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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 mortgage contract.
Accrued Interest - Interest earned for the period of time elapsed since
interest was last paid.
Adjustable Rate
Mortgage - A mortgage loan or deed of trust which allows the
lender to adjust the interest rate in accordance with a specified index
periodically and as agreed to at the inception of the loan.
Ad Valorem Taxes - Real estate taxes on the assessed value of property.
Amortization - Repayment of a mortgage debt with equal periodic payments of
both principal and interest, calculated to retire the obligation at the
end of a fixed period of time.
Amortization Schedule
- A table showing the amounts of principal and interest due
at regular intervals and the unpaid mortgage balance after each payment is
made.
Annual Mortgage Statement - A
report prepared by the lender or servicing agent for the mortgagor,
stating the amount of taxes, insurance, and interest that was paid during
the year, and the outstanding principal balance.
Annual Percentage Rate (APR) - The actual rate of interest paid, the APR represents the interest
percentage of the total finance charge to the amount of the loan. The APR
is disclosed to conform to federal truth-in-lending statutes.
Arrears - The situation in which
mortgage interest and real estate taxes are paid at or after the end of
the period for which they are levied. Late payment is also described as
being in arrears.
Assessed Valuation - The value
that a taxing authority places upon real property that becomes the base
for computing local property taxes.
Assessment - The value factor
assigned to real property and used to determine real property taxes. The
process of reaching the assessed valuation. Also, an add-on tax to raise
money for a special purpose.
Assumption Agreement - A written
agreement by one party to pay an obligation originally incurred by
another.
Assumption Fee - The amount paid
to a lender for the paperwork and processing of records necessary to
approve and document a new debtor.
Assumption of Mortgage - A
buyer’s acceptance of primary liability for payment of an existing note
secured by a mortgage or deed of trust. The seller remains secondarily
liable, unless specifically released by the lender.
Balloon Mortgage- A mortgage with periodic installments of principal and interest
that do not fully amortize the loan. The balance of the mortgage is due in
a lump sum at a specified date, usually at the end of the term.
Bankrupt - A person, firm, or
corporation who, through a court proceeding, is relieved from the payment
of all debts after the surrender of all assets to a court appointed
trustee, for the protection of creditors. Bankruptcy may be declared under
one of several chapters of the federal bankruptcy code. Chapter 7 covers
liquidation of bankrupt business; Chapter 11, covers reorganization of
bankrupt businesses; Chapter 12, covers certain farm bankruptcies; Chapter
13 covers workouts of debt by individuals.
Binder - Temporary hazard or
title insurance granted prior to the issuance of a permanent policy. In
real estate, a preliminary agreement between a buyer and seller which
includes the price and terms of the contract.
Bi-Weekly Mortgage - A mortgage
with payments due every two weeks, totaling 26 payments a year, allowing
the debt to be retired in 18 or 19 years.
Blanket - The coverage of more
than one piece of property under one instrument, such as blanket insurance
policy or blanket mortgage.
Borrower - One who receives
funds in the form of a loan with the obligation of repaying the
loan-in-full with interest.
Buydown Mortgage - A mortgage
with a below-market interest rate made by a lender in return for an
interest rate subsidy in the form of additional discount points paid by
the builder, seller, or buyer.
Caps (interest) - Consumer safeguards on an adjustable-rate mortgage which limit the
amount the interest rate may change per year and/or over the life of the
loan.
Caps (payment) - Consumer
safeguards on an adjustable-rate mortgage which limit the amount monthly
payments may change.
Certificate of Title - A
confirmation written by a title attorney or company stating that the title
to a parcel of real property is legally vested in the present owner.
Closing - In real estate, the
delivery of a deed, financial adjustments, the signing of notes, and the
disbursement of funds necessary to consummate a sale or loan
transaction.
Collection - The servicing
procedure followed to bring a delinquent mortgage current and to file the
required notices to begin foreclosure when necessary.
Community Property - In some
states, a form of ownership under which property acquired during a
marriage is presumed to be owned jointly unless acquired as separate
property of either spouse.
Co-Mortgagor - A second borrower
who signs a mortgage loan with a mortgagor. The co-mortgagor’s income,
assets, and debts are combined with the mortgagor’s for underwriting and
ratio analysis purposes. The co-mortgagor’s name must appear on the FHA
certificate of Commitment and the mortgage or deed of trust. For full
guarantee under the VA’s program, the co-mortgagor must be either a spouse
or another eligible veteran.
Condemnation - The taking of
private property for public use under the right of eminent domain with
just compensation paid the owner.
Conventional Financing - In real
estate, mortgage financing which is not insured or guaranteed by a
government agency such as HUD/FHA, VA, or the Farmers Home
Administration.
Convertible Mortgage - A type of
adjustable-rate mortgage that may be converted to a fixed-rate mortgage at
specified intervals during a predetermined time period. In income property
lending, a mortgage in which lender-provided funds convert to equity
ownership after a predetermined period of time.
Cosigner - One who agrees to
assume a debt obligation if the principal borrower defaults on mortgage
payments. A cosigner assumes only personal liability and has no ownership
interest in the property; his or her income and obligations are used in
the underwriting process to reinforce the credit of the principal
borrower.
Credit Rating - A rating given
to a person or company that establishes creditworthiness based upon
present financial condition, experience, and past credit history.
Deed-In-Lieu - A
deed given by a mortgagor to a mortgagee to satisfy a debt and avoid
foreclosure.
Deed of Trust - A type of
security instrument in which the borrower conveys a trust to hold property
to a third party (trustee) as security for the lender, with the condition
that the trustee shall reconvey the title upon the payment of the debt,
and, conversely, will sell the land and pay the debt in the event of a
default by the borrower.
Default - A breach or
nonperformance of the terms of a note or the convenants of a mortgage.
Delinquency - Failure of a
borrower to make timely payments under a loan agreement.
Demand Note/Mortgage - A note or
mortgage that the lender can call due at any time and without prior
notice.
Disbursement - Actual payment of
monies. Sometimes used to describe construction loan draws.
Due-On-Sale - A clause in a
mortgage stating that if the mortgagor sells, transfers, or in any way
encumbers the property, then the mortgagee has the right to implement an
acceleration clause making the balance of the obligation due.
Easement - A right
to the limited use or enjoyment of land held by another. Also, an interest
in land to enable sewer or other utility lines to be laid, or to allow
access to a property.
Encumbrance - Anything that
affects or limits the fee simple title to property, such as mortgages,
leases, easements, or restrictions.
Endorsement - A signature on a
negotiable instrument by which title to property mentioned therein is
assigned and transferred. Also, a notation added to an instrument after
execution to change or clarify its contents. In insurance, coverage may be
restricted or enlarged by endorsing a policy. In FHA loans, a notation
placed on the note by the FHA indicating that the loan is insured under
the National Housing Act.
Equity - Net ownership, the
difference between fair market value and current indebtedness, sometimes
called owner’s interest.
Escrow - A situation in which a
third party, acting as the agent for the buyer and the seller, carries out
instructions of both and assumes the responsibility of handling all
paperwork and disbursement of funds. Also, impounds or reserves for the
payment of taxes, insurance, or other bills when due.
Escrow Account - The segregated
trust account in which escrow funds are held.
Escrow Agent - The person or
organization having a fiduciary responsibility to both the buyer and
seller (or lender and borrower) to see that the terms of the purchase/sale
(or loan) are carried out.
Escrow Analysis - The periodic
examination of escrow accounts to determine if current monthly deposits
will provide sufficient funds to pay taxes, insurance, and other bills
when due.
Escrow Company - An organization
established to act as an escrow agent.
Escrow Contract - A three-party
agreement between the buyer, seller, and the escrow agent, specifying the
rights and duties of each.
Escrow Overage or Shortage - The
difference, determined by escrow analysis, between escrow funds on deposit
and escrow funds required to make a payment when it becomes due.
Escrow Payment - That portion of
a mortgagor’s monthly payment held by a lender or servicer to pay taxes,
hazard insurance, mortgage insurance, lease payments, and other items as
they become due.
Federal Home Loan
Mortgage Corporation (FHLMC) - A quasi-governmental secondary
market organization that offers various mortgage purchase and
securitization programs. Its major program is the Freddie Mac
Participation Certification (PC).
Federal Housing Administration (FHA) - A federal agency within the Department of Housing and Urban
Development (HUD).
Federal National Mortgage Association
(FNMA) - The nation’s largest mortgage investor. A
quasi-governmental secondary market organization that offers various
mortgage purchase and securitization programs.
FHA Loan - A loan made through
an approved lender and insured by the Federal Housing Administration.
While there are limits to the size of FHA loans, they are intended to
finance moderately priced homes.
First Mortgage - A real estate
loan that creates a primary lien against real property.
Fixed-Rate Mortgage - A mortgage
in which the interest rate and payments remain the same for the life of
the loan.
Foreclosure - A legal procedure
in which a mortgaged property is sold to pay the outstanding debt in case
of default.
Governmental National
Mortgage Association (GNMA) - A federal agency within the
Department of Housing and Urban Development (HUD) that guarantees the
timely payment of principal and interest for mortgage-backed securities
backed by FHA-insured, and VA-guaranteed mortgages.
Grace Period - A period of time
after an obligation is due during which a borrower can perform without
incurring a penalty and without being considered in default.
Graduated Payment Mortgage (GPM) - A type of flexible payment mortgage where the payments increase for
a specified period of time and then level off. Usually results in negative
amortization.
Hazard Insurance - Insurance coverage that provides compensation to the insured in
case of property loss or damage.
Homeowner’s Policy - A multiple
peril insurance policy available to owners of private dwellings that
covers the dwelling and its contents, as well as personal liability.
HUD - The Department of Housing
and Urban Development. A governmental entity responsible for the
implementation and administration of housing and urban development
programs. HUD was established by the Housing and Urban Development Act of
1965 to supersede the Housing and Home Finance Agency.
Impound - That
portion of a mortgagor’s monthly payment held by the lender or servicer to
pay for taxes, hazard insurance, mortgage insurance, lease payments, and
other items as they become due.
Index - A published interest
rate, such as prime rate, LIBOR, T-Bill, or the 11th District
COFI. Lenders use indexes to establish interest rates charged on mortgages
or to compare investment returns. On ARMs, a predetermined martin is added
to the index to compute the interest rate adjustment.
Insured Loan - A loan insured by
FHA, VA, or a private mortgage insurance company.
Interest - Consideration in the
form of money paid for the use of money, usually expressed as an annual
percentage. Also, a right, share, or title in property.
Investor - Any person or
institution that invests in mortgages or mortgage-backed securities.
Late Charge - Additional charge that a borrower is required to pay as a penalty
for failure to pay a regular installment when due.
Legal Description - A property
description, recognized by law, which is sufficient to locate and identify
the property without oral testimony.
Lien - A legal hold or claim of
a creditor on the property of another as security for a debt. Liens are
always against property, usually real property.
Loan Administration - A mortgage
banking function, which includes the receipt of payments, customer
service, escrow administration, investor accounting, collections, and
foreclosures. Also called servicing.
Maturity - The
date on which an agreement expires; termination of a mortgage note.
Mechanic’s Lien - A claim
created by law to secure priority of payment for work performed and
materials provided by a vendor. Land may be attached as well as buildings,
equipment, or other property.
Mortgage - A formal document
executed by an owner of property, pledging that property as security for
payment of a debt or performance of some other obligation. Also, the
security instrument itself.
Mortgage-Backed Security (MBS) - An investment instrument backed by mortgage loans as security.
Ownership is evidenced by an undivided interest in pool of mortgages or
trust deeds. Income from the underlying mortgages is used to pay off the
securities, and provides a return on investment.
Mortgage Banker - A firm that
conducts mortgage lending activities from its own funds. Newly formed
mortgages are sold to investors in the secondary market, providing funds
for subsequent lending. The mortgage banker generally continues to service
the loans.
Mortgage Insurance (MI) - Insurance that protects mortgage lenders against loss in the event
of default by the borrower. This allows lenders to make loans with lower
down payments. The federal government offers MI through HUD/FHA; private
entities offer MI for conventional loans.
Mortgage Life Insurance - Term
life insurance paid by the borrower in which the amount of coverage
decreases as the mortgage balance declines. In the event the borrower dies
while the policy is in force, the debt is automatically satisfied by
insurance proceeds.
Mortgage Insurance Certificate (MIC) - Certificate issued by HUD/FHA as evidence that a mortgage has been
insured, and that a contract of mortgage insurance exists between HUD/FHA
and the lender incorporating the HUD/FHA regulations identified in the
certificate.
Mortgage Insurance Premium (MIP) - The amount paid by a mortgagor for mortgage insurance either to FHA
or a private mortgage insurance company.
Mortgage Note - A written
promise to pay a sum of money at a stated interest rate during a specified
term. A mortgage note is secured by a mortgage.
Mortgage Portfolio - The
aggregate of mortgage loans held by an investor or serviced by a mortgage
banker.
Mortgagee - The lender in a
mortgage transaction.
Mortgagee Clause - A clause that
may be attached to an insurance policy stipulating that the lender will
receive a portion of insurance proceeds sufficient to satisfy the unpaid
amount of a loan in the event of a loss.
Mortgagor - The borrower in a
mortgage transaction who pledges property as a security for a debt.
Negative Amortization - The unpaid interest which is added to the mortgage principal in a
loan where the principal balance increases rather than decreases because
the mortgage payments do not cover the full amount of interest due.
Nonassumption Clause - A
mortgage clause that prohibits the assumption of a mortgage by a third
party without the prior approval of the lender.
Note - A general term for any
kind of paper or document signed by a borrower that is an acknowledgment
of the debt, and is, by inference, a promise to pay. When the note is
secured by a mortgage, it is called a mortgage note and the mortgagee is
named as the payee.
Notice of Default - Notice
recorded after default under a deed of trust or mortgage. Also, the notice
sent to defaulting borrowers, required by insurers or guarantors such as
FHA, VA, or MIC.
Origination - The
process of creating both commercial and residential mortgages.
Partial Payment - In loan collections, receipt of less than the full payment due.
PITI - An acronym for the items
included in a monthly payment: principal, interest, taxes, and
insurance.
Portfolio - The collection of
loans held for servicing or investment.
Premium - In insurance, a
payment for coverage.
Prepayment - The payment of all
or part of a mortgage debt before it is due.
Prepayment Penalty - A charge
the mortgagor pays the mortgagee for the privilege to prepay the loan.
Principal - The original balance
of money lent, excluding interest. Also, the remaining balance of the
loan, excluding interest.
Private Mortgage Insurance (PMI) - Insurance written by a private company protecting the mortgage
lender against financial loss occasioned by a borrower defaulting on the
mortgage.
Quitclaim Deed - A
deed relinquishing all interest, title, or claim an owner has in a
property. A quitclaim deed implies no warranty.
Real Estate Owned (REO) - Property a lender acquires as the result of foreclosure.
Real Property - Land and objects
permanently attached to it, such as buildings and fences.
Redemption Period - The time
allowed by law in some states during which mortgagors may buy back their
foreclosed properties by paying the balance owed on their delinquent
mortgages, interest and fees.
Reinstatement - The curing of
all loan defaults by a borrower to return it to current status.
Satisfaction of Mortgage
- The recorded instrument the lender provides to evidence payment
in full of the mortgage debt.
Second Mortgage - A mortgage
that has rights subordinate to a first mortgage.
Secondary Mortgage Marketing - A
process whereby lenders and investors buy and sell existing mortgages or
mortgage-backed securities, thereby providing greater availability of
funds for additional mortgage lending by banks, mortgage bankers, and
savings institutions.
Seller-Servicer - A term used by
Fannie Mae and Freddie Mac for a mortgage banker or other entity that has
met the requirements necessary to sell and service mortgages for Fannie
Mae or Freddie Mac.
Servicing Agreement - A written
agreement between an investor and mortgage servicer stipulating the rights
and obligations of each party.
Servicing Income - Fees the
investor pays the mortgage servicer for performing loan administration
duties.
Subordination - The act of a
party acknowledging by written record that a debt is inferior to the
interest of another in the same property. Subordination may apply not only
to mortgages, but also to leases, real estate rights, and any other types
of debt instrument.
Tax Lien - A claim
against property for unpaid taxes.
Tax Sale - The sale of property
by a taxing authority or an officer of the court acting on a judgment to
satisfy the payment of delinquent taxes.
Term - The period of time
between the commencement date and the termination date of a note,
mortgage, legal document, or other contract.
Title - Written evidence of the
right to or ownership in property. In the case of real estate, the
documentary evidence of ownership is the title deed that specifies in whom
the legal estate is vested and the history of ownership and transfers.
Title may be acquired through purchase, inheritance, devise, gift, or
through foreclosure of a mortgage.
Title Search - An examination of
public records, laws, and court decisions to ensure that no one except the
seller has a valid claim to the property, and to disclose past and current
facts regarding ownership of the subject property.
Trust Deed - The instrument
given by a borrower (trustor) to a trustee vesting title to a property in
the trustee to ensure the borrower’s fulfillment of an obligation. A
mortgage.
Underwriting - In
mortgage banking, the analysis of the risk involved in making a mortgage
loan to determine whether the risk is acceptable to the lender.
Underwriting involves the evaluation of the property as outlined in the
appraisal report, and of the borrower’s ability and willingness to repay
the loan.
Veterans Administration
(VA) - The Department of Veteran’s Affairs, a cabinet-level agency
of the federal government. The Servicemen’s Readjustment Act of 1944
authorized the agency to administer a variety of benefit programs designed
to facilitate the adjustment of returning veterans to civilian life. Among
the benefit programs is the VA Home Loan Guaranty program, which
encourages mortgage lenders to offer long-term, low down payment financing
to eligible veterans by guaranteeing the lender against loss.
Voluntary Conveyance - An
elective transfer of property title from a defaulting borrower to the
lender, as an alternative to foreclosure. This arrangement saves the
lender the expense of foreclosure, and the borrower receives credit for
payment in full.
Wraparound Mortgage - A refinancing technique involving the creation of a second mortgage
which includes the balance due on any existing mortgages, plus the amount
of the new secondary or junior lien.
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