Mortgage Terms Glossary

Adjustable Rate (ARM) – Adjustable-rate mortgage loan featuring an interest rate that moves up and down as market conditions change. ARMs generally offer a lower initial interest rate, but your mortgage payments may change (usually semiannually or annually). Rate changes are based on an index such as the one-year Treasury Index or the cost-of-funds index (COFi). Some ARMs can be converted to fixed rate.

Affidavit of Title – A written statement, made under oath by a seller or grantor of real property and acknowledged by a notary public, in which the grantor: (1) identifies him or herself and indicates marital status; (2) certifies that since the examination of the title on the date of the contract no defects have occurred in the title; and (3) certifies that he or she is in possession of the property (if applicable).

Agency – A legal relationship between two or more persons whereby one person (the agent) is authorized to act on behalf of the other(s).

Agent – Generally, someone who acts on behalf of another for a fee. In real estate, the term refers to a person with a real estate license who works under the authority of a real estate broker.

ALTA (American Land Title Association ) – Since any lending institution funding a loan for the acquisition of property wants assurance of good title on the property, there is a special policy prepared for the benefit of the lender known as ALTA Policy.

Amortization – A schedule for repayment of a loan, including interest and principal, by regular installment payments. Mortgage loans are typically amortized over 15 to 30 years.

Annuity – The return from an investment of capital, with interest, in a series of regular payments. An entity that lends money collects an annuity from the borrower, while the borrower is amortizing the loan.

APR (Annual Percentage Rate) – The total yearly cost of a loan stated as a percentage of the loan amount: Includes the base interest rate, primary mortgage insurance, and loan origination fee (points). Use the APR to compare various loan programs, as all lenders are required to use the same guidelines in determining APR.

Application Fee – Often non-refundable, this is the fee charged by the lender to cover a portion of the costs of processing a loan application.

Appraisal – A professional opinion of the market value of a property. Sometimes, an appraised value may be dependent upon certain improvements or repairs being made.

Appreciation – Increase in value of a property, not including increases from improvements.

As-is Agreement – An agreement in which a property is sold without warranty in whatever condition it is in at the time the contract is signed.

Assessed Value – Value placed on a property by the tax assessor for property tax purposes.

Assumable Mortgage – A mortgage that can be taken over -assumed- by the buyer when a property is sold.

Balloon Mortgage – A mortgage that offers lower interest rates for a shorter term financing, usually seven years, and requires final payment or refinancing at the end of the term.

Assessment – Tax or charge levied against a property by the government, typically to pay for local improvement, e.g. sidewalks, curbs, sewers, etc.

Assignment Clause – A sales contract with an assignment clause allows the buyer to transfer the interest in the property (e.g. the right to buy it at the given rates and terms) to another party.

Assumption – The process of taking over the existing mortgage and assuming liability for the payments when purchasing a property. If the purchaser defaults, both buyer and seller may be responsible for repaying the debt.

Attached – Term used to describe a house that is attached on both sides to its adjoining properties.

Back Ratio – Ratio of monthly housing costs (principal, insurance, taxes, and interest) plus regular monthly payments to gross monthly income used by lenders to evaluate an applicant’s qualification for a loan. Lenders will typically allow a back ratio between 32 and 45 percent.

Balloon Payment – A payment of a loan that extinguishes the debt.

Bankruptcy – A legal proceeding which offers protection from creditors to a debtor who is unable to pay debts.

Bids – An offer to purchase a property for a specific set of terms.

Book Value – The value of an asset as shown in the financial records of an individual or corporation.

Breach – Failure to perform on a promise made in contract without legal excuse.

Broker – A licensed professional who assists in the purchase, sale, rental, or management of real property. A broker can be employed by either the buyer or seller, and accordingly, his duties may include locating and showing properties to prospective buyers, advertising properties for sale, assisting in contract negotiations, and other related activities. The term agent is often used interchangeably with broker, although in actuality, agents work under a broker and act as agents for that broker.

Buy-back Agreement – An agreement specifying conditions under which the seller agrees to repurchase the property, usually for a stated price and within a stated time limit.

Buy Down – Payment of additional points to lower the interest rate of the loan.

Buyer’s Market – A market in which there are more houses for sale than there are potential buyers. As such, housing prices are driven lower, and buyers stand to get a better deal when purchasing.

CAP – Limit on the amount an adjustable rate mortgage may increase or decrease during specific intervals and over the term of the loan. This safeguard protects the buyer from dramatic changes in monthly payments.

Capital Gain – Taxable profit derived from the sale of a capital asset. The capital gain is the difference between the sale price and the basis of the property, after making appropriate adjustments for closing costs, fixing up expenses, capital improvements, allowable depreciation, etc.

Certificate of Occupancy – A certificate stating that a building is approved for occupancy issued by the city or county building inspection department. It is important that a certificate has been issued, as some home insurance policies will not pay claims for damage to a property that has not been approved for occupancy.

Closing – Also referred to as settlement. The process of finalizing all dealings in the purchase of a property, including signing of papers, disbursement of money, preparation of deed, and transfer of ownership.

Closing Costs – Expenses (such as loan fees, title fees, appraisal fees, etc.) over and above the price of the property incurred by buyers and sellers in transferring ownership. Also called “settlement costs”. Closing costs may be paid by the buyer, the seller or shared by both. In some cases, all or a portion of these costs may be included in the financing amount.

Cloud on Title – An invalid legal claim to the title of a property that appears during the sale of the property, due to a recording mistake or other error and thus not apparent to the buyer or seller beforehand.

Co-ownership – The state of two or more people sharing ownership of a property. Can be an important issue in matters such as personal liability or inheritance.

Co-signer – A person who assumes joint liability with another person by signing documents (e.g. loan promissory note). A co-signer is not necessarily a co-owner.

Collateral – Personal property pledged as security for a debt. Collateral for a mortgage is usually the property itself.

Commercial Lender – An entity that lends money to individuals or businesses as part of its normal business operations.

Comparative Market Analysis – A comparison of sale prices of similar properties in a given area for the purpose of determining the fair market value of a property.

Condominium – An individually owned living unit (typically, an apartment) that is part of a building with many such units. As an owner of a condo, you typically have an ownership interest in the common areas of the complex, such as the land, parking facilities, swimming pool, and so on.

Construction/end Loan – A mortgage that finances the construction of a home and converts to permanent financing when the home is completed. It allows buyers to deal with only one lender, file only one credit application and pay only one set of closing costs.

Contingency – A condition that must be met before a contract is legally binding.

Contract – A formal agreement between two or more parties that is typically legally binding.

Conventional Loans – A loan secured by investors, but neither insured by the FHA nor guaranteed by VA. Both fixed rate and adjustable rate loans are available with conventional financing.

Convertible ARM – Some ARMs include a provision allowing conversion to a fixed-rate mortgage at specified times, typically during the first five years of the loan. Some lenders charge a premium for this option, so you will need to find out the exact conversion terms and costs from your lender. This will help you decide whether this is a cost-effective option.

Counteroffer – A rejection of an original offer, combined with a new offer stating different terms and conditions.

Credit Report – A report from an independent source outlining the credit history of an individual, including current and previous debts, payment amounts, late payments and past due amounts, defaults, and other related information on every credit source the individual has used.

Deed – The legal document conveying title to a property.

Default – Failure or neglect to fulfill an obligation or requirement. A borrower defaults on a loan if he fails to make payment, or otherwise fails to perform according to the terms of the note.

Deposit – Money that is placed in trust to show good faith, usually delivered by the buyer to demonstrate an intent to purchase.

Deposit Receipt – Another term for a purchase contract or offer, since most purchase contracts include a good faith deposit of money with a third party which the buyer will forfeit if they reneg on their offer without cause.

Detached – Term used to describe a house that is completely separate from the units surrounding it.

Disclosure – Statement of fact(s) concerning the condition of the property for sale and the surrounding area. In most states, the buyer is protected by disclosure laws requiring sellers to divulge certain information about the property, e.g. if the property is in a special studies zone.

Disclosure Report – Residential Real Property Disclosure Act, effective since October 1, 1994 in Illinois is an act relating to disclosure by the seller of residential real property. The purpose of this report is to provide prospective buyers with information about material defects in the residential real property.

Discount Points or Points – Any amount paid to the lender when a loan is originated to account for the difference between the current market-determined cost of interest and the actual lower interest rate of the loan. In most cases each point is equal to one percent of the original loan amount. Points may be paid by either the buyer or seller.

Down Payment – The part of the purchase price which the buyer pays in cash and does not finance with a loan.

Dual Agency – Some states permit a real estate licensee to potentially act as a dual agent, that is, represent more than one party to the transaction. A licensee may legally act as a dual agent with the written disclosure and informed consent of a consumer in form required by law.

Duplex – A house that is divided into two living units.

Earnest Money – An amount of money, deposited by a buyer under the terms of a contract, that is to be forfeited if the buyer defaults but applied on the purchase price if the sale is closed.

Easement Rights – The rights of an individual to use another individuals property for a particular purpose (e.g. access to their own property). The seller should make the buyer aware of any easement rights that affect the property for sale.

Encumbrance – Any claim against the title to a property, such as a lien or mortgage.

Equity – The market value of a property minus the amount of any existing loans or liens.

Entitlement – A right due to an individual. The term, when used with VA insurance, refers to the loan amount that the VA will guarantee for a particular borrower.

Escrow Account – A separate account for accumulating the portion of your monthly payments that will pay future taxes, insurance, fees, assessments and so forth. Depending on your lender and the financing you select, an escrow account may be required.

Escrow Agent – A disinterested third party appointed to act as custodian for documents and funds during the transfer from seller to buyer.

Fair Market Price – A price which approximates what comparable homes have sold at in the same area.

Fannie Mae – Another name for the Federal National Mortgage Association, a federally sponsored agency which buys mortgages from banks, savings and loans, and other lending institutions. Agencies such as Fannie Mae are part of the secondary market.

FHA Financing – A loan insured by the Federal Housing Administration (FHA) and made by an approved lender in accordance with the FHA’s regulations. FHA requires that the property being purchased meets certain minimum standards. This mortgage may be easier to qualify for than a conventional mortgage, but it also has a lower maximum loan limit that varies depending on the average cost of housing in a given region. FHA loans require the borrower to pay mortgage insurance premiums (MIP) if the down payment is less then 20%. Fixed and adjustable rates are available with FHA loans.

Financial Index – An agreed upon basis for making interest rate changes on an adjustable rate mortgage. One example of a financial index could be the cost of U.S. Treasury Bonds.

Fixed Rate – The interest rate does not change during the entire term of the loan.

Fixed Rate Mortgage – A mortgage with an interest rate and payments that remain fixed over the duration of the loan.

Fixture – An item that is attached to the property, e.g. a dishwasher or air conditioner, and usually sold with it.

Flat – An apartment that occupies one whole floor of a building. Often, each flat in a building has its own entrance from the outside.

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

Foreclosure – Legal procedure used by creditors to take a mortgaged property from a debtor who has defaulted on the loan.

Freddie Mac – Another name for the Federal Home Loan Mortgage Corporation, a federally sponsored agency which buys and sells mortgages. Along with Fannie Mae, Freddie Mac is a major player in the secondary market.

Free and Clear Title – Title to a property which is free from any mortgage, lien, or other encumbrance.

Freely Assumable – Term used to describe a loan which may be assumed by anyone without permission from the lender. In such a situation, however, the original borrower is usually held liable in the event the loan is not repaid.

Front Ratio – Ratio of monthly housing costs (principal, insurance, taxes, and interest) to gross monthly income used by lenders to evaluate an applicants qualification for a loan. Lenders will typically allow a front ratio between 28 and 40 percent.

Grace Period – The time period between the due date of a mortgage payment and the date when late charges are assessed. For example, payments due on the first of the month may have a 14 day grace period, meaning that fees will be charged if payment is not received by the fifteenth.

Graduated Payment Mortgage (GPM) – A mortgage with monthly payments that are smaller at the beginning of the loan period and gradually increase by a specified amount for the first five or ten years, after which they become fixed. A GPM has a fixed interest rate and fixed loan period.

Gross Income – The total amount of money you make annually from all sources. This amount is reported on your federal tax returns.

Guaranteed Mortgage – A mortgage that is guaranteed against default, such as a VA or FHA insured mortgage. Borrowers must pay an insurance premium in order to get a guaranteed mortgage (also called an insured mortgage).

Hazard Insurance – Property insurance that protects homeowners against theft, personal liability, and fire.

Home Improvement Loan Interest – The amount of money the borrower pays the lender to compensate the lender for the use of its money to make major modifications to the borrowers home. This interest is tax deductible.

Home Warranty Insurance – Private insurance for homebuyers that covers appliances and plumbing, heating, and electrical systems in the home.

HUD Flood Zone – An area prone to flooding, as determined by the Housing and Urban Development, a branch of the federal government.

Hybrid Mortgage – A mortgage that combines some attributes of fixed rate mortgages with other attributes of adjustable rate mortgages. E.g. a loan which is fixed for 5 years but then reverts to an ARM.

Income to Debt Ratio – The percentage of gross income that lenders will allow for monthly housing costs when evaluating a borrowers qualification for a particular loan amount.

Index – A market indicator used to determine the interest rate for an adjustable rate mortgage. Common indexes include one-year treasury securities and the 11th District Cost of Funds. The actual interest rate is calculated by adding the margin to the index.

Initial Interest Rate – The interest rate charged for the first six or 12 months of an adjustable rate mortgage (before the first interest rate adjustment).

Inspection – An examination of a property or building to determine condition or quality for a particular purpose such as an assessment of structural or termite damage.

Interest Rate – The percentage rate on a principal amount charged by a lender for the use of a sum of money.

Interest Rate Cap – Limit on the amount an adjustable rate mortgage may increase or decrease during specific intervals and over the term of the loan. This safeguard protects the buyer from dramatic changes in monthly payments.

Junior Lien – When a property is foreclosed, lenders are repaid in a particular order, established by the loan documents. The lender with the first claim to repayment is said to hold the first mortgage, and a lender whose repayment order is after the first claimant is said to hold a junior lien.

Junior Mortgage – Also called a secondary mortgage. A mortgage whose claim to repayment is second to another mortgage.

Key Lot – A tract of land which sells for a high price because of its desirable location.

Loan Commitment – A written promise by a lender to make a loan under certain terms and conditions. These include interest rate, length of the loan, lender fees, annual percentage rate, mortgage and hazard insurance and other special requirements.

LTV (Loan to Value Ratio ) – The ratio of the mortgage loan principal (amount borrowed) to the property’s appraised value. On a $100,000 home, with a mortgage loan of $80,000, the loan to value ratio is 80%.

MIP (Mortgage Insurance Premium ) – The insurance issued by a government agency such as the FHA.

Mortgage Banker – A company that originates mortgages exclusively for resale in the secondary market.

Mortgage Broker – An individual or company that for a fee acts as an intermediary between borrowers and lenders.

Mortgagee – The lender of money or the receiver of the mortgage document.

Mortgagor – The borrower of money or the giver of the mortgage document.

Mortgage Pre-Approval Service – A service offered by many lenders that allow you to qualify for financing before finding a property to buy.

Note – A written promise to pay a certain amount of money at a certain time at a certain interest rate.

Origination Fee – A fee charged by the lender for making a real estate loan – usually a percentage of the amount loaned, such as one percent. Not to be confused with an application fee.

PITI (Principal, Interest, Taxes, Insurance) – Stands for principal, interest, taxes, and insurance – the components of the monthly loan payments.

PMI (Private Mortgage Insurance) – Insurance written by a private company that insures repayment of the loan balance to the lender in the event of default by the borrower. Usually required for homes financed with less than a 20 percent down payment.

Points or Discount Points – Amount paid to the lender when a loan is originated to account for the difference between the current market-determined cost of interest and the actual lower interest rate of the loan. Each point is equal to one percent of the original loan amount. In most cases points may be paid by either the buyer or seller.

Prepayment Privilege – The right given to a purchaser to pay all or part of a debt prior to its maturity. The mortgagee cannot be compelled to accept any payment other than those originally agreed to.

Prequalification – The process of determining how much money a prospective home buyer will be eligible to borrow before a loan is applied for.

Rate Guarantee – The lender’s guarantee, usually for a specified period of time, that the interest rate in effect the date you apply for a loan (or at the time of approval) will be the final rate on your loan when closed.

Refinance – Replacing an existing loan with a new one to get a lower rate, switch from one loan type to another, or convert equity to cash. A refinance loan will involve various loan fees, just as with any other mortgage.

RESPA Real Estate Settlement Procedures Act – A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Secondary Mortgage Market – The lender will frequently sell his loan to an entity in the secondary mortgage market. This secondary market has nothing to do with second mortgages, instead, it consists of government or private associations which buy loans from primary lenders. Often the loans are bought and grouped together in a pool for resale. The best known of the participants in the secondary mortgage market is FANNIE MAE, the Federal National Mortgage Association. Fannie Mae buys and sells both first and second mortgages. GINNIE MAE tends to favor FHA and VA loans since they are stable loans but also buys conventional mortgages.

Survey – 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.

Term – The number of years before a loan is paid in full; 15 to 30 year terms are most common for home mortgages.

Title – A legal document evidencing a person’s right to ownership of a property.

Title Insurance – Insurance to protect the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of property.

Title Option – An attorney’s opinion of a title, based on an abstract of title.

Transfer Tax – State or local tax payable when title passes from one owner to another.

Underwriting – The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower’s credit worthiness and the quality of the property itself.

VA Financing – A loan guaranteed by the Veterans Administration (VA) to a qualified veteran and made by an authorized lender on an approved property. Fixed and adjustable rates are available with VA loans. The VA charges borrowers a funding fee.

Warranty Deed – A legal document used to convey title.

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