Mortgage Terms

Mortgage Terms:

Learn about all the mortgage terms you will see or hear during all real estate transactions.  The mortgage terms page provides a description of the mortgage terms use by realtors and mortgage companies.

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A summary an abridgement. Before the use of photo copying, public records
were kept by abstracts of recorded documents

Abstract of Title
A compilation of the recorded documents relating to a parcel of land, from
which an attorney may give an opinion as to the condition of this title.
Still in use in some states, but giving way to the use of title insurance.

Acceleration Clause
Clause used in an installment note and mortgage which give the lender the
right demand the payment in full upon the happening of a certain event,
such as failure to pay an installment by a certain date, change of
ownership without the lender’s consent, destruction of the property, or
other event which endangers the security of the loan.

Acre
A measure, usually of land, equal to 43,560 square feet in any shape.

Adjustable Rate Mortgage (ARM)
Mortgage loans under which the interest rate periodically adjusted to more
closely coincide with current rates. The amounts and times of adjustment
are agreed to at the inception of the loan.

Agent
One who is authorized to act for or represent another. Authority may be
either written or implied.

Agreement of Sale
In some states it is synonymous with a purchase agreement. In other
states, it is synonymous with a land contract. This is different depending
upon the area of country.

Alienation Clause
A clause that calls for debt under a mortgage or deed of trust to be due
in its entirety, upon transfer of ownership of the property. This is the
same as “Due on Sale” clause.

Amortization
Payment of debt in regular, periodic installments of principal and
interest, as opposed to interest only payments.

Annual Percentage Rate (APR)
The yearly interest percentage of a loan, as expressed by the actual rate
of interest paid. Example: 6% add-on interest would be much more than 6%
simple interest, even though both would say 6%. The APR is disclosed as a
requirement of federal truth in lending status.

Appraised Value
An opinion of the value of a property at a given time, based on facts
regarding the location, improvements, etc., of the property and
surroundings.

Arrears
Payment made after it is due is in arrears. Interest is said to be paid in
arrears since it is paid to the date of payment rather than in advance.

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

Assumption of Mortgage
The agreement by a buyer to assume the liability under an existing not
secured by a mortgage or deed of trust. The lender usually must approve
the new debtor in order to release the existing debtor from liability.

Balloon Note
A note calling for periodic payments which are insufficient to fully
amortize the face amount of the note prior to maturity, so that a
principal sum known as a “balloon” is due at maturity.

Binder
A report issued by a title insurance company setting forth the condition
of title to certain property as of a certain date, and setting forth
conditions, which if satisfied will cause a policy of title insurance to
be issued.

Blanket Mortgage
A mortgage covering more than one property of the mortgagor, such as a
mortgage covering all the lots of a builder in a subdivision.

Bridge Financing
A form of interim loan, generally made between a short term loan and a
long term loan, when the borrower needs to have more time before taking on
long term financing.

Broker
A person who, for a fee, acts as the agent of another, assisting in
arranging funding or negotiating contracts for a client’s purchase of real
estate.

Buy down
A payment to the lender from the seller, buyer, third party, or some
combination of these, causing the lender to reduce the interest rate
during the early years of the loan.

Cap / Caps
A maximum amount of charge. Example: An Adjustable Rate Mortgage with a 5%
rate cap could not adjust the interest rate by more than 5%.

Closing
The meeting between the buyer, seller, and lender of their agents, where
the property and funds legally change hands. Also called a settlement

Closing Costs
Expenses incurred in the closing of a real estate or mortgage transaction.
These expenses include loan fees, title fees, appraisal fees, processing
fees, etc.

Cloud on Title
An invalid encumbrance on real property which, if valid, would affect the
rights of the owner. Example: “A” sells Lot 1, Tract 1 to “B”. The deed is
mistakenly drawn to read Lot 2, Tract 1. A cloud is created on Lot 2 by
the recording of the erroneous deed. The cloud may be removed by quitclaim
deed, or, if necessary, by court action.

Co-maker
A surety under a loan. The co-maker is equally responsible for repayment
as the borrower.

Commitment
Title insurance term for the preliminary report issued before the actual
policy. Said report shows the condition of title and the steps necessary
to complete the transfer of title as contemplated by buyer and seller.

Comparables
Properties used as comparisons to determine the value of a specified
property.

Condominium
A structure of two or more units, the interior spaces of which are
individually owned; the balance of the property is owned in common by the
owners of the individual units.

Construction loan
Short term financing of real estate construction. The lender advance funds
to the builder at periodic intervals as the work progresses. Generally
followed by long term financing called “take out” loan, issued upon
completion of improvements.

Contingency
The dependence upon a stated event which must occur before a contract is
binding.

Contract of Sale
Depending on the area of country, it may be a Land Sale Contract or a
Purchase Agreement.

Conventional loan
A mortgage or deed of trust not obtained under a government insured
program (such as FHA or VA)

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

Debt-to-Income Ratio
The ratios, expressed as a percentage, between a borrower’s monthly
payment obligation on long term debts, and his gross monthly income

Declaration of Restrictions
A set of restrictions filed by a subdivider to cover an entire tract or
subdivision.

Deed of trust
In some states, this document is used in place of a mortgage. Property is
transferred to a trustee by the borrower (trustor), in favor of the lender
(beneficiary), and reconveyed upon payment in full.

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

Defective Title
Title to a negotiable instrument obtained by fraud. Title to real property
which lacks some of the elements necessary to transfer a good title.

Delinquency
Failure to make payments on time.

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

Depreciation
Decrease in value to real property improvements caused by deterioration or
obsolescence.

Devise
Real estate left by will

Devisee
One to whom real estate is given by will.

Devisor
A testator who leaves real estate.

Disbursements
Payments made at closing.

Discount Points (Points)
Prepaid interest assessed at closing by the lender. Each point is equal to
one percent of the loan amount. Example: 3 points on a $100,000 mortgage
would cost $3,000

Down Payment
Money paid to make up the difference between the purchase price and the
mortgage amount. Depending upon the loan type, down payments are usually 3
to 20 percent of the sales price

Due-on-Sale
A clause included in the mortgage that allows the lender to call the loan
due and payable at its option, if the borrower sells the property

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

Easement
A right created by grant, reservation, agreement, prescription, or
necessary implication, which one has in the land of another.

Eminent Domain
A Government right to acquire private property for public use by
condemnation, and the payment of just compensation.

Encroachment
Generally construction onto the property of another, such as a wall,
fence, building, etc.

Encumbrance
A claim, lien, charge, or liability attached to and binding real property.
Any right to, or interest in, land which may exist in one other than the
owner, but which will not prevent the transfer of fee title.

Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit
equally available without discrimination based upon race, color, religion,
national origin, age, sex, martial status, or receipt of income from
public assistance programs

Equity
The value an owner has in real estate over and above the obligation
against the property

Escrow
Delivery of a deed by a grantor to a third party for delivery to the
grantee upon the happening of a contingent event.

Farmers Home Administration (FmHA)
The federal agency which makes, participates, and insures loans for rural
housing and farms.

Federal Home Loan Bank Board (FHLBB)
A regulatory and supervisory agency for federally chartered savings
institutions

Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)
A semi-governmental agency that purchases mortgages in the secondary
market. Also known as “Freddie Mac”

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

Federal National Mortgage Association (FNMA or 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. Also known as “Fannie Mae”

Fee Simple
An estate under which the owner is entitled to unrestricted powers to
dispose of the property, and which can be left by a will or inherited.

FHA Loan
A loan insured by the Federal Housing Administration open to all qualified
home purchasers. While there are limits to the size of the FHA loans, they
are generous enough to handle moderately priced homes almost anywhere in
the United States

FHA Mortgage Insurance
Requires a fee paid at closing or a portions of this feed added to each
monthly payment of an FHA loan to insure the loan with FHA

Fixed Rate Mortgage
A mortgage for which the interest rate is set for the term of the loan.

Foreclosure
A proceeding, in or out of court, to extinguish all rights, title, and
interest, of the owner(s) of property in order to sell the property to
satisfy a lien against it.

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

Grandfather Clause
The clause in a law permitting the continuation of a use, business, etc.
which, when established, was permissible but because of a change in the
law, is now not permissible.

Hazard Insurance
Real estate insurance protecting against loss caused by fire, some natural
causes, vandalism, etc., depending upon the terms of the policy.

Heir and Assigns
Words usually found in a deed showing the interest the grantee is
receiving.

Home Owner Association (HOA)
An association of people who own homes in a given area formed for the
purpose of improving or maintaining the quality of the area.

Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, between a borrower’s montly housing
expenses, and his gross monthly income

Impound Account
An account held by a lender for payment of taxes, insurance, or other
periodic debts against real property. The mortgagor or trustor pays a
portion of, for example, the yearly taxes, with each monthly payment. The
lender pays the tax bill from the accumulated funds.

Installment Sale
A tax term used to describe a sale wich is usually accomplished by use of
a land contract. If the seller receives less than 30% of the sale price in
the year of the sale (not including interest), the tax on the profit
(gain) from the sale may be paid over the installment period, provided the
30% rule is followed each year.

Insured Mortgage
A mortgage insured against loss to the mortgagee in the event of default
and a failure to the mortgaged property to satisfy the balance owing plus
costs of foreclosure.

Interest Rate
The percentage of an amount of money which is paid for its use for a
specified time. Usually expressed as an annual percentage rate.

Investor
A money source for a lender

Joint Tenancy
An undivided interest in property, taken by two or more joint tenants. The
interests must be equal, accruing under the same conveyance, and beginning
at the same time. Upon death of a joint tenant the interest passes to the
surviving joint tenants, rather than to the heirs of the deceased.

Judgement
The decision of a court of law. Money judgements, when recorded, become a
lien on real property of the defendant.

Jumbo Loan
Loan amount up to $625,500 (can vary by county).

Late Charge
A penalty for failure to pay an installment payment on time.

Lease with Option to Purchase
A lease under which the lessee has the right to purchase the property. The
price and terms of the purchase must be set forth for the option to be
valid. The option may run for the length of the lease or only for a
portion of the lease period.

Lender
Any person or entity advancing funds which are to be repaid. A general
term encompassing all mortgagees and beneficiaries under deeds of trust.

Letter of Intent
A formal method of stating that a prospective developer, buyer or lessee,
is interested in property. Not an offer and creates no obligation.

Lien
An encumbrance against property for money, either voluntary or
involuntary. All liens are encumbrances are not liens.

Life Estate
An estate in real property for the life of a living person. The estate
then reverts back to the grantor or on to a third party.

Limited Partnership
A partnership consisting of one or more general partners who conduct the
business and are responsible for losses, and one or more special partners,
contributing capital and liable only to the amount contributed.

Loan Package
The file of all items necessary for the lender to decide to give or not
give a loan. These items would include the information on the prospective
borrower and information on the property.

Loan-to-Value Ratio
The ratio, expressed as a percentage, between the amount of the mortgage
loan and the appraised value of the property

Margin
The amount a lender adds to the index on an adjustable rate mortgage to
establish the adjusted interest rate

Market Value
The highest price that a willing buyer would pay and a willing seller
accept, both being fully informed, and the property exposed for a
reasonable period of time. The market value may be different from the
price a property can actually be sold for at a given time.

Mechanics Lien
A lien created by statute for the purpose of securing priority of payment
for the price of value of work performed and materials furnished in
construction or repair of improvements to land, and which attaches to the
land as well as the improvements.

MIP (Mortgage Insurance Premium)
The premium paid by the borrower on the insurance policy from FHA to the
lender, against incurring a loss due to the borrower’s default

Mortgagee
The party lending the money and receiving the mortgage.

Mortgagor
The party who borrows the money and gives the mortgage.

Negative Amortization
A condition created when a loan payment is less than interest alone. Even
though payments are made on time, the amount owing increases.

Non-Assumption Clause
A statement in a mortgage contract forbidding the assumption of the
mortgage without the prior approval of the lender

Non-Conforming Use
A property which does not conform to the zoning of the area.

Note
A unilateral agreement containing an express and absolute promise of the
signer to pay to a named person, or order, or bearer, a definite sum of
money at a specified date or on demand. Usually provides for interest and,
concerning real property, is secured by a mortgage or trust deed.

Open End Mortgage
A mortgage permitting the mortgagor to borrow additional money under the
same mortgage with certain conditions, usually as to the assets of the
mortgage.

Origination Fee
A fee made by a lender for making a real estate loan. Usually a percentage
of the amount loaned, such as one percent.

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

Perk Test (Percolation)
The test to determine the capability of the soil to absorb liquid, both
for construction and septic systems.

Permanent Mortgage
A mortgage on completed construction for a long period of time.

PITI
Payment consisting of principal, interest taxes and insurance. Used to
indicate what is included in a monthly payment on real property. These are
the four major portions of a usual monthly payment.

PMI (Private Mortgage Insurance)
Insurance against a loss by a lender in the event of default by a
borrower. The insurance is similar to insurance by a governmental agency
such as FHA or VA, except that it is issued by a private insurance
company. The premium is paid by the borrower and is included in the
mortgage payment.

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

Pre-paid 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

Pre-payment
A privilege in a mortgage permitting the borrower to make payments in
advance of their due date

Pre-payment Penalty
A penalty under a note, mortgage, or deed or trust, imposed when the loan
is paid before it is due.

Principal
The amount of debt, not counting interest, left on a loan

Pro Rate
To divide in proportionate shares, such as taxes, insurance, rent, or
other items which the buyer and seller share as of the time of closing or
other agreed upon time.

Recision of a Contract
The annulling or cancellation of a contract and placing the parties to it
in a position as if there had not been a contract. With respect to
mortgage refinancing, the law that gives the homeowner three days (the
recision period) to cancel a contract if the transaction uses equity in
the primary home as security

Recital
Setting forth in a deed or other writing some explanation for the
transaction.

Recording Fee
The amount paid to the recorder’s office in order to make a document a
matter of public record.

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

Reissue Rate
A charge for a title insurance policy if a previous policy on the same
property was issued within a specified period. Reissue is less than the
original charge.

REIT (Real Estate Investment Trusts)
A method in investing in real estate in a group, with certain tax
advantages. Federal and state statutes dictate procedure.

Release
An instrument releasing property from the lien of the mortgage, judgement,
etc.

RESPA (Real Estate Settlement Procedures Act)
A federal statute effective June 20, 1975, requiring disclosure of certain
costs in the sale of residential improve property which is to be financed
by a federally insured lender.

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

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

Security
Real or personal property pledged by a borrower as additional protection
for the lender’s interest.

Servicing
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 Statement
A statement prepared by broker, escrow, or lender, giving a complete
breakdown of costs involved in a real estate transaction.

Simple Interest
Interest which is computed only on the principal balance

Statutory Lien
An involuntary lien, includes tax liens, judgement liens, mechanic liens,
etc.

Substitute of Trustee
A document which is recorded to change the trustee under the deed of
trust.

Survey
A measurement of land, prepared by a registered land surveyor, showing the
location of the land with reference to known points, its dimensions, and
the location and dimensions of any buildings.

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

Tax Sale
Public sale of property at auction by governmental authority, after a
period of nonpayment of property taxes.

Tenancy by the Entirety
A form of ownership by husband and wife whereby each owns the entire
property. In event of the death of one, the survivor owns the property
without probate.

Testator
One who dies leaving a testament or will.

Title
The document that gives legal evidence of an individual’s ownership of
property

Title Insurance
Insurance against loss resulting from defects of title to a specifically
described parcel of real property. Defects may run to the fee (chain of
title) or to encumbrances.

Title Search
A review of all recorded documents affecting a specific piece of property
to determine the present condition of title.

Truth-in-Lending
The federal law requiring disclosure of the Annual Percentage Rate (APR)
to home buyers shortly after they apply for the loan.

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

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.

Verification of Deposit (VOD)
A document signed by the borrower’s financial institution verifying the
status and balance of his financial accounts. Most lenders require that
the funds used for real estate purchase be “seasoned”, or on deposit in
the account for at least 60 days.

Verification of Employment (VOE)
A document signed by the borrower’s employer verifying his position and
salary. Most lenders require a minimum of a two year history of stable and
constant employment.