Definitions

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Accrued interest – Interest that is earned but not paid, increasing the loan balance. It is also referred to as negative amortization.

Adjustable rate mortgage (ARM) – A mortgage in which the lender can make changes in the interest rate. These changes are based on a specified index at predetermined intervals.

Adjustment date – The date on which the interest rate changes on an adjustable rate mortgage (ARM).

Adjustment interval –The period between changes in the interest rate or monthly payment on an adjustable rate mortgage (ARM).

Amortization – The payment of principal as a result of scheduled mortgage payments that exceed the amount of interest due. The scheduled payment less the interest equals amortization.

Amortization term – The contracted amount of time necessary to amortize the mortgage loan.

Annual percentage rate (APR) – A measure of the cost of credit or mortgage stated as a yearly rate. Lenders are required to report the APR by Truth in Lending regulations. APR includes the interest rate, and other items such as upfront charges paid by the borrower.

Application – A request for a loan that contains the information about the borrower, the property and the requested loan. Also, the standardized application form is commonly referred to as the 1003 form.

Appraisal – A written estimate and analysis of a property’s present market value prepared by an appraiser.

Appraisal Fee – A fee charged by an appraiser for the appraisal of a specific property. It is customarily paid outside of closing (p.o.c.).

Appraiser – A professional with knowledge and experience of real estate markets and accomplished in the practice of appraisal.

Appreciation – An increase in the value or price of property due to fluctuations in market conditions or other causes. The opposite of appreciation is depreciation.

Asset – A valuable material possession or anything of monetary value that is owned by a person. Assets include real property, personal property, bank accounts, stocks, mutual funds, enforceable claims against others, etc.

Assignment – The transfer of rights, ownership, or interests in a property (mortgage) by one party to another.

Assumable mortgage – A mortgage contract that permits a buyer to assume the existing mortgage contract of the seller.

Assumption – The buyer of the property agrees to become responsible for the repayment of the existing loan on the property, that is, the existing mortgage is transferred to the new buyer.

Assumption clause – The provision in a mortgage that allows a new buyer to assume responsibility for the existing mortgage from the seller. The original buyer does not need to pay off the existing loan upon sale or transfer of the property. The vast majority of loans no longer have assumption clauses.

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Balance sheet – A statement of financial assets and liabilities at a given date of an individual, partnership or corporation.

Balloon mortgage –A mortgage that has level monthly payments amortized over an accepted term, but that has a lump sum payment due at the end of an earlier defined term.

Balloon payment – The loan balance remaining when the loan contract calls for full repayment.

Beneficiary – The recipient designated to receive funds or property as income from a trust, a deed of trust, or an estate.

Biweekly payment mortgage – A mortgage on which half the monthly payment is paid every two weeks. Consequently there are 26 payments per year, which is the equivalent of 13 monthly payments rather than the customary 12. The extra payment causes the biweekly mortgage to amortize before term, resulting in significant savings in interest for the borrower.

Bond – A written and sealed obligation (ex. interest-bearing certificate) requiring payment of a stipulated amount of money on or before a maturity date. A real estate bond is a written obligation usually secured by a mortgage or a deed of trust.

Breach – A violation of a legal obligation, or promise.

Bridge loan – A short-term loan, that “bridges” the period between the closing of a new home purchase and the closing of the buyer’s existing home sale. It requires the borrower to have a contract to sell the existing house. It is also known as a "swing loan."

Broker – An agent that negotiates contracts, purchases, or sales.

Buydown mortgage –A mortgage on which an upfront cash deposit is made by the buyer, the seller or both resulting in a reduction in a borrower’s initial monthly payments.

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Cap – The maximum allowable increase or decrease in the interest rate on an adjustable rate mortgage (ARM) each time the rate is adjusted.

Capital improvement – Any structure or component constructed as a permanent improvement to real property that adds to its value and functional life.

Cash-out refinance – Refinancing for an amount in excess of the balance on the old loan plus closing costs, that is, a transaction in which the borrower receives additional cash that can be used for any purpose.

Certificate of eligibility – A document issued by the federal government certifying a veteran’s eligibility for a VA mortgage.

Certificate of Title – A statement provided by a title company, or attorney stating that the current owner legally holds the title to real estate.

Chain of title – The history of all documentation that transfers the title of a parcel of real property, starting with the earliest existing document and ending with the most recent.

Clear title – A title that is free of liens or legal uncertainty as to ownership of the property.

Closing – The process or meeting in which the transfer of ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan are finalized. Closing costs are paid at this time. It is also called the “settlement.”

Closing costs – Total costs charged to the borrower that is paid upon closing, which can be paid by the borrower, the seller, or the lender. Closing cost items are included as numbered items on the HUD-1 statement and, normally include but are not limited to an origination fee, an attorney’s fee, taxes, an amount placed in escrow, and charges for obtaining title insurance and a survey.

Closing date – The date on which the closing or settlement occurs.

Closing statement – A document itemizing the costs and disbursements on the loan. It is also referred to as the HUD-1.

Cloud on a title – Any conditions discovered by a title search that unfavorably affects the title to real estate

Co-Borrowers – More than one person have signed the note and are equally responsible for loan repayment.

Collateral – Property or asset (ex. a car or a house) acceptable as security for a loan, and guarantees the repayment of a loan. The borrower risks the loss of the property or asset if the loan is not repaid according to the terms of the loan contract.

Combination loan – A loan program in which you receive a first mortgage for 80 percent of the loan amount, and a second mortgage at the same time for the remainder of the balance. It is often used to avoid PMI (Private Mortgage Insurance), which is required on a conventional loan by Fannie Mae and Freddie Mac for loans greater than 80% of the property’s value. Combination loan programs are also known as 80/10/10’s or 80/20’s.

Combined loan-to-value (CLTV) – The total of the outstanding principal balances of all the mortgages and liens on a property divided by the property’s appraised value.

Commitment letter – A formal proposal by a lender stating the terms under which it agrees to loan money to a homebuyer. It is also known as a “loan commitment.”

Common areas – Those components of a building, land, and amenities owned or managed by a Planned Unit Development (PUD) or by a development’s homeowners’ association. The areas are used by all of the unit owners, who share in the operating costs of their management and upkeep. Common areas include tennis courts, swimming pools, and other recreational facilities, as well as common corridors of buildings, means of ingress and egress, parking areas, etc.

Comparables – Properties used for comparative purposes in the appraisal process. Comparables help the appraiser determine and approximate the fair market value of the subject property. Comparables are properties similar to the property under consideration with approximately the same size, location, and amenities and have recently been sold.

Condominium – A real estate project in which the living units are owned individually and all the unit owners own the common areas jointly, that is, an owner has an undivided interest in the common areas of the project, and sometimes the exclusive use of specified limited common areas.

Condominium conversion – The process of changing the ownership of an existing building (usually a rental project) into the condominium-form of ownership.

Conforming mortgage – A loan eligible for purchase by the two major federal agencies that buy mortgages, Fannie Mae and Freddie Mac. The mortgage cannot exceed the maximum amount, which is $333,700 for 2004, and must also meet the agencies’ underwriting requirements.

Construction financing – A method of financing utilized when a borrower contracts to have a house built, as opposed to purchasing a completed house. There are two loan options. One option is to use two loans; a construction loan for the period of construction of the house, in which the lender makes payments to the builder at periodic intervals as the work progresses, and a permanent loan normally from another lender, which pays off the construction loan. The second option is to use a single combination loan, in which the construction loan becomes permanent at the end of the construction period.

Contingency – A stipulation that must be met before a contract is legally binding. For example, a buyer uses a contingency that stipulates that the contract is not binding until a satisfactory home inspection report is obtained.

Contract – A legally enforceable agreement between two or more persons, or the document containing the agreement.

Conventional mortgage – A mortgage that is not insured or guaranteed by the federal government.

Conversion clause or option – An option in an adjustable rate mortgage (ARM) that allows the conversion of the ARM to a fixed-rate mortgage (FRM) at some point during its life (usually at specified time frames after loan origination.)

Convertible ARM – An adjustable rate mortgage (ARM) that can be converted to a fixed rate mortgage (FRM) under defined conditions.

Correspondent Lender – A lender who relinquishes loans to another (usually larger) lender through prior price commitments.

Co-Signing – Accepting responsibility for someone else’s payment obligation in the event that that party fails to pay.

Cost of funds index (COFI) – An interest rate index used in determining some adjustable rate mortgage interest adjustments. The 11th District Cost of Funds Index (COFI) is the most stable and more widely used rate index. The index represents the weighted-average cost of savings, borrowing, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco.

Credit – A borrower receives something of value in exchange for a promise to reimburse the lender at a later date. The amount of credit extended is based on the lender’s confidence in a buyer’s ability and intention to fulfill financial obligations.

Credit report – A report of an individual’s credit history prepared by a credit bureau, and used by a lender in determining a loan applicant’s creditworthiness. The potential borrower’s history of repaying debts in a timely manner is one of the factors used in determining creditworthiness.

Credit bureau – An organization that collects, updates, records, and stores financial and public record information about the payment history of individuals.

Credit score – A numerical score based on information in an individual’s credit report, and used to measure an individual’s creditworthiness. The most commonly used credit sore is called FICO (named after Fair Isaac Co., which developed it). Scores range from 350 to 850, the higher the better.

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Debt – An obligation (liability) to pay or render something to another.

Deed – The legal document sealed as a contract conveying title to a property.

Deed of trust – The document used in some states as an alternative to a mortgage; the title is conveyed to a trustee.

Default – Failure of the borrower to honor the conditions of the loan agreement. Normally lenders regard borrowers delinquent greater than 90 days as in default.

Deposit – A sum of money given as security to bind the sale of real estate; or a sum of money given to guarantee payment of an advance of funds in the processing of a loan.

Depreciation – An allowance made for a decline in the value of property.

Down payment – The difference between the property price and the loan amount, or the portion of the purchase price of a property that the borrower pays in cash and does not finance with a mortgage.

Due-on-sale clause – A provision in a mortgage that allows the lender to demand full loan repayment if the borrower sells the property that functions as security for the mortgage. The loan is not assumable, preventing the owner from transferring the existing loan to the buyer when the existing loan’s interest rate is below current market rates.

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Earnest money deposit – A deposit made by the prospective homebuyer to show that he or she is sincere about buying the house.

Easement – A right of way giving persons other than the owner admittance to or over a property.

Encumbrance – Anything that influences or limits the fee simple title to a property; examples are mortgages, leases, easements, or restrictions.

Endorser – An individual who signs ownership interest over to another party.

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

Equity – The net value of an asset. In real estate, equity is the value of the property less the balance of any outstanding loans on that property.

Escrow – Money, property, a deed, or a bond put into the custody of a third party to be delivered upon the fulfillment of specified conditions. Examples are, the deposit by a borrower with the mortgage lender of funds to pay taxes and insurance premiums when they become due; and the deposit of funds or documents with an escrow agent or attorney to be disbursed upon the closing of a sale of real estate.

Escrow account – The account in which the mortgage servicing agent retains the borrower's escrow payments prior to disbursing for payment of property expenses such as property taxes and insurance.

Escrow analysis – The periodic examination or analysis of an escrow account to verify that current monthly deposits will provide sufficient funds to pay property taxes, insurance, and other bills when scheduled.

Escrow disbursements – The distribution of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

Escrow payment – The portion of a borrower’s monthly mortgage payment that is held by the mortgage servicing agent to pay for property taxes, hazard insurance, mortgage insurance, lease payments, and other items.

Estate – The total of all the real and personal property owned by an individual at their time of death; or the ownership interest of an individual in real and personal property.

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Fair Credit Reporting Act– A consumer protection law regulating the disclosure of consumer credit reports by reporting agencies. The law also establishes procedures for rectifying mistakes on one’s credit record.

Fair market value – The highest price that a buyer is willing to pay for a property, and the lowest a seller is willing to accept for the same property.

Fannie Mae – One of two federal agencies that purchase home loans from lenders, making it one of the nations’ largest supplier of home mortgage funds. The other federal agency is Freddie Mac.

Federal Housing Administration (FHA) – An agency of the U.S. Department of Housing and Urban Development (HUD) that insures residential mortgage loans made by private lenders. The FHA sets construction and underwriting standards but does not itself construct housing or lend money.

Fee simple – The maximum possible interest a person can have in real estate.

FHA mortgage – A mortgage on which the Federal Housing Administration (FHA) insures the lender against loss, with the borrower paying the mortgage insurance premium.

First mortgage – A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan.

Fixed rate mortgage (FRM) – A mortgage in which the interest rate remains unchanged during the entire loan term.

Float – Allowing the interest rate and points to fluctuate with changes in market conditions, as opposed to “locking” them.

Flood insurance – Insurance that compensates for physical property damage resulting from flooding. It is mandatory for properties located in federally designated flood areas.

Foreclosure – The legal process by which a lender gains possession of the property securing a mortgage loan when the borrower defaults. Consequently the borrower’s interest in the mortgaged property is lost.

Freddie Mac – One of two federal agencies that purchase home loans from lenders, making it one of the nations’ largest supplier of home mortgage funds. The other federal agency is Fannie Mae.

Fully amortizing payment – A monthly mortgage payment which, if maintained unaltered through the remaining loan life at the then-existing rate, will pay off the loan at term.

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Good faith estimate (GFE) – The form that lists the settlement costs the borrower must pay at closing, which the lender is obligated to provide the borrower within three business days of receiving the loan application.

Grace Period – The number of days (10 – 15) that a borrower is permitted to be late in making the mortgage payment without being penalized.

Gross income – Income exclusive of any deductions. Salary is usually the prime source, but other stable income may qualify.

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Hazard insurance – Insurance purchased by the borrower and required by the lender to protect the property against loss from fire, flood, and other hazards.

Home Equity Line of Credit (HELOC) – A mortgage set up as a credit line against which a borrower can draw up to a maximum amount. It is a revolving account that works like a credit card, which can be charged up or paid down during the loan term.

Home equity loan– A second mortgage, a loan with a second-priority claim against a property in the event that the borrower defaults. It is normally used for home improvements or bill consolidation.

Housing expense ratio – The ratio of the monthly housing payment divided by the borrower’s gross monthly income.

HUD – The U.S. Department of Housing and Urban Development.

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Index – The specific interest rate series to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. Examples of commonly used indices are the 1 Year Treasury Bill, 6 Month LIBOR, the prime rate, and the 11th District Cost of Funds (COFI).

Interest-Only loan option – An option attached to a mortgage, which allows the borrower to pay only the interest for a specified period. This can increase purchasing power by reducing mortgage payments in the early years.

Interest rate – The rate the lender charges the borrower for the loan of money. A mortgage interest rate is a rate on a loan secured by a specific property.

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Jumbo mortgage – A mortgage loan larger than the maximum amount eligible for purchase by either of the two federal agencies, Fannie Mae and Freddie Mac. (For example the 2004 limit is $333,700. Loan amounts of $333,701 are jumbo, and they are usually subject to higher pricing.)

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Lien – An encumbrance against a property for payment of a debt, either voluntary or involuntary.

Lender – The party, bank, or mortgage company advancing the money to the borrower at the closing table in exchange for a note authenticating the borrower’s debt and obligation to repay.

LIBOR – An acronym that stands for London Inter-Bank Offered Rate. It is one of the interest rate series or index to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. This is a favorable interest rate offered for U.S. dollar deposits by a group of London banks.

Lifetime cap – A provision of an Adjustable Rate Mortgage (ARM) that limits the maximum rate that can occur over the life of the loan.

Loan to value ratio (LTV) – The loan amount divided by the lesser of the selling price or the appraised value. The LTV affects loan programs available to the borrower with the lower the LTV the more advantageous the loan terms.

Lock commitment letter – A letter from a lender verifying that the price and other terms of a loan have been locked.

Lock period – The interval of time that a lender will guarantee a loan’s interest rate. Lock periods are usually for 30, 45, or 60 days.

Locking the Loan – A decision exercised by the borrower to “lock in” the rates and points existing in the market at that time. A loan can be locked at the time of the loan application or later.

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Margin – The number of percentage points a lender adds to the index value to obtain the adjustable rate mortgage (ARM) or home equity line of credit (HELOC) interest rate after the initial rate periods ends.

Maturity – The period until the last scheduled payment is due.

Maximum Loan-to-Value Ratio – The highest allowable ratio of loan–to-value on any loan program.

Minimum down payment – The minimum acceptable ratio of down payment to sale price on any loan program.

Mortgage – A legal document that evidences the lien on a property taken by the lender as security for repayment of a debt.

Mortgage disability insurance – A disability insurance policy that will pay the monthly mortgage payment for a specified period of time in the event of a covered disability of an insured borrower.

Mortgage insurance (MI) – Insurance provided the lender against loss on a mortgage in the event of borrower default. In the case of FHA and VA mortgages, the federal government provides insurance. On other loan programs lenders require insurance through an independent mortgage insurance company on loans with a loan–to-value (LTV) of 80.01% or higher with the borrower funding the insurance premium.

Mortgagee – The mortgage holder, that is, the lender.

Mortgagor – The mortgage borrower, the one who mortgages one’s property.

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Negative amortization – An increase in the loan balance, which occurs when the payment is less than the interest and principal due.

Negative points – Points paid by a lender for a loan with a rate above the rate on a zero point loan. Negative points, called “rebates,” are incentives to reduce a borrower’s settlement costs. Negative points that are retained by a mortgage broker are called a “yield spread premium.”

Non-conforming mortgage – A conventional home mortgage that does not meet the purchase requirements by either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of loan amount, underwriting guidelines, or other various reasons.

Note – A document that assures a debt and a promise to repay a definite sum of money at a specified date or on demand.

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Origination fee – A fee assessed by a lender, expressed as a percent of the loan amount. It covers some of the processing expenses associated with a real estate loan.

Owner financing – A property purchase arrangement in which the property seller provides all or part of the financing.

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Payoff Month – The month in which a zero loan balance is attained.

Per diem interest – The interest calculated from the day of closing to first day of the following month.

Periodic cap – The maximum rate increase for a specific period for a specific adjustable rate mortgage (ARM) loan program.

PITI – Principal, interest, taxes, and insurance

Planned Unit Development (PUD) – A subdivision of five or more individually owned lots with one or more additional lots owned in cooperation or with shared rights in one or more other lots. Property on which HOA dues are paid to a Home Owner Association belongs to a PUD.

Points – An upfront cash payment required by the mortgage lender as part of the charge for the loan. It is expressed as a percent of the loan amount. One point denotes 1% of the mortgage loan amount.

Prepaids – Property expenses which are paid in advance of their due date, and are usually pro-rated upon the sale of the property, examples are taxes, insurance, rent, etc.

Pre-approval – A lender commitment to originate a mortgage loan for a borrower, prior to the identification of the property that will be mortgaged.

Prepayment – Any payment made by the borrower over and above the scheduled mortgage payment.

Prepayment penalty – A charge imposed by the mortgage lender if the borrower pays off the loan early.

Primary residence – The house in which the borrower will reside most of the time, as opposed to a second home or an investment property that will be rented.

Principal – The amount of the debt, excluding interest. It is also the portion of the monthly payment that is used to reduce the loan balance.

Private mortgage insurance (PMI) –Mortgage insurance provided to the lender by private, non-government insurance companies. It insures lenders against loss if a borrower defaults. Lenders usually require insurance through an independent mortgage insurance company on loans with a loan-to-value (LTV) of 80.01% or higher with the borrower funding the insurance premium.

Processing – Compiling, maintaining, and managing the file of information concerning the loan transaction, including the appraisal, credit report, verification of assets, verification of employment, etc.

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Qualification – The process of determining whether a potential borrower has the ability to repay a loan.

Qualifying ratios – The ratio of housing expense to borrower income; and the ratio of housing expense plus other debts to borrower income cannot exceed specified maximums stipulated by the mortgage lenders, e.g., 28% and 35%.

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Rate – The rate the lender charges the borrower for the loan of money. A mortgage interest rate is a rate on a loan secured by a specific property.

Rate cap – A constraint on how much the interest rate can change, either during the life of the loan or at each adjustment period.

Refinancing – Paying off an old loan while simultaneously obtaining a new one using the same property as the loan security.

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Second Mortgage – A loan with a second-priority claim against a property in the event that the borrower defaults.

Self-employed borrower – A borrower who must use tax returns to document income rather than employer provided information.

Seller contribution – A contribution to a borrower’s down payment or closing costs made by the seller, as an alternative to a price reduction.

Servicing – Administering loans from the time of disbursement to the time the loan is paid off.

Servicing Agent – The party or organization who services a loan, who may or may not be the lender who originated the loan.

Settlement costs – Total costs charged to the borrower that is paid upon closing, which can be paid by the borrower, the seller, or the lender. It is the same as closing costs.

Simple interest – A transaction in which interest is not paid on interest. There is no compounding.

Stated income –The borrower discloses income and its source but the lender does not need verification for documentation.

Subordinate financing – A second mortgage on a property that is not paid off when the first mortgage is refinanced, that is, the second mortgage holder remains in the second lien position.

Survey – A document recording the boundaries, area or elevations of land, structures and improvements on a property cataloging all measurements.

Swing loan – A short-term loan, that “bridges” the period between the closing of a new home purchase and the closing of the buyer’s existing home sale. It requires the borrower to have a contract to sell the existing house. It is also known as a "bridge loan."

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Term – The period of time used to calculate the monthly mortgage payment, i.e. the life of the loan.

Title – Fullest legal right of ownership of property.

Title insurance – Insurance against loss arising from problems associated with a property title.

Title search – An examination of the ownership history of a property to check for liens, unpaid claims, restrictions, or problems, verifying that the seller can sign over free and clear ownership.

Total debt ratio – The ratio of monthly expense to borrower income.

Truth-in-Lending Act – A federal law that specifies a disclosure of information or credit terms that must be provided to borrowers on different loan types. It is intended to aid in lending term and financial institution comparisons.

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Underwriting – The process of verifying all borrower provided information, and creditworthiness used for qualification and determining final approval or rejection of the loan application.

Underwriting Requirements – Standards required by lenders and used in determining whether a borrower can be approved for a loan. The requirements vary on loan type, and by lender.

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Veterans Administration (VA) – A government agency representing ex-servicemen and women.

VA mortgage – A mortgage available only to qualified ex-servicemen and women requiring no down payment, and on which the Veterans Administration insures the lender against loss.

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Yield-spread premium – A payment made by a lender to a mortgage broker for delivering an above-par loan.

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Nancy J. Deane
Sr. Loan Officer
Community Banks of Colorado Colorado Express Mortgage
5690 DTC Blvd., Suite 400
Greenwood Village, CO 80111

(303) 740-4422

nancy@nancydeane.com