GLOSSARY OF MORTGAGE TERMS

Abstract of Title
A summary of recorded public records (transfers, conveyances, legal proceedings, etc.) and any other facts that may be relied upon as evidence of title to show continuity of ownership, or any possible title defects that may be associated with a particular piece of property.

Acceleration Clause
A provision in the financing instrument (loan) that allows the lender to declare the remaining debt immediately due and payable. This is predicated upon certain specific events such as missed payments or sale of property.

Adjustable Rate Mortgage (ARM)
A mortgage with an adjustable rate of interest over the life of the loan. Adjustments are made to the interest rate based on movements of the index rate.

Adjustment Period
The time period where the interest rate is fixed for an ARM. After that period the rate may be adjusted depending on the terms of the loan.

Alienation Clause
Provision in the loan agreement stating that the debt must be paid in full upon transfer of ownership.

Amortization
The payment of a financial obligation via periodic installments. An amortized loan includes payments of principal and interest in approximately equal payments and includes both principal and interest. A fully amortized loan is one in which the principal and interest are paid in full over the term of the loan.

Annual Percentage Rate (APR)
The relative cost of credit as determined with Regulation Z of the Board of Governors of the Federal Reserve System, and expressed as a percentage.

Appraisal
An estimate of a property's value on the open market.

Assumability
The existing loan on a property may be assumable by the new buyer based on credit review and approval of the buyer by the lender. This will be defined in the loan document.

Assumption
The undertaking or adoption of a debt by another person (typically the buyer). The lender has to be notified and agree to the assumption.

Balloon Mortgage
A loan typically of shorter duration, with smaller payments due during the loan term and a large payment due at the end of the loan for the remaining loan balance.

Biweekly Mortgage
A mortgage where the payments are due every two weeks.

Blanket Mortgage
A mortgage covering more than 1 property.

Bridge Loan
An interim loan made to finance a new residence until the existing residence is sold.

Buydown
The interest rate or points on a loan can be bought down by paying a fee to the lender.

Caps
A limit on how much the interest rate or monthly payment can change, on a periodic basis and for the life of the loan. Most ARMs have an interest rate caps to protect the borrower from enormous increases in monthly payments.

Certificate of Eligibility
The document issued by the VA. It is required when applying for a VA loan.

Certificate of Reasonable Value
Appraisal required for a VA loan. The appraisal must be performed by a VA
approved appraiser.

Closing Costs
The expenses incurred in the processing of the escrow and loan(s) associated with the purchase of the property. Buyers and sellers each pay some of the closing costs. Typical costs are as follows:

Commitment
An agreement between borrower and lender as to the amount and terms of the loan.

Commitment Letter
A written letter from a lender stating that it will loan the borrower funds (in a specific amount) for the purchase of the property.

Conforming Loan
A loan that meets Fannie Mae and Freddie Mac purchase criteria. The current limit for a conforming loan is $359,650.

Construction Loan
A short term loan to pay for the construction of a home or building. Generally followed by a long term (take out) loan once construction is complete.

Conventional Mortgage
A mortgage or loan that is not secured by government agency (such as FHA or VA).

Conversion Option
Some ARMs have an option where the buyer can convert the ARM to a fixed rate loan. There are typically time limitations and possible fees associated with the conversion.

Credit Report
A report documenting your credit history and how you have met financial obligations. There are three credit reporting agencies: Experian, Equifax and TransUnion. More information is available at www.myfico.com

Deed
Written document that conveys title to real property from a grantor(seller) to a grantee (buyer).

Deed in lieu of foreclosure
A deed to real property accepted by a lender from a borrower who has defaulted on their loan.

Deed of Trust
A security instrument where real property is given as security for the indebtedness. With a Deed of Trust there are three parties involved: Trustor (borrower), Trustee, and Beneficiary (lender). If the Trustor were to default the Trustee would sell the house on behalf of the Beneficiary.

Default
Failure to make payments as agreed on a loan or mortgage. Defaults may also be due to other breaches as specified in the contract.

Deferred interest
When the monthly payment is lower than the interest due on a loan, the interest is deferred and added to the loan balance.

Deficiency Judgment
Personal claim against the borrower when the sale of the property does not cover debt and foreclosure costs.

Depreciation
Decline in value of a house due to wear and tear, changes in the surrounding area or any other reason. Depreciation for tax purposes is different. Please consult your accounting professional for more information regarding depreciation for tax purposes.

Discount
With an ARM the lender may discount the initial interest rate to give the borrower lower payments. The discounted rate will go away after a period of time specified in the loan agreement.

Down payment
The amount of money the buyer pays in cash, and includes the initial deposit as well as money paid at closing.

Due on Sale Clause
A clause in the Mortgage or Deed of Trust that requires the entire loan is due upon the sale of the property.

Encumbrance
Anything that affects the title to real property or use of the real property. Examples are: debts, liens, easements, claims, zoning ordinances etc.

Equal Credit Opportunity Act
Prohibits discrimination in any credit transaction on the basis of race, religion, age, color, national origin, receipt of public assistance funds, sex or marital status.

Fair Housing Act
Prohibits discrimination in housing sales or loans on the basis of race religion, color, national origin, sex familial status or handicap.

Federal Home Loan Mortgage Corporation (Freddie Mac)
A private secondary mortgage corporation, purchasing mortgages and loans from lenders and packages them into securities which are then sold to investors.

Federal Housing Administration (FHA)
A private secondary mortgage corporation, purchasing mortgages and loans from lenders and packages them into securities which are then sold to investors. The Federal Housing Administration, generally known as "FHA", provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring nearly 33 million properties since its inception in 1934.

FICO
A credit scoring system developed to help lenders determine the likelihood of a borrower repaying a loan on time. Credit scores are based on the following data: Payment history, amounts owed, length of credit history, new credit, types of credit used. For more information go to www.myfico.com

First Mortgage or Trust Deed
A loan that is in first priority of being repaid when the property is sold.

Fixed Rate Mortgage
A mortgage with fixed interest rate and payments over the life of the loan.

Foreclosure
A legal procedure where leveraged property is sold to pay the debt secured by the property.

General Warranty Deed
A deed that warrants that the grantor has good title, and if the title did have a "cloud" or claim by another third party, the grantee can hold the grantor liable.

Ginnie Mae (GNMA)
Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as With Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.

Good Faith Estimate
An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

Graduated Payment Mortgage
A mortgage or loan that has lower payments at the beginning of the loan and the payments increase over time.

Grantee
The person whom property is transferred to by grant (buyer).

Grantor
The person transferring property by grant (seller).

HUD
The U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws. For more information go to www.hud.gov

HUD-1 Statement
Also known as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing. RESPA allows the buyer to request to see the HUD-1 statement one day before the actual settlement.

Impound
A portion of the borrower's payment held by the lender or loan servicer to pay for such items as property taxes, insurance, PMI, and other items. The lender or servicer then pays these items on behalf of the borrower when they become due.

Index
A measurement used be lenders to determine interest rates and changes that may be charged with an ARM. Common indexes include: Treasury Bill (T-Bill), 12 month Treasury Average, 11th District Cost of Funds, London Inter Bank Offering Rates (LIBOR), Prime Rate (set by Federal Reserve), and Certificate of Deposit Indexes.

Initial Deposit
The money a buyer submits with an offer to purchase a property. The initial deposit is typically between 1% -3% of the offering price. Once the offer is accepted by the seller the deposit is held in escrow and contributes to the down payment on the property.

Interest
A fee charged for the use of money.

Jumbo Loan (Non-conforming loan)
A loan that is larger than the limit established by Fannie Mae or Freddie Mac. The limit for 2005 is $359,650.

Lien
A claim by a party on a property. A lien can be a loan, judgment, unpaid taxes, or other obligations such as for services, labor or materials used on a property.

Loan
Money borrowed that is repaid with interest.

Loan to Value Ratio
The percentage of a loan based on the value of the property. For purchase loans the value of the property is the lesser of the purchase price or the appraised value. A loan program will have a stated LTV. If the LTV is greater than 80%, then PMI (Primary Mortgage Insurance) may be required.

Lock
A lender's promise to hold an interest rate and points for a borrower. A lock is valid for a certain number of days, and after that can change. If the sale of the property does not occur within the lock period, the interest rate and or points may change. Locked-in interest rates can be secured for longer periods of time by paying a fee.

Margin
The number of percentage points a lender adds to the index rate to calculate the interest rate on an ARM.

Mortgage
A lien or claim against a property pledged by the borrower to the lender as security for the money borrowed. The mortgagor is the borrower and the mortgagee is the lender. Mortgages are not typically used in California, Trust Deeds are more prevalent.

Mortgage Banker
A company that originates their own loans.

Mortgage Broker
A person who brings together a borrower and lender. A mortgage broker typically sources their loans from a variety of lenders and can therefore usually offer a borrower more choices for a loan program.

Mortgage Insurance
A policy that protects lenders against losses that may occur if a borrower defaults on a loan. Mortgage Insurance is typically required when the LTV is higher than 80%.

Mortgage Insurance Premium
A monthly payment for mortgage insurance and is typically included as part of the loan payment.

Origination
The process of preparing, submitting, and evaluating a loan application.

Origination Fee
Fee charged for originating a loan, typically calculated in the form of points.

PITI
Principal, Interest, Taxes and Insurance- the 4 elements of a loan payment. If Taxes and Insurance are included in the loan payment they are held in an impound account on behalf of the borrower and paid directly to the vendor when due.

PMI
Same as Mortgage Insurance; offered by private companies.

Points
A point is one percent of the amount of the loan. Points are used to calculate fees, as well as raise the yield on a loan.

Pre-approval
A lender has spoken with a potential borrower and verbally reviewed the borrowers buying power including income, credit scores, price of the property, etc.. Based upon this preliminary information the lender will issue a pre-approval letter. The letter will also state that any loan would be subject to verification and acceptance of information and application as well as an appraisal of the property.

Pre-qualify
The potential borrower has submitted to the lender all financials and the information is reviewed by the lender and underwriting. Based upon the findings the borrower is financially approved for the purchase, but it is still subject to a purchase contract, preliminary title review, escrow instructions and appraisal.

Prepayment
Payment of a loan prior to the due date. Some loans carry prepayment penalties.

Principal
The amount of money borrowed, and the basis for interest charges. Does not include interest or any other fees that may have been charged by the lender.

Pro-ration
The allocation of expenses between two or more parties. Typical expenses that are pro-rated are taxes, and interest. Pro-ration is typically done based upon a 30 day month and 360 day year.
Purchase Money Trust Deed
A trust deed (loan) used for the initial purchase of a property. Purchase money is important if a property ever goes to foreclosure. If a property is re-financed, the re-financed loan is not considered purchase money.

Qualifying Ratios
Ratios lenders use in qualifying a person for a loan. Lenders will typically look at two ratios:

• Front end ratio- housing expenses divided by gross monthly income

• Back end ratio- housing expenses plus long-term debt divided by gross monthly income.

Lenders will establish maximum ratios that are acceptable and vary by program.

Real Estate Settlement Procedures Act (RESPA)
A law protecting consumers during the home buying process. RESPA required disclosure by lenders of fees, and interest charges as well as settlement costs.

Reverse Mortgage
A financing instrument that will allow the borrower to obtain cash based on the equity in their home. A reverse mortgage has many restrictions associated with it.

Second Trust Deed
A loan that is subordinate to a first trust deed, but is also secured by the property. A second trust deed is often used as an alternative to paying PMI.

Section 1031
An IRS section where an investor can exchange like-kind property.

Super Jumbo Loan
A loan over $1,000,000.

Teaser Rate
A low initial rate on a loan.

Trustee
A party who is given legal rights to act on behalf of a beneficiary (lender) where the property is secured by a Trust Deed.

Truth in Lending Act
Also called Regulation Z. This is a Federal Act requiring disclosures regarding the loan to borrowers as well as in advertising. Under this act, a lender has 3 days to provide the buyer with an estimated costs of the loan, as well as total finance charges and the APR (annual percentage rate).

Underwriting
A process of deciding whether to make a loan to a borrower based upon their application, appraisal and other factors.

VA Loan
A loan for veterans and service persons guaranteed by the Dept. of Veterans Affairs. VA loans have little or no down payment requirements.

Wrap-around Mortgage or Trust Deed
A loan where a lender assumes payments on an existing loan(s) and takes from the borrower a junior trust deed with a face value equal to the amount on the prior instrument plus the additional amount of money borrowed. Also know as an All-Inclusive-Trust Deed (AITD).