Glossary of Mortgage Terms

 

Abstract (or search) of Title: A brief history of the legal ownership of a piece of property.

 

Acceleration Clause: A clause in a Deed of Trust or mortgage which accelerates or hastens the time when the debt becomes due. For example, most Deeds of Trust or mortgages contain a provision that the note shall become due immediately upon the sale or transfer of title of land or upon failure to pay an installment of principal or interest.

 

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

 

Annual Mortgage Statement: Report to the borrower of taxes and interest paid during the year and remaining principal balance.

 

Applicant: One who applies for a real estate loan (the prospective borrower).

 

Application: A form used to record pertinent information concerning a prospective borrower. This form is used for evaluating the applicant in terms of his or her credit standing and history, earning potential, ability to pay the real estate loan, and the property to be pledged as security.

 

Appraisal: A formal written estimate of the current market value of a home and land. It also refers to the process by which a value estimate is obtained.

 

Borrower:  One who receives funds in the form of a loan with the obligation of repaying the loan in full with interest.

 

Broker: In real estate transactions, the broker usually brings together the buyer, seller and the mortgage lender to assist them in negotiating a contract.

 

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

 

Cancellation Clause: A clause in a contract whereby either one of the parties is permitted to terminate the contract upon the occurrence of specific conditions set forth in the clause. For example, if the buyers are not certain whether they can secure a mortgage, they would insist on this clause to protect themselves in the event a mortgage is not secured.

 

Certificate of Title: A document stating the name of the legal owner of the property, which often furnishes a legal description of the property.

 

Chain of Title: A list as far back as the records show of all transfers of ownership with a list of anything that may affect the title, such as easements or encumbrances.

 

Chattel: Personal property.

 

Closing: The delivery of a Deed, financial adjustments, the signing of the Note, and the mortgage or Deed of Trust and the disbursement of funds necessary to consummate a sale or loan transaction.

 

Closing Costs: Fees paid to effect the closing of a loan, such as origination fee, discount points, title insurance fees, survey fees and attorney’s fees.

 

Cloud of Title: A defect in the title, such as an encumbrance, a lien or a claim that may prevent the owner from transferring a clear title.

 

Commitment Letter: A written promise to make a loan for a specified amount and on specified terms.

 

Contract: An agreement between two parties to do or not do certain things for a legal consideration. Generally to be enforceable, contracts must be in writing and must include: a consideration (price and terms), a valid description, place and date of delivery, and all terms and clauses that were agreed upon.

 

Conventional Financing: Mortgage financing that is not insured or guaranteed by a government agency, such as HUD/EHA, VA or USDA Rural Development.

 

Credit Report: A report to a prospective lender on the credit standing of a prospective borrower, used to aid in the determination of creditworthiness.

 

Debt-to-Income Ratio (DTI): The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her gross monthly income.

 

Deed of Trust: A type of security instrument in which the borrower conveys title to real property to a third party (trustee) to be held in trust as security for the lender with the condition that the trustee shall re-convey the title upon the payment of the debt in full and conversely, will sell the land and pay the debt in the event of a default by the borrower.

 

Deficiency Judgment: A judgment against a borrower if the sale of pledged property at foreclosure does not bring in enough money to pay the balance due the lender, under the note.

 

Delinquency: Failure of a borrower to make timely payments under a loan agreement.

 

Deposit: Amount of money given to bind sale of real estate or to ensure payment; advance of funds in the processing of a loan.

 

Down payment: The difference between the sales price of real estate and the mortgage amount.

 

Earnest Money: The deposit money given to the sellers by the buyers to show that they are serious about buying the house. This money is usually applied to the down payment if the contract is accepted.

 

Federal Housing Administration (FHA): A federal agency with the Department of Housing and Urban Development that provides mortgage insurance for residential mortgages and sets standards for construction and underwriting.

 

Flood Insurance: insurance reimbursing up to a specified limit against loss by Flood damage, required by lenders in areas federally designated as special flood hazard areas. The insurance is private but is federally subsidized.

 

Foreclosure: A procedure in which a mortgaged property is sold to pay the outstanding debt in case of default.

 

Good Faith Estimate: An estimate of the closing costs given to the borrower within three (3) business days after the lender receives a completed loan application.

 

Gross Monthly Income: The total amount the borrower earns per month before any expenses are deducted.

 

Homeowner’s Hazard Insurance: A policy insuring against multiple perils, commonly called a package policy, and made available to owners of private dwellings. There are wide variations in the coverage of such policies, which generally insure the dwelling and its contents.

 

Home Inspection: A home inspection is performed by a qualified home inspector to determine the structural soundness and condition of the home, at the request of a purchaser, seller or lender. The inspector will provide a report outlining the condition of the home and what repairs, if any, are necessary before the loan may he closed.

 

Joint Tenancy: The ownership of real estate for life by two or more persons, each having an undivided interest.

 

Loan-to-Value Ratio (LTV): The ratio, expressed as a percentage that results from dividing the amount being borrowed by the appraised value or selling price of the house.

 

Market Value: The highest price that a buyer and the lowest price that a seller will accept, neither one being compelled to buy or sell.

 

Maturity Date: The date on which a mortgage indebtedness is completed if paid in accordance with the terms of the note.

 

Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.

 

Mortgage Discount Points: Points are a one-time charge made by a lending institution. A point is equal to 1 percent of the loan amount.

 

Mortgage Insurance: A policy that allows mortgage lenders to recover part of their financial losses if a borrower defaults on a loan.

 

Origination Fee: The lender’s fee charged to a borrower to prepare documents, make credit checks, inspect and sometimes appraise a property. Usually this is equal to 1 percent of the loan amount.

 

Pest Inspection: A certified pest inspector will check the home’s interior and exterior to ensure that it is free from destructive insects. The inspector will provide a detailed report; sometimes specific treatments are required before the loan may be closed, usually at the seller’s expense.

 

PITI: Principal, interest, real estate taxes, homeowner’s hazard insurance and private mortgage insurance. Also called monthly housing expense.

 

Points: Points are a one-time charge in order to adjust the price of your loan to prevailing market conditions. Each point is equal to one percent of the loan amount. For example, two points on a $100,000 loan amounts to a charge of $2,000. Points may be included in your closing costs. (Also called Loan Discount Fees)

 

Prepayment: The buyer may be permitted to pay off the Mortgage before maturity without penalty. At times, buyers may decide to refinance at a lower rate or to fully pay the Mortgage before it is due.

 

Prepaid Expenses: The initial deposit at the time of closing for real estate taxes and homeowner’s hazard insurance and the subsequent monthly deposits made to the lender for that purpose.

 

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

 

Private Mortgage Insurance: Insurance written by a private company protecting the mortgage lender against financial loss occasioned by a borrower defaulting on the Mortgage.

 

Realtor®: A person licensed to sell and/or lease real property, acting as an agent for others, and who is a member of a local real estate board affiliated with the National Association of Realtors®. Realtor® is a registered trademark of the NAR.

 

Real Estate Settlement Procedures Act (RESPA): A federal statute and regulation published by HUD governing real estate lending practices and disclosures. Its main features pertain to the distributions of a good faith estimate of loan settlement costs and the HUD settlement booklet within three business days of making loan application.

 

USDA Rural Development: This agency provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

 

Sales Contract: A written agreement between the buyer and the seller stating the terms and conditions of a sale or exchange of property.

 

Settlement: The closing of a mortgage loan.

 

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 dimension of any improvements.

 

Title: The means whereby the owner of land has the just possession of the property; the right to or ownership in land. In the case of real estate, the documentary evidence of ownership is the Deed that specifies in whom the legal estate is vested and the history of ownership and transfers. Title may be acquired through purchase, inheritance, gift or through foreclosure of a Mortgage.

 

Title Insurance: A policy, usually issued by a title insurance company, which insures against errors in the title search. The cost of the policy is usually a function of the value of the property and is often borne by the purchaser and/or seller.

 

Title Search: An examination of public records, laws and court decisions to ensure that no one except the seller has a valid claim to the property, and to disclose past and current facts regarding ownership of the subject property.

 

Truth-In-Lending Act: A federal law requiring disclosure of the annual percentage rate to homebuyers shortly after they apply for a loan.

 

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

 

VA Loans: A long-term, low- or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlement.

 

Verification of Deposit (VOD): A form that requests and secures verifications of amounts of deposit at financial institutions. When a depository institution is also the applicant’s creditor, the VOD verifies the obligations.

 

Verification of Employment (VOE): A form that requests and secures documentation of a mortgage applicant’s work history and/or occupation to assist in the lender’s credit investigation.

 

 

 

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