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.
ADJUSTABLE RATE MORTGAGE (ARM)
A mortgage in which the interest rate is adjusted periodically based on an index. Also called a variable rate mortgage.
For an adjustable rate mortgage, the time between changes in the interest rate charged. The most common adjustment intervals are one, three or five years.
Someone who acts on behalf of another for a fee. In real estate, the term refers to a person with a real estate license who works under the authority of a real estate broker.
Extinguishing the outstanding balance of a loan by making equal payments on a regular schedule (usually monthly). The payments are structured so that the borrower pays both interest and principal with each payment.
ANNUAL PERCENTAGE RATE (APR)
The interest rate which reflects the cost of a mortgage as a yearly rate. This rate is usually higher than the stated loan rate for the mortgage because it includes points and other charges.
The fee charged by the lender to the borrower for making loan application. Payment of this fee does not guarantee that a loan will be approved. Some lenders may apply the cost of the application fee to closing costs.
A written report by a qualified person that determines a property’s value based on recent sales information of similar properties.
Increase in value of a property, not including increases from improvements.
The value of a property based on its present condition.
A tax or charge levied against a property by the government, typically to pay for local improvements, e.g., sidewalks, curbs, or sewers.
These loans may be passed from a seller of a home to the buyer. The buyer “assumes” all outstanding payments.
A loan that behaves like a fixed-rate mortgage for a set number of years (usually five or seven) and then must be paid off in full in a single “balloon” payment. Balloon loans are popular with those expecting to sell or refinance their property within a definite period.
An individual in the business of arranging funding or negotiating contracts for a client but who does not loan money himself. A broker usually charges a fee or receives a commission for his services.
An agreement specifying conditions under which the seller agrees to repurchase the property usually for a stated price and within a stated time limit.
Funds paid to the lender by the borrower or third party for reducing the interest rate of the loan for a specified period.
A market in which there are more houses for sale than there are potential buyers. Housing prices are usually driven lower, and buyers stand to get a better deal.
A set percentage by which an ARM may adjust each pre-set period as described in the mortgage note. Caps are usually quoted as two numbers as in 2/6. The first number indicates how much a loan may change at each adjustment period while the second number indicates the percentage a loan may adjust over its lifetime. Loans like the 3/1 and 5/1 adjustable which have an initial fixed period are quoted with 3 numbers as in 3/2/6 which would mean that the first adjustment may be as much as 3%, subsequent adjustments are capped at 2% each, and the lifetime cap is 6%.
The amount of cash derived over a certain period from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (i.e., mortgage payment, maintenance, and utilities).
CERTIFICATE OF ELIGIBILITY
Written authorization issued by a local municipal authority that permits occupancy of a newly constructed home.
CERTIFICATE OF OCCUPANCY
Written authorization issued by a local municipal authority that permits occupancy of a newly constructed home.
CERTIFICATE OF REASONABLE VALUE (CRV)
An appraisal issued by the Veterans Administration showing the property’s current market value.
Also referred to as settlement. The process of finalizing the purchase or refinance of a property, including but not limited to, signing papers, disbursing money, and preparing the deed and transfer of ownership.
Fees paid by the borrower when a property is purchased or refinanced. These typically include a loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee, and credit report charge.
CLOSING DISCLOSURE (CD)
Final review of costs and terms including costs paid by the buyer, seller and third parties.
Personal property pledged as security for a debt. Collateral for a mortgage is usually the property.
A written letter of agreement detailing the terms and conditions on which the mortgage company will lend money to finance a home.
Real estate that includes the separate ownership of a specified unit with undivided interest in the ownership of the common elements which are owned jointly with the other condominium unit owners.
A mortgage loan with an initial balance equal to or less than the maximum amount established by Fannie Mae and Freddie Mac.
A short term loan for funding the cost of construction. The lender advances funds to the builder as the work progresses.
A provision that makes the occurrence of one event dependent upon the completion of another. For example, the purchase of a home may be contingent on the seller repairing structural damages.
A mortgage neither insured by the FHA nor guaranteed by the VA.
The right of a borrower to convert an adjustable or balloon loan into a fixed rate loan.
Borrowers are rated by credit bureaus according to their credit-worthiness or risk profile. These ratings are based on various factors such as a borrower’s payment history, foreclosures, bankruptcies, and charge-offs.
A report to a prospective lender on the credit standing of a prospective borrower which is used to help determine creditworthiness. Information regarding late payments, defaults, or bankruptcies will appear on the report.
A legal document which conveys ownership of real estate from the seller to the buyer.
DEED OF TRUST
This document is used to secure the payment of a note.
The borrower’s failure to make payments on a loan. It may also be a breach of the terms of the note or deed of trust.
Money paid by a buyer from his own funds, as opposed to the portion of the purchase price which is financed by the lender.
DUE ON SALE CLAUSE
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the borrower sells the home.
EARNEST MONEY DEPOSIT
A sum of money given to bind a sale of real estate. Usually held by the real estate company until closing.
The rights of an individual to use another property for a particular purpose (e.g., access to their own property).
A right due to an individual. The term, when used with VA insurance, refers to the loan amount that the VA will guarantee.
EQUAL CREDIT OPPORTUNITY ACT (ECOA)
Federal law prohibiting lenders from discrimination in lending 1) by reason of race, color, religion, national origin, sex, marital status or age, 2) because any income is derived from public assistance, or 3) because the applicant has exercised any rights under the Consumer Protection Act.
The difference between the current market value of a property and the principal balance of all outstanding loans.
FEDERAL HOME LOAN MORTGAGE CORPORATION
A private corporation authorized by Congress which sells participation certificates secured by conventional mortgage loans. Also known as Freddie Mac.
FEDERAL NATIONAL MORTGAGE ASSOCIATION
A private, for profit, corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA and guaranteed by the VA as well as conventional mortgages. Also known as Fannie Mae.
Having full title ownership of an estate.
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately-priced homes.
FHA MORTGAGE INSURANCE
FHA requires a fee (up to 1.50 percent of the loan amount) paid at closing to insure the loan. In addition, FHA mortgage insurance requires a monthly instalment of .50 percent of the loan amount. The lower the down payment, the more years the insurance must be paid.
The total dollar amount your loan will cost you. It includes all interest payments for the life of the loan, any interest paid at closing, your origination fee and any other charges paid to the lender and/or broker. Certain closing costs are not included in the finance charge calculation.
FIXED RATE MORTGAGE
A mortgage where the interest rate does not change for the life of the loan.
Between application and closing, a borrower may choose to “play the market” by electing to float the interest rate. Floating is essentially choosing not to lock the interest rate. Since it is the borrower’s responsibility to lock his or her rate before closing, choosing to float is considered risky and may result in a higher interest rate.
A legal procedure in which real estate is sold by the lender to pay a defaulting borrower’s debt.
A mortgage that is guaranteed against default, such as a VA or FHA insured mortgage. Borrowers must pay an insurance premium to get a guaranteed mortgage.
The time between the due date of a mortgage payment and the date when late charges are assessed.
GRADUATED PAYMENT MORTGAGE (GPM)
A mortgage with monthly payments that are smaller at the beginning of the loan period and gradually increase by a specified amount for the first five or ten years, after which they become fixed. A GPM has a fixed interest rate and fixed loan period.
GROSS MONTHLY INCOME
The total amount the borrower earns per month, not counting any taxes or expenses. Often used in calculations to determine whether a borrower qualifies for a loan.
A form of insurance in which the insurance company protects the insured from certain losses, such as fire, vandalism, storms, and certain other natural causes. Also called Homeowners Insurance.
A mortgage that combines some attributes of a fixed rate mortgage with attributes of an adjustable rate mortgage (e.g., a loan that is fixed for 5 years but then becomes an ARM).
The ratio of the monthly housing payment to total gross monthly income. Also called Payment-to-Income Ratio or Front-End Ratio.
A published interest rate tied to an ARM loan’s interest rate. The index is not controlled by the lender. The index and the interest rate linked to it may increase or decrease.
An examination of a property or building to determine condition or quality for a particular purpose such as an assessment of structural or termite damage.
A percentage of the amount of a loan paid for the use of money for a specified time.
A loan made during the construction of a building or a project. A permanent loan usually replaces this loan after completion.
A joint holding of property by two or more people who enjoy the property equally throughout their lives with right to survivorship to the other Grantees. Not applicable to a husband and wife.
A initial loan balance exceeding the maximum amount established 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.
Interest in an estate that entitles a person to possession, but not ownership, of the land.
The bank, mortgage company, or mortgage broker offering the loan.
A charge against a property whereby the property is made security for the payment of a debt such as a judgment or mortgage.
LIFE OF LOAN CAP
The maximum interest rate that can be charged during the life of the loan. Also called Lifetime Cap. This value is often expressed as an increment above the initial note rate. For example, an adjustable rate loan with an initial rate of 7.25% and a 6% lifetime cap will never adjust above a rate of 13.25% (7.25% + 6.0%).
LOAN ESTIMATE (LE)
An estimate of charges that a borrower is likely to incur in connection with the loan.
LOAN-TO-VALUE RATIO (LTV)
The relationship between the amount of the mortgage loan and the lesser of the sales price or appraised value of the property expressed as a percentage. An LTV ratio of 90 means that a borrower is borrowing 90% of the value of the property and contributing 10% as a down payment. For refinances, the value is determined by an appraisal.
The period, expressed in days, during which a lender will guarantee a rate. Some lenders will lock rates at the time of application while others will allow the borrower to lock the rate after the application is taken.
The act of committing to a mortgage rate. This action, taken by a borrower between application and closing, is sometimes accompanied by a payment to the lender. Opposite of float.
The amount a lender adds to the quoted index rate for an adjustable rate loan to determine the new interest rate.
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could be sold for at a given time.
MONTHLY HOUSING EXPENSE
Total principal, interest, taxes, and insurance paid by the borrower monthly. Used with gross income to determine affordability.
The amount of money the borrower pays the lender to compensate the lender for the use of its money to purchase the home. This interest is tax-deductible.
NATIONAL ASSOCIATION OF REALTORS
A trade organization that sets the standards for the real estate profession and enforces a rigid code of ethics in real estate dealings.
The result of artificially low monthly mortgage payments which do not cover all interest due to the lender. The deferred interest is added to the loan balance which may be higher than the original amount of the loan.
PLANNED UNIT DEVELOPMENT
A subdivision having lots or areas owned in common and reserved for the use of some or all the owners of the separately owned lots.
Prepaid interest paid by the borrower to the lender at closing. A point is equal to 1 percent of the loan amount (e.g., 1.5 points on a $100,000 mortgage would cost the borrower $1,500). Generally, by paying more points at closing, the borrower reduces the interest rate of the loan and thus reduces future monthly payments.
POWER OF ATTORNEY
An instrument authorizing a person to act on behalf of the person granting it. A limited power of attorney restricts the power to a transaction.
Expenses such as taxes, insurance and assessments which are paid in advance of their due date and which must be paid by the buyer on a prorated basis at closing.
To repay the remaining balance of a loan ahead of the regular schedule.
Lenders who impose prepayment penalties will charge borrowers a fee if they wish to repay part or all their loan in advance of the regular schedule.
The process of establishing a borrower’s qualification for a loan of an amount based on income and expenses. Pre-qualification does not guarantee that the loan will be approved but can be used to demonstrate financial capability to an agent or seller.
The amount of debt, not counting interest, left on a loan.
PRIVATE MORTGAGE INSURANCE (PMI)
Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan-to-Value Ratio is greater than 80%.
The ratio of the borrower’s fixed monthly expenses to his gross monthly income. The Front-End Ratio is the percentage of a borrower’s gross monthly income (before income taxes) that would cover the cost of PITI (Mortgage Principal Payment + Mortgage Interest Payment + Property Taxes + Homeowners Insurance). In the case of a 28% Front-End Ratio, a borrower could qualify if the proposed monthly PITI payments were 28% or less of the borrower’s gross monthly income. The Back-End Ratio is the percentage of a borrower’s gross monthly income that would cover the cost of PITI plus any other monthly debt payments like personal loans and credit card debt. Please note that qualifying ratios are only a rough guideline in determining a potential borrower’s credit-worthiness. Many factors such as credit history, down payment, and loan size will influence the decision to approve or disapprove a loan.
REAL ESTATE SETTLEMENT PROCEDURES ACT
Also known as RESPA. Enacted by Congress to ensure that the consumer is provided with advance disclosure of the costs involved in the real estate settlement process. The law requires lenders to furnish this information after application only.
Money paid to the local authorities for recording a home sale, thereby making it part of the public records.
Obtaining a new mortgage loan on a property already owned (often to replace existing loans on the property).
The cancellation of a contract. It gives the homeowner three days to cancel a refinancing contract once it is signed if the transaction uses the equity in the home as security.
See Real Estate Settlement Procedures Act.
A contract between a purchaser and a seller of real estate to convey title after certain conditions have been met.
A collection of agencies that buy mortgages from primary lenders. These mortgage funds are then pooled and sold to investors, much like a mutual fund. By purchasing loans from primary lenders, the secondary market supplies money for additional mortgages.
A mortgage made after another mortgage and subordinate to the first one.
An agreement in which a seller provides the financing needed by a buyer to purchase the seller’s home. The agreement often is reached when the buyer has insufficient funds for a down payment.
See Closing Costs.
A measurement of land prepared by a surveyor showing the location of the property and its dimensions and the location and dimensions of any improvements.
Equity created by a purchaser performing work on a property being purchased.
A claim against the real estate for the amount of its unpaid taxes.
TENANTS IN COMMON
An undivided ownership in real estate by two or more individuals. The interests need not be equal and, in the event of the death of one of the owners, no right of survivorship exists for the other owners.
A document that gives evidence of an individual’s ownership of property. Documentary evidence of ownership is the title deed, which specifies in whom the legal estate is vested, and the history of ownership and transfers. The title can be acquired through purchase, inheritance, gift or foreclosure of a mortgage.
An insurance contract by which the title insurance company agrees to pay the insured a specific amount for any loss caused by defects of title to a specifically described parcel of real estate.
An examination of city, town, or county records to determine the legal ownership of real estate.
TOTAL DEBT RATIO
Monthly debt and housing payments divided by gross monthly income. Also known as Back-End Ratio.
Taxes imposed by local governments when transferring ownership of real property.
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.
VARIABLE RATE MORTGAGE
See Adjustable Rate Mortgage.
A guarantee or protection provided to the purchaser regarding the condition of appliances and certain fixtures. New homes often have more extensive warranties covering not only fixtures and appliances but the overall structure as well.