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Home Buying 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 |

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5/25 and 7/23
Loans with rates fixed for five or seven years and slightly lower than standard 30-year, fixed rate loans. Amortized for 30 years, loans are due in five or seven years or can be converted to a fixed rate at the current market rate.

A


Acceleration
The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower), or by using the right vested in the Due-on-Sale Clause.

Acceleration clause
A clause in contracts of debt which makes the entire amount due upon the debtor's default.

Accrued interest
Interest earned but not yet paid.

Acknowledgment (with respect to an instrument)
The statement of a competent officer, usually a notary public, that the person who has executed an instrument has appeared before him and sworn to the facts of its execution.

Adjustable rate
An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly. See Adjustable Rate Mortgage.

Adjustable Rate Mortgage (ARM)
A mortgage on which the interest rate is adjusted periodically, based on a pre-selected index. Also sometimes known as the re-negotiable rate mortgage, or the variable rate mortgage.

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.

Affordable housing programs
Mortgages for low-to-moderate income borrowers that provide more liberal terms than traditional home financing methods, in terms of Loan-to-Value and borrower qualifications.

Agent
A person authorized by a principal to act for the principal.

Alternative documentation
A method of documenting a loan file. The method relies on information from the borrower, rather than waiting for verification from third parties to confirm statements in the mortgage loan application. Often referred to as alt doc.

Amortization
A repayment method in which the amount borrowed is repaid gradually though regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

Amortize
To repay a debt through a series of periodic payments.

Annual membership
An amount charged annually for having a line of credit available. Often charged regardless of whether or not you use the line. Also referred to as a participation fee.

Annual Percentage Rate (APR)
The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the Federal Truth in Lending Act, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Does not include title insurance, appraisal, and credit report.

Application
An initial statement of personal and financial information. Required for loan approval.

Application fee
Fee paid upon application. An application fee may include charges for property appraisal and a credit report.

Appraisal fee
Fee charged by an appraiser to render an opinion of a property's market value as of a specific date. Required by most lenders to obtain a loan.

Appraisal report
A written report by an appraiser containing an opinion as to the value of a property and the reasoning leading to that opinion.

Appreciation
An increase in the value of property.

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

Assignment
The transfer of property rights by one person, known as the assignor, to another, known as the assignee.

Assumability
A loan feature permiting a homeowner to transfer the mortgage and its specified terms to the person(s) purchasing the home. Having an assumable loan could make it easier to sell a home, since assumption of a loan usually involves lower fees and/or qualifying standards for the new borrower than a new 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 costs and new, probably higher, market-rate interest charges will apply.

Attorney-in-fact
A person who is authorized by power of attorney to act for another.

Audited financial statement
A report on the financial position or operations of a company, reviewed by an independent auditor.

Average life
See weighted average life.

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B


Balance sheet
The balance sheet shows the financial condition of a company at a specific point in time. The balance sheet is broken down into the major sections: assets, liabilities and net worth.

Balloon payment
A short-term fixed-rate loan might require 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. This large payment is the balloon payment.

Bankruptcy
State of insolvency of an individual or organization - in other words, an inability to pay debts. There are two kinds of legal bankruptcy under U.S. law: involuntary, when one or more creditors petition to have a debtor judged insolvent by a court; and voluntary, when a debtor brings the petition. In both cases, the objective is an orderly and equitable settlement of obligations.

Bankruptcy trustee
The person appointed by a bankruptcy court to oversee either the running of a business in a reorganization proceeding or the sale of assets and distribution of proceeds in a business liquidation.

Bearer
The person in possession of an instrument, document of title or security payable to bearer or endorsed in blank.

Bequest
A gift of personal property by will.

Bill of exchange
A written order, which may be negotiable or nonnegotiable, directing one party to pay a certain sum of money to the drawer or to a third person.

Bill of lading
Receipt and contract issued by a common carrier for the shipment of goods.

Bill of sale
A written instrument by which one transfers his rights or interest in chattels and goods to another.

Blank endorsement
Endorsement that consists of only the signature of the endorser and does not state in whose favor it is made.

Blanket mortgage
- A mortgage covering at least two pieces of real estate as security for the same mortgage.

Bona fide
In good faith.

Bona fide purchaser
One who buys property without knowledge or notice of any defects in the title of the seller.

Bond
An instrument representing the right to certain payments on the underlying collateral.

Book entry
An electronic issuance and transfer system for securities transactions, such as that maintained by the Federal Reserve System.

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.

Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

Buy-down
The lender and/or the home builder subsidizing a mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they increase when the subsidy expires.

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C


C.O.D.
Cash on delivery or collect on delivery.

C.M.B.
Certified Mortgage Banker. The highest accreditation awarded mortgage professionals by Mortgage Bankers Association of America.

Cap
The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage.

Caps (interest)
Consumer safeguards that limit the amount the interest rate on an adjustable rate mortgage may change per year and/or for life of the loan.

Caps (payment)
Consumer safeguards that limit the amount monthly payments on an adjustable rate mortgage may change.

Cash flow
The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.).

Cash out
The money a borrower receives when refinancing a property.

Cashier's check
A check whose payment is guaranteed because it is drawn on the bank's account rather than the customer's account. The customer pays in advance or has the funds withdrawn in advance from his or her account. Cashier's checks are also called bank checks.

Ceiling
The maximum allowable interest rate over the life of the loan of an adjustable rate mortgage.

Certificate of Eligibility
A document given to qualified veterans entitling them to Veterans Administration (VA) guaranteed loans for homes, business, and mobile homes. Obtain a Certificate of Eligibility by sending a DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility).

Certificate of Occupancy
A document from an official agency stating that a property meets the requirements of local codes, ordinances, and regulations.

Certificate of Reasonable Value (CRV)
An appraisal issued by the VA showing a property's current market value.

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 a 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 Federal Housing Authority-insured loans).

Certified check
A check drawn on the issuer's account but for funds that have been segregated by the bank, guaranteeing payment.

Chattel
Any type of personal property as distinguished from real property.

Closing
The meeting between the buyer, seller, and lender, or their agents, where the property and funds legally change hands. Also called settlement costs, 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. The cost of closing usually is about three to six percent of the mortgage amount.

Closing costs
Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney's fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.

Collateral
Assets that back a mortgage loan or security.

Collateral security
A separate obligation given to secure the performance of the primary obligation in a contract.

Collateralized Mortgage Obligation (CMO)
A multiple-class mortgage-backed security. The real estate mortgage investment conduit (REMIC) has replaced the CMO, and today, all CMOs are issued in the form of REMICs; however, the terms are often used interchangeably.

Commitment
A promise by a lender to make a loan on specific terms or conditions to a borrower or builder. 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.

Commitment letter
A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer.

Community property
Property acquired by husband and wife during a marriage when not acquired as separate property by either spouse. Each spouse has equal rights, including the right of survivorship.

Conditional sale
An installment sale in which the goods are delivered to the buyer, but title remains with the seller until payment is made for the goods.

Conditions, Covenants, and Restrictions (CC and R)
The standards that define how a property may be used and the protections the developer makes for the benefit of all owners in a subdivision.

Condominium
A form of property ownership in which the homeowner holds title to an individual dwelling unit plus an interest in common areas of a multi-unit project.

Conforming loan
A mortgage with a loan amount under the maximum limits set by the Federal National Mortgage Association (FNMA, Fannie Mae) and the Federal Home Loan Mortgage Corp (FHLMC). Qualifying ratios and underwriting methods are standardized to a large degree.

Consideration
The required element in all contracts by which a legal right or promise is exchanged for the act or promise of another party. The inducement to a contract. Usually money.

Constant Maturity Treasury (CMT)
An index published by the Federal Reserve Board, calculated from the average yield of a range of Treasury securities, adjusted to constant maturities of various time periods (for example, six months, one year, ten years, etc.).

Constant Prepayment Rate
The pre-payment measure calculated by assuming that a constant portion of the outstanding mortgage loans will pre-pay each month (also see PSA) ..

Construction loan
A short term interim loan to pay for the construction 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.

Contract of sale
The agreement between buyer and seller on the purchase price, terms, and conditions necessary to both parties to convey the title to the buyer.

Conventional loan
A mortgage not insured by the FHA or guaranteed by the VA.

Conventional/fixed rate mortgage
Payments and interest rates are fixed for 15, 20, 25, or 30 year loans with up to 95% financing, 5% down payment, and quicker loan approval than with FHA or VA. These mortgages usually are not assumable.

Conveyance
The transfer of an interest in realty: a deed. Sometimes includes leases and mortgages.

Cooperative
A form of common property ownership in which the residents of an apartment building do not own their own units, but rather own shares in the corporation that owns the property.

Cost of funds index (COFI)
An index of the weighted-average interest rate paid by savings institutions for sources of funds, usually by members of the 11th Federal Home Loan Bank District.

Coupon rate
The stated annualized percentage of interest paid on an investment.

Covenant
A promise made by one person to another.

Credit limit
The maximum amount that one can borrow under a home equity plan.

Credit report
A report documenting the credit history and current status of a borrower's credit standing.

Credit risk
The possibility that there may be a default by the issuer or other party in its financial obligations to the investor.

Creditor's committee
The committee appointed by a bankruptcy court to represent the classes of creditors in a Chapter 11 reorganization. The committee primarily is responsible for reviewing the reorganization plan and recommending adoption or rejection.

Current face value
The current amount of principal outstanding on a security, which is calculated by multiplying the original face value by the most recent factor.

Current pay class
A term used for any REMIC class that is currently paying principal and/or interest.

Current ratio
Current Assets/Current Debt.

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D


Debt service
The total amount of credit card, auto, mortgage, or other debt upon which one must pay.

Debt-to-income ratio
The ratio, expressed as a percentage, that results when a borrower's monthly payment obligation on long-term debts is divided by gross monthly income. See housing expenses-to-income ratio.

Debt-to-net-worth ratio
Total debt divided by net worth.

Debtor in possession
A debtor who has filed for protection from creditors under Chapter 11 of the Bankruptcy Code and who is still running the company during the reorganization.

Deed
The legal document conveying title to a property.

Deed of trust
Used in many western states, the agreement used to pledge a home or other real estate as security for a loan. Similar to a mortgage.

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

Deferred interest
When a mortgage has 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.

Delinquency
Failure to make payments on time. Delinquency can lead to foreclosure.

Delivery
The voluntary transfer of possession—of instruments, documents of title, chattel paper, or certificate of securities.

Deposit
Cash paid to the seller when a formal sales contract is signed.

Depreciation
A decline in the value of property; the opposite of appreciation.

Discharge
The bankruptcy discharge ends the debtor's liability on a debt and acts as an injunction against any further efforts to collect a discharged debt from the debtor or from the debtor's assets.

Dischargeable debt
Debt that can be removed or forgiven in a Chapter 7 liquidation.

Discount points; points
A one-time charge imposed by the lender to lower the rate at which the lender would otherwise offer a loan. Each point is equal to one percent (1%) of the mortgage amount. For example, if a lender charges two points on an $80,000 loan, the discount points are a charge of $1,600.

Distribution date
The date when an investor receives payments from a security, such as an IRA.

Dividend
The portion of a company's profit paid out to its shareholders.

Document review
A fee charged by the lender for the review of documents necessary to fund the loan.

Down payment
The difference between the purchase price and the portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer's own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.

Draft
A bill of exchange.

Drawee
The person on whom a bill of exchange or a draft is drawn.

Drawer
The person who draws a bill or draft.

Due on sale
A clause in a mortgage agreement providing that, if the mortgagor (the borrower) sells, transfers, or, in some instances, encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full.

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E


Earnest money
Good faith money provided to the seller by the potential buyer to show he is serious about purchasing the home. This amount may be applied to the down payment. If the deal does not close, the deposit may be forfeited, although in some cases it is returned to the party who attempted to purchase the property.

Easement
The right-of-way granted to a person or company authorizing access to the owner's land; for example, a utility company may be granted an easement to install pipes or wires. An owner may voluntarily grant an easement or can be ordered to grant one by a local jurisdiction.

Effective interest rate
The cost of credit on a yearly basis expressed as a percentage. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Useful in comparing loan programs with different rates and points.

Effective yield
The annual return on an investment. Calculated by dividing the coupon interest rate by the amount invested, and expressed as a percent of par.

Encumbrance
A claim against a property by another party. An encumbrance usually affects the ability to transfer ownership of the property.

Endorsement
The signature of the person transferring a negotiable instrument.

Entitlement
A VA home loan benefit. If one has entitlement, one is guaranteed a VA home loan. Also known as eligibility.

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

Equity
The difference between the fair market value of a home and the outstanding mortgage balance.

Equity loan
A loan based on the borrower's equity in a home.

Equity of redemption
The right of a mortgagor to redeem property when a mortgage is past due.

Escrow
A deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition. Home mortgage lenders hold funds in escrow accounts to pay property taxes, homeowners insurance premiums, and other expenses incurred by the borrower.

Escrow waiver
When the loan-to-value (LTV) is 80% or less, the borrower may elect not to open an escrow account. The borrower thus pays for hazard insurance and property taxes independently. The borrower incurs a one-time charge, 0.0025 – 0.0375 of the loan amount, to obtain an escrow waiver from the lender.

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F


FDIC (Federal Deposit Insurance Corporation)
The independent deposit insurance agency created by Congress to maintain stability and public confidence in the nation's banking system.

FHA (Federal Housing Administration)
Government agency with information on home finance programs, loan limits, and other interesting items.

FHA loan
More appropriately termed "FHA Insured Loan." A loan for which the Federal Housing Administration insures the lender against losses the lender may incur due to a borrower's default.

FHLBB (Federal Home Loan Bank Board)
Former name of the regulatory and supervisory agency for federally chartered savings institutions. Now named the Office of Thrift Supervision.

FHLMC (Federal Home Loan Mortgage Corporation)
Also called "Freddie Mac," a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

FIFO inventory
The valuation of inventory on a first-in, first-out basis, which assumes that inventory sells in the order in which it came into stock.

FmHA (Farmers Home Administration)
Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

FNMA (Federal National Mortgage Association)
A major secondary market investor that purchases mortgage loans from mortgage bankers and other financial institutions. Also known as "Fannie Mae."

Face value
The principal amount of a bond.

Factor
- The decimal value, calculated monthly, that represents the proportion of the original principal amount outstanding at a given time.

Fair Credit Reporting Act (FCRA)
Consumer protection law establishing consumer credit rights.

Family Debt Arbitration and Counseling Services, Inc.
Consumer-oriented Web site. A non-profit debt management agency that helps people create a positive personal financial status.

Federal Reserve
The central bank of the United States and a major regulator agency for many commercial banks.

Fee simple
Absolute ownership of real property.

Final distribution date or maturity date
The latest possible date on which a REMIC (Real Estate Mortgage Investment Conduit) class will receive payment. The actual final payment of any class Is likely to occur earlier, and might occur much earlier, than the final distribution or maturity date. A projected final maturity is calculated based on an assumed pre-payment rate to determine the final maturity of each class.

Firm commitment
A promise by the FHA to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan.

First mortgage
A mortgage in first lien position, taking priority over all other liens (financial encumbrances).

Fixed rate
An interest rate that is fixed for the term of the loan. The payment amount also is fixed.

Flood insurance
A form of hazard insurance that lender sometimes require as a condition of making the loan. Flood insurance policies might not cover personal property.

Floor
The minimum rate of interest on an adjustable-rate mortgage.

Forbearance
The lender's postponement of foreclosure to give the borrower time to catch up on overdue payments.

Foreclosure
The legal act by which the owner of a mortgage cuts off the rights or interest of the mortgagor in the mortgaged property.

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G


Garnishment
A legal process including a summons or warning resulting in the attachment of property to satisfy a debt. People who have not been meeting their financial payment obligations can have their wages garnished to make fulfill those obligations.

GNMA (Government National Mortgage Association)
Government-owned secondary market investor that purchases FHA and VA mortgage loans from mortgage bankers and other financial institutions. Also known as "Ginnie Mae."

Good faith estimate
A written estimate of closing costs. A lender must provide a borrower the good faith estimate within three days following receipt of the borrower's application for a mortgage.

Grace period
The period of time following a loan payment due date during which the borrower may make the payment without incurring a penalty. The borrower's credit report might reflect grace period payments.

Graduated payment mortgage (GPM)
A type of flexible-payment mortgage. The payment amount increases for a specified period of time and then levels off.

Gross
An amount of money stated before the impact of taxes, as in gross income.

Gross income
For qualifying purposes, the income of the borrower before deducting taxes or expenses.

Growing equity mortgage (rapid payoff mortgage) A
fixed-rate, fixed-schedule loan that starts with the same payments as a level payment loan. The payments rise annually, with the entire increase being used to reduce the outstanding balance. No negative amortization occurs, and the increase in payments may enable the borrower to pay off a 30-year loan in 15 to 20 years, or less.

Guarantee
To assume the liability for debts of another in the event of the borrower's default.

Guaranty
A contract wherein one party assumes liability for the debt of another person in the event of the borrower's default.

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H


HUD (Housing and Urban Development)
A federal agency that oversees the FHA (Federal Housing Administration).

HUD-I Settlement Statement
A form used at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development.

Hazard insurance
A contract between purchaser and an insurer, to compensate the insured for property loss due to hazards (fire, hail damage, etc.), for a premium. Also called property insurance.

Home equity line of credit
A loan providing a borrower the ability to borrow funds at a time and in an amount he or she chooses, up to a maximum credit limit for which the borrower already has qualified. Repayment is secured by the equity in the home. Simple interest (interest-only payments on the outstanding balance) usually is tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home equity loan
A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in one's home. Interest paid is usually tax-deductible. Often used for home improvement or freeing of equity for other real estate or investments. Often recommended to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

Home inspection
Qualified home inspectors perform inspections to determine the structural soundness and condition of a home, at the request of a purchaser, seller, or lender. The inspector provides a report outlining the condition of the home and the repairs it needs.

Homeowners warranty
A type of insurance that covers repairs to specified parts of a house for a specific period of time.

Housing expenses-to-income ratio
A borrower's housing expenses, divided by gross monthly income, expressed as a percentage. See debt-to-income ratio.

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I


Impound
The portion of a borrower's monthly payments held by the lender or servicer to pay taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves and escrow.

Impound account
A savings account for accumulating the portion of a borrower's monthly payments designated for future payments of taxes and/or insurance. Required by certain lenders or with certain types of financing. Also known as an escrow account.

Index
A number upon which future interest rates for adjustable rate mortgages are based.

Insolvency
The condition of a person who is unable to pay debts as they fall due.

Installment debt
Debts with more than ten months left to repay.

Insurance
Provision to have losses covered, or reimbursed, by an insurer, in exchange for compensation to the insurer by the insured.

Intangible tax
Tax required by state governments whenever real property is sold. In Georgia, for example, this tax is $3.00 per $1,000 of property value.

Interest adjustment or prepaid interest
An estimated amount of interest due at a property closing, usually covering the period from the date of closing to the end of the month.

Interest rate
The periodic charge, expressed as a percentage of a credit or loan amount, paid by the borrower for the use of credit.

Interest rate cap
A safeguard built into a variable rate loan to protect the consumer. Specifies the highest interest rate a loan can have.

Interim financing
A construction loan made during completion of a building or project. A permanent loan usually replaces this loan after completion.

Intestate
Not having made a valid will.

Investment instrument
Legal document in which some contractual relationship is given formal expression or by which some right is granted—for example, notes, contracts, agreements.

Investor
A money source for a lender.

Issue date
The date on which a security is originally formed.

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J


Joint liability
Liability imposed upon two or more persons.

Joint tenancy
The ownership of property by two or more persons with the survivor taking the interest of the deceased.

Joint venture
A legal entity consisting of multiple persons together undertaking a commercial enterprise for profit.

Jumbo loan
Mortgage loans over the conforming loan limit. A conforming loan adheres to guidelines established by Fannie Mae or Freddie Mac. These guidelines establish the maximum loan amount, down payment, borrower credit & income requirements, and suitable properties. Lenders that make loans conforming to these guidelines may sell those loans to Fannie Mae or Freddie Mac. These lenders may retain the servicing on these loans so that a borrower continues to make payments to the original lender. Conforming loans make up the majority of loans in the U.S.) Jumbo loans are a minority of loans in the U.S.

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L


LIBOR (London Interbank Offered Rate)
The interest rate charged among banks for short-term Eurodollar loans. A common index for adjustable-rate mortgages and securities.

Late charge
The penalty a borrower must pay when making a payment after the due date.

Lease-purchase mortgage loan
An alternative financing option that allows low- and moderate-income homebuyers to lease a home from a nonprofit organization with an option to buy. Each month's rent payment consists of PITI (principal, interest, taxes, insurance) payments on the first mortgage, plus an extra amount earmarked for a savings account in which money for a down payment accumulates.

Letter of credit
A promise by a debtor's bank to pay a creditor upon presentation of specified documents.

Lien
The right to satisfy a debt from certain property owned by the debtor.

Liquidity
The capability of ready conversion of an asset or investment to cash.

Loan administration
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer. Also known as loan servicing.

Loan application fee
A lender's fee, usually ranging from $75 to $300, which the buyer must pay when applying for a mortgage.

Loan origination fee
A fee charged by the lender for processing a mortgage.

Loan servicing
See loan administration.

Loan-to-value ratio (LTV)
A ratio calculated by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $100,000 and a mortgage loan of $80,000, the loan to value ratio is 80%. Loans with an LTV over 80% might require private mortgage insurance.

Lock or lock in
A commitment from a lender assuring a borrower a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time one applies for a loan, acquires loan approval, closes the loan, and receives the borrowed funds.

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M


Mortgage-backed security (MBS)
A securitized interest in a pool of (typically residential) mortgages. The simplest form of MBS is a mortgage pass-through. With this structure, all principal and interest payments (less a servicing fee) from the pool of mortgages are passed directly to investors each month.

MGIC (Mortgage Guaranty Insurance Company)
A provider of private mortgage insurance and an excellent national real estate economic resource center.

MIP (mortgage insurance premium)
Mortgage insurance purchased by the borrower to insure the lender or the government against loss should the borrower default. MIP is paid on government-insured loans (FHA or VA loans) regardless of their LTV (loan-to-value). Should a borrower pay off a government-insured loan in advance of maturity, the borrower might be entitled to a small refund of MIP. PMI, or private mortgage insurance, is paid on loans that are not government-insured and whose LTV is greater than 80%. When a borrower has 20% of a home's value in equity, the lender can waive PMI at the borrower's request. These types of insurance do not include life insurance that pays off the loan in case of death.

Margin
An amount, usually a percentage, added to an index to describe the interest rate for adjustable rate mortgages.

Market price
The current price of a security. Market price changes over time.

Market rate
The average rate charged by lenders for conventional, fixed-rate loans.

Market risk
The possibility that the price of a security will decrease over time.

Market value
The highest price that a buyer would pay and the lowest price that a seller would accept for a property. Market value may be different from the price a property could actually sell for at a given time.

Minimum payment
The minimum amount that a borrower must pay, usually monthly, on a home equity loan or line of credit. In some plans, the minimum payment may be "interest only," (simple interest). In other plans, the minimum payment can include principal and interest (amortized).

Minor
A person who has not reached legal maturity.

Mortgage banker
Originates mortgage loans, loaning borrowers funds with their own organization's money.

Mortgage broker
As do mortgage bankers, takes loan applications and processes the necessary paperwork. Unlike mortgage bankers, brokers do not fund loans with their own organizations' money, but work on behalf of several investors, such as mortgage bankers, savings and loans, banks, or investment bankers.

Mortgage loan
A loan that uses real estate as security or collateral to provide for repayment should the borrower default on the terms of the loan. The mortgage or deed of trust is the agreement to pledge the home or other real estate as security.

Mortgage note
A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time. The agreement is secured by a mortgage.

Mortgagee
The lender in a mortgage loan transaction.

Mortgagor
The borrower in a mortgage loan transaction.

Multiple Listing Service (MLS)
A networking system through which real estate firms share information about their client's homes that are for sale.

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Negative amortization
A situation that may occur on variable rate loans that have the payment cap feature. If the monthly payment is capped, the adjusted payment amount may at times be insufficient to pay the actual amount of interest due. The unpaid deferred interest is then added to the loan balance. This increase in loan balance is known as negative amortization. A borrower usually has the option of increasing the monthly payment in any given month to avoid negative amortization.

Negotiable
Transferable from one person to another by being delivered with or without endorsement so that the title passes to the transferee.

Net
An amount of money stated after taxes have been taken out.

Net effective income
A borrower's gross income minus federal income tax.

Non-assumption clause
A statement in a mortgage contract forbidding the assumption of the mortgage by another party without the prior approval of the lender.

Non-dischargeable debt
Debt, such as taxes, that cannot be forgiven in a bankruptcy liquidation.

Note
A formal document showing the existence of a debt and stating the terms of repayment.

Notice of Default
- A formal written notice to a borrower that a default has occurred and that legal action may be taken.
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OCC (Office of the Comptroller of Currency)
Provides supervision and regulation to national banks to ensure safety and soundness in banking.

OTS (Office of Thrift Supervision)
Provides supervision and regulation to thrift institutions to ensure safety and soundness in banking.

Offer to purchase
Also called a purchase offer, earnest money agreement, contract of purchase, or deposit receipt. A document that lists the price, conditions, and terms under which the buyer is willing to purchase a property.

Original face value
The original principal amount of a security on its issue date.

Origination fee
The fee charged by a lender to cover administrative costs incurred during the processing of the loan, often expressed as a percentage of the loan amount.

Origination points
Points charged by the broker for services, that is, commission.

Owner financing
A purchase in which the seller provides all or part of the financing.

Owner's title policy
An insurance provided by the title company assuring the buyer that the title is free from defects up to the date the conveying instrument is recorded. The buyer is the beneficiary. Frequently the seller pays for this insurance. Typically it costs $300 or more.

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PITI (principal, interest, taxes and insurance)
These elements comprise borrowers' monthly mortgage payments.

PSA (Public Securities Association)
Association of banks, dealers, and brokers that underwrite, trade, and distribute mortgage-backed securities, U.S. government and federal agency securities, and municipal securities.

Par
One hundred percent (100%) of face value.

Payment cap
Provision of some ARMs (adjustable rate mortgages) limiting how much a borrower's payments may increase regardless of how much the interest rate increases; may result in negative amortization.

Payoff statement
The document signed by a lender indicating the amount required to pay a loan balance in full and satisfy the debt. Used in the settlement process to protect both the seller's and the buyer's interests.

Per diem interest
The daily interest that a borrower must pay from the date of closing to the end of that month. Usually the first full, regular mortgage payment is due the first of the following month.

Perfection
The proper recording or filing of an instrument, thereby giving notice to the world.

Permanent loan
A long term mortgage, usually ten years or more. Also called an "end loan."

Personal property right
All rights and interest owned in goods or chattels as distinguished from an interest in real property.

Pest inspection
A certified pest inspector checks a home's interior and exterior to ensure that it is free from destructive insects. The inspector provides the lender with a detailed report. Specific treatments are sometimes required before the loan can closed. Usually performed at the seller's expense.

Pledged account mortgage (PAM)
Money placed in a pledged savings account plus earned interest. This money is used to gradually reduce mortgage payments.

Points; discount points
A one-time charge imposed by the lender to lower the rate at which the lender would otherwise offer a loan. Each point is equal to one percent (1%) of the mortgage amount. For example, if a lender charges two points on an $80,000 loan, the discount points are a charge of $1,600.

Pool A
group of mortgages backing an individual mortgage-based security issue.

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

Preference
Paying or securing to one or more creditors, to the exclusion of other creditors, by an insolvent debtor, of all or part of an antecedent debt. Under the U.S. Bankruptcy Code such payment is a preference if to a regular creditor within 90 days or to an insider within one year of insolvency.

Premium
The amount paid for something that is greater than 100 percent of face value.

Prepaid expenses
Money needed to create an escrow account or to adjust the seller's existing escrow account. These funds are earmarked for taxes, hazard insurance, private mortgage insurance, and special assessments that are coming up.

Prepaid interest
The amount of interest that covers the period from close of escrow until the first payment.

Pre-payment
The unscheduled payment of all or part of the outstanding principal of a mortgage loan, including payments by the borrower as well as liquidations from foreclosures, condemnations, or casualty.

Pre-payment penalty
A penalty sometimes stated in a promissory note. It is a fee paid by the borrower to the lender when a loan is paid in full before it is due.

Pre-payment risk
The possibility that the mortgages underlying the security are repaid faster than expected.

Pre-qualification
The process of determining how much money a prospective homebuyer will be eligible to borrow before actually applying for a loan. Many home buyers pre-qualify themselves for loans, to have an idea what size mortgage they can expect to get and to appear attractive to prospective sellers..

Price
The amount paid for a security, often stated as a percentage of its face value. A par price is 100 percent, a premium price is higher than par, while a discount price is lower than par.

Primary mortgage market
Lenders making mortgage loans directly to borrowers such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage market, to organizations like FNMA or GNMA..

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

Principal-only (PO) class
[One of the simplest types of mortgage-backed securities is the "pass-through," which is created by pooling traditional fixed-rate, level payment mortgages. To appeal to investors with different preferences for risk and return, a number of variations of collateralized mortgage obligations have been developed to redistribute the prepayment risk in pass-throughs. Another variation of the collateralized mortgage obligation strips the interest payments of the underlying mortgages to an interest-only class and the principal payments to a principal-only class. Both classes are very sensitive to prepayment of the underlying mortgages. In the interest-only class, prepayment wipes out future cash flows (interest payments), whereas in a principal-only class, a slowdown in prepayment redistributes a portion of current cash flows into the future, extending the instrument's maturity. The value of a principal-only instrument responds to changes in interest rates much the way a conventional bond does, except the magnitude is greater. An increase in interest rates depresses the principal-only instrument's value because its cash flows will be realized later due to a slowdown in prepayment. This effect is compounded by a higher discount factor (as a result of higher interest rates) and the maturity extension of the instrument. This means the value of a principal-only instrument drops by relatively more than that of a comparable maturity conventional bond for a given interest rate rise. Similarly, as interest rates drop, a principal-only instrument appreciates relatively more in value than a conventional bond, since its cash flows are both realized sooner (due to prepayment) and discounted at lower rate (due to falling rates and a shortening of maturity). Hence, although a principal-only instrument moves with interest rates much the way a conventional bond does, it clearly has higher interest-rate risk.] A type of mortgage-backed security that does not bear interest and is entitled to receive only payments on principals. Rising interest rates will have an adverse effect on principal-only mortgage-backed securities.

Priority of claims
The specified order in which creditors' claims are paid when the assets of a debtor are liquidated in a bankruptcy. The priority of claims is regulated by the Bankruptcy Code.

Private label
A mortgage security not issued or guaranteed by a U.S. government agency (such as GNMA) or a U.S. government-sponsored enterprise (such as FNMA or FHLMC).

Private mortgage insurance (PMI)
An insurance for borrowers who do not have a 20 percent down payment. Lenders will allow a smaller down payment, as low as 5 percent in some cases, if the borrower carries private mortgage insurance. Private mortgage insurance protects the lender in the event that the borrower defaults on the loan..

Processing fee
A fee paid at closing. The processor is the person who handles all paperwork requirements in getting the loan approved. The processor obtains verifications from the borrower's bank, employer, and other sources.

Profit and loss statement
A financial statement that shows sales, expenses, and profits for a specific period of time. Also known as the income statement.

Prospectus and prospectus supplement
The legal documents that state all the details of an investment.

Proxy
An absentee ballot received before an annual meeting.

Purchase and sale agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

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Qualifying ratios
Comparisons of a borrower's debts and gross monthly income.

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REMIC (Real-Estate Mortgage Investment Conduit)
A multiple-class mortgage cash flow security. A REMIC is a multiclass, mortgage-backed security in which cash flows from the underlying collateral are allocated to individual bonds, called tranches, of varying maturities, coupons, and payment priorities. REMICs offer investment flexibility because each REMIC is designed according to specific investor needs.

RESPA (Real Estate Settlement Procedures Act)



RESPA is a HUD (Housing and Urban Development) consumer protection statute. RESPA requires that consumers receive disclosures at various times in the home buying transaction and outlaws kickbacks that increase the cost of settlement services. RESPA is enforced by HUD.



ROI
Return on investment.

R-value
The resistance of insulation materials (including windows) to heat that passes through air. The higher the R-value number, the greater the insulating value.

Rate lock
See Lock-in.

Real estate agent
A person licensed to negotiate and transact the sale of real estate on behalf of the owner.

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

Real property
Land and everything that is permanently affixed to it.

Realtor
A collective membership mark that may be used only by real estate professionals who are members of the National Association of Realtors and subscribe to its strict code of ethics.

Receiver
A person appointed by the court to take custody over property in litigation or insolvency. (Or, the guy who catches the pass and runs with the ball.)

Reclamation
A term used in bankruptcy to denote a right or proceeding on the part of a person having title to property to recover the same when it is in possession of the bankrupt, debtor, receiver, or trustee.

Reconveyance/Satisfaction
A fee charged by the lender to execute the Deed of Reconveyance, or Satisfaction, when an existing note is paid off.

Record date
The date used to determine the owner of a security for purposes of distributing the next scheduled payment.

Recording fees
Fees charged by the County Recorder's Office for recordation of Deed, Mortgage or Deed of Trust, and, at times, additional documents requiring public notice.

Refinancing
The process of paying off one loan with the proceeds from a new loan secured by the same property.

Renegotiable rate mortgage
A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.

Rent with option to buy
See lease-purchase mortgage loan.

Rescission
The annulment of a contract as a result of which both parties are returned to their former positions.

Reverse annuity mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home.

Right of rescission T
he legal right to void or cancel a mortgage contract in such a way as to treat the contract as if it never existed. Right of rescission is not applicable to mortgages made to purchase a home, but may be applicable to other mortgages, such as home equity loans.

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Satisfaction
The discharge of an obligation by paying a party what is due.

Satisfaction of mortgage
The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."

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

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 for lenders.

Security interest
Any interest in property acquired by contract for the purpose of securing payment or performance of an obligation.

Seller carryback
An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

Servicing
The steps and operations a lender performs to keep a loan in good standing, activities such as collecting payments, paying taxes, maintaining insurance, arranging property inspections, and the like. Also known as loan administration.

Settlement costs
See closing/closing costs.

Settlement date
The date of the delivery of and payment for a security.

Settlement sheet
The computation of costs payable at closing. The settlement sheet shows the seller's net proceeds and the buyer's net payment.

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. Also describes a mortgage in which borrowers share the monthly principal and interest payments with another party in exchange for part of the appreciation.

Simple interest
Interest computed only on the principal balance.

Subsidized second mortgage
An alternative financing option for low- and moderate-income households that includes a down payment and a first mortgage, with funds for the second mortgage provided by city, county, or state housing agencies, foundations, or nonprofit corporations. Payment on the second mortgage is often deferred and carries no or low interest. Some subsidized second mortgages forgive part of the debt each year the purchasing family remains in the home.

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 the purchased property.

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Tax and Insurance Reserve (TIR)
See Impound Account.

Tax impound
An amount for taxes required and collected by the lender/collection agent and held in the impound account to ensure adequate funds are available to pay the taxes. The amount is based upon one month's worth (one-twelfth) of yearly taxes, varying between one and five months, depending upon the time of the year in which the sale closes.

Tenancy by the entirety
The joint ownership of property by a husband and wife with the right of survivorship.

Tenancy in common
A form of ownership in which the tenants own separate but equal parts. To inherit the property, a surviving tenant should either have to be mentioned in the will or, in the absence of a will, be eligible to inherit through state inheritance laws.

Testator
The person who makes a will.

Three/two (3/2) Option
An alternative financing plan that enables households whose earnings are no more than 100 percent of the median income in their regional area to make a 3 percent down payment with their own funds, coupled with a 2 percent gift from a relative or a 2 percent grant or unsecured loan from a nonprofit or state or local government program.

Title
The written evidence that proves the right of ownership of a specific piece of property.

Title company
A company that specialized in insuring title to property.

Title examination
A practice that results in title insurance protecting the investor in case future title problems arise. Property purchasers have the opportunity to buy their own title insurance at a significant savings at closing.

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

Title search
A check of the property title records to ensure that the seller is the legal owner of the property and that there are no outstanding liens or other claims.

Tort
A private or civil wrong exclusive of a breach of contract.

Tranche
French word for "slice." A class of investment interest in a REMIC.

Transaction fee
A fee that a borrower might have to pay each time the borrower draws on a home equity credit line.

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

Treasury securities
Treasury securities and T-bills are common indexes for adjustable rate loans.

Truth-in-Lending Act
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

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 seven or 10 years. Also called "Super Seven" or "Premier" mortgage.

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Underwriting
The process of verifying data and approving a loan.

Underwriting fee
A fee paid at closing. This charge is for the review of the purchaser's file to ensure the buyer's ability to meet mortgage payment obligations.

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VA funding fee
A fee charged by the Veteran's Administration to guarantee the loan to a qualified veteran. Similar to private mortgage insurance (PMI).

VA loan
More appropriately termed "VA-Insured Loan." A loan for which the Veteran's Administration insures the lender against losses the lender may incur due to the purchaser's default. Available only to veterans who have a Certificate of Eligibility.

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.

VOD (Verification of Deposit)
A document signed by the borrower's financial institution verifying the status and balance of the borrower's financial accounts.

VOE (Verification of Employment)
A document signed by the borrower's employer verifying the borrower's position and salary.

VRM (Variable Rate Mortgage)
See Adjustable Rate Mortgage.

Variable rate
An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

Variable rate loan
Loan in which the rate of interest is tied to a specific financial index, with both the rate of interest and the monthly payments subject to change at established adjustment intervals.

Venue
The county, district, or other place where a case is or will be tried.

Vesting
Name(s) in which title to a property is held.

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WAC (Weighted-Average Coupon)
The weighted average of the interest rates on the mortgage loans underlying the mortgage-backed security (MBS) that backs the Real-Estate Mortgage Investment Conduit (REMIC), or the weighted average of the WACs of the individual MBS pools backing the REMIC.

WAL (Weighted-Average Life)
The average length of time that elapses from the date of a security's issuance until each dollar of principal is repaid to the investor. The weighted-average life of each class of a REMIC is only an assumption. The average amount of time that each dollar of principal is actually outstanding is influenced by, among other factors, the rate at which principal, both scheduled and unscheduled, is paid on the mortgage loans underlying the MBS that back the REMIC.

WAM (Weighted-Average Maturity)
The weighted average of the remaining terms to maturity (expressed in months) of the mortgage loans underlying the mortgage-backed security (MBS), or the weighted average of the remaining terms to maturity of the individual MBS pools backing the REMIC.

Waiver
The relinquishment of or refusal to accept some right or benefit.

Walk-through
A final inspection of a home before settlement to search for problems that need to be corrected before ownership changes hands.

Warehouse fee
Many mortgage firms must borrow funds on a short term basis to originate loans that are 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 its borrower a warehouse fee.

Workout
The plan by which a financially distressed company, not in bankruptcy, seeks to rehabilitate itself.

Wraparound mortgage
A loan combining an existing assumable loan with a new loan. A wraparound mortgage has an interest rate somewhere between the old rate and the current market rate. The buyer makes payments to a second lender or to the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.

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Yield
The rate of return on an investment over a given time, expressed as an annual percentage rate. Yield is affected by the price paid for the investment as well as the timing of the principal payments.

Yield to maturity
The annual percentage rate of return on an investment, assuming it is held to maturity.

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Z


Zoning regulations
Rules established by local governments regarding the location, height, and use of property within a specific area
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