation Coverage: an endorsement to a homeowner’s policy that automatically adjusts its level of insurance to compensate for inflationary rises in the home’s value. However, this type of coverage does not adjust for increases in the home’s value due to improvements.

Interest: describes the cost of borrowing money.

Interest Rate: the amount of interest charged on a loan, expressed as a percentage.

J

Joint Tenancy (with Rights of Survivorship): is a method of holding title in which two or more owners share equal ownership and rights to the property. In the event of the death of a joint owner, his or her share of the property passes to the other owners without probate. In a joint tenancy, ownership of the property cannot be willed to someone who is not a joint owner.

Judgment: is simply a legal decision. In the event that a judgment requires a debt repayment, a judgment may include a property lien that secures the creditor’s claim by providing a collateral source.

Jumbo Loan: is a non-conforming loan that exceeds Fannie Mae and Freddie Mac loan limits. Freddie Mac and Fannie Mae loans are often referred to as conforming loans.

K

L

Late Payment Charges: the penalty that the homeowner must pay when a mortgage payment is made after the due date grace period.

Lease: a written agreement between a property owner and a tenant that stipulates the payment and conditions under which the tenant may occupy a home or apartment and states a specified period of time.

Lease Purchase (Lease Option): assists low to moderate income homebuyers in purchasing a home by allowing them to lease a home with an option to buy. The rental payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.

Liabilities: a person’s financial obligations such as long term and short term debt, plus other financial obligations to be paid.

Liability Insurance: insurance coverage that protects against claims alleging a property owner’s negligence or action resulted in bodily injury or damage to another person. It is normally included in homeowner’s insurance policies.

Lien: a legal claim against property that must be satisfied in the event that a property is sold. Examples include a mechanic’s lien, which might be for the unpaid cost of building supplies, or a tax lien for unpaid property taxes. A lien is a defect on the title and needs to be settled before transfer of ownership. A lien release is a written report of the settlement of a lien and is recorded in public records as evidence of the payment.

Lien Waiver: a document that releases a consumer (or homeowner) from any further obligation for payment of a debt once it has been paid in full.

Life Cap: a limit on the range in which interest rates can increase or decrease over the life of an adjustable rate mortgage (ARM).

Line of Credit: an agreement by a financial institution such as a bank to extend credit up to a certain amount for a certain time to a specified borrower.

Liquid Asset: a cash asset or an asset that is easily converted into cash.

Listing Agreement: a contract between a seller and a real estate professional to market and sell a home. A listing agreement obligates the real estate professional (or his or her agent) to seek qualified buyers, report all purchase offers, and help negotiate the highest possible price and most favorable terms for the property seller.

Loan: money borrowed that is usually repaid with interest.

Loan Acceleration: an acceleration clause in a loan document is a statement in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if payments are missed or other specific instances occur as specified under the loan terms.

Loan Officer: a representative of a lending company or institution who is responsible for soliciting homebuyers and qualifying and processing the loans. Loan officers are sometimes also referred to as loan representatives, account executives, loan consultants, or loan reps.

Loan Origination Fee: a charge by the lender to cover the administrative costs of making the mortgage. This charge is paid at the closing and varies by the specific lender and type of loan. A loan origination fee of between 1 and 2 percent of the mortgage amount is common.

Loan Servicer: the company that collects monthly mortgage payments and disperses property taxes and insurance payments. Loan servicers also monitor nonperforming loans, contact delinquent borrowers, and notify insurers and investors of potential problems with the loan. Loan servicers may be the lender or a specialized company that just handles loan servicing under contract with the lender or the investor that owns the loan.

Loan to Value (LTV) Ratio: is a percentage calculated by dividing the amount borrowed by the purchase price or appraised value of the home. The higher the LTV, the less cash a borrower is required to pay as down payment.

Lock-in Period: the length of time that the lender has guaranteed a specific interest rate to a borrower.

Loss Mitigation: a process to avoid foreclosure in which the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.

M

Mandatory Delivery Commitment: an agreement that a lender will deliver loans or securities by a certain date at agreed upon terms.

Margin: the number of percentage points the lender adds to the index rate in order to calculate the interest rate at each adjustment of an ARM loan.

Market Value: the amount a willing buyer would pay a willing seller for a home. The appraised value is an estimate of the current fair market value.

Maturity: the date in which the principal balance of a loan becomes due and payable.

Merged Credit Report: raw data pulled from two or more of the major credit reporting firms.

Modification: when a lender agrees to modify the terms of a mortgage without refinancing the loan.

Mortgage: a lien on a piece of property that secures the promise to repay a loan. The mortgage gives the lender the right to collect payment on the loan and to foreclose if the loan obligations are not met.

Mortgage Acceleration Clause: a clause allowing a lender, under certain circumstances, to demand the entire balance of a loan to be repaid in one lump sum. An acceleration clause is usually triggered if the home is sold, title to the property has changed, the loan is refinanced, or the borrower defaults on a scheduled payment.

Mortgage Backed Security (MBS): a Fannie Mae security that represents an undivided interest in a group of mortgages. Principal and interest payments from the individual mortgage loans are grouped and paid out to the MBS holders.

Mortgage Banker: a company that originates loans and resells them to secondary mortgage lenders.

Mortgage Broker: a firm that originates and processes loans for a number of lenders.

Mortgage Life and Disability Insurance: term life insurance bought by borrowers to pay off a mortgage in the event of death or make monthly payments in the case of disability. The amount of coverage decreases as the principal balance declines. There are many different terms of coverage determining amounts of payments and when payments begin and end.

Mortgage Insurance (PMI): a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan. Mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price. Mortgage insurance is purchased by the buyer to protect the lender in the event of default.

Mortgage Modification: a loss mitigation option that allows a borrower to change the terms of the existing mortgage loan to position themselves in a more favorable situation.

Mortgage Note: a legal document obligating a borrower to repay a loan at a stated interest rate during a specified period. The agreement is secured by a mortgage that is recorded in the public records along with the deed.

Mortgagee: the lender in a mortgage agreement.

Mortgagor: the borrower in a mortgage agreement.

N

National Credit Repositories: currently there are three companies that maintain national credit reporting databases – Equifax, Experian, and Trans Union, also referred to as credit bureaus.

Negative Amortization: amortization is simply the process of paying off a mortgage balance in monthly installments. Negative amortization occurs when the monthly payments are not enough to cover the entire monthly interest cost of the loan. The interest cost that isn’t covered is then added to the unpaid principal balance, causing the principal balance to grow. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.

Net Income: is your take home pay after taxes and other deductions.

Note: a legal document obligating a borrower to repay a mortgage loan at a stated interest rate over a specified period of time.

Note Rate: the interest rate stated on a mortgage note.

Notice of Default: a formal written notice to a borrower stating that there is a default on the loan and that legal action is possible.

Non-Conforming Loan: a loan that exceeds Fannie Mae and Freddie Mac loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans.

Notary Public: a person who serves as a public official and certifies the authenticity of required signatures on a document by signing and placing an official seal on the document.

O

Offer: an indication by a potential buyer of a willingness to purchase a home at a specific price that is generally put forth in writing.

Original Principal Balance: the total amount owed on a mortgage prior to any payments being made.

Origination: the process of preparing, submitting, and evaluating a loan application. Loan origination generally includes a credit check, verification of employment, and a property appraisal.

Origination Fee: the charge for processing a loan that is usually calculated in the form of points and paid at closing. One point equals one percent of the loan amount.

Owner Financing: a home purchase where the seller provides all or part of the financing, acting as a lender.

Owner’s Policy: an insurance policy that protects the buyer from title defects.

P

Partial Claim: a loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest free loan from the HUD in order to bring their mortgage payments up to date.

Partial Payment: a payment that is less than the total amount owed on a monthly mortgage payment. Normally, lenders do not accept partial payments. The lender may make exceptions during times of difficulty. Contact your lender prior to the due date if a partial payment is needed.

Payment Cap: a limit on how much an ARM’s payment may increase, regardless of how much the interest rate increases.

Perils: a term utilized by the insurance industry which describes an event that can damage the property. Homeowner’s insurance generally covers the property for a wide variety of perils caused by accidents, nature, or people.

Personal Property: any property that is not real property or attached to real property. For example, furniture is not attached however a new light fixture would be considered attached and a component of real property.

PITI (Principal, Interest, Taxes, and Insurance): the four elements of a monthly mortgage payment. The portion of the payment which is principal goes directly towards repaying the loan, while the portion that covers taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover their yearly fees as the date approaches.

PITI Reserves: the cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months.

Planned Unit Development (PUD): a housing development that is planned and constructed as one entity. Generally, there are common physical features of the homes or lots that are governed by covenants attached to the deed. Most planned developments have common land and facilities owned and managed by a homeowner’s association (also called an HOA). Homeowners usually are required to participate in the association via a payment of monthly or annual dues.

Points: one point is equal to one percent of the principal amount of a mortgage. For example, if you get a mortgage for $95,000, one point means you pay $950 to the lender. Lenders frequently charge points for both fixed rate and adjustable rate mortgages in order to increase the yield on the mortgage and to cover loan closing costs. These points usually are collected at closing and may be paid by the borrower or the seller, or may be split between the two.

Power of Attorney: a legal document that authorizes one person to act on the behalf of another. A power of attorney can grant complete authority or can be limited to certain acts or certain periods of time or both.

Pre-Approval: a situation where a lender commits to lend a fixed amount to a potential borrower based upon a completed loan application, credit report, debt scenario, verified savings, and has been reviewed by an underwriter. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase, however does not guaranty a loan until the property has passed inspections underwriting guidelines.

Pre-Foreclosure Sale: a procedure in which the borrower is allowed to sell a property for an amount less than what is owed in order to avoid a foreclosure. This sale fully satisfies the borrower’s debt.

Prepayment: any amount paid to reduce the principal balance of a loan before the due date or the payment in full of a mortgage. This can occur with the sale of the property, the payoff a loan in full, or a foreclosure. In each case, full payment occurs before the loan has been fully amortized.

Prepayment Penalty: a provision in some loans that enable lenders to charge a fee to the borrower that pays off a loan before it is due.

Prequalify: the situation in which a lender informally determines the maximum amount an individual is eligible to borrow.

Prime Rate: changes in the prime rate are widely publicized via business media outlets. In regards to the mortgage industry, the prime rate can be used as the basis of an adjustable rate in an ARM or home equity line of credit.

Principal: the outstanding balance on a mortgage that has not yet been paid back to the lender. The principal does not include the interest paid to borrow the money. The principal balance is the amount owed on a loan at any given time.

Private Mortgage Insurance (PMI): insurance purchased by a buyer to protect the lender in the event the borrower defaults on the loan. The cost of mortgage insurance is usually added to the monthly mortgage payment.

Promissory Note: a written promise to repay a specified amount over a specified period of time.

Property Tax Deduction: the U.S. tax code allows homeowners to deduct the amount they have paid in property taxes from their gross income for income tax purposes.

Public Record Information: court records of events that are a matter of public interest such as a bankruptcy, a foreclosure, and tax lien information. The presence of public record information on a credit report is generally regarded negatively by creditors.

Purchase Offer: a detailed and written document in which a potential buyer makes a formal offer to purchase a property. A purchase offer may be amended several times during the negotiation process; however, once signed by all parties involved in the sale the purchase offer becomes a legally binding contract.

Q

Qualifying Ratio: a calculation utilized by underwriters to determine how much money a borrower is qualified to borrow. Lending guidelines typically include a maximum housing expense to income ratio in addition to a monthly expense ratio that considers all installment loans and revolving credit.

Quitclaim Deed: a deed transferring ownership of a property but does not make a guarantee of clear title.

R

Radon: a radioactive gas found in some homes that if occurring in strong enough concentrations can cause health problems.

Rate Cap: a limit on an ARM loan that specifies how much the interest rate on a particular loan can change. Rate caps limit how much the interest rates can rise or fall on both adjustment dates and over the life of the loan.

Rate Lock: a commitment by a lender to a borrower guaranteeing a specific interest rate over a period of time at a set cost.

Real Property: land, including all the natural resources and permanent buildings situated on it.

REALTOR: a real estate agent or broker who is a member of the National Association of Realtors and its local and state associations.

Recorder: the public official who keeps records of transactions concerning real property. The county recorder is sometimes also known as a “Registrar of Deeds” or “County Clerk.”

Recording: the recording of an executed legal document at the registrar’s office. Frequently recorded documents include deeds, mortgages, a satisfaction of a mortgage, or an extension of a mortgage. The recording of a document causes it to become public record.

Refinancing: the process of paying off one loan by obtaining another. Refinancing is generally done to secure better loan terms, for example a lower interest rate or to obtain additional funds for debt consolidation, home improvement, educational funding, among other reasons.

Rehabilitation Mortgage: a mortgage that covers the costs of rehabilitating (repairing or improving) a property. Some rehabilitation mortgages, for example a 203(k) FHA loan allow a borrower to roll the costs of rehabilitation and home purchase into one loan.

Reinstatement Period: a phase of the foreclosure process where the homeowner has an opportunity to stop the foreclosure by paying all past due monies to the lender.

Repayment plan: an agreement between a lender and a delinquent borrower in which the borrower agrees to make additional payments to pay down past due amounts in addition to making regularly scheduled payments.

RESPA (Real Estate Settlement Procedures Act): a law protecting consumers from abuse during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships.

Reverse Mortgage (HECM): a reverse mortgage is a loan product that is steadily growing in popularity among homeowners age 62 and older. A reverse mortgage is used to convert the equity in one’s home into monthly income streams and/or a line of credit.  Repayment of the mortgage is deferred until the borrower dies, sells the home, moves out of the house, or defaults on other obligations such as taxes or insurance.

Right of First Refusal: a provision in an agreement that requires the owner of a property to give one party an opportunity to purchase or lease a property before it is offered for sale or lease to others.

S

Sale Leaseback: the process that occurs when a seller deeds property to a buyer for a payment while the buyer simultaneously leases the property back to the seller.

Second Mortgage: an additional mortgage on property, which gives priority to the first mortgage in the event of foreclosure. In case of default the first mortgage must be paid before the second mortgage can recapture any funds. Second loans are more risky for the lender and usually carry a higher interest rate.

Secondary Mortgage Market: a market in which mortgage loans are bought and sold. Investors purchase the residential mortgages that are originated by lenders, which in turn provide the lenders with fresh capital for additional lending.

Secured Loan: a loan backed by collateral such as property.

Seller Take Back: an agreement in which the seller of a property provides second mortgage financing to the buyer. These are often combined with an assumed mortgage instead of a portion of the seller’s equity.

Servicer: a company that collects mortgage payments from borrowers and manages the borrower’s escrow accounts.

Setback: the distance between a property line and the area where a building can be situated. Setbacks are used to assure space between buildings and from roads for a many purposes including drainage and utilities.

Settlement Statement: a document required by the Real Estate Settlement Procedures Act (RESPA). The settlement statement is an itemized statement of services and charges relating to the closing of a property transfer or mortgage loan. The buyer has the right to examine the settlement statement one day before the closing.

Subordinate: to place in a rank of lesser importance or to make one claim secondary to another.

Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc. Surveys are conducted by licensed surveyors and are normally required by the lender in order to confirm that the property boundaries and features are correct, as described in the legal description of the property.

Sweat Equity: using labor to build or improve a property as part of the down payment.

T

Third Party Origination: a process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

Title: a legal document establishing the right of ownership of a property.

Title Company: a company that specializes in examining and insuring titles to real estate.

Title Defect: an outstanding claim on a property that limits the ability to sell the property. A title defect is sometimes also referred to as a cloud on title.

Title Insurance: insurance that protects the lender against any claims that arise from arguments over the ownership of the property.

Title Search: a check of public records to ensure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.

Transfer Taxes: state and local taxes charged during the transfer of real estate, usually calculated as a percentage of the final sale price.

Treasury Index: a financial index that is sometimes used as the basis for adjustable rate mortgages (ARMs). The treasury index is based on the results of auctions that the U.S. Treasury holds for its T-bills and securities.

Truth-in-Lending (TIL): a federal law obligating a lender to give a full written disclosure of all fees, terms, and conditions associated with obtaining a new loan.

Two Step Mortgage: an adjustable rate mortgage (ARM) that has one interest rate for the first five to seven years of its term and a different interest rate for the remainder of the term.

Trustee: a person who holds or controls property for the benefit of another.

U

Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan. Underwriting includes a review of the potential borrower’s credit and employment history and a judgment of the property value.

V

VA (Department of Veterans Affairs): a federal agency which guarantees loans made to active servicemen, veterans, and certain widowed spouses.

VA Mortgage: a mortgage guaranteed by the Department of Veterans Affairs (VA).

Variance: a special exemption from a law (for example in zoning code) to allow the property to be used in a manner different from what is typically permitted.

W

Walk Through: during the process of purchasing a home, the walk through is the final inspection of a property to confirm that any contingencies specified in the purchase agreement are completed. Examples of such are the completion of repairs, fixture and non-fixture property is in place, and to confirm that the electrical, mechanical, and plumbing systems are in working order.

Warranty Deed: a legal document that includes a guarantee that the seller is the true owner of the property, has the right to sell the property, and that there are no claims against the property.

X

Y

Z

Zoning: local laws that are established to control the uses of land within a particular area. Zoning laws are used to separate residential land from areas of non-residential use, such as industry or businesses. Zoning ordinances include many provisions governing such things as the type of structure, setbacks, lot size, and building use.

**The above material  is not from HUD or FHA and was not approved by HUD or a government agency.