acceleration clause
A clause in your mortgage which allows the lender to demand payment of the outstanding loan balance for various reasons. The most common reasons for accelerating a loan are if the borrower defaults on the loan or transfers title to another individual without informing the lender.
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adjustable rate mortgage (ARM)
Also known as variable rate, an ARM is a mortgage with interest rates that may fluctuate up or down periodically, according to the index upon which it is based. Most ARM's will have a limit on the amount that the rate can vary.
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amortization
The process of repaying a debt through regular payments of principal and interest. The loan payment consists of a portion which will be applied to pay the accruing interest on a loan, with the remainder being applied to the principal. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified time.
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amortization schedule
A table which shows how much of each payment will be applied toward principal and how much toward interest over the life of the loan. It also shows the gradual decrease of the loan balance until it reaches zero.
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annual percentage rate
The true rate of interest, stated as a yearly percentage, for a loan over its projected life.
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annuity
The return from an investment of capital, with interest, in a series of regular payments. An entity that lends money collects an annuity from the borrower, while the borrower is amortizing the loan.
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appraisal
An official estimate of value or written justification of the price paid for a property as determined by a qualified, independent party. Appraisal of property is typically based on facts such as recent sales of comparable properties, replacement cost, and ability to produce income.
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appraised value
An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property. Since an appraisal is based primarily on comparable sales, and the most recent sale is the one on the property in question, the appraisal usually comes out at the purchase price.
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appraiser
An individual qualified by education, training, and experience to estimate the value of real property and personal property. Although some appraisers work directly for mortgage lenders, most are independent.
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appreciation
Increase in value of a property, not including increases from improvements.
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assessment
Tax or charge levied against a property by the government, typically to pay for local improvement, e.g. sidewalks, curbs, sewers, etc.
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assessor
A public official who establishes the value of a property for taxation purposes.
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assignment clause
A sales contract with an assignment clause allows the buyer to transfer the interest in the property (e.g. the right to buy it at the given rates and terms) to another party.
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assumption
The process of taking over the existing mortgage and assuming liability for the payments when purchasing a property. If the purchaser defaults, both buyer and seller are responsible for repaying the debt.
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back ratio
Ratio of monthly housing costs (principal, insurance, taxes, and interest) plus regular monthly payments to gross monthly income used by lender to evaluate an applicants qualification for a loan. Lenders will typically allow a back ratio between 32 and 45 percent.
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balloon payment
Final payment on a mortgage that is larger than preceding payments and pays the loan in full.
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bankruptcy
A legal proceeding which offers protection from creditors to a debtor who is unable to pay debts. By filing in federal bankruptcy court, an individual or individuals can restructure or relieve themselves of debts and liabilities. Bankruptcies are of various types, but the most common for an individual seem to be a "Chapter 7 No Asset" bankruptcy which relieves the borrower of most types of debts. A borrower cannot usually qualify for an "A" paper loan for a period of two years after the bankruptcy has been discharged and requires the re-establishment of an ability to repay debt.
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breach of contract
Failure to perform on a promise made in contract without legal excuse.
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bridge loan
Bridge loans are obtained by those who have not yet sold their previous property, but must close on a purchase property. The bridge loan becomes the source of their funds for the down payment.
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buyer's market
A market in which there are more houses for sale than there are potential buyers. As such, housing prices are driven lower, and buyers stand to get a better deal when purchasing.
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Certificate of Eligibility
A document issued by the Veterans Administration that certifies a veteran’s eligibility for a VA loan.
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certificate of occupancy
A certificate stating that a building is approved for occupancy issued by the city or county building inspection department. It is important that a certificate has been issued, as some home insurance policies will not pay claims for damage to a property that has not been approved for occupancy.
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Certificate of Reasonable Value (CRV)
Once the appraisal has been performed on a property being bought with a VA loan, the Veterans Administration issues a CRV
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closing
Also referred to as settlement. The process of finalizing all dealings in the purchase of a property, including singing of papers, disbursement of money, preparation of deed, and transfer of ownership. In Washington State, a real estate transaction is not consider "closed" until the documents record at the local recorders office.
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closing costs
Costs associated with finalizing the purchase of a home or property, including property insurance, property taxes, title insurance, mortgage insurance premium, points, and filing fees.
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cloud on title
An invalid legal claim to the title of a property that appears during the sale of the property, due to a recording mistake or other error and thus not apparent to the buyer or seller beforehand.
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collateral
Personal property pledged as security for a debt. Collateral for a mortgage is usually the property itself.
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comparable market analysis
A comparison of sale prices of similar properties in a given area for the purpose of determining the fair market value of a property.
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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.
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contract
A formal agreement between two or more parties that is typically legally binding.
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conventional loan
Real estate loan that is not guaranteed by a government agency such as the Veterans Administration or Federal Housing Authority.
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counteroffer
A rejection of an original offer, combined with a new offer stating different terms and conditions.
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credit report
A report from an independent source outlining the credit history of an individual, including current and previous debts, payment amounts, late payments and past due amounts, defaults, and other related information on every credit source the individual has used.
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deed
A written, sealed document which transfers title to real estate from one party to another.
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default
Failure or neglect to fulfill an obligation or requirement. A borrower defaults on a loan if he fails to make payment, or otherwise fails to perform according to the terms of the note.
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disclosure
Statement of fact(s) concerning the condition of the property for sale and the surrounding area. In Washington State, the buyer is protected by disclosure laws requiring sellers to divulge certain information about the property, e.g. if known structural damage is present.
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discount points
In the mortgage industry, this term is usually used in only in reference to government loans, meaning FHA and VA loans. Discount points refer to any "points" paid in addition to the one percent loan origination fee. A "point" is one percent of the loan amount.
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down payment
The amount of payment required to secure the purchase of a property. Lenders typically require a 20% down payment, however with mortgage insurance down payments of 5, 10, and 15% are common.
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earnest money deposit
A portion of the purchase price paid to demonstrate the buyer's good faith (i.e. intent to go through with the purchase). Payment is usually accompanied by an agreement outlining the terms and conditions of the sale.
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easement rights
The rights of an individual to use another individual's property for a particular purpose (e.g. access to their own property). The seller should disclose any easement rights that affect the property for sale.
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encroachment
An improvement that intrudes illegally on another’s property.
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encumbrance
Any claim against the title to a property, such as a lien or mortgage.
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entitlement
A right due to an individual. The term, when used with VA insurance, refers to the loan amount that the VA will guarantee for a particular borrower.
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equity
The amount or value of a person's interest in a property in excess of any lien against the property. For example, if a person makes a down payment of $30,000 on a property with market value $120,000 and takes out a mortgage for $90,000, at the time of purchase the buyer would have a $30,000, or 25% equity in the property.
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escrow
A deed, contract, or something of value placed in the custody of a third party to be transferred upon fulfillment of a stipulated condition.
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escrow holdback
Funds that are held by a third party to insure the completion of repairs or improvements that must be completed on the property but that cannot be done prior to closing.
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Fannie Mae
Another name for the Federal National Mortgage Association, a federally sponsored agency which buys mortgages from banks, savings and loans, and other lending institutions. Agencies such as Fannie Mae are part of the secondary market.
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FHA insurance
Mortgage insurance provided by the Federal Housing Administration to protect banks, savings and loans, and mortgage companies against loss on real estate loans. Borrowers must pay a premium in order to get an FHA issued loan.
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fixed rate mortgage
A mortgage with an interest rate and payments that remain fixed over the duration of the loan.
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fixture
An item that is attached to the property, e.g. a dishwasher or air conditioner, and usually sold with it.
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foreclosure
Legal procedure used by creditors to take a mortgaged property from a debtor who has defaulted on the loan.
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Freddie Mac
Another name for the Federal Home Loan Mortgage Corporation, a federally sponsored agency which buys and sells mortgages. Along with Fannie Mae, Freddie Mac is a major player in the secondary market.
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free and clear title
Title to a property which is free from any mortgage, lien, or other encumbrance.
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freely assumable
Term used to describe a loan which may be assumed by anyone without permission from the lender. In such a situation, however, the original borrower is usually held liable in the event the loan is not repaid.
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front ratio
Ratio of monthly housing costs (principal, insurance, taxes, and interest) to gross monthly income used by lenders to evaluate an applicants qualification for a loan. Lenders will typically allow a front ratio between 28 and 40 percent.
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guaranteed mortgage
A mortgage that is guaranteed against default, such as a VA or FHA insured mortgage. Borrowers must pay an insurance premium in order to get a guaranteed mortgage (also called an insured mortgage).
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grace period
The time period between the due date of a mortgage payment and the date when late charges are assessed. For example, payments due on the first of the month may have a 14 day grace period, meaning that fees will be charged if payment is not received by the fifteenth.
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graduated payment mortgage (GPM)
A mortgage with monthly payments that are smaller at the beginning of the loan period and gradually increase by a specified amount for the first five or ten years, after which they become fixed. A GPM has a fixed interest rate and fixed loan period.
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hazard insurance
Insurance that covers events such as earthquakes, floods, tornadoes, and other "acts of God".
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home inspection
A thorough inspection by a professional that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser.
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homeowner's insurance
Property insurance that protects homeowners against theft, personal liability, and fire.
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home warranty insurance
Private insurance for homebuyers that covers appliances and plumbing, heating, and electrical systems in the home.
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HUD flood zone
An area prone to flooding, as determined by the Housing and Urban Development, a branch of the federal government.
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income to debt ratio
The percentage of gross income that lenders will allow for monthly housing costs when evaluating a borrower's qualification for a particular loan amount.
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index
A market indicator used to determine the interest rate for an adjustable rate mortgage. Common indexes include one-year treasury securities and the 11th District Cost of Funds.
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inspection
An examination of a property or building to determine condition or quality for a particular purpose such as an assessment of structural damage.
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interest cap
A limit on the amount that the interest rate for an adjustable rate mortgage can change, regardless of how much the index changes. Most ARMs have cap on both the amount it can increase or decrease at any periodic adjustment interval and a life-long cap that limits the amount the interest rate can vary over the life of the loan. The two interest caps are sometimes called a "periodic cap" and a "life cap".
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interest rate
The percentage rate on a principal amount charged by a lender for the use of a sum of money.
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joint tenancy
A form of co-ownership that gives each tenant equal undivided interest and equal rights in the property, including the right of survivorship.
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judgment
A decree made by a court of law. In judgments that require the repayment of a debt, the court may place a lien against the debtor's real property as collateral for the judgment's creditor.
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judicial foreclosure
Type of foreclosure proceeding used in some mortgage states that is handled like a civil lawsuit and conducted entirely under the direction of a court.
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judgment lien
A lien on the property of a debtor resulting from a judgment.
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junior lien
When a property is foreclosed upon, lenders are repaid in a particular order, established by the loan documents. The lender with the first claim to repayment is said to hold the first mortgage, and a lender whose repayment order is after the first claimant is said to hold a junior lien.
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junior mortgage
Also called a secondary mortgage. A mortgage whose claim to repayment is second to another mortgage.
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lien
A claim against a property, typically as security for a debt. In addition to a mortgage lien, a property may also have a tax lien (e.g. overdue property taxes) or judgment lien, which is a court-appointed claim against a property.
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liquidated damages
Compensation paid to the seller if the buyer fails to complete the purchase even though all contingencies have been satisfied. For example, the seller may keep the buyer's earnest money in the event the buyer defaults on the contract.
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loan application
A document containing detailed information about the borrower and co-borrower that is required for a loan to be issued.
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loan-to-value ratio (LTV)
The ratio of a proposed loan amount to the lesser of a property's appraised value or purchase price. For example, if a property is purchased for $110,000, appraised for $100,000 and the buyer is applying for a loan in the amount of $90,000, the LTV is 90% (90,000 divided by 100,000).
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lock-in
An assurance of a given interest rate at the time of settlement. For example, if the interest rate is at 7.5% when you apply for a loan, it may have risen (or fallen) by the time the loan is approved. A lock-in ensures that you will get the original interest rate. Some lenders charge a fee for locking in an interest rate.
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lump sum payment
A sum of money paid at one time, as opposed to spreading payments over a period of time.
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maintenance
Any repairs or general upkeep done to preserve the present condition of a property.
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margin
A percentage added to an adjustable rate mortgage's index to determine the interest rate at a given time. For example, if an ARM has an index of 4% and a margin of 2.75, the interest rate is set at 6.75% (4 + 2.75).
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market value
Also known as fair market value. The price that a property can realistically be sold for, given the selling price of other comparable houses in the area.
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mortgage
A conditional contract in which a property is given as security for the repayment of a loan.
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National Association of Realtors (NAR)
A trade organization that sets the standards for the real estate profession and enforces a rigid code of honesty in real estate dealings. Membership includes real estate professionals across the country. Members are referred to as Realtors. Not all real estate agents are Realtors.
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negative amortization
The situation in which the balance of a loan gets larger, rather than smaller each month because payments made are too small to cover the loan's interest charges. For example, if your monthly payment amount is based on a 4% interest rate but the actual rate being charged on the loan is 7.5%, your payments will not cover the accrued interest and each month the unpaid interest portion will be added to your loan balance.
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negotiation
Discussions held between two or more parties for the purpose of resolving issues and reaching an agreement.
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offer
A buyer's expression of willingness to purchase a property at the seller's specified price.
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origination fee
The fee charged by a mortgage lender for creating a mortgage loan. This fee covers some of the lender’s operating costs and profit. Typically 1% of the loan amount.
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payment cap
A limit on the amount that the monthly payment on an adjustable rate mortgage can increase or decrease at each adjustment period. For example, if your monthly payments start at $1,000 and the ARM has a payment cap of 7.5%, the next adjustment cannot exceed plus or minus $75 per month regardless of how much the loan's index changes. This can lead to negative amortization if the interest rate goes up and the monthly payment amount is too small to cover the increased interest charges.
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PITI
Short for principal, interest, taxes, and insurance. These are the basic monthly housing costs that lenders consider when evaluating a borrower's qualification for a loan, as in: the PITI may not exceed 28% of the borrower's gross monthly income.
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point
A fee charged by lenders at settlement equal to one percent of the loan amount. Points are charged so as to raise the lender's yield above the apparent interest rate.
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prepayment penalty
A charge which a lender may assess a borrower if a loan is paid off before the due date.
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prequalification
The process of establishing a borrower's qualification for a loan of a particular amount based on income and expenses. Prequalification does not guarantee that the loan amount will be approved, but can be used to demonstrate financial capability to an agent or seller.
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primary lender
A financial institution which actually makes mortgage loans from its funds. For Example, if you obtain a mortgage from a bank and the bank then sells the mortgage to the secondary market, the bank is the original, or primary lender. Examples of primary lenders are banks, saving and loans, mortgage companies, and credit unions.
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prime rate
The rate of interest charged by a lender to its best customers.
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private mortgage insurance (PMI)
Mortgage insurance available for a premium which allows a borrower to take out a loan with a down payment of less than 20%. Unlike VA or FHA insurance, PMI is not backed by any government agency.
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property tax
Tax assessed against a property by local governments. One of the four basic monthly housing costs (PITI).
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prorate
To divide proportionately, so as to determine actual amounts owed by the buyer and seller at closing. For example, if property taxes for a month are $300 and the seller owned the property for the first 10 days while the borrower owned the property for the remaining 20 days, the property taxes owed would be prorated so that the seller would pay $100 ($300 10/30) and the buyer would pay $200 ($300 20/30).
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qualifying
The process of determining whether a buyer is financially able to assume a mortgage by checking credit history, present and previous employment, and any other sources which may help to determine the buyer's financial capability.
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quit claim deed
A deed that transfers, without warranty, whatever interest or rights a grantor may have at the time the transfer is made. Often used to remove a possible cloud on the title or to add or remove individual(s) to the title of a property.
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rate change cap
Commonly associated with an adjustable rate mortgage (ARM). The Rate Change Cap is the maximum amount that an interest rate can change, either at an adjustment period or over the entire life of the loan.
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rate lock
An agreement by a lender to guarantee the interest rate offered for a mortgage provided that the loan closes within the specified period of time.
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recourse
The right of a lender to reclaim both money and collateral from a borrower who has defaulted on a loan.
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Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires mortgage lenders and brokers to give borrowers advance notice of closing costs in the form of a Good Faith Estimate.
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real property
Land and anything permanently affixed to the land, including structures, trees, minerals, and the interest, benefits and rights thereof.
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reconveyance fee
This fee is charged in some states to cover the cost of removing your current lender's lien from your property title when you refinance. For our comparison purposes, a reconveyance fee is considered to be a third party fee.
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recording
The entering in a book of public record the details of a properly executed legal instrument that affects title to real property, thereby making it a part of the public record.
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recording fees
A fee charged by the local government to record mortgage documents into the public record so that any interested party is aware that a lender has an interest in the property. For our comparison purposes, a recording fee is considered to be a tax or other unavoidable fee
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right of first refusal
The right to purchase a property under terms and conditions made by another purchaser and accepted by the seller. For example, if the Jones' make an offer of $120,000 on a property and the seller accepts the offer subject to the Wilsons' right of first refusal, the Wilson's have the right to buy the property for $120,000.
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right of survivorship
In joint tenancy, the right of surviving joint tenants to acquire the interest of a deceased joint tenant.
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sales contract
A formal, written document specifying the terms and conditions under which the sale of property will take place.
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secondary market
A collection of agencies that buy mortgages from primary lenders. These mortgage funds are than pooled and sold to investors, much like a mutual fund. By purchasing loans form primary lenders, the secondary market supplies money for additional mortgages.
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tenancy in common (TIC)
Type of joint tenancy without the right of survivorship. Compare with tenancy by the entirety and with joint tenancy.
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title
A formal document which establishes ownership of a property.
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title insurance
Insurance that protects a purchaser against any defects that may be discovered in the title after ownership has been transferred.
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trustee
A fiduciary who holds property in trust for another to secure performance of an obligation or act
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Truth in Lending Act
Also known as Regulation Z, this federal regulation requires a lender to provide borrowers with a disclosure estimating the costs of the loan including your total finance charge and the Annual Percentage Rate (APR) within three business days of the application for a loan. This act is designed to provide consumers with a standard method of comparing the financing costs from lender to lender.
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underwriting
Detailed process of evaluating a borrower's loan application to determine the risk involved for the lender. Underwriting usually involves an in-depth analysis of the borrower's credit history, as well as an examination of the value and quality of the subject property.
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unencumbered
The state of having no mortgages, liens, or other claims against a property. A property that is unencumbered is said to be "free and clear".
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VA insurance
Mortgage insurance available to veterans of the U.S. military form the Veterans Administration. Eligible borrowers must pay a premium of 1% of the loan amount to get a VA insured loan. The loan is then backed by the government in case of borrower default.
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valuation
An estimation of value of a property, as determined by various factors.
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waiver
The voluntary abandonment or surrender of some claim, right, or privilege
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warranty
A guarantee or protection provided to the purchaser regarding the condition of appliances and certain fixtures. New homes often have more extensive warranties covering not only fixtures and appliances but the overall structure as well.
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zoning
The local government's specifications for the use of property in certain areas.
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zoning ordinances
The acts of an authorized local government establishing building codes, and setting regulations for property usage.
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