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Mortgage Glossary
A-C,
D-F,
G-J,
L-M,
O-Q,
S-V
- A Thru C
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- acceleration clause
A clause in your mortgage which allows the lender to demand payment of the
outstanding loan balance for various reasons. The most common reasons for
accelerating a loan are if the borrower defaults on the loan or transfers
title to another individual without informing the lender.
adjustable-rate
mortgage (ARM)
A mortgage in which the interest changes periodically, according to
corresponding fluctuations in an index. All ARMs are tied to indexes.
adjustment date
The date the interest rate changes on an adjustable-rate mortgage
amortization
The loan payment consists of a portion which will be applied to pay the accruing
interest on a loan, with the remainder being applied to the principal. Over
time, the interest portion decreases as the loan balance decreases, and the
amount applied to principal increases so that the loan is paid off (amortized)
in the specified time.
amortization schedule
A table which shows how much of each payment will be applied toward principal
and how much toward interest over the life of the loan. It also shows the
gradual decrease of the loan balance until it reaches zero.
annual percentage rate
(APR)
This is not the note rate on your loan. It is a value created according to a
government formula intended to reflect the true annual cost of borrowing,
expressed as a percentage. It works sort of like this, but not exactly, so only
use this as a guideline: deduct the closing costs from your loan amount, then
using your actual loan payment, calculate what the interest rate would be on
this amount instead of your actual loan amount. You will come up with a number
close to the APR. Because you are using the same payment on a smaller amount,
the APR is always higher than the actual not rate on your loan.
application
The form used to apply for a mortgage loan, containing information about a
borrower’s income, savings, assets, debts, and more.
appraisal
A written justification of the price paid for a property, primarily based on an
analysis of comparable sales of similar homes nearby.
appraised value
An opinion of a property's fair market value, based on an appraiser's knowledge,
experience, and analysis of the property. Since an appraisal is based primarily
on comparable sales, and the most recent sale is the one on the property in
question, the appraisal usually comes out at the purchase price.
appraiser
An individual qualified by education, training, and experience to estimate the
value of real property and personal property. Although some appraisers work
directly for mortgage lenders, most are independent.
appreciation
The increase in the value of a property due to changes in market conditions,
inflation, or other causes.
assessed value
The valuation placed on property by a public tax assessor for purposes of
taxation.
assessment
The placing of a value on property for the purpose of taxation.
assessor
A public official who establishes the value of a property for taxation purposes.
asset
Items of value owned by an individual. Assets that can be quickly converted into
cash are considered "liquid assets." These include bank accounts,
stocks, bonds, mutual funds, and so on. Other assets include real estate,
personal property, and debts owed to an individual by others.
assignment
When ownership of your mortgage is transferred from one company or individual to
another, it is called an assignment.
assumable mortgage
A mortgage that can be assumed by the buyer when a home is sold. Usually, the
borrower must "qualify" in order to assume the loan.
assumption
The term applied when a buyer assumes the seller’s mortgage.
balloon mortgage
A mortgage loan that requires the remaining principal balance be paid at a
specific point in time. For example, a loan may be amortized as if it would be
paid over a thirty year period, but requires that at the end of the tenth year
the entire remaining balance must be paid.
balloon payment
The final lump sum payment that is due at the termination of a balloon mortgage.
bankruptcy
By filing in federal bankruptcy court, an individual or individuals can
restructure or relieve themselves of debts and liabilities. Bankruptcies are of
various types, but the most common for an individual seem to be a "Chapter
7 No Asset" bankruptcy which relieves the borrower of most types of debts.
A borrower cannot usually qualify for an "A" paper loan for a period
of two years after the bankruptcy has been discharged and requires the
re-establishment of an ability to repay debt.
bill of sale
A written document that transfers title to personal property. For example, when
selling an automobile to acquire funds which will be used as a source of down
payment or for closing costs, the lender will usually require the bill of sale
(in addition to other items) to help document this source of funds.
biweekly mortgage
A mortgage in which you make payments every two weeks instead of once a month.
The basic result is that instead of making twelve monthly payments during the
year, you make thirteen. The extra payment reduces the principal, substantially
reducing the time it takes to pay off a thirty year mortgage. Note:
there are independent companies that encourage you to set up bi-weekly payment
schedules with them on your thirty year mortgage. They charge a set-up fee and a
transfer fee for every payment. Your funds are deposited into a trust account
from which your monthly payment is then made, and the excess funds then remain
in the trust account until enough has accrued to make the additional payment
which will then be paid to reduce your principle. You could save money by doing
the same thing yourself, plus you have to have faith that once you transfer
money to them that they will actually transfer your funds to your lender.
bond market
Usually refers to the daily buying and selling of thirty year treasury bonds.
Lenders follow this market intensely because as the yields of bonds go up and
down, fixed rate mortgages do approximately the same thing. The same factors
that affect the Treasury Bond market also affect mortgage rates at the same
time. That is why rates change daily, and in a volatile market can and do change
during the day as well.
bridge loan
Not used much anymore, bridge loans are obtained by those who have not yet sold
their previous property, but must close on a purchase property. The bridge loan
becomes the source of their funds for the down payment. One reason for their
fall from favor is that there are more and more second mortgage lenders now that
will lend at a high loan to value. In addition, sellers often prefer to accept
offers from buyers who have already sold their property.
broker
Broker has several meanings in different situations. Most Realtors are
"agents" who work under a "broker." Some agents are brokers
as well, either working form themselves or under another broker. In the mortgage
industry, broker usually refers to a company or individual that does not lend
the money for the loans themselves, but broker loans to larger lenders or
investors. (See the Home Loan Library that discusses the different types of
lenders). As a normal definition, a broker is anyone who acts as an agent,
bringing two parties together for any type of transaction and earns a fee for
doing so.
buydown
Usually refers to a fixed rate mortgage where the interest rate is "bought
down" for a temporary period, usually one to three years. After that time
and for the remainder of the term, the borrower’s payment is calculated at the
note rate. In order to buy down the initial rate for the temporary payment, a
lump sum is paid and held in an account used to supplement the borrower’s
monthly payment. These funds usually come from the seller (or some other source)
as a financial incentive to induce someone to buy their property. A "lender
funded buydown" is when the lender pays the initial lump sum. They can
accomplish this because the note rate on the loan (after the buydown
adjustments) will be higher than the current market rate. One reason for doing
this is because the borrower may get to "qualify" at the start rate
and can qualify for a higher loan amount. Another reason is that a borrower may
expect his earnings to go up substantially in the near future, but wants a lower
payment right now.
call option
Similar to the acceleration clause.
cap
Adjustable Rate Mortgages have fluctuating interest rates, but those
fluctuations are usually limited to a certain amount. Those limitations may
apply to how much the loan may adjust over a six month period, an annual period,
and over the life of the loan, and are referred to as "caps." Some
ARMs, although they may have a life cap, allow the interest rate to fluctuate
freely, but require a certain minimum payment which can change once a year.
There is a limit on how much that payment can change each year, and that limit
is also referred to as a cap.
cash-out refinance
When a borrower refinances his mortgage at a higher amount than the current loan
balance with the intention of pulling out money for personal use, it is referred
to as a "cash out refinance."
certificate of
deposit
A time deposit held in a bank which pays a certain amount of interest to the
depositor.
certificate of
deposit index
One of the indexes used for determining interest rate changes on some adjustable
rate mortgages. It is an average of what banks are paying on certificates of
deposit.
Certificate of
Eligibility
A document issued by the Veterans Administration that certifies a veteran’s
eligibility for a VA loan.
Certificate
of Reasonable Value (CRV)
Once the appraisal has been performed on a property being bought with a VA loan,
the Veterans Administration issues a CRV.
chain of title
An analysis of the transfers of title to a piece of property over the years.
clear title
A title that is free of liens or legal questions as to ownership of the
property.
closing
This has different meanings in different states. In some states a real estate
transaction is not consider "closed" until the documents record at the
local recorders office. In others, the "closing" is a meeting where
all of the documents are signed and money changes hands.
closing costs
Closing costs are separated into what are called "non-recurring closing
costs" and "pre-paid items." Non-recurring closing costs are any
items which are paid just once as a result of buying the property or obtaining a
loan. "Pre-paids" are items which recur over time, such as property
taxes and homeowners insurance. A lender makes an attempt to estimate the amount
of non-recurring closing costs and prepaid items on the Good Faith Estimate
which they must issue to the borrower within three days of receiving a home loan
application.
closing statement
See Settlement Statement.
cloud on title
Any conditions revealed by a title search that adversely affect the title to
real estate. Usually clouds on title cannot be removed except by deed, release,
or court action.
co-borrower
IAn additional individual who is both obligated on the loan and is on title to
the property.
collateral
In a home loan, the property is the collateral. The borrower risks losing the
property if the loan is not repaid according to the terms of the mortgage or
deed of trust.
collection
When a borrower falls behind, the lender contacts them in an effort to bring the
loan current. The loan goes to "collection." As part of the collection
effort, the lender must mail and record certain documents in case they are
eventually required to foreclose on the property.
commission
Most salespeople earn commissions for the work that they do and there are many
sales professionals involved in each transaction, including Realtors, loan
officers, title representatives, attorneys, escrow representative, and
representatives for pest companies, home warranty companies, home inspection
companies, insurance agents, and more. The commissions are paid out of the
charges paid by the seller or buyer in the purchase transaction. Realtors
generally earn the largest commissions, followed by lenders, then the others.
common area assessments
In some areas they are called Homeowners Association Fees. They are charges paid
to the Homeowners Association by the owners of the individual units in a
condominium or planned unit development (PUD) and are generally used to maintain
the property and common areas.
common areas
Those portions of a building, land, and amenities owned (or managed) by a
planned unit development (PUD) or condominium project's homeowners' association
(or a cooperative project's cooperative corporation) that are used by all of the
unit owners, who share in the common expenses of their operation and
maintenance. Common areas include swimming pools, tennis courts, and other
recreational facilities, as well as common corridors of buildings, parking
areas, means of ingress and egress, etc.
common law
An unwritten body of law based on general custom in England and used to an
extent in some states.
community property
In some states, especially the southwest, property acquired by a married couple
during their marriage is considered to be owned jointly, except under special
circumstances. This is an outgrowth of the Spanish and Mexican heritage of the
area.
comparable sales
Recent sales of similar properties in nearby areas and used to help determine
the market value of a property. Also referred to as "comps."
condominium
A type of ownership in real property where all of the owners own the property,
common areas and buildings together, with the exception of the interior of the
unit to which they have title. Often mistakenly referred to as a type of
construction or development, it actually refers to the type of ownership.
condominium conversion
Changing the ownership of an existing building (usually a rental project) to the
condominium form of ownership.
condominium hotel
A condominium project that has rental or registration desks, short-term
occupancy, food and telephone services, and daily cleaning services and that is
operated as a commercial hotel even though the units are individually owned.
These are often found in resort areas like Hawaii.
construction loan
A short-term, interim loan for financing the cost of construction. The lender
makes payments to the builder at periodic intervals as the work progresses.
contingency
A condition that must be met before a contract is legally binding. For example,
home purchasers often include a contingency that specifies that the contract is
not binding until the purchaser obtains a satisfactory home inspection report
from a qualified home inspector.
contract
An oral or written agreement to do or not to do a certain thing.
conventional mortgage
Refers to home loans other than government loans (VA and FHA).
convertible ARM
IAn adjustable-rate mortgage that allows the borrower to change the ARM to a
fixed-rate mortgage within a specific time.
cooperative (co-op)
A type of multiple ownership in which the residents of a multiunit housing
complex own shares in the cooperative corporation that owns the property, giving
each resident the right to occupy a specific apartment or unit.
cost of funds index (COFI)
One of the indexes that is used to determine interest rate changes for certain
adjustable-rate mortgages. It represents the weighted-average cost of savings,
borrowings, and advances of the financial institutions such as banks and savings
& loans, in the 11th District of the Federal Home Loan Bank.
credit
An agreement in which a borrower receives something of value in exchange for a
promise to repay the lender at a later date.
credit history
A record of an individual's repayment of debt. Credit histories are reviewed my
mortgage lenders as one of the underwriting criteria in determining credit risk.
creditor
A person to whom money is owed.
credit report
A report of an individual's credit history prepared by a credit bureau and used
by a lender in determining a loan applicant's creditworthiness.
credit repository
An organization that gathers, records, updates, and stores financial and public
records information about the payment records of individuals who are being
considered for credit.
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