Minnesota Real Estate Investors' Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
401(k)/403(b)
An employer-sponsored investment plan allowing employees to set aside income
tax-deferred for retirement or emergency purposes. 401(k) plans are provided by
employers that are private corporations. 403(b) plans are provided by employers
that are not for profit organizations.
401(k)/403(b) Loan
Some administrators of 401(k)/403(b) plans allow for loans against the monies
you have accumulated in these plans. Loans against 401K plans are an acceptable
source of down payment for most types of loans.
Abandonment
Abandonment occurs when a person with a right or interest in a property
voluntarily gives up that right or interest, either by physically "abandoning"
the property or by showing the intention to give up the right or interest.
Abatement
A decrease or reduction in the price of a property (or in rent chargeable to a
tenant). Usually occurs as a result of the discovery of a negative fact about
the property which decreases its value from the price originally agreed upon by
the parties.
Able
Quite literally, being capable. A buyer is ready, willing and able to complete a
transaction when he has funds and has signed the documents required to transfer
title to a property.
If the seller is not ready, willing and able to complete the transaction on the
date set for completion, the buyer may tender upon the seller and sue as a
result of the failure to complete the transaction.
Absentee Owner
An owner of a property who lives elsewhere, leaving tenants in control and
occupation of the property.
Absorption Rate
Expressed as a percentage, the number of properties that can be bought or sold
in a particular market. May be broken down as to types and sizes of properties
Abstract of Title
A summary listing of the documents registered in the local land registry office
and which affect title (ownership) of a particular property.
Abstraction (Extraction) Method
A method by which the value of land may be established. Uses comparable,
improved properties and establishes a ratio of their original land value to
their value after they have been developed.
Abut
Adjoin or share a common boundary, or share even a small portion of a boundary.
Accelerated Depreciation
Depreciation is the reduction of the value of a property or chattel as a result
of the passing of time (i.e. a new car may be worth $20,000.00, $18,000.00 after
one year, $16,000.00 after two years etc.). Usually used for tax purposes, the
depreciation in the value of a property may be used as a tax deduction. If a
property or chattel loses its value quickly, this depreciation rate may be
accelerated so that most of the value is lost in the first few years and then
the depreciation rate decreases later in the property's life span.
Also known as "Writing down" the value of a property (or a chattel).
Acceleration Clause
A provision that gives the lender the right to collect the balance of a loan if
a borrower misses a payment
Acceptance
A positive response to an offer or a counter-offer that creates a binding
agreement between the parties. Acceptance may be conditional upon the occurrence
of certain events.
Access
The right to enter a property. Access may be restricted to certain times, to
certain persons and to certain purposes (i.e. access for the purpose of
inspection).
Accessibility
The ease with which one can reach a certain place, person or thing. A property
may be considered inaccessible because of geographic factors. A property may
also be said to have good accessibility to highways, shopping, schools etc.
Accessory Building
A structure on a property that serves a specific purpose, complementing the home
or main building, often a garage or storage shed.
Accredited Assessment Evaluator (AAE)
A professional designation. A property evaluator who has achieved the
requirements of the International Association of Assessing Officers.
Accredited Land Consultant (ALC)
A professional designation. A person who has met the requirements of the
Realtors Land Institute to aid in the marketing of real property
Acknowledgement
A written declaration affirming that a person acted voluntarily.
Acre
A measurement of land equal to 43,560 square feet.
Acre-foot
The volume of material needed to cover an acre of land one foot deep.
Actual Age
The number of years a structure has been standing.
Addendum
An addition or change to a contract
Adjustable Rate Mortgage (ARM)
A loan with an interest rate that is periodically adjusted to reflect changes in
a specified financial index. ARMS typically start with unusually low rate (or
teaser rate) that get unlocked and adjusted based on current interest rates
after a predetermine amount of time.
Adjusted Cost Basis
The cost of any improvements the seller makes to the property. Deducting the
cost from the original sales price provides the profit or loss of a home when it
is sold.
Adjustment Date
The date on which the interest rate changes for an adjustable-rate mortgage
(ARM).
Adjustment Interval
On 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.
Adjustment Period
For adjustable-rate loans, the period of time between interest rate changes. For
example, a mortgage with an adjustment period of one year is called a one-year
ARM, and the interest rate can change once each year.
Administrator
A person given authority to manage and distribute the estate or someone who died
without leaving a will.
Administrator's Deed
A legal document that an administrator of an estate uses to transfer property.
Agency
The relationship of trust that exists between sellers and buyers and their
agents. The agency is formed through a written contract.
Agent
A person licensed by the state to conduct real estate transactions.
Allowances
Budgets offered by builders of new homes for the purchase of carpeting and
fixtures.
Alternative Mortgage
Any home loan that does not conform to a standard fixed-rate mortgage.
Amenities
Parks, swimming pools, health-club facilities, party rooms, bike paths,
community centers and other enticements offered by builders of planned
developments.
Americans with Disabilities Act
A law passed in 1990 that outlaws discrimination against a person with a
disability in housing, public accommodations, employment, government services,
transportation and telecommunications.
Amortization
Means 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.
Amortization Schedule
A timetable for re-payment of a mortgage loan. An amortization schedule shows
the amount of each payment applied to interest and principal and shows the
remaining balance after each payment is made
Amortization Tables
Mathematical tables that lenders use to calculate a borrower's monthly payment.
Annual Mortgage Statement
A yearly statement to borrowers that details the remaining principal and amounts
paid for taxes and interest.
Annual Percentage Rate (A.P.R.)
A figure that states the total yearly cost of a mortgage as expressed by the
actual rate of interest paid. The APR includes the base interest rate, point,
and any other add-on loan fees and costs. As a result the APR is invariably
higher for the rate of interest that the lender quotes for the mortgage but
gives a more accurate picture of the likely cost of the loan. Keep in mind,
however, that most mortgages are not held for their full 15 or 30 year terms, so
the effective annual percentage rate is higher than the quoted APR because the
points and loan fees are spread out over fewer years.
Application Fee
a.) The fee that a lender charges to process a loan application.
b.) The fee that a landlord charges a potential tenant to apply for renting.
Customarily, it covers the background check of the tenant.
Appraisal
The process for estimating the fair market value of a particular property. It
can help home buyers and sellers determine what price to list a home at, or
offer. It can also be used by the lender for mortgage purposes.
Appraisal Fee
The fee paid to an appraiser in exchange for his assessment of the market value
of the property.
Appraisal Report
A written report detailing the value of a property based on recent sales of
comparable sites in the area created by an appraiser.
Appraised Value
An appraisers opinion of the fair market value of a property, based on the
appraiser's knowledge, experience, and analysis of the property itself.
Appraiser
An individual qualified by education, training, and experience to estimate the
value of real and personal property. Most appraisers are independent, but some
work directly for mortgage lenders.
Appreciation
An increase in the value of a home or other property due to changes in market
conditions, improvements and upgrades, or other causes. The opposite of
depreciation.
Appurtenances
A legal term for what belongs to and goes with something else, the accessories
or things usually conjoined with the substantive matter in question. In real
estate it is anything that is considered to be permanently attached, or custom
made to fit only in that structure, such as appliances and fixtures.
Arbitration
A method of resolving a dispute in which a third party renders a decision, and
is much faster and more cost-effective than litigation.
As-Is Condition
The purchase or sale of a property in its existing condition. This usually
includes addenda in the purchase agreement stating that.
Assessed Value
The valuation of a property by as determined by a public tax assessor for
purposes of taxation.
Assessment
a.) A local tax levied against a property for a specific purpose, such as a
sewer or street lights.
b.) The placing of an estimated value on property for the purpose of taxation.
Assessor
A public official who determines the value of a property for taxation purposes.
Asset
Any item(s) of value owned by an individual. Assets that can be quickly
converted into cash are considered liquid assets. These include bank accounts,
stocks, bonds, mutual funds, and so on. Other assets include real estate,
personal property, and debts owed to an individual by others.
Assignable
In pre-construction, when a contract or purchase agreement is allowed to be
transferred to another individual, it is said to be assignable.
Assignment
When ownership of your mortgage transfers from one company or individual to
another, it is called an assignment.
Assignor
A person who transfers rights and interests of a property.
Assumable Mortgage
A mortgage that can be assumed by the buyer when a home is sold. Usually, the
borrower must "qualify" in order to assume the loan.
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, possibly higher, market-rate interest charges will apply.
Assumption Fee
A fee the lender charges to process new records for a buyer who assumes an
existing loan.
Balance
The amount of principal that a borrower owes on a loan.
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.
Balloon Payment
The final lump sum payment that is due at the termination of a balloon mortgage.
Bankruptcy
A proceeding in which an insolvent debtor can obtain relief from payment of
certain obligations. Bankruptcies remain on a credit record for seven years and
can severely limit a person's ability to borrow.
Bill of Sale
A document that transfers ownership of specified property.
Biweekly Mortgage
A mortgage in which you make payments every two weeks instead of once a month.
The basic result is that instead of making twelve monthly payments during the
year, you make thirteen. The extra payment reduces the principal, substantially
reducing the time it takes to pay off a thirty year mortgage.
Blanket Insurance Policy
A policy that covers more than one person or piece of property.
Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same
mortgage.
Bond Market
Usually refers to the daily buying and selling of thirty year treasury bonds.
Lenders follow this market intensely because as the yields of bonds go up and
down, fixed rate mortgages do approximately the same thing. The same factors
that affect the Treasury Bond market also affect mortgage rates at the same
time. That is why rates change daily, and in a volatile market can and do change
during the day as well.
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.
Breach of Contract
The failure to perform provisions of a contract without a legal excuse.
Break-Even Point
The point at which the owner's rental income matches expenses and debt.
Bridge Loan
Bridge loans are a short-term loan, rarely used anymore, obtained by those who
have not yet sold their previous property, but must close on a purchase
property. The bridge loan is the source of their funds for the down payment. One
reason for their fall from favor is that there are more and more second mortgage
lenders now that will lend at a high loan-to-value. In addition, sellers often
prefer to accept offers from buyers who have already sold their property.
Broker
a.) 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.
b.) Most Realtors are "agents" who work under a "broker." Some agents are
brokers as well, either working form themselves or under another broker.
Brokerage
The act of bringing together two or more parties in exchange for a fee or
commission.
Building Code
A comprehensive set of laws that control the construction or remodeling of a
home or other structure.
Buy-down
This refers to a fixed rate mortgage where the interest rate is "bought down"
for a temporary period, usually one to three years. After that time and for the
remainder of the term, the borrower's payment is calculated at the note rate. In
order to buy down the initial rate for the temporary payment, a lump sum is paid
and held in an account used to supplement the borrower's monthly payment. These
funds usually come from the seller (or some other source) as a financial
incentive to induce someone to buy their property. A "lender funded buydown" is
when the lender pays the initial lump sum. They can accomplish this because the
note rate on the loan (after the buydown adjustments) will be higher than the
current market rate. One reason for doing this is because the borrower may get
to "qualify" at the start rate and can qualify for a higher loan amount. Another
reason is that a borrower may expect his earnings to go up substantially in the
near future, but wants a lower payment right now.
Buyer Agent
An real estate agent who represents the buyer only in a real estate transaction.
A buyer agent is typically paid by the seller or listing agent after closing,
provided all parties consent.
Buyer Broker
A real estate broker who exclusively represents the buyer's interests in a
transaction and whose commission is paid by the buyer rather that the seller.
Bylaws
The rules and regulations that a homeowners association or corporation adopts to
govern activities in their community.
Call Option
See "acceleration clause".
Cap (ARM)
Adjustable Rate Mortgages have fluctuating interest rates, but those
fluctuations are usually limited to a certain amount. Those limitations may
apply to how much the loan may adjust over a six month period, an annual period,
and over the life of the loan, and are referred to as "caps." Some ARMs,
although they may have a life cap, allow the interest rate to fluctuate freely,
but require a certain minimum payment which can change once a year. There is a
limit on how much that payment can change each year, and that limit is also
referred to as a cap.
Cap (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.
Cap (payment)
Consumer safeguards which limit the amount monthly payments on an adjustable
rate mortgage may change.
Capital
Money used to create income, such as funds invested in rental property.
Capital Expenditure
The cost of making improvements on a property.
Capital Gains
Profits an investor makes from the sale of real estate or investments.
Capital Gains Tax
A tax placed on profits from the sale of real estate or investments.
Capital Improvement
An improvement made to extend the useful life of a property or add to its value.
Major repairs such as the replacement of a roof are capital improvements. The
costs of capital improvements to business property must be capitalized and may
be depreciated.
Cash Flow
The amount of cash derived from an investment property. It is measured over a
set period of time (month, year, or decade) and measures expenses vs. income.
The time over which the measurement is figured will dictate how much detail is
included. I.E., the longer the period, the more detailed, accurate and
all-inclusive the measurement will be.
Cash-Out Refinance
When a borrower refinances his mortgage at a higher amount than the current loan
balance with the intention of pulling out money for personal use, it is referred
to as a "cash out refinance."
Certificate of Deposit (CD)
A time deposit held in a bank which pays a certain amount of interest to the
depositor.
Certificate of Deposit Index (CDI)
One of the indexes used for determining interest rate changes on some adjustable
rate mortgages. It is an average of what banks are paying on certificates of
deposit.
Certificate of Eligibility
A document issued by the Veterans Administration that certifies a veteran's
eligibility for a VA loan. The document is given only to qualified veterans,
entitling them to VA guaranteed 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 document that states that a home or other building has met all building codes
and is suitable for habitation.
Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans Administration showing the property's
current market value. Once the appraisal has been performed on a property being
bought with a VA loan, the Veterans Administration issues the CRV.
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).
Chain of Title
The official record of the transfers of title to a piece of property over the
history of the property.
Chattel
All personal property such as furniture, clothing or a car. In real estate, one
way of determining chattel is if you imagine turning your house upside-down,
chattel is everything that would fall out.
Clear Title
A title that is free of liens or other legal encumbrances as to ownership of the
property.
Closing
The actual meeting between the buyer, seller, lender or their agents where the
property, funds, and title legally change hands, also called the settlement.
Costs associated with the closing are: 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. An average cost of closing is about 3 percent to 6 percent of the
mortgage amount. Be aware that the term "closing" has different meanings in
different states. In some states a real estate transaction is not consider
"closed" until the documents are actually record at the local recorders office.
Closing Costs (see also Settlement/Settlement Costs)
Closing costs are separated into what are called "non-recurring closing costs"
and "pre-paid items." Non-recurring closing costs are any items which are paid
just once as a result of buying the property or obtaining a loan (such as loan,
title and appraisal fees). "Pre-paids" are items which recur over time, such as
property taxes and homeowners insurance. A lender makes an attempt to estimate
the amount of non-recurring closing costs and prepaid items on the Good Faith
Estimate which they are required to issue to the borrower within three days of
receiving a home loan application.
Closing Statement (HUD-1 Settlement Statement )
A document that provides an itemized listing of the funds that were paid at
closing. Items that appear on the statement include real estate commissions,
loan fees, points, and initial escrow (impound) amounts. Each type of expense
goes on a specific numbered line on the sheet. The totals at the bottom of the
HUD-1 statement define the seller's net proceeds and the buyer's net payment at
closing. It is called a HUD1 because the form is printed by the Department of
Housing and Urban Development (HUD). The HUD1 statement is also known as the
"closing statement" or "settlement sheet."
Cloud on Title
Any conditions revealed by a title search that adversely affect the title to
real estate. Usually clouds on title cannot be removed except by deed, release,
or court action.
Co-Borrower
An additional individual who is both obligated on the loan and is on title to
the property.
Collateral
In a home loan, the property is the collateral. The borrower risks losing the
property if the loan is not repaid according to the terms of the mortgage or
deed of trust.
Collection
When a borrower falls behind, the lender contacts them in an effort to bring the
loan current. The loan goes to "collection." As part of the collection effort,
the lender must mail and record certain documents in case they are eventually
required to foreclose on the property.
Commission
Most salespeople earn commissions for the work that they do and there are many
sales professionals involved in each transaction, including Realtors, loan
officers, title representatives, attorneys, escrow representative, and
representatives for pest companies, home warranty companies, home inspection
companies, insurance agents, and more. The commissions are paid out of the
charges paid by the seller or buyer in the purchase transaction as specified on
the HUD1.
Commitment
a..) A promise by a lender to make a loan on specific terms or conditions to a
borrower or builder.
b.) 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.
Common Area
Areas inside a housing development that are (and managed) owned by all of the
residents of that community and their collective association. Typically
homeowners share the common expenses associated with the operation and
maintenance of these facilities as well. Common areas could include swimming
pools, tennis courts, and other recreational facilities, as well as common
corridors of buildings, parking areas, means of ingress and egress, etc.
Common Area Assessments
Also known as Homeowners Association Fees (or HOAs), they are fees paid to the
Homeowners Association by the owners of the individual units in a condominium or
planned unit development (PUD) and are generally used to maintain the property
and common areas.
Common Law
An unwritten body of law based on general custom in England and used to an
extent in some states.
Community Property
In some states, especially the southwest, property acquired by a married couple
during their marriage is considered to be owned jointly, except under special
circumstances. This is an outgrowth of the Spanish and Mexican heritage of the
area.
Comparable Sales, Comparables (Comps)
Recent sales of similar properties in nearby areas of similar usage, used to
help determine the market value of a property. Most commonly referred to as
"comps."
Condominium
A type of ownership in real property where all of the owners own the property,
common areas and buildings together, with the exception of the interior of the
unit to which they have title. Often mistakenly referred to as a type of
construction or development, it actually refers to the type of ownership.
Condominium Conversion
Changing the ownership of an existing building (usually an apartment building or
hotel) to the condominium form of ownership. All conversions must be approved by
the state and result in the change in title from a single owner of an entire
project or building to multiple owners of individual units.
Condominium Hotel
A condominium project that has rental or registration desks, short-term
occupancy, food and telephone services, and daily cleaning services and that is
operated as a commercial hotel even though the units are individually owned.
These are often found in resort areas like Hawaii.
Construction loan
A short term interim loan to pay for the construction or rehabbing of buildings
or homes. These are usually designed to provide periodic disbursements to the
builder as he progresses.
Contingency
A condition that must be met before a contract is legally binding. For example,
home purchasers often include a contingency that specifies that the contract is
not binding until the purchaser obtains a satisfactory home inspection report
from a qualified home inspector.
Contract
An oral or written agreement between two or more parties to do or not to do a
certain thing.
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 other than government loans and therefore not insured by FHA or
guaranteed by the VA.
Convertible ARM
An adjustable-rate mortgage that allows the borrower to change the ARM to a
fixed-rate mortgage within a specific time.
Cooperative (Co-Op)
A type of multiple ownership in which the residents of a multiunit housing
complex own shares in the cooperative corporation that owns the property, giving
each resident the right to occupy a specific apartment or unit.
Co-signer
A second party who signs a promissory note and takes responsibility for the
associated debt.
Cost Of Funds Index (COFI)
One of the indexes that is used to determine interest rate changes for certain
adjustable-rate mortgages. It represents the weighted-average cost of savings,
borrowings, and advances of the financial institutions such as banks and savings
& loans, in the 11th District of the Federal Home Loan Bank.
County Clerk
The public official who keeps records of transactions that affect real property
in the area. Sometimes known as a "Registrar of Deeds" or "Recorder."
Credit
An agreement in which a borrower receives something of value in exchange for a
promise to repay the lender at a later date.
Credit History
A record of the history of an individual's repayment of debt. Credit histories
are reviewed my mortgage lenders as one of the underwriting criteria in
determining credit risk
Credit Report
A report documenting the credit history and current status of a borrower's
credit standing commonly used to determine a loan applicant's creditworthiness.
Credit Repository
An organization that gathers, records, updates, and stores financial and public
records information about the payment records of individuals who are being
considered for credit.
Creditor
A person to whom money is owed.
Debt
An amount of money owed to another.
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. Also sometimes referred to as expenses-to-income ratio.
Deed
The legal document conveying title to a particular property.
Deed of Trust
In many states, this document is used in place of a mortgage to secure the
payment of a note. For example, in California, they do not record mortgages,
instead, they record a deed of trust, which is essentially the same thing.
Deed-in-Lieu
Short for "deed in lieu of foreclosure," this conveys title to the lender when
the borrower is in default and wants to avoid foreclosure. The lender may or may
not cease foreclosure activities if a borrower asks to provide a deed-in-lieu.
Regardless of whether the lender accepts the deed-in-lieu, the avoidance and
non-repayment of debt will most likely show on a credit history. What a
deed-in-lieu may prevent is having the documents preparatory to a foreclosure
being recorded and become a matter of public record.
Default
Failure to meet legal obligations in a contract, specifically, failure to make
the monthly payments on a mortgage. For first mortgages or first trust deeds, if
a payment has still not been made within 30 days of the due date, the loan is
considered to be in default.
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 (or neg-am).
Delinquency
Failure to make payments on time. this can lead to foreclosure. For most
mortgages, payments are due on the first day of the month. Even though they may
not charge a "late fee" for a number of days, the payment is still considered to
be late and the loan delinquent. When a loan payment is more than 30 days late,
most lenders report the late payment to one or more credit bureaus.
Department of Veterans Affairs (VA)
An independent agency of the federal government which guarantees long-term,
low-or no-down payment mortgages to eligible veterans.
Deposit
A sum of money given in advance of a larger amount being expected in the future.
Often called in real estate an "earnest money deposit."
Depreciation
a.) A decrease in the value of a property due to changes in market conditions or
other causes. The opposite of appreciation.
b.) The theoretical decrease in value of a property as recognized as a deduction
on annual taxes. In residential real estate, for example that amount is 1/27.5
annually.
Disclosure
A statement to a potential buyer listing information relevant to a piece of
property, such as the presence of radon, lead paint or mold.
Discount Points
In the mortgage industry, this term is usually used only in reference to
government loans, meaning FHA and VA loans. Discount points refer to any
"points" paid in addition to the one percent loan origination fee. A "point" is
one percent of the loan amount. (see points )
Down Payment
The part of the purchase price of a property that the buyer pays in cash and
does not finance with a mortgage. (10% to 20% of the purchase price is common
for owner-occupied residential real estate, but there are mortgage products
available requiring less)
Due-on-Sale-Clause (or provision)
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.
Earnest Money Deposit
A deposit made by the potential home buyer to show that he or she is serious
about buying the house.
Easement
A right of way giving persons other than the owner access to or over a portion
of the property.
Effective Age
An appraiser's estimate of the physical condition of a building. The actual age
of a building may be shorter or longer than its effective age.
Eminent Domain
The right of a government to take private property for public use upon payment
of its fair market value. Eminent domain is the basis for condemnation
proceedings.
Encroachment
An improvement that intrudes illegally on another's property.
Encumbrance
Anything that affects or limits the fee simple title to a property, such as
mortgages, leases, easements, or restrictions.
Entitlement
The VA home loan benefit is called entitlement. Entitlement for a VA guaranteed
home loan is also known as eligibility.
Equal Credit Opportunity Act (ECOA)
Is a federal law that requires lenders and other creditors to make credit
equally available without discrimination based on race, color, religion,
national origin, age, sex, marital status or receipt of income from public
assistance programs.
Equity
The difference between the fair market value of a property and current
indebtedness, also referred to as the owner's interest. It's the value an owner
has in real estate over and above the obligation against the property.
Escrow
Escrow is the holding of money and important documents related to the purchase
and/or sales of a property by a neutral third party (the escrow officer) prior
to the close of the transaction.
Escrow Account
Another type of escrow is an account held by the lender containing funds
collected in conjunction with monthly mortgage payments. The funds in the escrow
account are used by the lender to pay annual expenses such as taxes and
insurance on behalf of the borrower.
Escrow Analysis
Once each year your lender will perform an "escrow analysis" to make sure they
are collecting the correct amount of money for the anticipated expenditures.
Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage
insurance, and other property expenses as they become due.
Estate
The ownership interest of an individual in real property. The sum total of all
the real property and personal property owned by an individual at time of death.
Eviction
The lawful expulsion of an occupant from real property.
Examination of Title
The report on the title of a property from the public records or an abstract of
the title.
Exclusive Listing
A written contract that gives a licensed real estate agent the exclusive right
to sell a property for a specified amount of time.
Executor
A person named in a will to administer an estate. The court will appoint an
administrator if no executor is named. "Executrix" is the feminine form.
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit
reports by consumer/credit reporting agencies and establishes procedures for
correcting mistakes on one's credit record
Fair Housing Act
Landmark federal law passed in 1965 and amended in 1988 that makes it illegal to
deny rent or refuse to sell to anyone based on race, color, religion, sex or
national origin. The 1988 amendment expanded the protections to include family
status and disability.
Fair Market Value
The highest price that a buyer, willing but not compelled to buy, would pay, and
the lowest a seller, willing but not compelled to sell, would accept.
Fannie Mae (Federal National Mortgage Association or FNMA)
The Federal National Mortgage Association, which is a congressionally chartered,
shareholder-owned company that is the nation's largest supplier of home mortgage
funds. [Fannie Mae, Freddie Mac (FHLMC), and Ginnie Mae (GNMA)]
Fannie Mae's Community Home Buyer's Program
An income-based community lending model, under which mortgage insurers and
Fannie Mae offer flexible underwriting guidelines to increase a low- or
moderate-income family's buying power and to decrease the total amount of cash
needed to purchase a home. Borrowers who participate in this model are required
to attend pre-purchase home-buyer education sessions
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. Agency is now called the Office of Thrift
Supervision
Federal Home Loan Mortgage Corporation (FHLMC) also called "Freddie Mac", is a
quasi-governmental agency that purchases conventional mortgage from insured
depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development (HUD). Its
main activity is the insuring of residential mortgage loans made by private
lenders. The FHA sets standards for construction and underwriting but does not
lend money or plan or construct housing.
Federal National Mortgage Association (FNMA) also know 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. A mortgage that is insured by the Federal Housing
Administration (FHA), along with VA loans, will often be referred to as a
government loan.
FHA Mortgage Insurance
Requires a 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.
FHLMC
The Federal Home Loan Mortgage Corporation provides a secondary market for
savings and loans by purchasing their conventional loans. Also known as "Freddie
Mac."
Federal Reserve Board
A group of economists and other experts who set the nation's monetary policy.
Its chief tool to control inflation is the power to control interest rates.
Fee Simple
The greatest possible interest a person can have in real estate.
Fee Simple Estate
An unconditional, unlimited estate of inheritance that represents the greatest
estate and most extensive interest in land that can be enjoyed. It is of
perpetual duration. When the real estate is in a condominium project, the unit
owner is the exclusive owner only of the air space within his or her portion of
the building (the unit) and is an owner in common with respect to the land and
other common portions of the property.
Fiduciary Duty
The relationship of trust that buyers and sellers expect from a real estate
agent. The term also applies to legal and business relationships.
Firm Commitment
A promise by FHA to insure a mortgage loam for a specified property and
borrower. A promise from a lender to make a mortgage loan.
First Mortgage
The mortgage that is in first place among any loans recorded against a property.
Usually refers to the date in which loans are recorded, but there are
exceptions.
Fixed Rate Mortgage
A mortgage in which the interest rate does not change during the entire term of
the loan.
Fixture
Personal property that becomes real property when attached in a permanent manner
to real estate.
Flood Insurance
Insurance that compensates for physical property damage resulting from flooding.
It is required for properties located in federally designated flood areas.
Flood Plain
Flat, flood-prone areas located along waterways.
FNMA (Fannie Mae)
The Federal National Mortgage Association is a secondary mortgage institution
which is the largest single holder of home mortgages in the United States. FNMA
buys VA, FHA, and conventional mortgages from primary lenders.
Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged
property because the borrower has not met the terms of the mortgage, also known
as a repossession of property.
Forfeiture
The relinquishing of property rights by a delinquent borrower.
Freddie Mac (see Federal Home Loan Mortgage Corporation)
The common name for the Federal Home Loan Mortgage Corporation, a
congressionally chartered institution that buys mortgages from lenders and
resells them as securities on the secondary mortgage market.
Ginnie Mae
A government-owned corporation within the U.S. Department of Housing and Urban
Development (HUD). Created by Congress on September 1, 1968, GNMA performs the
same role as Fannie Mae and Freddie Mac in providing funds to lenders for making
home loans. The difference is that Ginnie Mae provides funds for government
loans (FHA and VA)
Good Faith
An estimate from an institutional lender that shows the costs a borrower will
incur, including loan-processing charges and inspection fees.
Government Loan (Mortgage)
A mortgage that is insured by the Federal Housing Administration (FHA) or
guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing
Service (RHS). Mortgages that are not government loans are classified as
conventional loans
Government National Mortgage Association (GNMA or Ginnie Mae)
A government-owned corporation within the U.S. Department of Housing and Urban
Development (HUD). Created by Congress on September 1, 1968, GNMA performs the
same role as Fannie Mae and Freddie Mac in providing funds to lenders for making
home loans. The difference is that Ginnie Mae provides funds for government
loans (FHA and VA)
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.
Grantee
The person to whom an interest in real property is conveyed.
Grantor
The person conveying an interest in real property.
Gross Income
The total income of a household before taxes or expenses are subtracted.
Guaranty
A promise by one party to pay a debt or perform an obligation contracted by
another if the original party fails to pay or perform according to a contract.
Hazard Insurance
A form of insurance in which the insurance company protects the insured from
specified losses, such as fire, wind, vandalism, or other hazards.
Home Equity Conversion Mortgage (HECM)
Usually referred to as a reverse annuity mortgage, what makes this type of
mortgage unique is that instead of making payments to a lender, the lender makes
payments to you. It enables older home owners to convert the equity they have in
their homes into cash, usually in the form of monthly payments. Unlike
traditional home equity loans, a borrower does not qualify on the basis of
income but on the value of his or her home. In addition, the loan does not have
to be repaid until the borrower no longer occupies the property.
Home Equity Line of Credit (HELOC)
A mortgage loan, usually in second position, that allows the borrower to obtain
cash drawn against the equity of his home, up to a predetermined amount.
Home Inspection
A thorough inspection by a professional that evaluates the structural and
mechanical condition of a property. A satisfactory home inspection is often
included as a contingency by the purchaser.
Homeowner Association Fees (HOAs)
A nonprofit association that manages the common areas of a planned unit
development (PUD) or condominium project. In a condominium project, it has no
ownership interest in the common elements. In a PUD project, it holds title to
the common elements.
Homeowner Insurance
An insurance policy that combines personal liability insurance and hazard
insurance coverage for a dwelling and its contents.
Homeowner Warranty
A type of insurance often purchased by homebuyers that will cover repairs to
certain items, such as heating or air conditioning, should they break down
within the coverage period. The buyer often requests the seller to pay for this
coverage as a condition of the sale, but either party can pay.
Homesteading
A document that protects some of a homeowner's equity from lawsuits.
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.
HUD Median Income
Median family income for a particular county or metropolitan statistical area (MSA),
as estimated by the Department of Housing and Urban Development (HUD).
HUD-1 (see also Settlement Statement)
A document that provides an itemized listing of the funds that were paid at
closing. Items that appear on the statement include real estate commissions,
loan fees, points, and initial escrow (impound) amounts. Each type of expense
goes on a specific numbered line on the sheet. The totals at the bottom of the
HUD-1 statement define the seller's net proceeds and the buyer's net payment at
closing. It is called a HUD1 because the form is printed by the Department of
Housing and Urban Development (HUD). The HUD1 statement is also known as the
"closing statement" or "settlement sheet."
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.
Income Property
Property that is not occupied by the owner but is used to generate income.
Index
A published interest rate against which lenders measure the difference between
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.
Inspection
The examination of a property by a professional inspector (licensing required in
some states) of the buildings exterior, foundation, framing, plumbing,
electrical system, heating, air conditioning, fireplace, kitchen, bathroom,
roofing and interior.
Inspection Report
The full document of feedback on a property after an examination of a property's
exterior, foundation, framing, plumbing, electrical system, heating, air
conditioning, fireplace, kitchen, bathroom, roofing and interior.
Interest
The fee borrowers pay to obtain a loan. It is calculated based on a percentage
of the total loan.
Interest-Only Loan (IO Loan)
The borrower pays only the interest that accrues on the loan balance each month.
Because each payment goes toward interest, the outstanding balance of the loan
does not decline with each payment.
Interest Rate
The fee charged by a lender to a borrower for the use of borrowed money, usually
expressed as an annual percentage of the principal; the rate is dependent upon
the time value of money, the credit risk of the borrower and the inflation rate.
Interest rates can be calculated as simple, compounded or effective.
Interim Financing
A construction loan made during completion of a building or a project. A
permanent loan usually replaces this loan after completion.
Investment Property
Real estate that is purchased for the purpose of generating income, such as an
apartment building or a rental house.
Investor
a.) A money source for a lender.
b.) A person leveraged in such a way to own properties for the purpose of
generating income.
Joint Tenancy
A form of ownership or taking title to property which means each party owns the
whole property and that ownership is not separate. In the event of the death of
one party, the survivor owns the property in its entirety.
Judgment
A decision made by a court of law. In judgments that require the repayment of a
debt, the court may place a lien against the debtor's real property as
collateral for the judgment's creditor.
Judicial Foreclosure
A type of foreclosure proceeding used in some states that is handled as a civil
lawsuit and conducted entirely under the auspices of a court. Other states use
non-judicial foreclosure.
Jumbo Loan
A loan which is larger than the limits set by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, currently at
$227,150 . Because jumbo loans cannot be funded by these two agencies, they
usually carry a higher interest rate.
Lease
A binding agreement that contains the terms and conditions of a renter's
occupancy and the landlords obligations during said period.
Lease Option
A lease that contains the right to purchase the property for a specific price
within a certain time frame.
Leverage
The use of a small amount of cash or other secured funds - often a five percent
or ten percent used for the down payment - to buy a piece of property.
Lien
A claim upon a piece of property for the payment or satisfaction of a debt or
obligation.
Limited partnership
Real estate syndicates and other investment groups use this type of ownership. A
general partner makes the group's investment decisions, oversees the investment
and is principally liable for any losses.
Liquid Assets
Cash, or other assets that can be converted to cash relatively quickly. Liquid
assets can include money in savings and checking accounts, money-market accounts
and most certificates of deposit.
Loan-to-Value Ratio
The relationship between the amount of the mortgage loan and the appraised value
of the property expressed as a percentage.
Loan Origination Fee
Most lenders charge borrowers an origination fee - or points - for processing a
loan. A point is 1 percent of the total loan amount.
Maintenance Fee
The monthly assessment members of a homeowners' association pay for the repair
and maintenance of common areas.
Margin
The difference between the interest rate and the index on an adjustable rate
mortgage. The margin remains stable over the life of the loan. It is the index
which moves up and down.
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.
Maturity
The date on which the principal balance of a loan, bond, or other financial
instrument becomes due and payable.
Merged Credit Report
A credit report which reports the raw data pulled from two or more of the major
credit repositories. Contrast with a Residential Mortgage Credit Report (RMCR)
or a standard factual credit report.
Mortgage Insurance Premium (MIP)
It is insurance from FHA to the lender against incurring a loss on account of
the borrower's default.
Modification
Occasionally, a lender will agree to modify the terms of your mortgage without
requiring you to refinance. If any changes are made, it is called a
modification.
Mortgage
A mortgage is a formal document which proves the legal claim or lien on your
property that your lender holds as security for the money you borrowed. There
are (at least) two people involved in a mortgage, the lender and the lendee (or
buyer/owner). The buyer pledges the property as security for the repayment of
the money you borrowed, but does not transfer title to the lender. However, if
the buyer does not pay the debt as agreed the lender, through a court
proceeding, will compel the sale of said property to pay off the debt owed to
the lender.
Mortgage Banker
A mortgage banker is generally assumed to originate and fund their own loans,
which are then sold on the secondary market, usually to Fannie Mae, Freddie Mac,
or Ginnie Mae. However, firms rather loosely apply this term to themselves,
whether they are true mortgage bankers or simply mortgage brokers or
correspondents
Mortgage Broker
A mortgage company that originates loans, then places those loans with a variety
of other lending institutions with whom they usually have pre-established
relationships.
Mortgage Insurance (MI, see also Private Mortgage Insurance or PMI)
In the event that a borrower does not have a 20 percent down payment
(Loan-To-Value (LTV) percentage in excess of 80 percent), lenders will allow a
smaller down payment — as low as 5 percent in some cases. With the smaller down
payment loans, however, borrowers are required to carry private mortgage
insurance (PMI). That PMI is provided by private mortgage insurance company to
protect your lender against loss if the borrower defaults. Generally, PIM is
paid on a monthly basis along with the mortgage and usually averages about 5
percent of your monthly mortgage payment. Also, FHA loans and certain first-time
homebuyer programs require mortgage insurance regardless of the loan-to-value.
Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either to a government
agency such as the Federal Housing Administration (FHA) or to a private mortgage
insurance (MI) company.
Mortgage Interest
Interest rate charge for borrowing the money for the mortgage. It is used to
calculate the interest payment on the mortgage each month.
Mortgage Life and Disability Insurance
A type of term life insurance often bought by borrowers. The amount of coverage
decreases as the principal balance declines. Some policies also cover the
borrower in the event of disability. In the event that the borrower dies while
the policy is in force, the debt is automatically satisfied by insurance
proceeds. In the case of disability insurance, the insurance will make the
mortgage payment for a specified amount of time during the disability. Be
careful to read the terms of coverage, however, because often the coverage does
not start immediately upon the disability, but after a specified period,
sometime forty-five days
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower or homeowner in a mortgage agreement.
Multidwelling Units (Multiunit Dwellings)
Properties that provide separate housing units for more than one family,
although they secure only a single mortgage.
Multiple Listing Service (MLS)
An online database service combining the listings for all available homes in an
area, except For-Sale-By-Owner (FSBO) properties, in one directory. It is
regulated by the local Board of Realtors and a real estate agent must be
licensed as a member of the National Association of Realtors, and pay associated
annual dues in order to have full access to this service.
Negative Amortization (neg-am)
Occurs when your monthly payments are not large enough to pay all the interest
due on the loan. This unpaid interest is then added monthly to the unpaid
balance of the loan. The danger of negative amortization is that the home buyer
ends up owing more than the original amount of the loan, and possibly the value
of the property.
Net Cash Flow
Investment property that generates income after expenses such as principal,
interest, taxes and insurance are subtracted, most commonly figured on an annual
basis.
Net Effective Income
The borrower's gross income minus federal income tax.
Net Worth
The worth of a person or company based on the difference between total assets
and total liabilities.
No Cash-Out Refinance
A refinance transaction which is not intended to put cash in the hand of the
borrower. Instead, the new balance is calculated to cover the balance due on the
current loan and any costs associated with obtaining the new mortgage. Often
referred to as a "rate and term refinance."
No Cost Loans
Many lenders offer loans that you can obtain at "no cost." You should inquire
whether this means there are no "lender" costs associated with the loan, or if
it also covers the other costs you would normally have in a purchase or
refinance transactions, such as title insurance, escrow fees, settlement fees,
appraisal, recording fees, notary fees, and others. These are fees and costs
which may be associated with buying a home or obtaining a loan, but not charged
directly by the lender. Keep in mind that, like a "no-point" loan, the interest
rate will be higher than if you obtain a loan that has costs associated with it.
Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage
without the prior approval from the lender.
Note
A legal document that obligates a borrower to repay a mortgage loan (or other
debt) at a stated interest rate during 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 that a default has occurred and that legal
action may be taken.
Original Principle Balance
The total amount of principal owed on a mortgage before any payments are made.
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. On a government loan the loan origination fee is one
percent of the loan amount, but additional points may be charged which are
called "discount points." One point equals one percent of the loan amount. On a
conventional loan, the loan origination fee refers to the total number of points
a borrower pays.
Owner Financing
A property purchase transaction in which the property seller provides all or
part of the financing.
Partial Payment
A payment that is not sufficient to cover the scheduled monthly payment on a
mortgage loan. Normally, a lender will not accept a partial payment, but in
times of hardship you can make this request of the loan servicing collection
department.
Payment Cap
A legal limit on the amount a monthly payment can increase on an adjustable-rate
mortgage.
Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable-rate
mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment
change date occurs in the month immediately after the interest rate adjustment
date.
Periodic Payment Cap
For an adjustable-rate mortgage (ARM) where the interest rate and the minimum
payment amount fluctuate independently of one another, this is a limit on the
amount that payments can increase or decrease during any one adjustment period.
Periodic Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest
rate can increase or decrease during any one adjustment period, regardless of
how high or low the index might be.
Permanent Loan
A long term mortgage, usually ten years or more, also referred to as an "end
loan".
Personal Property
Any property that is not real property.
PITI
In a mortgage this stands for principal, interest, taxes and insurance. If you
have an "impounded" loan, then your monthly payment to the lender includes all
of these and probably includes mortgage insurance as well. If you do not have an
impounded account, then the lender still calculates this amount and uses it as
part of determining your debt-to-income ratio.
PITI Reserves
A 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 type of ownership where individuals actually own the building or unit they
live in, but common areas are owned jointly with the other members of the
development or association. Contrast with condominium, where an individual
actually owns the airspace of his unit, but the buildings and common areas are
owned jointly with the others in the development or association
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 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.
Pre-Approval
A loosely used term which is generally taken to mean that a borrower has
completed a loan application and provided debt, income, and savings
documentation which an underwriter has reviewed and approved. A pre-approval is
usually done at a certain loan amount and making assumptions about what the
interest rate will actually be at the time the loan is actually made, as well as
estimates for the amount that will be paid for property taxes, insurance and
others. A pre-approval applies only to the borrower. Once a property is chosen,
it must also meet the underwriting guidelines of the lender. A letter of
pre-approval included with an offer to buy property strengthens the offer.
Contrast with pre-qualification.
Pre-Qualification
This usually refers to the loan officer's written opinion of the ability of a
borrower to qualify for a home loan, after the loan officer has made inquiries
about debt, income, and savings. The information provided to the loan officer
may have been presented verbally or in the form of documentation, and the loan
officer may or may not have reviewed a credit report on the borrower. A letter
of pre-qualification included with an offer to buy property strengthens the
offer. Contrast with pre-approval.
Prepaid Expenses
Necessary to create an escrow account or to adjust the seller's existing escrow
account. Can include taxes, hazard insurance, private mortgage insurance and
special assessments.
Prepayment
A privilege in a mortgage permitting the borrower to make full or partial
payment of the principal before the due date. This might occur if the borrower
makes extra payments, sells the property, or refinances the existing loan and
can help lower the interest payment paid over the life of the loan and can
shorten the life of the loan itself. However, before you make a prepayment,
consult with your lender to make sure that you are eligible to do so (it should
be stated in the loan agreement), and make sure that you explicitly state that
it is a prepayment intended to be applied against the principal amount on your
loan.
Prepayment Penalty
A fee charged to the borrower 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 interest rate that banks charge to their preferred customers. Changes in the
prime rate are widely publicized in the news media and are used as the indexes
in some adjustable rate mortgages, especially home equity lines of credit.
Changes in the prime rate do not directly affect other types of mortgages, but
the same factors that influence the prime rate also affect the interest rates of
mortgage loans
Principal
The amount of debt, not counting interest, left on a loan.
Principal Balance
The amount of money borrowed to buy your house or the amount of the loan that
has not yet been paid back to the lender. This does not include the interest you
will pay to borrow that money. The principal balance (sometimes called the
outstanding or unpaid principal balance) is the amount owed on the loan at any
given time. It is the original loan amount minus the total repayments of
principal you have made to date.
Private Mortgage Insurance (PMI, see also Mortgage Insurance, or MI)
In the event that a borrower does not have a 20 percent down payment
(Loan-To-Value (LTV) percentage in excess of 80 percent), lenders will allow a
smaller down payment — as low as 5 percent in some cases. With the smaller down
payment loans, however, borrowers are required to carry private mortgage
insurance (PMI). That PMI is provided by private mortgage insurance company to
protect your lender against loss if the borrower defaults. Generally, PIM is
paid on a monthly basis along with the mortgage and usually averages about 5
percent of your monthly mortgage payment. Also, FHA loans and certain first-time
homebuyer programs require mortgage insurance regardless of the loan-to-value.
Promissory Note
A written promise to repay a specified amount over a specified period of time.
Public Auction
A meeting in an announced public location to sell property to repay a mortgage
that is in default.
Purchase Agreement (PA)
A written contract signed by the buyer and seller stating the terms and
conditions under which a property will be sold.
Purchase Money Transaction
The acquisition of property through the payment of money or its equivalent.
Qualifying Ratios
Calculations that are used in determining whether a borrower can qualify for a
mortgage. There are two ratios. The "top" or "front" ratio is a calculation of
the borrower's monthly housing costs (principle, taxes, insurance, mortgage
insurance, homeowner's association fees) as a percentage of monthly income. The
"back" or "bottom" ratio includes housing costs as well as all other monthly
debt.
Quit Claim Deed
A deed that transfers without warranty whatever interest or title a grantor may
have at the time the conveyance is made.
Rate Lock
A commitment issued by a lender to a borrower (or other mortgage originator)
guaranteeing a specified interest rate for a specified period of time at a
specific cost.
Real Estate Agent
To become a real estate agent, a person must pass a certification course and
state examination which covers the legal aspects of real property, and must pass
a background check in order to become licensed. A real estate agent must also
satisfy a certain number of hours of additional training each year in order to
maintain this license. Once they are licensed they may negotiate and transact
the sale of real estate on behalf of the property owner and buyer, or in some
cases both parties.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice
of closing costs.
Real Property
Land and appurtenances, including anything of a permanent nature such as
structures, trees, minerals, and the interest, benefits, and inherent rights
thereof.
Realtor
A real estate agent or broker holding an active membership in a local Board of
Realtors affiliated with the National Association of Realtors (NAR). An agent
must be an active Realtor in order to have full access and use of their local
MLS (Multiple Listing Service). They must pass additional ethics training
through the Board of Realtors and comply with more stringent rules and
regulations than an agent not affiliated with the NAR.
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."
Recording
The noting in the registrar's office of the details of a properly executed legal
document, such as a deed, a mortgage note, a satisfaction of mortgage, or an
extension of mortgage, thereby making it a part of the public record.
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 Transaction
The process of paying off one loan with the proceeds from a new loan using the
same property as security.
Refinance Refinancing
Obtaining a new mortgage loan on a property already owned. Often to replace
existing loans on the property.
Registrar of Deeds
The public official who keeps records of transactions that affect real property
in the area. Sometimes known as a "Recorder" or "County Clerk."
Remaining Balance
The amount of principal that has not yet been repaid.
Remaining Term
The original amortization term minus the number of payments that have already
been applied.
Renegotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically. See adjustable rate
mortgage.
Rent Loss Insurance
Insurance that protects a landlord against loss of rent or rental value due to
fire or other casualty that renders the leased premises unavailable for use and
as a result of which the tenant is excused from paying rent.
Repayment Plan
An arrangement made to repay delinquent installments or advances.
Replacement Reserve Fund
A fund set aside for replacement of common property in a condominium, PUD, or
cooperative project — particularly that which has a short life expectancy, such
as carpeting, furniture, etc.
Rescission (see also Right of Rescission)
The cancellation of a contract. The law that gives the purchaser a set number of
days to cancel a contract once it is signed. In mortgage terms the period is
typically three days if the transaction uses equity in the home as security. The
cancellation of a purchase agreement by the buyer depends on the type of
structure and state in which it's being purchased.
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.) 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.
b.) The document issued by the mortgagee when the mortgage loan is paid in full,
also referred to as a "release of mortgage."
Revolving Debt
A credit arrangement, such as a credit card, that allows a customer to borrow
against a pre-approved line of credit when purchasing goods and services. The
borrower is billed for the amount that is actually borrowed plus any interest
due.
Right of First Refusal
A provision in an agreement that requires the owner of a property to give
another party the first opportunity to purchase or lease the property before he
or she offers it for sale or lease to others.
Right of Ingress or Egress
The right to enter or leave designated premises.
Right of Rescission
The amount of time given to a buyer in which they my cancel a purchase agreement
for any reason whatsoever. The number of days for cancellation depends on the
type of structure and state in which it's being purchased.
Right of Survivorship
In joint tenancy, the right of survivors to acquire the interest of a deceased
joint tenant.
Sale-Leaseback
A technique in which a seller deeds property to a buyer for a consideration, and
the buyer simultaneously leases the property back to the seller.
Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one,
having a lien position to it.
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 and security for
the lenders.
Secured Loan
A loan that is backed by some form of collateral.
Security
The property that will be pledged as collateral for a loan.
Seller Carry-Back
An agreement in which the owner of a property provides financing, often in
combination with an assumable mortgage.
Servicer
An organization that collects principal and interest payments from borrowers and
manages borrowers' escrow accounts. The servicer often services mortgages that
have been purchased by an investor in the secondary mortgage market.
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/Settlement Costs (see also closing costs)
Settlement costs are separated into what are called "non-recurring settlement
costs" and "pre-paid items." Non-recurring settlement costs are any items which
are paid just once as a result of buying the property or obtaining a loan (such
as loan, title and appraisal fees). "Pre-paids" are items which recur over time,
such as property taxes and homeowners insurance. A lender makes an attempt to
estimate the amount of non-recurring settlement costs and prepaid items on the
Good Faith Estimate which they are required to issue to the borrower within
three days of receiving a home loan application.
Settlement Statement (see also HUD1)
A document that provides an itemized listing of the funds that were paid at
closing. Items that appear on the statement include real estate commissions,
loan fees, points, and initial escrow (impound) amounts. Each type of expense
goes on a specific numbered line on the sheet. The totals at the bottom of the
settlement statement define the seller's net proceeds and the buyer's net
payment at closing. It is also called a HUD1 because the form is printed by the
Department of Housing and Urban Development (HUD). The settlement statement is
also known as the "closing statement".
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 borrowers 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.
Subdivision
A housing development that is created by dividing a tract of land into
individual lots for sale or lease.
Subordinate Financing
Any mortgage or other lien that has a priority that is lower than that of the
first mortgage.
Survey
a.) A measurement of land, prepared by a registered land surveyor, showing the
location of the land with reference to know points, its dimensions, and the
location and dimensions of any buildings.
b.) A drawing or map showing the precise legal boundaries of a property, the
location of improvements, easements, rights of way, encroachments, and other
physical features.
Sweat Equity
Equity created by a purchaser performing work on a property being purchased,
such that the contribution to the construction or rehabilitation of the property
is in the form of labor or services rather than cash.
Tenancy in Common
As opposed to joint tenancy, when there are two or more individuals on title to
a piece of property, this type of ownership does not pass ownership to the
others in the event of death, but passes it to other rightful heirs instead.
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 that gives evidence of an individual's right to, or ownership
of property.
Title Company
A company that specializes in examining and insuring titles to real estate.
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.
Ultimately it is protecting against loss arising from disputes over ownership of
a property.
Title Search
An examination of municipal records to determine the legal ownership of a
property, usually performed by a title company, ensuring that there are no liens
or other claims outstanding on the property.
Transfer of Ownership
Any means by which the ownership of a property changes hands. Lenders consider
all of the following situations to be a transfer of ownership: the purchase of a
property "subject to" the mortgage, the assumption of the mortgage debt by the
property purchaser, and any exchange of possession of the property under a land
sales contract or any other land trust device.
Transfer Tax
State or local tax payable when title transfers from one owner to another.
Treasury Index
An index that is used to determine interest rate changes for certain
adjustable-rate mortgage (ARM) plans. It is based on the results of auctions
that the U.S. Treasury holds for its Treasury bills and securities or is derived
from the U.S. Treasury's daily yield curve, which is based on the closing market
bid yields on actively traded Treasury securities in the over-the-counter
market.
Trustee
A fiduciary who holds or controls property for the benefit of another.
Truth-In-Lending
A federal law that requires that lenders fully disclose in writing the terms and
conditions of a mortgage, including the Annual Percentage Rate and other
charges, to home buyers shortly after they apply for the loan, also known as
Regulation Z (or Reg. Z).
Two- to Four-Family Property
A property that consists of a structure that provides living space (dwelling
units) for two to four families, although ownership of the structure is
evidenced by a single deed.
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 five, seven, or 10 years (also called "Super Seven" or
"Premier" mortgage).
Underwriting
a.) 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.
b.) The group of individuals or department of a lending institution that make
the decision to make a loan based on credit, employment, assets, and other
factors.
USURY
Interest charged in excess of the legal rate established by law.
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 also adjustable rate mortgage, or ARM)
A loan with an interest rate that is periodically adjusted to reflect changes in
a specified financial index. VRMS typically start with unusually low rate (or
teaser rate) that get unlocked and adjusted based on current interest rates
after a predetermine amount of time.
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.
Vested
Having the right to use all, or a portion of a fund such as an individual
retirement fund. For example, individuals who are 100 percent vested can
withdraw all of the funds that are set aside for them in a retirement fund.
However, taxes may be due on any funds that are actually withdrawn.
Veterans Administration (VA)
An agency of the federal government that guarantees residential mortgages made
to eligible veterans of the military services. The guarantee protects the lender
against loss and thus encourages lenders to make mortgages to veterans
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
This results when 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.
