June 7, 2017

Mortgage Glossary

1031 Exchange – a tax-deferred exchange of real estate employed to offset or even avoid capital gains tax.Adjustable-Rate Mortgage (ARM) – a mortgage with a variable interest rate, which adjusts monthly, biannually, or annually. Option-arms and hybrid mortgages are also considered adjustable-rate mortgages.

Acceleration – Declaring a loan’s entire balance immediately due and payable, because the borrower has defaulted or (if the loan includes an alienation clause) sold the security property without the lender’s approval. Also referred to as calling the loan.

Acceleration Clause – A provision in a security instrument that allows the lender to declare the entire debt due immediately if the borrower breaches one or more provisions of the agreement. Also called a call provision.

Acknowledgement – When a person who has signed a document formally declares to an authorized official (usually a notary public) that he signed voluntarily. The official can then attest that the signature is voluntary and genuine.

Acquisition Cost – The amount of money a buyer was required to expend in order to acquire title to a piece of property; in addition to the purchase price, this ordinarily includes a variety of closing costs, and may also include other expenses.

Adjustable-Rate Mortgage (ARM) – A loan with an interest rate that is periodically increased or decreased to reflect changes in the cost of money. Compare: Fixed-Rate Loan.

Age, Actual – The age of a structure from a chronological standpoint (as opposed to its effective age); how many years it has actually been in existence.

Age, Effective – The age of a structure indicated by its condition and remaining usefulness (as opposed to its actual age).

Alienation – The transfer of ownership or an interest in property from one person to another by any means.

Alienation Clause – A Provision in a security instrument that gives the lender the right to accelerate the loan if the borrower sells the property or transfers a significant interest in it without the lender’s approval. Also called a due-on-sale clause.

All-Inclusive Trust Deed – A deed of trust used for wraparound financing.

Alt-A Mortgage – a home loan that isn’t prime or subprime, but somewhere in the middle.

Amortization – the way a loan is paid off over time in installments, detailing how much goes toward interest, and how much is paid toward principal.

Annual Percentage Rate (APR) – the actual interest rate you pay on your mortgage, which factors in fees, points, and other costs associated with the loan.

Annual Percentage Yield (APY) – the annual interest rate taking into account the frequency and cost of compounding interest.

Anti-Deficiency Rules – Laws that prohibit a secured lender from suing the borrower for a deficiency judgement after foreclosure, in certain circumstances.

Appraisal – a comprehensive report that determines the value of your property based on a number of valuation factors.

Appraiser  – One who estimates the value of property, especially an expert qualified to do so by training and experience.

Appreciation  – An increase in the value of an asset over time, as a result of economic forces; the opposite of depreciation.

Arm’s Length Transaction  – A sale in which the buyer and the seller are unrelated parties with no preexisting personal or business relationship.

Asset  – Anything of value owned by a person or other entity.

Assets, Liquid  – Cash or other assets that can be readily turned into cash (liquidated), such as stock.

Assign – To transfer rights (especially contract rights) or interests to another.

Assignee – One to whom rights or interests have been assigned.

Assignment  – A transfer of contract rights from one person to another.

Assignor – One who has assigned their rights or interests to another.

Assumption – The act of assuming responsibility for the payment of a mortgage lien.

Assumption Fee – A fee charged by the lender when a buyer assumes a seller’s loan.

Assumptor – One who assumes a mortgage or deed of trust, usually when buying the property that secures the debt.

Audit – An examination and verification of records, particularly the financial accounts of a business or other organization.

Automated Underwriting (AU) – Underwriting using software that performs a preliminary analysis of a loan application and makes a recommendation for approval or additional scrutiny.

Average Cost Pricing – Charging all borrowers who are approved for a particular type of loan the same interest rate and fees, without regard to the borrowers’ varying degrees of creditworthiness. Compare to Risk-Based Pricing.

Balloon Mortgage – a short-term mortgage with small monthly installments and a large lump sum due at the end of the loan term. An example would be a 30 due in 15, which amortizes like a 30 year fixed, but is due 15 years earlier.

Balloon Payment – 1. The payment of the remaining principal balance due at the end of the term of a partially amortized or interest only loan; so called because it is much larger than the regular payments made during the loan term. 2. Any loan payment that is larger than the regular payment.

Basis – A figure used in calculating a gain on the sale of real estate for federal income tax purposes. Also called cost basis.

Basis, Adjusted – A property owner’s initial basis in the property, plus capital expenditures for improvements, and minus any allowable cost recovery (depreciation) deductions.

Basis, Initial – The amount of a property owner’s original investment in the property; what it costs to acquire the property, which may include closing costs and certain other expenses, as well as the purchase price.

Beneficiary – 1. A person on whose behalf a trust is established and administered. 2. A person who receives money or property through a will. 3. In a deed of trust transaction, the lender. Compare to: Mortgagee.

Bill of Sale – A document used to transfer title to personal property from one person to another.

Biweekly Mortgage – a mortgage where 26 half payments, or 13 full payments, are made annually.

Blanket Mortgage – A mortgage that encumbers more than one parcel of real property.

Bond – A certificate of indebtedness issued by a government body or a corporation; the bondholder typically receives a return in the form of periodic payments of interest until the principal is repaid in a lump sum.

Breach – Violation of an obligation, duty. or law; especially an unexecuted failure to perform a contractual obligation.

Brokerage Fee – The commission or other compensation charged for a real estate broker’s services.

Bridge Loan – a short term loan taken out against one property to finance the purchase of a new property.

Budget Mortgage – A mortgage with monthly payments that include a share of the property taxes and insurance, in addition to principal and interest. The tax and insurance portions are kept in an impound account maintained by the lender until payment is due.

Buy-Down / Buydown – the act of securing a lower than par interest rate by paying the bank a lender a premium.

Call Provision – Check Acceleration Clause.

Capital Expenditures – Money spent on property improvements and modifications that add to the property’s value or prolong its life.

Capitalization – Estimating a property’s value by dividing its annual net income by a percentage that represents the rate of return an investor would expect from the property (the capitalization rate).

Caps – initial, periodic, and lifetime payment caps which limit how much and how frequently an interest rate can change on an adjustable-rate mortgage.

Carryback Loan – Check Purchase Money Loan.

Cash-In Refinance – a refinance transaction where borrowers bring money to the closing table to lower their mortgage balance.

Certificate of Deposit (CD) – A savings arrangement in which a depositor agrees to leave money on deposit for a specified period, or pay a penalty for early withdrawal.

Certificate of Eligibility – A document issued by the Department of Veterans Affairs, indicating a veteran’s eligibility for a VA – guaranteed loan.

Certificate of Reduction – A document signed by a lender when property is sold subject to an existing mortgage. It either acknowledges the transfer and waives the right to accelerate the loan pursuant to a due-on-sale clause, or else merely states the balance due and the status of the loan. Sometimes called an estoppel letter.

Certificate of Reasonable Value (CRV) – an appraisal issued by the Veterans Administration to determine the value of a property. The loan amount may not exceed the CRV on a VA loan.

Certificate of Sale – The document that a purchaser of foreclosed property at a sheriff’s sale is given instead of a deed; it is replaced with a sheriff’s deed only after the statutory redemption period expires.

Charge-Off – When a creditor writes off a delinquent debt for tax purposes, because no payment has been received for six months or more and the debt will probably never be collected.

Closed Mortgage – A mortgage loan that cannot be paid off early.

Closing – the final step in the loan process when loan documents are signed at an escrow or title company.

Closing Costs – the amount of money that must be paid to close your loan, including lender fees and third-party charges, along with taxes and transfer fees.

Closing Disclosure – A form required by TILA-RESPA Integrated Disclosure rules that shows the charges and credits that will apply to each party at closing.

Co-Borrower – Someone (often a member of the borrower’s family) who accepts responsibility for the repayment of a mortgage loan along with the primary borrower, to help the borrower qualify for the loan. Also called a co-mortgagor or cosigner.

Collateral – Property (personal or real) accepted by a lender as security for a loan. If the borrower fails to repay the loan, the lender has the right to keep or sell the collateral.

Commercial Bank – A financial institution that holds deposits and makes loans, which emphasizes commercial lending but also makes many residential mortgage loans. Compare with Investment Bank.

Commission – The compensation paid to a real estate broker for services in connection with a real estate transaction; usually a percentage of the sales price.

Commitment – A lender’s promise to make a loan, usually after the underwriter evaluates both the borrower as well as the property that will serve as security.

Comparables – In a sales comparison appraisal, properties similar to the subject property that have recently been sold; the appraiser uses the sales prices of the comparables as an indication of the value of the subject property.

Competitive Market Analysis (CMA) – A real estate agent’s estimate of the value of a listed home, based on the sales prices or listing prices of comparable homes. Also known as a broker’s price opinion.

Compound Interest – Interest calculated as a percentage of both the principal and any accumulated interest that has not yet been paid. Compare with Simple Interest.

Condition – A provision in an agreement that makes the parties’ rights and obligations depend on the occurrence (or nonoccurrence) of a particular event. Also called a contingency clause.

Conforming Loan – a loan that meets Fannie Mae and Freddie Mac guidelines, which also falls under a certain loan amount.

Conforming Loan Limit – The maximum conventional loan amount that Fannie Mae and Freddie Mac will purchase.

Consideration – Something of value given to induce another to enter into a contract. An agreement is not a legally binding contract unless the parties exchange consideration.

Construction Loan – a short-term loan given to a builder during intervals of the building process which is due upon completion of the project.

Consumer Financial Protection Bureau (CFPB) – A federal financial oversight agency created in 2011. The CFPB administers the Home Mortgage Disclosure Act, Truth in Lending Act, and Real Estate Settlement Procedures Act, among other responsibilities.

Consumer Price Index – An index that tracks changes in the cost of goods and services for a typical consumer. Formerly called the cost of living index.

Contract Rent – The rent a property owner is currently receiving for the property. Compare with Economic Rent.

Conventional Mortgage – any mortgage loan that is not insured or guaranteed by the federal government.

Convertible ARM – An Adjustable-rate mortgage that includes a conversion option.

Conversion Option – A provision in an adjustable rate mortgage that gives the borrower the option of converting to a fixed interest rate at one or more specified points during the loan term.

Cost Approach to Value – One of the three main methods of appraisal (along with the income approach and the sales comparison approach), in which an estimate of the subject property’s value is arrived at by estimating the cost of replacing the improvements, then deducting the estimated accrued depreciation and adding the estimated market value of the land. Also called the replacement cost method.

Cost Recovery Deductions – Tax deductions allowed to owners of income property and property used in a trade or business, for the cost of assets that will wear out and eventually have to be replaced. Also called depreciation deductions.

Credit – A payment receivable by a party at closing; the opposite of a debit, which is a payment owned by that party at closing.

Creditor – One who is owned a debt.

Credit Report – a tool used by the bank or lender to review your credit profile and your ability to carry and repay debt.

Credit Score – A figure used in underwriting that encapsulates the likelihood that a loan applicant will default, calculated using a credit scoring model and the information from the applicant’s credit history.

Credit Union – A type of financial institution that serves only the members of a particular group, such as a professional organization or labor union. Credit unions make  consumer loans, including residential mortgage loans.

Cure – To remedy a default, by paying money that is overdue or by fulfilling other obligations.

Debt – A payment owned by a party at closing; the opposite of a credit, which is a payment receivable by that party at closing.

Debtor – One who owes money to another.

Debt Investment – An investment in which temporary use of an investor’s funds is exchanged for interest payments, under an agreement that requires repayment of the funds or allows withdrawal of the funds.

Debt Relief – The forgiving of debt by a lender (usually refers to a mortgage lender reducing the debt so that foreclosure won’t be necessary). The IRS treats debt relief as taxable income, but there are significant exceptions.

Debt-to-Income Ratio – the ratio of monthly liabilities and housing expenses divided by the monthly gross income of the borrower.

Deed-in-Lieu of Foreclosure – a method of avoiding foreclosure by deeding your property to the lender.

Deed of Trust – a security instrument between the borrower and the lender, recorded in public records as a lien on the subject property. It differs from a mortgage in that the bank can foreclose on the property without judicial proceedings.

Deferred Interest – the amount of interest added to the principal loan balance when a borrower pays less than the interest-only note rate (see: option arms).

Delinquency – the failure to make a monthly mortgage payment on time, which can eventually lead to a notice of default, and later a foreclosure.

Discount Rate – the interest rate the Federal Reserve offers to member banks and thrifts.

Down Payment – an upfront payment made by the home buyer toward the property purchase price, usually ranging from five to 20 percent. The remainder of the sales prices makes up the mortgage loan amount.

Earnest Money – a deposit paid to the seller by the buyer as a pledge to complete a real estate transaction. If the seller accepts the offer, the deposit is held in escrow and applied to closing costs when the deal is closed.

Equal Credit Opportunity Act – a federal law that prevents lenders from discriminating applicants based on race, religion, national origin, sex, age, marital status or involvement in public assistance programs

Escrow – a third party intermediary who holds and allocates funds, including taxes and insurance in a mortgage transaction.

Federal Funds Rate – the interest rate banks charge one another for overnight use of excess reserves.

Federal Home Loan Mortgage Corporation – one of the largest financiers of conventional mortgages on the secondary market. Widely known as Freddie Mac.

Federal National Mortgage Corporation – a publicly owned, government-sponsored corporation that packages mortgages and resells them on the secondary market. Also known as Fannie Mae.

FHA Loan – a program originated during The Great Depression that allows lower income borrowers to qualify for mortgages as long as they fit certain criteria set forth by the Federal Housing Administration who insures them.

First-Time Homebuyer – typically defined as someone who has not owned another property at any time during the three years prior to the date of the purchase.

Fixed-Rate Mortgage – a mortgage with a constant interest rate that will not adjust at any point during the life of the loan.

Foreclosure – the legal process by which a bank or lender sells a property after a borrower fails to meet the repayment terms of the loan.

Good Faith Estimate – a disclosure which details your loan summary and an estimate of the charges you’ll incur upon settlement.

Graduated Payment Mortgage – a negative amortization mortgage with flexible payment options that gradually increase over time until leveling off. Intended for young couples who are unable to make the full mortgage payment, but whose income will increase over time.

Hard Money Loan – a mortgage of last resort for borrowers who can’t obtain financing in the standard market due to poor credit.

HARP Loan – a refinance loan offered to those with negative equity.

Hazard Insurance – insurance which protects a property owner from damages caused by fire or severe weather.

Home Equity – the value of a property less any and all existing liens. If a borrower owns a property worth $500,000 and has liens of $400,000, equity is $100,000.

Home Equity Line of Credit – a line of credit that uses the value of a property as collateral.

Impound Account – an account established by the issuing bank/lender or loan servicer to collect monthly and automatically pay a borrower’s property taxes and insurance costs when payments are due.

Interest Only – paying just the interest portion of the mortgage payment each month.

Islamic Mortgage – a mortgage that avoids the payment or receipt of interest, which is prohibited under Islamic law.

Jumbo Loan – a loan amount above the conforming loan limits, which is set each year by Fannie Mae and Freddie Mac. These loans typically carry higher interest rates than conforming loans because they can’t be sold to Fannie or Freddie.

Lender Credit – a credit paid by the lender to the borrower for taking an above-market interest rate.

Lender-Paid Mortgage Insurance – the lender pays for your mortgage insurance in exchange for a higher interest rate on your mortgage.

Lender Overlay – a guideline (or set of guidelines) in addition to those required by Fannie Mae, Freddie Mac, or the FHA/VA.

Lien – a claim against a property by the issuing bank or lender to secure repayment of a debt, typically in the form or a mortgage.

Loan Officer – a representative of a bank or broker who originates mortgages on their behalf.

Loan Origination – the initiation of the home loan process whereby a borrower submits their information to a bank or lender in order to obtain mortgage financing.

Loan Processor – the individual who handles all the paperwork associated with closing your loan.

Loan-to-Value – the percentage of the appraised property value that is borrowed from a bank or lender. A down payment of 20% would create a loan-to-value of 80%.

Margin – a given amount specified by the bank or lender which when added to the accompanying mortgage index sets the interest rate for an adjustable-rate mortgage.

Mortgage – a temporary loan used to finance the purchase of real property, also known as a home loan.

Mortgage Broker – an independent loan originator who works on behalf of consumers to obtain mortgage financing.  Brokers don’t represent a single bank, but rather work with numerous lenders.

Mortgage Discount Points – a form of prepaid interest whereby the borrower lowers the interest rate of the mortgage at closing.

Mortgage Due Date – the date your mortgage payment is due each month during the loan’s duration.

Mortgagee – the issuing bank or mortgage lender.

Mortgage Insurance – required insurance on a mortgage if the down payment is less than twenty percent and a single loan is used to finance the property.

Mortgage Lender – an institution that originates mortgage loans either to keep for interest income or sell on the secondary market.

Mortgage Payment – the cost of your loan, paid monthly.

Mortgage Rate – the interest rate associated with your mortgage.

Mortgage Rate Lock – the act of locking-in a desired interest rate on your mortgage so it cannot change. Borrowers also have the option to float their rate.

Mortgage Term – the length of your mortgage. Most are 30 years, though 15 years is also very common.

Mortgagor – the borrower or homeowner.

Negative Amortization – when a mortgage payment received is below the interest-only payment, the difference will be added onto the principal balance of the loan.

Ninja Loan – no income, no job, no asset loan. A “Ninja loan” is industry slang for a no doc loan, which doesn’t require income, asset, or job verification.  NoIncomeNoJobAssets.  It’s not specifically for Ninjas, unless they’ve got something to hide.

No Closing Cost Refinance – a refinance transaction in which the bank or broker pays all settlement costs.

Note – a written promise to repay the mortgage plus interest, which includes the name of the borrower, issuing lender, and the terms and provisions.

Option Arm – a home loan that gives borrowers four payment options, including a negative amortization payment option.

Origination Fee – a percentage of the loan amount charged by the bank or broker for completing the loan process.

Par Rate – the interest rate a borrower will qualify assuming there is no rate manipulation.

Payment Shock – a sudden, large increase in the monthly mortgage payment as a result of an adjustable-rate mortgage or through a refinance with new financing terms.

Piggyback Mortgage – a second mortgage that closes simultaneously with the first mortgage to reduce the total necessary down payment.

PITI – the monthly housing expense, expressed as principal, interest, taxes, and insurance (see: mortgage payment).

Points – stands for a percentage point of the loan amount, typically makes up the origination fee, which can be a fraction of a point to multiple points.

Pre-Approval/Pre-Qualification – processes to determine what you can afford to ensure you can obtain mortgage financing when purchasing a property.

Prepayment Penalty – if a loan is refinanced or repaid prior to a certain date as agreed upon in the loan documents, a fee will be charged by the bank or lender.

Prime Rate – the interest rate offered by commercial banks to its best corporate customers.

Principal – the balance of the liens on a property, not including interest.  What you owe on your mortgage.

Purchase Money Mortgage – a mortgage used to purchase a piece of property.

Qualified Mortgage – a home loan that meets new underwriting guidelines established by the CFPB.  Also known as a QM loan.

Quitclaim Deed – a document by which a person either disclaims interest in a property or transfers interest to another person, typically a spouse.

Refinance – the act of replacing your existing loan(s) with a new loan on the same property. There are two main types of refinancing, including a rate and term refinance and cash-out refinance.

Replacement Cost – In appraisal, the current cost of constructing a building with the same utility as the subject property, using modern materials and construction methods. Compare with Reproduction Cost.

Reproduction Cost – In appraisal, the cost of constructing a replica (an exact duplicate) of the subject property, using the same materials and construction methods that were originally used, but an current prices. Compare with Replacement Cost.

Reverse Mortgage – a mortgage reserved for homeowners aged 62 or older who wish to tap their home equity without paying monthly mortgage payments.

Right of Rescission – a law which allows a homeowner to rescind a contract to refinance their primary residence within three days of signing loan documents .

Second Mortgage – a mortgage taken out behind a first mortgage, either concurrently or after the fact.

Secured Creditor – A creditor with a lien on a property that enables them to foreclose and collect the debt from the sale proceeds if the debtor does not pay.

Seller Carryback – when a seller acts as the bank or lender and carries a second mortgage on the subject property.

Short Sale – a foreclosure alternative where a property is sold for less than the balance on the associated mortgage.

Short Refinance – a refinance transaction where the lender agrees to lower the rate and/or change the term despite the mortgage balance exceeding the property value.

Stated Income Mortgage – a mortgage in which the borrower does not have to document their income.

Streamline Refinance – an expedited refinance that requires limited underwriting, and may even forego the need for an appraisal.

Subprime Mortgage – a home loan reserved for those who have marginal credit or difficulty qualifying for a traditional loan.

Teaser Rate – the initial, discounted interest rate offered on adjustable-rate mortgages.

Title Insurance – protection against lawsuits and claims tied to the chain of title on the subject property.

Underwater Mortgage – a mortgage whose balance exceeds the value of the property.  Also known as an “upside down” mortgage.

Underwriter – the individual who decisions your mortgage by either approving, suspending, or declining it.

VA Mortgage – a mortgage offered to veterans and their families that is guaranteed by the Veterans Administration.

Yield Spread Premium – the commission mortgage brokers receive from banks and mortgage lenders by originating loans.

Zestimate – the estimated market value of a piece of property based on Zillow’s algorithm.