Glossary
Mortgage and finance terminology can sometimes
be confusing. Here are a few common terms and their meanings.
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A & D Loan
Acquisition and Development Loans are used in purchasing and
developing raw land with the intent of future development.
Abstract of Title
A written history of ownership showing verification or non-verification
of title.
Acceleration Clause
Requires the balance of a loan to become due immediately.
Occurs when regular payments are not made.
Acquisition Cost
The price to obtain property, including purchase price and all
nonrecurring closing costs, including discount points, FHA application
fee, service charge, credit report, FHA appraisal, escrow, document
preparation, title insurance, termite inspection, reconveyance
and recording fees for FHA-insured loans.
Ad Valorem
A Latin phrase used to describe a tax charged in relation to the
value of the property taxed meaning "according to value".
Adjustable Rate Mortgage (ARM)
A loan with an adjusted interest rated determined by a pre-selected
index.
Adjustment Period
The period between adjustments of an ARM interest rate.
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All-inclusive Trust Deed
Overriding trust deed; A financing tool where a lender assumes
payments on an existing mortgage or trust deed and takes from
the borrower a trust deed with a face value in an amount equal
to the amount due on the old instrument and the additional amount
of money borrowed.
Amortization
A financial obligation paid in installments; An amortized
loan includes both principal and interest, usually due monthly,
resulting in complete payment of the amount borrowed, with interest,
by the end of the loan term.
Annual Percentage Rate (APR)
The cost of credit including interest, loan fees and discount
points stated as an annual percentage.
Appraisal
A licensed appraiser’s estimate of a property’s monetary value
on the open market; Justifies the contract purchase price.
Arrearages
The total delinquent principal, interest, taxes and insurance
owed.
Balloon Payment
An installment payment on a loan that is usually a larger
payment and due on a specified date.
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Bond
Real Estate Bond. An obligation issued on security of a mortgage
or trust deed.
Cap
A limit on interest rate fluctuation on an adjustable rate.
Certificate of Reasonable Value
Property appraisal necessary for a VA-guaranteed loan.
Certificate of Redemption
Certificate issued by the county tax collector verifying payment
of all past due obligations.
Chattel Mortgage
Using personal property to guarantee a promissory note.
Closing
The ending of a real estate transaction resulting in title
and fund conveyance.
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Closing Costs
Expenses resulting from the closing of a real estate mortgage
loan.
Closing Statement
Also known as a HUD-1 statement. Provides a listing of all
funds payable at closing.
Cloud on Title
Encumbrance which affects the title marketability.
Compound Interest
Interest payable on the principal loan amount and accrued
interest.
Conventional Loan
A secured loan that is not insured by FHA and VA loans.
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Cost Approach
An Appraisal method to determine market value calculated by
adding value less depreciation to the replacement value.
Deed
A legal document conveying title to real property.
Debt to Income Ratio
Ratio comparing total monthly obligations, including home
loan payments, to total monthly gross income.
Discount Points
Fee charged by the lender to decrease the interest rate on
a loan.
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Due on Sale Clause
Mortgage provision stating that the entire note balance is
due if the borrower sells the property.
Easement
The right and use to a specific piece of land owned by someone
else.
Encroachment
A property improvement that unlawfully intrudes on another’s
property.
Equity
Calculated by subtracting the balance owed on a home from
the market value.
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Escrow
The holdings of documents or funds by a neutral third party
on the behalf of the borrower pending the closing of a loan or
payment of real estate taxes, insurance and any such agreements
of a contract.
Escrow Impounds
Money paid at loan settlement and with monthly loan payments
for the purpose of paying future real estate taxes and homeowners
insurance.
Escrow Waiver
The borrower’s request to not pay taxes and insurance through
impounds. Equity positions play a role in the decision.
Fair Credit Reporting Act
Law protecting consumers that establishes procedures to correct
errors on credit reports and gives consumers specific rights in
dealing with credit reporting agencies.
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Fannie Mae (FNMA)
The Federal National Mortgage Association. It purchases, sells
and guarantees conventional, VA or FHA mortgages.
Federal Home Loan Mortgage Corporation (FHLMC)
Purchases conventional mortgage loans in the secondary mortgage
market.
Federal National Mortgage Association (FNMA)
Purchases mortgage loans from primary lenders in the secondary
mortgage market.
Federal Truth In Lending Act
Requires disclosures about terms and costs intended to give
consumers cost vs. credit comparisons.
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FHA
Federal Housing Authority. Provides home loan insurance for
FHA loans.
Fico Score
Enables a credit grantor to identify credit prospects with
the best credit opportunities.
Fixed Rate Mortgage
The interest rate on a loan that remains constant throughout
the entire term.
Floating Interest Rate
The interest on a loan before it is guaranteed by a lender.
Gift Letter
A signed letter or statement from an individual providing
a cash gift to a borrower in order to qualify for a loan. The
letter or statement states that the cash gift does not have to
be repaid.
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Ginnie Mae
Government National Mortgage Associations works with FHA facilitating
efficient secondary market activities for federally insured or
guaranteed mortgages.
Graduated Payment Mortgage (GPM)
A mortgage based on payments that will be increased over time
dependent on a predetermined schedule.
Gross Income Multiplier
Using the gross annual income of a property to calculate an
estimate of a property’s value.
Good Faith Estimate
A document prepared by the lender showing borrowers the estimated
cost they will incur payable at closing.
Hazard Insurance
Insurance policy placed on property improvements that covers
damage by fire or other natural disasters.
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HUD
The United States Department of Housing and Urban Development.
Responsible for all facets of the federal housing and urban development
programs.
Index
A factor used to calculate the interest on an adjustable rate
mortgage.
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Inheritance Taxes
Taxes on real and personal property received through an inheritance.
Jumbo Loan
A home loan that is monetarily more than the limits of Freddie
Mac or Fannie Mae.
Land Contract
A contract used in a real property sale where the seller keeps
the title to the property until the sales price has been paid.
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Leverage
Use of debt financing to purchase an investment.
Lien
A legal hold against the property as security for the payment
of a debt, mortgages, judgments or taxes.
Loan to Value Ratio
Ratio reflecting the mortgage loan amount to the appraised
value or purchase price of a home.
Market Value
The highest price that a buyer is willing to pay and the lowest
price that a seller is to accept for real estate.
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Marketable Title
Enables an owner to sell property without objection. It is
free of any clouds.
Mortgage
A guarantee of real estate from a borrower as security for
the payment of a loan to a lender.
Mortgage Insurance
Insures the lender against non-payment of a government or
conventional loan.
Mortgagee
The lender for a home loan.
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Mortgagor
The borrower in a home loan.
Negative Amortization
A loan schedule in which the principal increases due to a
payment that does not cover all of the interest.
Notice of Default
Written notice to a borrower showing default on a mortgage.
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Origination Fee
Lender’s fee for processing and underwriting loan documents.
Usually 1 point or 1%.
PITI
Principal, interest, taxes and insurance, which combined make
a monthly mortgage payment.
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Points
A one-time payment to lower the interest rate on a mortgage.
Prepaid Interest
The interest charged at closing calculated to pay for the
cost of borrowing for the remainder of the month.
Prepayment Penalty
Fee paid by the borrower if loan is paid before its due date.
Pre-qualification
A non-binding opinion of how much a borrower will be qualified
to borrow.
Private Mortgage Insurance (PMI)
Insurance required by lender from a non-governmental insurer
if down payment is less than around 20%.
Real Estate Settlement Procedures Act (RESPA)
Requires advance disclosure to consumers about mortgage loan
settlements.
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Redlining
The illegal practice of lending institutions denying loans
to certain areas of a community.
Refinancing
The borrower pays off one loan with another.
Reverse Annuity Mortgage (RAM)
The homeowner receives monthly payments based on accumulated
equity. The loan must be repaid at a prearranged date or upon
the death of the owner or the sale of the property.
Right of Recission
The borrowers right to cancel a mortgage refinance transaction
within three days from the date the settlement documents were
executed.
Sales Comparison Approach
The construction and locations of homes comparable to the
subject home are used to form an appraisal.
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Satisfaction
Paying and being released from an obligation in its’ entirety
before the end of the term.
Second Mortgage
Mortgage that has a lien position second to a first mortgage.
Secondary Mortgage Market
Market in which investors buy and sell existing mortgages.
Security Instrument
The deed of trust or mortgage verifying the pledge of real
property as security for the repayment of the debt.
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Servicing
The operational procedures related to the collection of home
loan payments and other payments related to mortgage loans.
Shared Appreciation Mortgage (SAM)
Loan in which the lender participates in any profits when
the property is sold.
Simple Interest
Interest payable on the principal amount of the loan only.
Subrogation
Substituting the legal rights and claims from one creditor
to another.
Suspended
A loan can neither be approved nor denied. More information
is needed.
Takeout Loan
Loan in which the lender provides financing to the builder
or developer upon completion of construction.
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Temporary Buydown
Money paid at closing to temporarily reduce the interest rate
for the first and second year of the mortgage.
Title Insurance
Insurance policy protecting owner or lender against loss affecting
title.
Title Search
An examination of public records to determine legal ownership
of property.
Usury
Charging an interest rate greater than the rate permitted by law.
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Underwriting
Analyzing a homebuyer’s ability to repay a home loan.
VA Loan
A home loan guaranteed by the Department of Veterans Affairs.
Enables a veteran to buy a home with no money down.
VOD
Verification of Deposit
VOM
Verification of Mortgage
VOE
Verification of Employment
Wraparound Mortgage
A loan in which a new loan is added to
the existing first mortgage loan.
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