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IMPORTANT NOTICE REGARDING THESE MORTGAGE TERMS AND MORTGAGE DEFINITIONS
The mortgage terms and mortgage definitions that follow are meant to give simple, informal meanings for mortgage words and mortgage phrases you may see on this mortgage Web site that may be unfamiliar to you. The specific meaning of a mortgage term or mortgage phrase will depend on where and how it is used. The mortgage terms and mortgage definitions that follow have no binding effect for purposes of any contracts or other transactions. We offer mortgage terms and mortgage definitions here in the hope they will provide helpful basic information.
Abstract (of Title)
A full summary of all consecutive grants, conveyances, wills, records and judicial proceedings affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. The abstract of title does not guarantee or ensure the validity of the title of the property. Rather, it is a condensed history that merely discloses those items about the property that are of public record; thus, it does not reveal such things as encroachments and forgeries.
Acceleration Clause
A common provision of a mortgage which allows the holder to demand the entire outstanding mortgage balance due and payable in the event of a breach of the mortgage contract.
Adjustable Rate Mortgage (ARM)
A mortgage loan in which the interest rate is subject to periodic adjustment up or down according to the movement of a pre-arranged index.
Affidavits
As part of the closing process, you're likely to sign numerous affidavits. You may be required, for example, to sign an affidavit of occupancy. It states that you will use the property as a principal residence. Or, you and the seller may have to sign an affidavit stating all of the improvements to the property required in the sales contract were completed before closing.
Affordability Analysis
A detailed analysis of your ability to afford the purchase of a home. An affordability analysis takes into consideration your income, liabilities, and available funds, along with the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that you might expect to pay.
Agreement of Sale
Known by various names, such as contract of purchase, purchase agreement, or sales agreement according to location or jurisdiction. A contract in which a seller agrees to sell and a buyer agrees to buy, under certain specific terms and conditions spelled out in writing and signed by both parties
Amortization
A payment plan which enables the borrower to reduce his debt gradually through monthly payments of principal.
Annual Percentage Rate (APR)
The annual cost to a borrower of consumer credit that has been calculated according to certain consumer laws.
Appraised Value
An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.
Appraiser
A person qualified by education, training, and experience to estimate the value of real property and personal property.
Appreciation
An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.
Assessed Value
The valuation placed on property by a public tax assessor for purposes of taxation.
Assumable Loan (Mortgage)
A mortgage loan that, by its terms, permits its obligations to be taken over (assumed) by a new owner of the real property who is not the original borrower.
Assumption of Mortgage
An agreement by someone other than the original borrower to assume the obligations of a mortgage loan.
Automated Underwriting
After you complete your loan application with a lender, it is sent to "underwriting" for review. In short, underwriting is the process used to analyze how you have managed credit obligations in the past, whether you have the ability to repay the mortgage loan you are applying for (i.e., your income and assets), and whether the price you are willing to pay for the home is supported by the price of the property.
Beneficiary
A person for whose use and benefit property is held by another, such as by a trustee or an executor.
Bi-weekly Mortgage
A mortgage that features a bi-weekly payment that is approximately equal to about one-half of a regular monthly payment. The payments are then made 26 times a year, as opposed to 12 monthly full payments.
Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same mortgage.
Borrower
A person who receives a loan and is responsible to make mortgage payments.
Bridge Loan
A loan that "bridges" the gap between the purchase of a new home and the sale of the borrower's current home. The borrower's current home is used as collateral and the money is used to close on the new home before the current home is sold. Some are structured so they completely pay off the old home's first mortgage at the bridge loan's closing, while others pile the new debt on top of the old. They usually run for a term of six months.
Buy Down
With a buy down, the seller pays an amount to the lender so that the lender can give you a lower rate and lower payments, usually for an early period in an ARM. The seller may increase the sales price to cover the cost of the buy down. Buy downs can occur in all types of mortgages, not just ARMs.
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.
Buyers Market
Market conditions that favor buyers i.e. there are more sellers than buyers in the market. As a result buyers have ample choice of properties and may negotiate lower prices. Buyers markets may be caused by an economic slump or overbuilding.
Bylaws
Bylaws are the rules and regulations adopted by a corporation for its internal governance. It usually contains provisions relating to shareholders, directors, officers and general corporate business. At the corporation's initial meeting the bylaws are adopted. Bylaws are a private document not filed with any state authority. Bylaws are more flexible than the articles of incorporation because they are easier to amend.
Capital Gains
The difference between an asset's purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income.
Cash Flow
The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.).
Cash Out
The cash that a borrower can receive upon refinancing all existing loans against a property with a new loan or loans that is greater than the amount needed to pay off the existing loans.
Covenants, Conditions, and Restrictions - CC&Rs.
Usually called Restrictive Covenants because they restrict the use of real property. Often required as part of the subdivision process by the approving authority, these are charges registered against the title, and binding upon all subsequent owners. These covenants govern how a property may be used.
Certificates of Deposit Index (CODI)
The average of the 12 most recent monthly yields on 3-month certificates of deposit (CDs). The 3-month CD yields we use are published under "CDs (secondary market)" in the Federal Reserve's H.15 Statistical Release
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
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
A certificate issued by a title company or a written opinion rendered by an attorney that the seller has good marketable and insurable title to the property, which he is offering for sale. A certificate of title offers no protection against any hidden defects in the title, that an examination of the records could not reveal. The issuer of a certificate of title is liable only for damages due to negligence. The protection offered a homeowner under a certificate of title is not as great as that offered in a title insurance policy.
Clear Title
A title that is free of liens and legal questions as to ownership of the property.
Closing
Changing ownership of land from the current owner to the buyer.
Closing Costs
The expenses involved in completing a real estate loan transaction. Among them can be survey charges, title searches, insurance premiums and filing fees.
Cloud on Title
Questionable claims that could jeopardize the owner's title.
Co-Borrower
An additional borrower whose income and credit contribute to the primary borrower's ability to qualify for a loan and whose name appears on the loan documents. There may be more than one co-borrower, and all co-borrowers have legal obligations equal to the primary borrower.
Commitment
A lender agreeing or committed to specific terms, on a written document, to a contractor or borrower.
Compounding Interest
The process of reinvesting interest to earn additional interest. The more frequent the compounding, the more you earn.
Condemnation
The determination that a building is not fit for use or is dangerous and must be destroyed; the taking of private property for a public purpose through an exercise of the right of eminent domain.
Conditional Commitment
A lender making a commitment to a loan however, certain conditions must be meet before the closing date of the property.
Condominium
Single ownership of a property unit with a shared interest in commonly owned areas and facilities which appeal to everyone in the condo community.
Construction loan
A short-term loan financing improvements to real estate, such as the building of a new home. The lender advances funds to the borrower as needed while construction progresses. Upon completion of the construction, the borrower must obtain permanent financing or pay the construction loan in full.
Consumer Price Index (CPI)
An economic gauge that tracks changes in consumer prices for a fixed number of goods and services, including housing costs, food, transportation and electricity. The CPI is generally used to measure inflation at the retail level.
Consideration
Anything that would entice a seller into a contract (example: money deposits).
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
A binding agreement between two or more persons that is enforceable by law
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.
Conventional Mortgage
A mortgage that is not obtained under a federal government insured program, such as the Federal Housing Authority, (FHA) or the Veterans Administration (VA), but which meets other standard requirements.
Conveyance
The change of a real estate title from one party to another.
Co-op - cooperative
An apartment building or a group of dwellings owned by a corporation, the stockholders of which are the residents of the dwellings. It is operated for their benefit by their elected board of directors. In a cooperative, the corporation or association owns title to the real estate. A resident purchases stock in the corporation which entitles him to occupy a unit in the building or property owned by the cooperative. While the resident does not own his unit, he has an absolute right to occupy his unit for as long as he owns the stock.
Convertible ARMs
Certain loans are able to be converted to a fixed loan provided it follows a set formula.
Cost of Funds Index (COFI)
Monthly weighted average cost of funds for savings institutions that are members of the Federal Home Loan Bank System Eleventh District (San Francisco). COFI consists of the monthly weighted average cost to Bank members of savings, borrowings and advances.
Cost of Savings Index (COSI)
Banks receive money from consumers in the form of deposits and lends money as home or other loans. The interest rates in effect on these deposits are the basis for the COSI index. It is not based on actual interest paid, but rather the weighted annualized average of all interest rates in effect on the Banks deposit accounts on the last day of each month.
Credit Report
A detailed report showing someone's credit history such as credit cards (revolving accounts) and car loans (installment accounts). Some reports will also show detailed descriptions from tax liens and judgments.
Deed
A legal document that transfers some interest in real estate or other property.
Deed Restriction
A covenant contained in a deed imposing limits on the use or occupancy of the real estate or the type, size, purpose or location of improvements to be constructed on it.
Defective Title
The inability to give a clear title.
Deed of Trust
A legal document, used in some states in place of a mortgage, to secure a lien on a property.
Deferred Interest
Interest is deferred on an ARM when a minimum monthly payment is not large enough to pay all the interest that has accrued on the loan for that period. The unpaid interest is added to the outstanding principal balance to be repaid over the remaining life of the loan. To avoid deferred interest, a borrower sometimes has the option of making a larger payment that includes what would otherwise become deferred interest.
Deficiency Judgment
The judgment against a person when they default on a mortgage and the sale of the property does not fully satisfy the obligation. The amount of the judgment is usually the unsatisfied portion of the loan.
Depreciation
A decline in the value of property; the opposite of appreciation.
Discount Points
Discount points are paid to obtain a lower interest rate on your mortgage. The more points you pay, the lower the rate you may obtain. The longer you own your property and continue to pay on the loan, the more likely it will be that paying points will be advantageous for you. If you intend to hold the mortgage for only a short period of time, the cost you pay upfront may exceed the benefit you will receive from obtaining this lower rate. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000. mortgage would equal to $2,000.
Documentary Tax Stamps
Stamps, affixed to a deed, showing the amount of transfer tax.
Down payment
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage. Down payments are usually 5% to 20% of the sales price on conventional loans.
Earnest Money
The deposit money given to the seller or his agent by the potential buyer upon the signing of the agreement of sale to show that he is serious about buying the house. If the sale goes through, the earnest money is applied against the down-payment. If the sale does not go through, the earnest money will be forfeited or lost unless the binder or offer to purchase expressly provides that it is refundable.
Easement
Using land for a specific purpose, the easement can either be temporary or permanent.
Eminent Domain
The right of a government to take private property for public use upon payment of its fair market value. Eminent domain is the basis for condemnation proceedings.
Encroachment
Anything that physically lays or touches on the property of another.
Encumbrance
Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions.
Equity
In terms of real property, equity is the difference between the outstanding balance on all the loans secured by the property and the property's fair market value.
Escrow
A third party agent that receives, holds, and/or disburses certain funds or documents upon the performance of certain conditions. For example, an earnest money deposit is put into escrow until the transaction is closed. Only then can the seller receive the deposit.
Escrow Account (Impound Account)
In connection with loans secured by real estate, an escrow account is an account that a borrower pays into at the same time the borrower pays his or her loan payment, and from which the lender makes tax and insurance payments applicable to the borrower.
Federal National Mortgage Association (FNMA, Fannie Mae)
A privately owned for-profit corporation that purchases home mortgage loans from lenders, and uses the loans to create mortgage-backed securities for sale to investors. In order to be sold to FNMA, loans must meet FNMA standards to qualify for Fannie Mae Interest rates.
Federal Home Loan Bank Board (FHLBB)
The agency of the federal government that supervises all federal savings and loan associations and federally insured state-chartered savings and loan associations. The FHLBB also operates the Federal Savings and Loan Insurance Corporation, which insures accounts at federal savings and loan associations and those state-chartered associations that apply and are accepted. In addition, the FHLBB directs the Federal Home Loan Bank System, which provides a flexible credit facility for member savings institutions to promote the availability of home financing. The FHL Banks also own the Federal Home Loan Mortgage Corporation, established in 1970 to promote secondary markets for mortgages.
Farmer's Home Administration (FMHA)
Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac)
A privately owned for-profit corporation that purchases home mortgage loans from lenders, and uses the loans to create mortgage-backed securities for sale to investors.
Federal Housing Administration (FHA)
Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
Federal Reserve Board
A seven-member governing body of the Federal Reserve System appointed by the President for 14-year terms. The Board plays an important role in determining the country's monetary policy, which, in turn, can influence economic activity.
Fee Simple
The owner that has absolute ownership of the property in the case of this person's death the property is given to their heirs.
FHA Mortgage
A mortgage insured by the Federal Housing Administration (FHA).
FICO
Fair, Isaac and Company. A company specializing in calculating credit scores.
Fiduciary
A person legally appointed and authorized to hold assets in trust for another person and manage those assets for the benefit of that person.
Finance Charge
Interest charged by a lender.
First Deed of Trust (or First Mortgage)
In order to protect the rights of the lender and the borrower, liens on real estate are usually recorded in the county where the property is located. A deed of trust or mortgage typically becomes a lien against the property when it is recorded, and this record typically establishes the priority of liens if the property is sold for any reason. The loan with first rights is the First Deed of Trust or First Mortgage.
Fixed Rate Mortgage
A mortgage loan in which the interest rate does not change.
Floating Rate of Interest
An interest rate that varies throughout the term of the loan instead of being fixed. The degree to which the interest rate may vary is governed by changes in a selected index and by interest rate caps (see Cap). For example, if your initial interest rate is 14% and after the first year the index has increased by one percentage point, then your interest rate generally would be raised to 15% if interest rate caps were not reached. Used in ARM’s (see
Adjustable Rate Mortgage)
Flood Insurance
Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.
Foreclosure
The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
Free and clear
Unencumbered. In property law, a title is free and clear if it is not encumbered by any liens or restrictions.
FSBO
For sale by owner. A property for sale that is not listed with a real estate broker.
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