Mortgage Glossary or "What is an..."

Abstract (Of Title). A summary of the public records relating to the title to a particular piece of land. If there are any title defects they must be cleared before a buyer can purchase clear, marketable, and insurable title.

Adjustable Rate Mortgage (ARM). A type of mortgage in which the interest rate adjusts from time to time according the current market rate. Monthly mortgage payments can increase or decrease over the life of the loan. Also known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.

Agreement for Sale. A document in which the purchaser agrees to buy certain real estate (or personal property) and the seller agrees to sell under stated terms and conditions. Also called sales contract, binder or earnest money contract.

Amortization. Repayment of a mortgage with equal periodic payments of both principal and interest, calculated to retire the debt at the end of a fixed period of time.

Annual Percentage Rate (APR). The actual annual cost of borrowing. The APR represents the relationship of the total finance charge (interest, loan fees, points) to the amount of the loan.

Appraisal. An opinion or estimate of the current market value of a home.

Appraiser. A professional who determines the market value of a home based on its condition and the selling prices of comparable homes recently sold in the area. His or her job is to compute a fair estimate of market value to help the lender decide a reasonable loan amount.

Assessed Valuation. The value that a taxing authorities places upon personal property for the purposes of computing taxes.

Asset. Property or right owned, tangible or intangible, that has monetary value and is capable of providing future benefits to the owner.

Balloon Mortgage. A mortgage with low payment installments. The balance of the mortgage is due in a lump sum at a specified date, usually at the end of the term.

Building Code. Regulations based on safety and health standards that govern design, construction and materials used in construction.

Buy Down Mortgage. A mortgage with a below market interest rate made by a lender in return for an interest rate subsidy in the form of any additional discount points paid by the builder, seller or buyer.

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

Certificate of Occupancy. Written authorization given by a local municipality that allows a newly completed or substantially completed structure to be inhabited.

Chain of Title. The history of all the documents transferring title to a parcel of real property, starting with the earliest existing document and ending with the most recent.

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Clear Title. Title to a real property that is free of any liens or other legal issues about ownership.

Closing. In real estate, the delivery of a deed, financial adjustments, the signing of notes and the disbursement of funds necessary to close the sale or loan transaction.

Closing Attorney/Agent. A closing agent or attorney assures that all documentation related to the sale of a house has been completed properly, including the title search and title insurance. The closing agent explains all closing documents to the buyer and the seller obtains their signatures where necessary and records the documents.

Closing Costs. Includes a loan origination fee, points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The closing costs usually are about 2 percent to 6 percent of the mortgage amount.

Closing Statements. A financial disclosure giving an account of all funds received and expected at the closing, including the escrow deposits for taxes, hazard insurance and mortgage insurance.

Cloud (On Title). An outstanding claim which negatively affects the marketability of title.

Collateral. An asset (such as a home) owned by a borrower that guarantees the repayment of a loan. The borrower risks losing the asset if the conditions of the loan are not met and the loan is not repaid.

Commission. An agent's fee for negotiating a real estate or loan transaction, often expressed as percentage of the sales price or mortgage amount.

Commitment. An agreement, often in writing, between a lender and a borrower, to loan money at a future date subject to compliance with stated conditions.

Co-Borrower. A second borrower who signs a mortgage loan with a mortgagor. The co-mortgagor's income, debts and assets are combined with the mortgagor's for ratio analysis and underwriting purposes.

Comparable. A property used for comparative purposes in the appraisal process that has similar characteristics to the subject property.

Condominium. A form of ownership of real property. The purchaser receives title to a particular unit and a proportionate interest in certain common areas.

Condominium Declaration. The basic condominium document that must be registered by the developer before the first unit is sold. This declaration thoroughly describes the entire condominium project, including each unit and all common areas.

Construction Loan. A short term interim loan for financing the cost of construction. The lender advances funds to the builder as the work progresses.

Contingency. A Condition that must be met before a contract is binding. For example, the sale of a house might be contingent upon seller paying for certain repairs.

Conventional Loan. A mortgage loan not insured by FHA or guaranteed by VA or Farmers Home Administration.

Cooperative Housing (Co-op). An apartment building or a group of dwellings owned by a corporation, the stockholders of which are the residents of the dwellings. It is operated for their benefit by their elected board of directors. In a cooperative, the corporation or association owns title to the real estate. A resident purchases stock in the corporation which entitles him to occupy a unit in the building or property owned by the cooperative. While the resident does not own his unit, he has an absolute right to occupy his unit for as long as he owns the stock.

Cosigner. Another person who signs your loan and assumes equal responsibility for it.

Credit Rating. A rating given to a person to establish willingness to pay obligations based upon one's past history or timely payment.

Credit Report. A report to a prospective lender on the credit standing of a prospective borrower, used to help determine credit worthiness.

Credit Scoring System. A statistical system used to rate credit applicants according to various characteristics relevant to creditworthiness.

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Debt To Income Ratio. Long term debt expenses as a percentage of monthly income. Lenders use this ratio to qualify borrowers for mortgage loans.

Deed. A formal written instrument by which title to real property is transferred from one owner to another. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the State where the property is located, and should be delivered to the purchaser at closing day. There are two parties to a deed: the grantor and the grantee. (See also deed of trust , general warranty deed , quit claim deed , and special warranty deed .)

Deed of trust. A legal document used in some states instead of a mortgage. In this situation ownership (title) is conveyed to a trustee.

Down payment. A portion of the purchase price of real property that a buyers pay from their own funds or gifts.

Earnest Money. A sum of money given to bind a sale of real estate; a deposit.

Easement Rights. A right-of-way granted to a person or company authorizing access to or over the owner's land. An electric company obtaining a right-of-way across private property is a common example.

Encroachment. An obstruction, building, or part of a building that intrudes beyond a legal boundary onto neighboring private or public land, or a building extending beyond the building line.

Encumbrance. A legal right or interest in land that affects a good or clear title, and diminishes the land's value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes, or restrictive covenants. An encumbrance does not legally prevent transfer of the property to another. A title search is all that is usually done to reveal the existence of such encumbrances, and it is up to the buyer to determine whether he wants to purchase with the encumbrance, or what can be done to remove it.

Equity. The homeowner's interest in a property; the difference between fair market value and the outstanding balance owed on its mortgage.

Escrow Account. An account set up by the lender into which the borrower makes periodic payments, usually monthly, for taxes, hazard insurance, assessments and mortgage insurance premiums. The funds are held in trust by the lender who pays the sums as they become due.

Fair Market Value. The price at which property is transferred between a willing buyer and a willing seller, each of whom has reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell.

Fannie Mae. See FNMA.

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

FHA. Federal Housing Administration. A division of the Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders.

FHLMC. Federal Home Loan Mortgage Corporation. A private corporation created by Congress to support the secondary mortgage market. It sells participation certificates secured by pools of conventional mortgage loans, their principal and interest guaranteed by the federal government through the FHLMC. Popularly known as Freddie Mac.

First Mortgage. A real estate loan that creates a primary lien against real property.

Fixed Rate Mortgage. A mortgage with a set interest rate that does not change during the life of the loan.

FNMA. Federal National Mortgage Association. A private corporation created by Congress to support the secondary mortgage market. FNMA sells mortgage backed securities backed by pools of conventional loans. Payment of principal and interest on those securities is backed by the US Government. Popularly known as Fannie Mae.

Freddie Mac. See FHLMC.

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General Warranty Deed. A deed which conveys not only all the grantor's interests in and title to the property to the grantee, but also warrants that if the title is defective or has a "cloud" on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic's liens against it) the grantee may hold the grantor liable.
Ginnie Mae. See Government National Mortgage Association.

Government National Mortgage Association (GNMA). Also known as Ginnie Mae, provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

Government Mortgage. Any mortgage that is insured by the Federal government. Examples of government mortgages are VA, and FHA mortgages.

Graduated Payment Mortgage (GPM). A type of flexible payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

Gross Monthly Income. The amount of consistent and stable income that an individual receives each month averaged over a period of time. The amount includes overtime pay, bonuses, commissions and income from dividends or interest, provided the individual can show a consistent history of receiving income.

Hazard Insurance. A contract that pays for loss on a home from certain hazards, such as fire, wind, and vandalism.

Home Equity Line of Credit. A form of open end credit in which the home serves as collateral.

Home Equity Loan. A loan that allows a homeowners to borrow against the equity in their property.

Homeowners Association. An organization of homeowners residing within a particular development whose major purpose is to maintain and provide community facilities and services for the common enjoyment of the residents.

Homeowners Insurance Policy. A Multiple peril insurance policy. It is available to owners of private dwellings and covers the dwelling and contents in the case of fire or wind damage, theft, liability for property damage and personal liability.

Housing Expense Ratio. A homeowners monthly housing expense as a percentage of his or her gross monthly income.

HUD. U.S. Department of Housing and Urban Development. Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders and sets minimum standards for such homes.

Initial Interest Rate. The original interest rate used for an ARM. Sometimes called a "start" rate.

Inspector. The property/mechanical inspector examines a home to evaluate its plumbing, electrical work appliances, heating and cooling systems, roof and structural stability.

Interest. Money paid for the use of money. That is, money paid for a loan.

Joint Tenancy. Co-ownership that allows each party an equal interest and equal rights in a property.

Jumbo Loan. A loan which is larger (more than $240,000) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Liabilities. An individual's financial obligations to others. Liabilities can be short term (less than five years) or long term (longer than five years).

Lifetime Rate Cap. For an Adjustable Rate Mortgage (ARM) the maximum amount the interest rate can increase of decrease over the loan term.

Lien. A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

Loan To Value Ratio (LTV). The relationship between the amount of a home loan and the total value of the property For example, if you receive a loan of $95,000 on a home that costs $100,000, the loan-to-value ratio is 95%.

Lock-In Rate. A commitment from a lender to make a loan at a preset interest rate at some future date, usually for not more than 180 days. A fee may be charged to "lock in" a rate.

Market Value. The highest price that a willing buyer would pay and the lowest a willing seller would accept.

Mortgage. An agreement pledging a property to a lender as security for the payment of an obligation.

Mortgage Insurance. A policy that allows mortgage lenders to recover part of their financial losses if a borrower fails to fully repay a loan. Mortgage insurance makes it possible to buy a home with as little as 3% down.

Mortgage Insurance Premium (MIP). The payment made by a borrower to the lender for transmittal to HUD to help defray the cost of the FHA mortgage insurance program and to provide a reserve fund to protect lenders against loss in insured mortgage transactions. In FHA insured mortgages this represents an annual rate of one half of one percent paid by the mortgagor on a monthly basis.

Mortgage Investor. Any person or institution that invests in mortgages. By buying mortgage loans from lenders, the mortgage investor gives the lender funds that can be used for more lending.

Mortgage Life Insurance. A type of term life insurance. The amount of coverage decreases as the mortgage balance declines. In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.

Mortgagee. A lender to whom property is conveyed as security for a loan.

Mortgagor. One who borrows money, giving as security a mortgage or deed of trust on real property.

Negative Amortization. The unpaid principal and interest which is added to the mortgage loan causing the mortgage balance to increase rather than decrease.

Origination Fee. A fee paid to the mortgage lender in consideration for the work and expenses related to obtaining a mortgage. The fees are usually computed as a percentage of face value of the loan.

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PITI. Principal, Interest, Taxes and Insurance; the components of a mortgage payment.

Planned Urban Development (PUD). A subdivision having lots or areas owned in common and reserved for the use of some or all of the separately owned lots.

PMI. Private Mortgage Insurance (see also Mortgage Insurance) Insurance purchased by a buyer to cover the lender's risk of loss.

Points. A dollar amount paid to a lender for making a loan. A point is one percent of the loan amount. Also called discount points.

Principal. The original balance of money loaned, excluding interest. Also, the remaining balance of a loan, excluding interest.

Quitclaim Deed. A deed which transfers whatever interest the maker of the deed may have in the particular parcel of land. A quitclaim deed is often given to clear the title when the grantor's interest in a property is questionable. By accepting such a deed the buyer assumes all the risks. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has.

Rate lock. See Lock-In rate.

Real Estate Broker/Agent. The seller of the house pays the real estate broker to attract potential buyers and help negotiate the contract between the seller and the buyer. The broker identifies available properties for buyers and shows them homes that meet their criteria.

Realtor. A member of the National Association of Realtors.

RESPA. Real Estate Settlement Procedures Act. RESPA is a Federal law that requires lenders to provide home mortgage borrowers with information about known or estimated settlement costs.

Rescission.The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

Recording Fees. Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

Refinancing. The process of the same mortgagor paying off one loan with the proceeds from another loan.

Renegotiable Rate Mortgage (RRM). A loan in which the interest rate is adjusted periodically. See Adjustable Rate Mortgage.

Restrictive Covenants. Private restrictions limiting the use of real property. Restrictive covenants are created by deed and may "run with the land," binding all subsequent purchasers of the land, or may be "personal" and binding only between the original seller and buyer. The determination whether a covenant runs with the land or is personal is governed by the language of the covenant, the intent of the parties, and the law in the State where the land is situated. Restrictive covenants that run with the land are encumbrances and may affect the value and marketability of title. Restrictive covenants may limit the density of buildings per acre, regulate size, style or price range of buildings to be erected, or prevent particular businesses from operating or minority groups from owning or occupying homes in a given area. (This latter discriminatory covenant is unconstitutional and has been declared unenforceable by the US Supreme Court.)

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 as security.

Security. Property pledged to the creditor in case of a default on a loan; see collateral.

Servicing. All the steps and operations a lender perform to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

Servicer. After a mortgage loan closes, the loan servicer collects the payments, manages escrow accounts, pays escrowed taxes and insurance, and manages delinquent payments Lenders often "release servicing to another business," which means that a home buyer will not necessarily send house payments to the original lender.

Shared Appreciation Mortgage (SAM). A mortgage in which a borrower receives a below market interest rate in return for which a lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgages where the borrower shares the monthly principal and interest payments with another party in exchange for a part of the appreciation.

Special Assessments. A special tax imposed on property, individual lots or all property in the immediate area, for road construction, sidewalks, sewers, streetlights, etc.

Special Lien. A lien that binds a specified piece of property, unlike a general lien, which is levied against all one's assets. It creates a right to retain something of value belonging to another person as compensation for labor, material, or money expended in that person's behalf. In some localities it is called "particular" lien or "specific" lien. Also see lien.

Special Warranty Deed. A deed in which the grantor conveys title to the grantee and agrees to protect the grantee against title defects or claims asserted by the grantor and those persons whose right to assert a claim against the title arose during the period the grantor held title to the property. In a special warranty deed the grantor guarantees to the grantee that he has done nothing during the time he held title to the property which has, or which might in the future, impair the grantee's title.

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 building.

Term. The period of time between the beginning loan date on the legal documents and the date the entire balance of the loan is due.
Term Mortgage. See Balloon Payment Mortgage.

Title. The evidence of ownership in property. In the case of real estate, the documentary evidence of ownership is the title deed. Title may be acquired through purchase, inheritance, gift or through foreclosure of a mortgage.

Title Insurance. Insurance which provides for the payment of a specific amount of funds for loss caused by defects in the title to real estate.

Title Search. An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Trustee. A party who is given legal responsibility to hold property in the best interest of or "for the benefit of" another. The trustee is one placed in a position of responsibility for another, a responsibility enforceable in a court of law.

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

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 years), 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 within 30 days notice at the end of seven or 10 years. Also called "Super Seven" or "Premier" mortgage.

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

Unsecured Note. A loan that is not backed by collateral (property).

VA Loan. A long term, lower no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

VA Mortgage Funding Fee. A premium of up to 2 percent (depending on the size of the down payment) paid on a VA backed loan. On a $75,000 30 year fixed rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed.

Variable Rate Mortgage (VRM). See Adjustable Rate Mortgage.

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

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

Veterans Administration (VA). An independent agency of the federal government created in 1930. The VA home loan guaranty program is designed to encourage lenders to offer long term, low down payment mortgages to eligible veterans by guaranteeing the lender against loss.

Wraparound. Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.

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