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Glossary of Mortgage Terms A B C D E F G H I J K L
A
Abstract (of Title)	A historical summary of all the recorded transactions that affect the title to the property. An attorney or a title company will review an abstract of title to determine if there are any problems affecting the title to the property. All such problems must be cleared before the buyer can be issued a clear and insurable title.
Agreement of Sale	A written signed agreement between the seller and the purchaser in which the purchaser agrees to buy certain real estate and the seller agrees to sell upon terms of the agreement. Also known as contract of purchase, purchase agreement, offer and acceptance, earnest money contract or sales agreement.
Acre	A measure of land equal to 43,560 square feet.
Adjustable Rate Mortgage (ARM)	Also known as a variable rate mortgage. The interest rate on these mortgages changes periodically.
Adjustment Period	This is the length of time for which the interest rate is fixed on an adjustable. Therefore if the adjustment period is six months, then the interest rate will remain fixed for six months, after which time it will adjust.
Amortization	A gradual paying off of a debt by periodic installments which pay principal and interest.
Annual Percentage Rate - APR	The effective rate of interest for a loan per year. This rate is typically higher than the note rate because it takes into account closing costs. This is one way to compare loan programs offered by different lenders. Caution : the APR is sometimes computed differently by different lenders and can be misleading.
Appraisal	An opinion or estimate of the value of a property at a given date.
Assumable Mortgage	A mortgage loan which allows a new home buyer to take over the obligation of making loan payments with no change in the terms of the loan. Assumable loans do not have a due-on-sale clause. The lender has to be notified and agree to the assumption. The lender may require the buyer to qualify for the loan and may charge an assumption fee. The seller should obtain a written release from the lender stating clearly that he/she is no longer liable to make mortgage payments. See also " Subject To."
B
Balloon (payment) Mortgage	Usually a short-term fixed-rate loan which involves 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. Example : A balloon mortgage for $25,000 has interest only payments for 5 years at 12% ($250 per month), with the full principal of $25,000 due and payable after 5 years.
Binder	Definition #1: A title insurance binder is the written commitment of a title insurance company to insure title to the property subject to the conditions and exclusions shown on the binder. Definition #2: Preliminary agreement, normally secured with earnest money, between a buyer and a seller as an offer to purchase real estate.
Biweekly Mortgage	A mortgage which requires 1/2 the normal monthly payment every two weeks. Over the course of the year, 26 half payments are made which is equivalent to 13 full mortgage payments. As a result of this extra payment the loan amortizes much faster than a loan with normal monthly payments.
Blanket Mortgage	A mortgage covering more than one piece of property. Example : A developer subdivides a tract of land into lots and obtains a blanket mortgage on the whole tract.
Borrower (Mortgagor)	One who applies for a loan secured by real estate and is responsible for repaying the loan (mortgage).
Bridge Loan	An interim loan typically used when the buyer is unable to sell his/her house but needs money to close the transaction on the house he/she is buying. The bridge loan is made on the buyers current residence to finance the buyers new residence. The loan is paid off when the buyers current residence is sold.
Broker	See Real Estate Broker or Mortgage Broker.
Buy Down	Obtaining a lower interest rate (buying down the rate) by paying additional points to the lender. The lower rate may apply for the full duration of the loan or for just the first few years. A buy down may be used to qualify a borrower who would otherwise not qualify . This is because a buy down results in lower payments which are easier to qualify for. Example : A very popular buy down is the 2-1 buy down. If the interest rate on the note is 9%, the buy down results in the rate being 7% (9%-2%) for the first year, 8% (9%-1%) for the second year, and 9% thereafter.
Buyers Broker	An agent hired by a buyer to locate a property for purchase. The broker represents the buyer and negotiates with the sellers broker for the best possible deal for the buyer.
C
CC&R's - Covenants, conditions, and restrictions	The basic rules establishing the rights and obligations of owners of real property within a condominium, townhouse, PUD, subdivision or other tract of land. An association is organized for the purpose of operating and maintaining property commonly owned by the individual owners. The association is normally made up of property owners.
Certificate of Eligibility	The document issued by the Veterans Administration to those that qualify for a VA loan which may be used to buy a house with 0 down. Certificates of eligibility may be obtained by sending the form DD-214 to the local VA office along with VA form 1880.
Certificate of Reasonable Value (CRV)	An appraisal performed by an VA approved appraiser which establishes the property's current market value. This value establishes the ceiling on the maximum VA mortgage loan principal
Certificate of Occupancy Certificate of Occupancy	Document issued by a local governmental agency that states a property meets the local building standards for occupancy and is in compliance with public health and building codes. This document is normally required by a lender prior to closing the loan.
Certificate of Title	An opinion rendered by an attorney as to the status of title to a property, according to the public records. This certificate does not the same level of protection as title insurance.
Chain of Title	The chronological order of conveyance of a parcel of land from the original owner to the present owner. Example : An abstractor can research title to property going back to the date that the property was granted to the United States.
Clear Title	A marketable title, free of clouds and disputed interests. Most lenders require a clear title prior to closing.
Closing	1. The act of transferring ownership of a property from seller to buyer in accordance with a sales contract. 2. The time when a closing takes place.
Closing Costs	Expenses incurred by the buyer and seller in a real estate or mortgage transaction. There are two types of costs : recurring and non recurring. Non-recurring costs are one time transactional costs which include Discount and origination points Lender fees - underwriting, processing, document preparations, flood certificate, tax service, wire transfer, courier, etc. Title insurance fees Escrow, attorney or closing agent fees Recording fees Inspection and appraisal fees Real estate brokerage commissions Recurring fees are costs associated with owning the property and they recur month after month. These costs may include hazard insurance, interest, property taxes, mortgage insurance (PMI), and association fees. A prorated amount of these fees may have to be paid at closing including Prepaid interest - interest charges from the date of closing to the end of the month Property taxes if due Hazard insurance, fire insurance or homeowners insurance has to be paid for one year Mortgage insurance (PMI) - may be required if the loan amount is more than 80% of the value of the property. In the past a whole year of PMI had to be paid up front, however in recent years many PMI companies only require 1-2 months up front. Mortgage insurance premiums are normally paid every month with the loan payment Impound account may need money to be set up for future payments
Condominium	Individual ownership of a dwelling unit and an individual interest in the common areas and facilities which serve the multiunit project.
Construction loan	A short term loan to pay for the construction of buildings or homes. These loans typically provide periodic disbursements to the builder as each stage of the building is completed. When construction is completed a take-out or permanent loan is used to pay off the construction loan.
Contingencies	Conditions which must be satisfied before the buyer can close the purchase of a property. Contingencies are generally outlined in the purchase contract between the buyer and seller. Example : The buyer has 14 days to remove the property contingency under the sales contract. In this case the buyer has 14 days to inspect the property and request the seller to perform repairs. If the buyer is not satisfied with the condition of the property or if the buyer and the seller cannot agree on repairs, the buyer may back out of the contract with no penalty. After 14 days the buyer no longer has the right to back out with no penalty as a result of a problem with the condition of the property.
Contract	An agreement between competent parties to do or not do certain things for consideration. Example : To have a valid contract for the sale of real estate there must be: an offer an acceptance competent parties consideration legal purpose written documentation description of the property signatures by principals or their attorney-in-fact
Contract of Sale	Same as the Agreement of Sale
Contract sale or deed	A real estate installment selling arrangement where the buyer may occupy the property but the seller retains the title until the agreed upon sales price has been paid. Also known as an installment land contract. Example : John sells Mary a house. Mary has to put $10,000 and pay $1,000 per month for 24 months, after which time she will receive title to the property.
Conveyance	The transfer of title of real from one party to another.
Credit Report	A report detailing a borrowers credit history including payment history on revolving accounts (e.g.. credit cards) and installment accounts (e.g. car loan). A credit report also includes information found from public records including tax liens and judgments.
D
Deed	A written document 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 buyer at closing.
Deed of Trust	Used in many states in lieu of a mortgage to secure the payment of a note. In a deed of trust there are three parties - the borrower, the trustee, and the lender, (or beneficiary). In such a transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the debt to the lender or beneficiary. If the borrower pays the debt as agreed, the deed of trust becomes void. If, however, he/she defaults in the payment of the debt, the trustee may sell the property without a court proceeding.
Deed Restriction	A clause in a deed that limits the use of land. Example : A deed might require that a road cannot be built on the land.
Deficiency Judgment	Personal claim against the debtor when the sale of foreclosed property does not yield sufficient proceeds to pay off the mortgages, accrued interest, legal fees, etc.
Depreciation	Decline in the value of a house due to wear and tear, obsolescence, adverse changes in the neighborhood, or any other reason.
Discount Points	Fees paid to a lender to reduce the interest rate.
Dower	The rights of a widow or child to part of a deceased husband's or fathers property.
Down payment	The amount paid for the purchase of a property in addition to the mortgage, but not including any closing costs. Example : John buys a house for $100,000 and obtains a loan for $80,000. His Down payment is $20,000.
Due on Sale Clause	A clause in the Deed of Trust or Mortgage that states that the entire loan is due upon the sale of the property.
Dragnet Clause	A provision in a mortgage that pledges several properties as collateral. A default in the mortgage could lead to foreclosure proceedings on any of the properties in the dragnet.
E
Earnest Money	A deposit made by a buyer of real estate towards the down payment to evidence good faith. This money is typically held by the real estate brokers or the escrow company.
Easement	The right to use the land of another for a specific purpose. Easements may be temporary or permanent. Example : The utility company may need an easement to run electric lines.
Eminent Domain	The right of the government or a public utility to acquire property for necessary public use by condemnation, with proper compensation to the owner.
Encroachment	A building, a part of a building, or an obstruction (e.g. a fence or a wall) that physically intrudes upon or overlaps into the property of another.
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	Equity = Property Value - Loans/Liens Against the property. Equity is typically expressed as a percentage of the property value.
Equity Sharing	Joint ownership of a property between the owner/occupant and the owner/investor, that results in tax advantages for both parties. Upon sale of the property the joint owners split profits based on the percentage they own.
Escrow	1. Neutral third party that handles all funds in a real estate transaction. The buyer puts his deposit into escrow, the lender funds the loan into escrow. Escrow pays the real estate brokers commission, pays off any loans/liens against the property, pays real estate taxes and any other fees associated with the transaction and sends the balance of the money to the seller. 2. Escrow payment - see impound account.
Escheat	The reversion of property to the state in the event that the owner dies without leaving a will and has no legal heirs.
Executor (Executrix - feminine for Executor)	A person named in a will to carry out its provisions for the disposition of the estate.
F
Fee Simple (Fee Absolute or Fee Simple Absolute)	Absolute ownership of real property; owner is entitled to the entire property with unconditional power of disposition during the owners life and upon his death the property descends to the owner's designated heirs.
Fiduciary	A person in a position of trust or responsibility with specific duties to act in the best interest of a client. A real estate broker is a fiduciary for his/her clients.
Finance Charge	Interest charged by a lender.
First Mortgage	A mortgage that has priority as a lien over all other mortgages. In the case of a foreclosure the first mortgage will be satisfied before other mortgages. See also second mortgage.
Fixture	Improvements or personal property attached to the land so as to become a part of the real estate. Fixtures are transferred to the buyer upon sale of the property. To determine whether an item is a fixture include: Intent (was it intended to be part of the property) How is it fixed ? Is the fixture essential to the property ? Relationship - was the fixture intended to be a part of the tenant's business ? Example : John sells his house to Mary. John wants to take the chandelier because he states it is personal property. Mary wants the chandelier to stay because she believes it is a fixture.
Flood Insurance	An insurance policy that covers property damage due to natural flooding. Flood insurance may be required on properties in a flood zone.
Free and clear	A property that has no liens.
FSBO	For sale by owner. A property for sale that is not listed with a real estate broker.
Fully indexed rate	The fully indexed rate = value of the index + margin. See adjustable loans.
G
General Warranty Deed	A deed in which the grantor (seller) agrees to the protect the grantee (buyer) against any other claim to title of the property. See also warranty deed.
Grantee	That party in the deed who is the buyer or recipient.
Grantor	That party who is the seller or the giver.
H
Hazard Insurance (Fire Insurance, Homeowners insurance)	Insurance on a property against fire and other risks. A homeowners policy may have additional coverage for theft, liability, etc. that a fire insurance policy may not cover.
Homeowners Association	An association of homeowners in a particular subdivision, planned unit development (PUD), or condominium organized to manage the common area of the development and to enforce the association rules and regulations.
Homestead	Status provided to a homeowner's principal residence in some states that protects the home against judgments up to specified amounts.
Homestead Exemption	Available in some states - this causes the assessed value of a principal residence to be reduced by the amount of the exemption for the purposes of calculating property tax. Example : John's principal residence is assessed at $100,000 and the homestead exemption is $7,000. His property taxes will be based on $93,000.
Home Warranty Plan	Insurance that covers appliances, heating systems, etc. Typically purchased at the time of closing.
HUD 1	A closing document required by HUD that outlines the settlement cost of a loan. The closing agent prepares this document and sends it to the buyer upon closing.
Hypothecate	To pledge a property as security without having to give up possession of it.
I
Impound Account	That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
Income Property	Real estate that generates rental income. Examples : apartment buildings, office buildings and shopping centers.
Index	A statistic that indicates some current economic of financial condition. Indexes are used to make adjustments in variable rate loans.
Installment Sale	See land contract.
J
Joint Tenancy	Ownership of a property by 2 or more people, each of whom has an undivided interest with the right of survivorship. Example : John and Mary own a house in joint tenancy. Each owns half of the entire (undivided) property. If John dies, Mary will own the entire property and vice versa.
Judgment	The decision of a court of law stating that one individual is indebted to another and fixing the amount of indebtedness. Judgments, when recorded, become a lien on real property owned by the defendant.
Judgment Lien	The claim on the property of a debtor resulting from a judgment.
Jumbo Loan	Loan size that is larger than the limit established by Fannie Mae or Freddie Mac.
Junior Mortgage	A mortgage subordinate to another mortgage. In the case of a foreclosure a senior mortgage will be paid prior to a junior mortgage.
K
Kicker	A payment required by a mortgage in addition to normal principal and interest. Sometimes known as a participation loan.
L
Land Contract	A real estate installment selling arrangement whereby the buyer may use and occupy land, but no deed is given by seller until the sales price has been paid
Lease with Option to Purchase	A lease under which the lessee has the right to purchase the property. The option may run for a portion or for the full length of the lease
Leasehold Estate	Tenant's right of possession for a specific period of time under a lease agreement.
Legal Description	Legally acceptable identification of real estate by one of the following: the government rectangular survey metes and bounds recorded plat (lot and block number)
Lessee	A person to whom property is rented under a lease. (Tenant)