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Definition of Terms When Buying a Home
The MMI Online Articles are designed to inform, assist, educate and alert consumers.
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A B C D E
F G H I J
L M N O P
Q R S T U
V W Z
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Adjustable Rate Mortgage (ARM): A mortgage loan with regularly scheduled adjustments to interest rate and payments tied to changes to an index plus a margin. Adjustment features and terms vary from lender to lender.
Amortization Schedule: A statement showing each scheduled principal and interest payment as to when due and the unpaid principal balance after each payment.
Annual Percentage Rate (APR): The calculation as required by the Truth in Lending Act to express as a percentage the total of the financing charged paid by the borrower to the loan amount.
Assessment: The official value given a property normally for taxation purposes. May also refer to subjecting a property to a tax, a charge or a levy.
Assignment of Mortgage: The act of transferring ownership of a property by transferring the liability of payment to another, without the release or liability of the present owner and mortgagee (the seller) unless specially released by the lienholder.
Assumption of Mortgage: The legal document and the act of transferring ownership of a mortgage from one entity to another.
Basis Point: One one-hundredth of one percent. Normally used in describing variances in yields or mortgage.
Buydown: The act of temporarily subsidizing an interest rate for a specific term, normally to more than three years, by placing funds into escrow to compensate for lower payments during that term.
Call Provision: The ability to require a note to be immediately due and payable at a certain time or if certain conditions occur.
Cap (interest rate): The maximum amount an interest rate may increase or decrease over a given time period.
Certificate of Completion: A document issued by an appraiser, an engineer or other party evidencing that all improvements to a property have been completed according to the plans and specifications provided.
Certificate of Eligibility: The document issued by the Veteran's Administration evidencing the amount of entitlement a veteran has for use in purchasing a home.
Certificate of Occupancy: The document issued by a local municipality evidencing that the property has been completed and is suitable for occupancy.
Certificate of Reasonable Value (CRV): The document issued by the Veteran's Administration establishing the fair market value of a property and the maximum loan available based on the value along with any repairs or inspections required to establish that value.
Chattel Mortgage: A mortgage placed on personal property.
Clear Title: The ability to take title to a property without any other liens, judgments, exceptions or defects.
Closing: The act of signing all documents required to transfer title of a property and, if necessary, to establish the lien and create the mortgage and disburse the funds. Also referred to as settlement.
Closing Agent: The person at the title company or attorney's office supervising the closing and disbursing the funds. Also referred to as an escrow agent.
Closing Costs: The fees paid at closing to various parties, to transfer the title of a property and, if necessary to establish the lien and create the mortgage.
Closing Statement: The document prepared by the closing agent evidencing the receipt and disbursement of funds to all parties involved in a closing. Also known as a HUD-1 Settlement Statement.
Collateral: The property or personal effects pledged as security for a loan.
Commitment: The agreement issued by a lender evidencing the approval and terms of a mortgage. Also see Title Commitment: The agreement issued by a lender evidencing the approval and terms of a mortgage. Also see Title Commitment.
Common Area: An area of land in a real estate project and any improvements to the land specifically for the use and enjoyment of the owners of the project and their tenants.
Community Property: A form of ownership, in some states, where property obtained during a marriage is presumed to be owned jointly by both parties unless specifically purchased as separate property.
Comparables: Properties recently sold that are similar to the subject property in location, size and amenities and analyzed as part of the appraisal process to determine the fair market value of the subject property.
Conditional Commitment: The document issued by HUD through the FHA, or through a lender's appraiser approved by the FHA, establishing the value of a property, the maximum loan available, the maximum allowable closing costs and any required repairs or inspections to establish that value.
Condominium: A form of ownership of property where each owner has title to a percentage of a project and the project's common areas and the actual ownership is of the interior surfaces established by the perimeter walls, floors and ceilings of a unit.
Condominium Declarations: The document establishing the percentages of ownership of unit owners of a condominium project and the project's common areas including the covenants, conditions and restrictions upon their ownership and their use.
Conventional Loan: Any first mortgage loan originated that is not issued by HUD through FHA or guaranteed by the VA.
Cul-de-Sac: A dead end residential street with ample room at the dead end to allow automobiles to turn around.
Deed of Trust: A legal document used in some states as the security instrument to convey title in trust to a third party as collateral for a loan and to establish the lien against the collateral.
Deed Restriction: A legal restriction placed on a property or group of properties limiting their use or placing requirements upon their maintenance, etc.
Default: Failure to abide by the requirements of the note and the security instrument, most commonly a failure to make payments when they are due.
Deficiency Judgment: A judicial judgment obtained against a borrower after foreclosure to recap a loss suffered by a lender in foreclosure.
Delinquency: Failure to make payments when they are due.
De Minimus: Meaning to contribute little value. Most commonly in a de minimus PUD where the common areas contribute little value to the property.
Discount Point: A fee charged to increase the yield to an investor over and above the stated interest rate. One point equals one percent of the loan amount.
Due On Sale Clauses: Included as part of the security instrument requiring the full loan balance to be due and payable in the event the property owner sells or transfers ownership of the property.
Easement: An interest in a property owned by another that entitles the holder to a specific use or enjoyment, such as a utility easement.
Egress: The act or right of going or coming out, specifically as in "ingress and egress" to and from a property.
Encroachment: Improvements to land that are illegally located on a easement or another's property.
Entitlement: The funds made available to qualified veterans by the VA in the form of a loan guaranty for the purchase of a home.
Equity: The difference between the value of a property and the unpaid loan balance.
Escrow Account: A specific trust account in which funds are held for disbursement based upon the agreement between the parties to the agreement. Accounts may be for the handling of taxes, insurance, or for funds held to complete repairs, or for the disbursement at closing.
Escrow Analysis: A statement prepared, normally on a annual basis, by an escrow agent, normally the loans servicing agent, to identify disbursement of funds held in escrow. The typical escrow analysis includes disbursement of taxes and insurance, the annual interest paid, and the remaining balances in the account as well as the unpaid principal balance.
Exception: The most common use is in reference to an objection or an encumbrance to title which will not be insured by a title insurance policy, such as a survey exception for encroachments shown on a survey. May also refer to a portion of land to be deleted or excluded in legal description.
Fannie Mae: The term used to refer to the Federal National Mortgage Association, a tax paying corporation created by Congress to facilitate the sale of residential mortgages in the secondary mortgage market.
Freddie Mac: The term used to refer to the Federal Home Loan Mortgage Corporation, a quasi-government agency that purchases conventional mortgages in the secondary market from government insured depositories and HUD approval mortgage bankers.
FHA: The Federal Housing Administration, a division of the Department of Housing and Urban Development created to insure residential mortgage loans made by private lenders. FHA sets standards for construction and underwriting but does not construct or lend money.
Fee Simple: A form of property ownership without restrictions on the sale of the property to heirs.
Flood Plain: Technically level land that may be prone to flooding when streams or rivers are at their flood stage. Most commonly seen as the 100 Year Flood Plan as that area determined by the Corps of Engineers to be most likely to flood and therefore eligible for federally assisted flood disaster insurance protection.
Foreclosure: A legal proceeding in which a mortgaged property is sold under the terms of the security instrument to repay the mortgage debt against the property and extinguishing a mortgagor's right or claim to the property.
Ginnie Mae: The Government National Mortgage Association (GNMA) created by Congress to facilitate the sale or residential loans insured by FHA or guaranteed by VA in the secondary market in the form of government securities. Since loans in the GNMA securities are insured or guaranteed by a department of the government, the securities are protected by the "full faith and credit of the United States".
Grantee: The person to whom an interest or ownership in real estate is given, i.e., the buyer.
Grantor: The person giving an interest or ownership in real estate, i.e., the seller.
Gross Income: A person's total income prior to any deductions for taxes, social security, etc. Typically the income used for qualification purposes on conventional loans.
Guaranty: Most common usage is that indicating the amount the VA will pay to a lender in the event a veteran defaults on a mortgage guaranteed by the VA. Hazard Insurance: A policy whereby an insurer agrees to compensate the insured for loss on a specific property due to certain hazards such as fire or wind damage.
Homeowner's Insurance Policy: A policy whereby an insurer agrees to compensate the insured in the event of loss to the property and its contents due to multiple perils including wind damage, theft and liability for personal or property claims.
Homeowner's Warranty Program (HOW): A program operated through the National Association of Home Builders through which participating builders provide home buyers with a warranty ion the workmanship and materials of a home and also warrants against major structural defects. A ten year HOW warranty furnished buy a builder is sufficient evidence to FHA to allow waiver of HUD inspection during construction.
Homestead: The primary dwelling of a borrower protected by laws in some states against claims by creditors other than the mortgage lender.
Homestead Exemption: The exemption granted by certain taxing authorities for decreased taxes on a homestead.
HUD: The U.S. Department of Housing & Urban Development which administers the FHA and has the overall responsibility for the implementation and administration of government housing and urban development programs.
Impound: The required monthly deposit made by borrowers in addition to principal and interest for the payment of taxes and insurance. Also known as escrows or reserves.
Income Ratio: On conventional loans, this ratio of total monthly payment for PITI to gross monthly income, standardly required to be 25% to 28%. On FHA loans, the ratio of PITI to net monthly income, standardly required to be 35%.
Index: The standard by which adjustable rate mortgages are adjusted, normally a trackable moving scale. The most common indexes are the weekly average of all U.S. Government securities adjusted to a constant maturity of one year and the Federal Home Loan Bank Board's 11th District cost of funds.
Ingress: The act of right of going in or entering. See Egress.
Joint Tenancy: A form of ownership where two or more persons share equal interest and equal rights in the property, including the rights of survivorship.
Junior Mortgage: Any mortgage loan that is subordinated to the first purchase money mortgage, also referred to as a second liens.
Late Charge: The penalty incurred for failing to make payments when due, normally 5% of the payment amount but may vary from state to state and depending on the loan plan.
Legal Description: The exact definition of the location of a property sufficient to be acceptable in court without oral testimony.
Lien: The legal claim of one person on the property of another as security for a debt, established by the security instrument.
Limited Common Area: The common area of a project assigned to a specific homeowner for the homeowner's exclusive use.
Liquidity: Cash assets available upon demand.
Loan Guaranty Certificate: The document provided by VA establishing the amount of guaranty given a loan.
Loan Submission: The act of submitting a processed loan to an approved loan underwriter for determination of acceptance on behalf of the lender of the borrower and the property.
Loan-to-Value Ratio: The ratio expressed as a percentage of the loan amount to the sales price or appraised value, whichever is less.
Lock-in: Most commonly used in referring to the guarantee issued by a lender for a specific period of time prior to closing a mortgage loan, guaranteeing the terms at which the loan, if approved, will close.
Loss Payable Clause: The clause in an insurance policy indicating to whom a claim will be paid other than the insured.
Margin: Most commonly used in referring to the amount to be added to the index to determine the required adjustment amount for rate and payments in ARM loans.
Market Value: The highest price that a buyer, willing but not compelled to buy, would pay and the lowest price a seller, willing but not compelled to sell, would accept.
Mechanic's Lien: A legal claim for securing payment for work performed and material furnished by a mechanic or other person. Typically, the lien filled by a builder for constructing a home on a lot owned by another for making home improvements.
Metes and Bounds: The legal description of a property in which the boundaries are decided by distances and directions.
Mortgage Insurance Premium (MIP): The premium paid for obtaining insurance on a mortgage loan through HUD, payable in cash or financed as part of the loan. Mortgage: The security instrument used in some states signed by a property owner pledging the property as collateral for repayment of a note.
Mortgage Banker: A person or entity that originates mortgage loans for sale to secondary investors but usually continues to service the loan.
Mortgage Broker: A person or entity that brings a borrower and a lender together, receiving a fee for originating the transaction and does not retain the servicing.
Mortgagee: The lender in a mortgage transaction.
Mortgage Clause: A provision in an insurance policy requiring that the lender receive process of a claim to pay a debt against the insured property in the event or loss.
Mortgagor: The borrower or borrowers in a mortgage transaction.
Mortgage Credit Certificate (MCC): A certificate issued in some states to certain first time homeowners meeting income limitation and other restrictions, giving the homeowner a reduction in federal income tax liability for a period of time.
Negative Amortization: The act of increasing the unpaid principal balance of a mortgage loan created when the scheduled monthly payment is less than the payment required at the established interest rate.
Net Income: The income after subtracting income taxes, social security, insurance and other deductions from gross income. Net income is used in calculating ratios on FHA and VA loans.
Obligation Ratio: Also referred to as a debt ratio, is calculated by adding the proposed monthly house payment and any regular monthly installment revolving debt and dividing by the monthly income.
Obsolescence: Loss of value due to reduced usefulness resulting from outmoded physical features by becoming less suitable for use, or be economic influences.
Origination Fee: The fee paid to a lender for originating the loan, normally expressed as a percentage of the loan amount.
Par: A situation where the yield on a loan is based solely on the interest rate with no additional discount or premium.
Party Walls: A wall built between two adjoining properties and used by both property owners.
Percolation Test: The test given to soil to determine its water seepage capacity when the use of a septic tank is being considered.
PITI: The abbreviation for principal, interest, taxes and insurance comprising a monthly payment.
PUD: A planned unit development where the property owners own individual lots and share in ownership or maintenance of the common areas which are reserved for the use and enjoyment of the property owners.
Plat: A map identifying how a piece of land is subdivided into lots and showing the streets, easements and boundary dimensions of each. Points: Fees paid on a mortgage loan for discount or origination. One point equals one percent of the loan amount.
Prepaid Interest: The interest due on a loan from the date of closing to the first day of the following month.
Prepaid Items: Those fees paid at closing for items required to be paid in advance; including prepaid interest, current taxes, first year insurance premiums and the amounts required to establish impounds for taxes and insurance.
Prepayment Penalty: The penalty required for paying a loan in full prior to the maturity or for paying more than the amount scheduled, now considered illegal in many states on mortgage loans.
Principal: The actual amount of loan as established by a note.
Private Mortgage Insurance (PMI): The insurance obtained on a conventional loan to protect the lender in the event of default by a borrower.
Processing: The act of gathering information to confirm the date provided on a loan application and obtaining appraisals, credit reports, title commitments and surveys on a mortgage transaction.
Quitclaim Deed: A legal instrument used to release a person's right, title and interest in a property to another without providing a guarantee or warranty that title is valid.
REOL: The abbreviation for Real Estate Owned used to indicate any property owned by a lender usually obtained through foreclosure.
Release of Liability: The release given a seller when a property is sold by assumption of any further obligation to pay a note secured by a lien against the property. Unless specifically given, properties sold by assumption do not release original mortgagors of the liability to pay.
RESPA: The Real Estate Settlement Procedures Act, a law requiring lenders provide borrowers a complete estimate of known and anticipated closing costs within three days of the loan application.
Secondary Financing: A loan obtained in addition to a first mortgage for the purchase of a property, may be provided by the lender or a third party such as the seller.
Secondary Mortgage Marker: A network of investors willing to purchase mortgage loans originated by mortgage bankers. The network consists of saving and loans, banks, mortgage bankers and quasi-government agencies such as FNMA or FHLMC.
Security Instrument: The legal document used to secure a lien for a note against the promised collateral. Either a mortgage or deed of trust depending upon what state the collateral is in.
Servicing: The act of collecting monthly payment from borrowers, passing on principal and interest payments to the noteholder, and collecting and paying any taxes and insurance on individual loans.
Settlement: Also known as closing the act of signing all documents and payment of all fees necessary to effect the sale of real estate from one party to another and/or the establishment of a mortgage loan and the disbursement or proceeds of that loan.
Settlement Costs: See closing costs.
Subordination: The act of acknowledging through a recorded document that one loan is inferior to another and that the inferior loan may only be collected in the event of foreclosure after the complete payment of the superior loan. Normally required by junior or second mortgages.
Subsidy: Funds paid by a party to lower the cost of a property or of a loan, primarily used in reference to funds paid on a buydown loan to lower the initial payments or in reference to subsidized housing where assistance is given a purchaser to lower the amount paid for the property.
Sweat Equity: The value of ownership given a borrower for work performed on a property to increase the value through improvements.
Tenants in Common: A type of ownership where two or more have equal rights of possession in the property.
Titles: The evidence of the right to, or ownership in a property.
Title Commitment: The contract issued by a closing agent giving the terms to be included in a title insurance policy.
Title Policy: The document issued by a title insurance agency, insuring the holder against any defects in the title, such as claims to title from previous owners.
Townhouses: A type of property joined to a similar property on at least one side, and ownership includes the dwelling and the lot underneath. Normally the type of property in a Planned Unit Development.
Transfer Tax: The tax charged by some state and local governments for the conveyance of real estate.
Underwriting: The act of reviewing the credit documents and the appraisals and agreeing to bind or not to bind the lender to grant a loan. Direct Endorsement or delegated underwriting involves binding an agency (FHA or VA) through a lender.
Usurv: The act of contracting an interest rate higher than a rate allowed by legal limits.
Vendor's Lien: A seller's right to superior lien on a property until the purchase price is paid.
VA: The Veteran's Administration, established by the government to grant benefits to Veterans returning to civilian life including entitlement for purchase of homes.
Warehousing: Borrowing of funds by a mortgage banker using a mortgage note as collateral until the note is sold to a permanent investor in the secondary market.
Warranty Deed: The document conveying title from one party to another and guaranteeing that the title is good, as opposed to a quitclaim deed.
Wraparound Mortgage: A means of financing where the existing loan of the seller remains intact and the borrower makes payments to a wraparound noteholder that in turn pays the existing mortgage, the wraparound note being inferior to the existing mortgage.
Yield: The effective amount of income derived from a note comprised of interest rate and financing charges.
Zero Lot Line: A type of real estate in which the dwelling is built on the property line boundary, typically used in patio home developments for space conservation.
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