GLOSSARY OF MORTGAGE TERMS

A

Acceleration

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.

Acceleration Clause

A clause in contracts of debt which makes the entire amount due upon the debtor's default.

Accrued Interest

Interest earned but not yet paid.

Adjustable Rate

An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly. See Adjustable Rate Mortgages.

Adjustable Rate Mortgage (ARM)

Is a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as the re-negotiable rate mortgage, or the variable rate mortgage.

Adjustment Interval

On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index.

Agent

A person authorized by another, i.e., the principal, to act for him.

Alternative Documentation

A method of documenting a loan file, often referred to as Alt Doc, that relies on information that the borrrower is likely to be able to provide, rather than waiting on verification sent to third party for confirmation of statements made in the mortgage loan application.

Amortization

A repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

Amortize

To repay a debt through a series of periodic payments.

Annual Membership

An amount that may be charged annually for having a line of credit available. Often charged regardless of whether or not you use the line. Also referred to as a "participation fee."

Annual Percentage Rate (APR)

The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the federal Truth in Lending Act, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Does not include title insurance, appraisal, and credit report.

Application

An initial statement of personal and financial information which is required to approve your loan.

Appraisal Fee

A fee charged by an appraiser to render an opinion of market value as of a specific date. Required by most lenders to obtain a loan.

Appraisal Report

A written report by an appraiser containing an opinion as to the value of a property and the reasoning leading to that opinion.

Appreciation

An increase in the value of property.

Assessment

A local tax levied against a property for a specific purpose, such as a sewer or street lights.

Assignment

The transfer of property rights by one person, known as the assignor, to another, known as the assignee.

Assumability

A feature of a loan which permits you to transfer your mortgage and its specified terms to the person(s) purchasing your home. Having an assumable loan could make it easier to sell your home, since assumption of a loan usually involves lower fees and/or qualifying standards for the new borrower than a new loan.

Assumption

The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will apply.

Attorney-In-Fact

A person who is authorized by power of attorney to act for another.

Audited Financial Statement

A report on the financial position or operations of a company that has been reviewed by an independent auditor.

B

Balance Sheet

The balance sheet shows the financial condition of a company at a specific point in time. The balance sheet is broken down into the major sections: Assets, liabilities and net worth.

Balloon Payment

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.

Bankruptcy

State of insolvency of an individual or organization in other words, an inability to pay debts. There are two kinds of legal bankruptcy under U.S. law: involuntary, when one or more creditors petition to have a debtor judged insolvent by a court; and voluntary, when a debtor brings the petition. In both cases, the objective is an orderly and equitable settlement of obligations.

Bankruptcy Trustee

The person appointed by a bankruptcy court to oversee either the running of a business in a reorganization proceeding or the sale of assets and distribution of proceeds in a business liquidation.

Bearer

The person in possession of an instrument, document of title or security payable to bearer or endorsed in blank.

Bequest

A gift of personal property by will.

Bill of Sale

A written instrument by which one transfers his rights or interest in chattels and goods to another.

Blank Endorsement

Endorsement which consists only of the signature of the endorser and does not state in whose favor it is made.

Blanket Mortgage

A mortgage covering at least two pieces of real estate as security for the same mortgage.

Bona Fide

In good faith.

Bona Fide Purchaser

One who buys property without knowledge or notice of any defects in the title of the seller.

Borrower (Mortgagor)

One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Broker

An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

Buy-down

When the lender and/or the home builder subsidized the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

C

Cap

The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage.

Caps (interest)

Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan.

Caps (payment)

Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.

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

Receiving money back when refinancing your present mortgage.

Cashier's Check

A check whose payment is guaranteed because it is drawn on the bank's account rather than the customer's account. The customer pays in advance or has the funds withdrawn in advance from his or her account. Cashier's checks are also called bank checks.

Ceiling

The maximum allowable interest rate over the life of the loan of an adjustable rate mortgage.

Certificate of Occupancy

A document from an official agency stating that the property meets the requirements of local codes, ordinances, and regulations.

Certificate of Reasonable Value (CRV)

An appraisal issued by the Veterans Administration showing the property's current market value.

Certified Check

A check drawn on the issuer's account but for funds that have been segregated by the bank, guaranteeing payment.

Chattel

Any type of personal property as distinguished from real property.

Closing

The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement costs, closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually is about three to six percent of the mortgage amount.

Closing Costs

Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney's fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.

Collateral

Assets that back a mortgage loan or security.

Collateral Security

A separate obligation which is given to secure the performance of the primary obligation in a contract.

Commitment

A promise by a lender to make a loan on specific terms or conditions to a borrower or builder. A promise by an investor to purchase mortgages from a lender with specific terms or conditions. An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

Commitment Letter

A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer.

Community Property

Property acquired by husband and wife during a marriage when not acquired as separate property by either spouse. Each spouse has equal rights, including the rights of survivorship.

Conditional Sale

An installment sale in which the goods are delivered to the buyer, but title remains with the seller until payment is made for the goods.

Conditions, Covenants, and Restrictions (CC and R)

The standards that define how a property may be used and the protections the developer makes for the benefit of all owners in a subdivision.

Condominium

A form of property ownership in which the homeowner holds title to an individual dwelling unit plus an interest in common areas of a multi-unit project.

Conforming Loan

Generally, a mortgage with a loan amount under the maximum limits set by FNMA and FHLMC. Qualifying ratios and underwriting methods are standardized to a large degree.

Consideration

The required element in all contracts by which a legal right or promise is exchanged for the act or promise of another party. The inducement to a contract.

Constant Maturity Treasury (CMT)

An index published by the Federal Reserve Board, calculated from the average yield of a range of Treasury securities, adjusted to constant maturities of various time periods (for example, six months, one year, ten years, etc.).

Constant Prepayment Rate

The pre-payment measure calculated by assuming that a constant portion of the outstanding mortgage loans will pre-pay each month (also see PSA) ..

Construction loan

A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he progresses.

Contingency

A condition that must be met before a contract is legally binding.

Conventional Loan

A mortgage not insured by FHA or guaranteed by the VA.

Conventional/fixed rate mortgage

Payments and interest rates are fixed for 15, 20, 25, or 30 year loans with up to 95% financing, 5% down payment and quicker loan approval than with FHA or VA. These are usually not assumable.

Conveyance

The transfer of an interest in realty: a deed. Sometimes includes leases and mortgages.

Cost of Funds Index (COFI)

An index of the weighted-average interest rate paid by savings institutions for sources of funds, usually by members of the 11th Federal Home Loan Bank District.

Covenant

A promise made by one person to another.

Credit Limit

The maximum amount that you can borrow under a home equity plan.

Credit Report

A report documenting the credit history and current status of a borrower's credit standing.

Credit Risk

The possibility that there may be a default by the issuer or other party in its financial obligations to the investor.

Current Face Value

The current amount of principal outstanding on a security, which is calculated by multiplying the original face value by the most recent factor.

D

Debt Service

The total amount of credit card, auto, mortgage or other debt upon which you must pay.

Debt-to-Income Ratio

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. See housing expenses-to-income ratio.

Deed

The legal document conveying title to a property.

Deed of Trust

Used in many western states, the agreement used to pledge your home or other real estate as security for a loan. Similar to a mortgage.

Default

Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

Deferred Interest

When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization.

Delinquency

Failure to make payments on time. this can lead to foreclosure.

Delivery

With respect to instruments, documents of title, chattel paper or certificate securities, means the voluntary transfer of possession.

Deposit

Cash paid to the seller when a formal sales contract is signed.

Depreciation

A decline in the value of property; the opposite of appreciation.

Discharge

The bankruptcy discharge extinguishes the debtor's liability on a debt and acts as an injunction against any further efforts to collect a discharged debt from the debtor or the debtor's assets.

Discount Points (or Points)

A one-time charge imposed by the lender to lower the rate at which the lender would otherwise offer the loan to you. Each point is equal to one percent (1%) of the mortgage amount. For example, if a lender charges two points on a $80,000 loan this amounts to a charge of $1,600.

Distribution Date

The date on which payments from a security to an investor are made.

Dividend

The portion of a company's profit paid out to its shareholders.

Down Payment

The difference between the purchase price and that portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer's own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.

Due on Sale

A clause in a mortgage agreement providing that, if the mortgagor (the borrower) sells, transfers, or, in some instances, encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full.

E

Earnest money

Good faith money provided to seller by the potential buyer to show he is serious about purchasing the home. This amount may be applied to the down payment, but if the deal does not go through it may be forfeited, although in some cases it's returned.

Easement

The right-of-way granted to a person or company authorizing access to the owner's land; for example, a utility company may be granted an easement to install pipes or wires. An owner may voluntarily grant an easement or can be ordered to grant one by a local jurisdiction.

Effective Interest Rate

The cost of credit on a yearly basis expressed as a percentage. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Useful in comparing loan programs with different rates and points.

Effective Yield

The annual return on an investment that is calculated by dividing the coupon interest rate by the amount invested expressed as a percent of par.

Encumbrance

A claim against a property by another party which usually affects the ability to transfer ownership of the property.

Endorsement

The signature of the person transferring a negotiable instrument.

Equal Credit Opportunity Act (ECOA)

A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity

The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance.

Equity loan

A loan based on the borrower's equity in his or her home.

Equity of Redemption

The right of a mortgagor to redeem his property after the mortgage is past due.

Escrow

A fee charged by the escrow as a neutral third party to carry out the procedures necessary to transfer ownership of property.

Escrow Waiver

When a loan value is 80% or less, you may elect not to open an escrow account and pay the hazard insurance and property taxes yourself. There is a one time charge by the Investor of 1/4 of a percent to 3/8 of a percent (0.0025 0.0375) of the loan amount.

F

FDIC

Federal Deposit Insurance Corporation is the independent deposit insurance agency created by Congress to maintain stability and public confidence in the nation's banking system.

FHLMC

Federal Home Loan Mortgage Corporation, also called "Freddie Mac", is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

FNMA

The Federal National Mortgage Association is a major secondary market investor that purchases mortgage loans from mortgage bankers and other financial institutions. Also known as "Fannie Mae."

Face value

The principal amount of a bond.

Fair Credit Reporting Act

A consumer protection law that sets up a procedure for correcting mistakes on one's credit record.

Federal Reserve

The Federal Reserve is the central bank of the United States and a major regulator agency for many commercial banks.

Fee Simple

Absolute ownership of real property.

Final Distribution Date or Maturity Date

The latest possible date on which a REMIC class will receive payment. The actual final payment of any class will likely occur earlier, and could occur much earlier, than the final distribution date or maturity. A projected final maturity is calculated based on an assumed pre-payment rate to determine the final maturity of each class.

First Mortgage

A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances).

Fixed Rate

An interest rate which is fixed for the term of the loan. Payments are also fixed at one amount.

Flood Insurance

A form of hazard insurance that may be required by the lender as a condition of making the loan. May not cover personal property.

Floor

The minimum rate of interest payable on an adjustable-rate class or mortgage.

Forbearance

The lender's postponement of foreclosure to give the borrower time to catch up on overdue payments.

Foreclosure

The legal act by which the owner of a mortgage cuts off the rights or interest of the mortgagor in the mortgaged property.

G

Garnishment

The legal process by which property due to a debtor and in the hands of a third person is attached.

GNMA

GNMA is a government owned secondary market investor that purchases FHA and VA mortgage loans from mortgage bankers and other financial institutions. Also known as "Ginnie Mae."

Good Faith Estimate

A written estimate of closing costs which a lender must provide you within three days of submitting an application.

Grace Period

A period of time during which a loan payment may be paid after its due date but not incur a late penalty. Such late payments may be reported on your credit report.

Graduated Payment Mortgage (GPM)

A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

Gross Income

For qualifying purposes, the income of the borrower before taxes or expenses are deducted.

Guarantee

To assume the liability for such debts of another in the event of his default.

Guaranty

A contract wherein one party assumes liability for the debt of another person in the event of his default.

Guaranty Fees

A sum of money required by FNMA, FHLMC, and GNMA, a credit guarantee to mortgage-backed security.

H

HUD

Housing and Urban Development is a federal agency that oversees the Federal Housing Administration.

HUD-I Settlement Statement

A form utilized at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development.

Hazard Insurance

A contract between purchaser and an insurer, to compensate the insured for loss of property due to hazards (fire, hail damage, etc.), for a premium.

Home Equity Line of Credit

A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan

A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax-deductible. Often used for home improvement or freeing of equity for other real estate or investments. Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

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 be closed.

Homeowners Warranty

A type of insurance that covers repairs to specified parts of a house for a specific period of time.

Housing Expenses-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. See debt-to-income ratio.

I

Impound

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.

Impound Account

A savings account for accumulating that portion of a borrower's monthly payments designated for future payments of taxes and/or insurance. Required by certain lenders or with certain types of financing.

Index

A number, usually a percentage, upon which future interest rates for adjustable rate mortgages are based. Common indexes include the Cost of Funds for the Eleventh Federal District of Banks or the average rate of a one year Government Treasury Security.

Installment Debt

Debts with more than ten months left to repay.

Insurance

The first annual premium, plus 2 months, for fire and extended coverage insurance to cover loss of the property. Usually called Homeowners Insurance. In the event of a condominium property, coverage for personal property (contents) may also be needed.

Intangible Tax

This tax is required by State governments whenever real property is sold. In Georgia, for example, this tax is $3.00 per $1,000.

Interest Adjustment or Prepaid Interest

An estimated amount of interest due at closing, usually from the date of closing to the end of the month.

Interest Rate

The periodic charge, expressed as a percentage, for use of credit.

Interest Rate Cap

A safeguard built into a variable rate loan to protect the consumer in the rate of interest movements at time of adjustment.

Interim Financing

A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.

Investor

A money source for a lender.

Issue date

The date as of which a security is originally formed.

J

Joint Liability

Liability imposed upon two or more persons.

Joint Tenancy

The ownership of property by two or more persons with the survivor taking the interest of the deceased.

Jumbo Loan

Mortgage loans over the conforming loan limit. Terms and underwriting requirements may vary from conforming loans.

L

LIBOR (London Interbank Offered Rate)

The interest rate charged among banks for short-term Eurodollar loans. A common index for adjustable-rate mortgages and securities.

Late charge

The penalty a borrower must pay when a payment is made after the due date.

Lease-Purchase Mortgage Loan

An alternative financing option that allows low- and moderate-income homebuyers to lease a home from a nonprofit organization with an option to buy. Each month's rent payments consists of PITI (principal, interest, taxes, insurance) payments on the first mortgage, plus an extra amount that is earmarked for a savings account in which money for a down payment accumulates.

Letter of Credit

A promise by a debtor's bank to pay the creditor upon presentation of specified documents.

Lien

The right to satisfy a debt out of certain property owned by the debtor.

Liquidity

The capability of ready conversion of an asset or investment to cash.

Loan Administration

The collection of mortgage payments from borrowers and related responsibilities of a loan servicer. Also known as Loan Servicer.

Loan Origination Fee

A fee charged by the lender for processing a mortgage.

Loan Servicing

See Loan Administration.

Loan to Value Ratio (LTV)

A ratio determined by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $100,000 and a mortgage loan of $80,000, your loan to value ratio would be 80%. Loans with an LTV over 80% may require Private Mortgage Insurance, defined below.

Lock or Lock In

A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive the funds you have borrowed.

M

Margin

An amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages.

Market Price

The current price of the security will change over time.

Market Rate

The average rate charged by lenders for conventional, fixed-rate loans.

Market Value

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 actually be sold for at a given time.

Minimum Payment

The minimum amount that you must pay, usually monthly, on a home equity loan or line of credit. In some plans, the minimum payment may be "interest only," (simple interest). In other plans, the minimum payment may include principal and interest (amortized).

Minor

A person who has not reached legal maturity; an infant.

Mortgage Broker

As do mortgage bankers, takes loan application and processes the necessary paperwork. Unlike a mortgage banker, brokers do not fund the loan with their own money, but work on behalf of several investors, such as mortgage bankers, Savings and Loan's, banks, or investment bankers.

Mortgage Loan

A loan which utilizes real estate as security or collateral to provide for repayment should you default on the terms of your loan. The mortgage or Deed of Trust is your agreement to pledge your home or other real estate as security.

Mortgage Note

A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the agreement is secured by a mortgage.

Mortgagee

The lender in a mortgage loan transaction.

Mortgagor

The borrower in a mortgage loan transaction.

Multiple Listing Service (MLS)

A networking system, frequently on computer, in which a number of real estate firms share information about their client's homes that are for sale.

N

Negative Amortization

A situation which may occur on variable rate loans which have the payment cap feature. Because your monthly payment is capped, your adjusted payment amount may, at times, be insufficient to pay the actual amount of interest due. The unpaid deferred interest will then be added to your loan balance. This increase in your loan balance is known as negative amortization. A borrower usually has the option of increasing the monthly payment in any given month to avoid negative amortization.

Negotiable

That species of property which can be transferred by endorsement and delivery.

Net

After taxes.

Net Effective Income

The borrower's gross income minus federal income tax.

Non Assumption Clause

A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Note: The signed obligation to pay a debt as a mortgage note.

Note

A formal document showing the existence of a debt and stating the terms of repayment.

Notice of Default

A formal written notice to a borrower that a default has occurred and that legal action may be taken.

O

Offer to Purchase

Also known as a purchase offer, earnest money agreement, contract of purchase, or deposit receipt. A document that lists the price conditions, and terms under which the buyer is willing to purchase a property.

Original Face Value

The original principal amount of a security on its issue date.

Origination Fee

The fee charged by a lender to cover administrative costs incurred during the processing of the loan, often expressed as a percentage of the loan amount.

Origination Points

Points charged by the Broker for their services (i.e. commission).

Owner Financing

A purchase in which the seller provides all or part of the financing.

Owner's Title Policy

An insurance premium charged by the title company to insure the buyer that the title is free from defects up to the date the conveying instrument is recorded. Buyer is the beneficiary. (Frequently paid by the seller. $300 and up).

P

PITI

Principal, interest, taxes and insurance, which comprise your monthly mortgage payment.

Par

100 percent of face value.

Payment Cap

Provision of some ARMs limiting how much a borrower's payments may increase regardless of how much the interest rate increases; may result in negative amortization.

Payoff Statement

A fee charged by the lender or collection company for payoff information on a loan which you are paying in full.

Per Diem Interest

Depending on the day of the month you close, you will have to pay interest from the date of closing to the end of the month. Then, usually, the first mortgage payment will be due the first of the following month

Permanent Loan

A long term mortgage, usually ten years or more. Also called an "end loan."

Personal Property Right

All rights and interest owned in goods or chattels as distinguished from an interest in real property.

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 the lender with a detailed report. Specific treatments are sometimes required before the loan may be closed, usually at the seller's expense.

Points (or Discount Points)

A one-time charge imposed by the lender to lower the rate at which the lender would otherwise offer the loan to you. Each point is equal to one percent (1%) of the mortgage amount. For example, if a lender charges two points on a $80,000 loan this amounts to a charge of $1,600.

Power of Attorney

A legal document authorizing one person to act on behalf of another.

Premium

A price in excess of 100 percent of face value.

Prepaid Expenses

Necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

Prepaid Interest

The amount of interest to cover the period from close of escrow until the beginning of the first payment.

Pre-payment

The unscheduled payment of all or part of the outstanding principal of a mortgage loan, including payments by the borrower as well as liquidations from foreclosures, condemnations, or casualty.

Prepayment Penalty

A penalty found in a Promissory Note imposed by the lender when the loan is paid before it is due.

Pre-payment Risk

The possibility that the mortgages underlying the security are repaid faster or more slowly than expected.

Prequalification

The process of determining how much money a prospective homebuyer will be eligible to borrow before a loan is applied for.

Price

The amount paid for a security, usually stated as a percentage of its face value. A par price is 100 percent, a premium price is higher than par, while a discount price is lower than par.

Primary Mortgage Market

Lenders making mortgage loans directly to borrowers such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets such as to FNMA or GNMA, etc.

Principal

The amount of debt, not counting interest, left on a loan.

Priority of Claims

The specified order in which creditors' claims are paid when the assets of a debtor are liquidated in a bankruptcy. The priority of claims is regulated by the Bankruptcy Code.

Private Mortgage Insurance (PMI)

In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan's structure.

Processing Fee

This fee is paid at closing. The Processor is the person who handles all paperwork requirements in getting your loan approved. He/She obtains verifications from your bank, employer, and other sources.

Profit and Loss Statement

Part of the financial statement that shows sales, expenses and profits for a specific period of time. Also known as Income Statement ..

Prospectus and Prospectus Supplement

The legal documents that outline all details of an investment.

Proxy

An absentee ballot received before the annual meeting.

Purchase and Sale Agreement

A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Q

Qualifying Ratios

Comparisons of a borrower's debts and gross monthly income.

R

RESPA

Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.

ROI

Return on Investment

Rate Lock

See Lock-in.

Real Estate Agent

A person licensed to negotiate and transact the sale of real estate on behalf of the owner.

Real Estate Settlement Procedures Act

A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Real Property

Land and everything that is permanently affixed to it.

Realtor

A collective membership mark that may be used only by real estate professionals who are members of the National Association of Realtors and subscribe to its strict code of ethics.

Receiver

A person appointed by the court to take custody over property in litigation or insolvency.

Record Date

The date used to determine the owner of a security for purposes of distributing the next scheduled payment.

Recording Fees

Fees charged by the County Recorder's Office for recordation of Deed, Mortgage or Deed of Trust, and, at times, additional documents requiring public notice.

Refinancing

The process of paying off one loan with the proceeds from a new loan secured by the same property.

Rent With Option To Buy

See Lease-purchase mortgage loan.

Rescission

The annulment of a contract as a result of which both parties are returned to their former positions.

Right of Rescission

The legal right to void or cancel your mortgage contract in such a way as to treat the contract as if it never existed. Right of rescission is not applicable to mortgages made to purchase a home, but may be applicable to other mortgages, such as home equity loans.

S

Satisfaction

The discharge of an obligation by paying a party what is due.

Second Mortgage

A mortgage made subsequent to another mortgage and subordinate to the first one.

Secondary Mortgage Market

The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.

Security Interest

Any interest in property acquired by contract for the purpose of securing payment or performance of an obligation.

Seller Carryback

An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

Servicing

All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like. Also known as Loan Administration.

Servicing a Loan

The ongoing process of collecting your monthly mortgage payment, including accounting for and payment of your yearly tax and/or homeowners insurance bills.

Settlement Costs

See closing/closing costs.

Settlement Date

The date of the delivery of and payment for a security.

Settlement Sheet

The computation of costs payable at closing which determines the seller's net proceeds and the buyer's net payment.

Simple Interest

Interest which is computed only on the principal balance.

Survey

A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to know points, its dimensions, and the location and dimensions of any buildings.

Sweat Equity

Equity created by a purchaser performing work on a property being purchased.

T

Tax and Insurance Reserve (TIR)

See Impound Account.

Tax Impound

An amount for taxes required and collected by the lender/collection agent and held in the impound account to insure adequate funds are available to pay the taxes. The amount is based upon one month's worth (one-twelfth) of yearly taxes, varying between one and five months, depending upon the time of the year in which you close.

Tenancy in Common

A form of ownership on which the tenants own separate but equal parts. To inherit the property, a surviving tenant should either have to be mentioned in the will or, in the absence of a will, be eligible through state inheritance laws.

Title

The written evidence that proves the right of ownership of a specific piece of property.

Title Company

A company that specialized in insuring title to property.

Title Examination

This fee is paid at closing. This policy protects the Investor in case of future title problems arising. You will have the opportunity to purchase your own title insurance at a significant savings at the time of closing.

Title Insurance

Insurance to protect the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.

Title Search

A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Transaction Fee

A fee which may be charged each time you draw on a home equity credit line.

Transfer Tax

State or local tax payable when title passes from one owner to another.

Truth-in-Lending Act

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

Two-Step Mortgage

A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of seven or 10 years. Also called "Super Seven" or "Premier" mortgage.

U

Underwriting

The process of verifying data and approving a loan.

Underwriting Fee

This fee is paid at closing. This charge is for the review of your file to insure your ability to meet your mortgage payment obligations.

V

VOD (Verification of Deposit)

A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.

VOE (Verification of Employment)

A document signed by the borrower's employer verifying his/her position and salary.

Variable Rate

An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

Variable Rate Loan

Loan in which the rate of interest is tied to a specific financial index, with both the rate of interest and the monthly payments subject to change at established adjustment intervals.

Vesting

Name(s) in which title to a property is held.

W

Waiver

The relinquishment of or refusal to accept some right or benefit.

Walk-through

A final inspection of a home before settlement to search for problems that need to be corrected before ownership changes hands.

Wraparound Mortgage

Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.

Y

Yield

The rate of return on an investment over a given time, expressed as an annual percentage rate. Yield is affected by the price paid for the investment as well as the timing of the principal repayments.

Yield to Maturity

The annual percentage rate of return on an investment, assuming it is held to maturity.

Z

Zoning Regulations

established by local governments regarding the location, height, and use for any given piece of property within a specific area.