Mortgage Dictionary

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Abstract (of Title)

A historical summary of all the recorded transactions that affect the title to the property. An attorney or a title company will review an abstract of title to determine if there are any problems affecting the title to the property. All such problems must be cleared before the buyer can be issued a clear and insurable title.

Acceleration Clause

A loan provision giving the lender the power to declare all sums owing lender immediately due and payable upon the violation of a specific loan provision, such as the sale of the property, or the failure to make loan payments on time.

Example : John sells his property to Mary who takes over John's mortgage payments. They do not notify the lender of this transaction. The lender finds out that the title to the property has transferred and calls the loan, since the loan documents state that the loan is due on the sale of the property. John is now liable to pay his lender in full.

Accretion

The addition to land through natural forces like wind or water.

Example : deposit of soil carried by a river

Agreement of Sale

A written signed agreement between the seller and the purchaser in which the purchaser agrees to buy certain real estate and the seller agrees to sell upon terms of the agreement. Also known as contract of purchase, purchase agreement, offer and acceptance, earnest money contract or sales agreement.

Acknowledgment

Formal declaration before a public official (typically a Notary Public) that one has signed a document. Required before recording real estate legal documents, such as a deeds of trust.

Acre

A measure of land equal to 43,560 square feet.

Adjustable Rate Mortgage (ARM)

Also known as a variable rate mortgage. The interest rate on these mortgages changes periodically.

Adjustment Period

This is the length of time for which the interest rate is fixed on an adjustable. Therefore if the adjustment period is six months, then the interest rate will remain fixed for six months, after which time it will adjust.

Amortization

A gradual paying off of a debt by periodic installments which pay principal and interest.

Annual Percentage Rate - APR

The effective rate of interest for a loan per year. This rate is typically higher than the note rate because it takes into account closing costs. This is one way to compare loan programs offered by different lenders. Caution : the APR is sometimes computed differently by different lenders and can be misleading.

Appraisal

An opinion or estimate of the value of a property at a given date.

Arm's length transaction

A transaction among parties each of who acts in his or her own best interest.

Example : A transaction between a father and his son would NOT be an an Arm's length transaction

Assessment

A local tax levied against a property for a specific purpose such as street lights.

Assumable Mortgage

A mortgage loan which allows a new home buyer to take over the obligation of making loan payments with no change in the terms of the loan. Assumable loans do not have a due-on-sale clause. The lender has to be notified and agree to the assumption. The lender may require the buyer to qualify for the loan and may charge an assumption fee. The seller should obtain a written release from the lender stating clearly that he/she is no longer liable to make mortgage payments. See also "Subject To".

Attorney In Fact

One who is authorized to act for another under a power of attorney which may be general or limited in scope.

Example : John wants to sell his house but has to be out of the country for 4 months. John gives authorization to Mary to sign the grant deed to sell the property to a buyer. Mary becomes John's Attorney In Fact.

Balloon (payment) Mortgage

Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

Example : A balloon mortgage for $25,000 has interest only payments for 5 years at 12% ($250 per month), with the full principal of $25,000 due and payable after 5 years.

Bankruptcy

The financial inability to pay one's debts when due. The debtor surrenders his assets to the bankruptcy court. An individual typically files for Chapter 7 (all debts wiped out) or Chapter 13 (establishes a payment plan to pay off debts). A bankruptcy stays on an individual's credit report for 7 years.

Beneficiary

The person who receives or is to receive the benefits resulting from certain acts.

Example : The lender is named as the beneficiary on a mortgage loan.

Example : John has a life insurance policy for $100,000 with Jane as his beneficiary. Should John die - Jane will receive the benefits i.e. $100,000.

Binder

Definition #1: A title insurance binder is the written commitment of a title insurance company to insure title to the property subject to the conditions and exclusions shown on the binder.

Definition #2: Preliminary agreement, normally secured with earnest money, between a buyer and a seller as an offer to purchase real estate.

Bi-weekly Mortgage

A mortgage which requires 1/2 the normal monthly payment every two weeks. Over the course of the year, 26 half payments are made which is equivalent to 13 full mortgage payments. As a result of this extra payment the loan amortizes much faster than a loan with normal monthly payments.

Blanket Mortgage

A mortgage covering more than one piece of property.

Example : A developer subdivides a tract of land into lots and obtains a blanket mortgage on the whole tract.

Bond

1. A debt instrument in the capital markets. The U.S. government, corporations and municipalities use bonds to raise money. Bonds can also be backed by mortgages. The best known bond is the 30-year treasury bond issued by the U.S. government.

2. A sum of money given to a court to guarantee against a loss. For example if there is a lien on a property, the owner may remove the lien by posting a bond.

Borrower (Mortgagor)

One who applies for a loan secured by real estate and is responsible for repaying the loan (mortgage).

Bridge Loan

An interim loan typically used when the buyer is unable to sell his/her house but needs money to close the transaction on the house he/she is buying. The bridge loan is made on the buyers current residence to finance the buyers new residence. The loan is paid off when the buyers current residence is sold.

Broker

See Real Estate Broker or Mortgage Broker.

Buy Down

Obtaining a lower interest rate (buying down the rate) by paying additional points to the lender. The lower rate may apply for the full duration of the loan or for just the first few years. A buydown may be used to qualify a borrower who would otherwise not qualify . This is because a buydown results in lower payments which are easier to qualify for.

Example : A very popular buydown is the 2-1 buydown. If the interest rate on the note is 9%, the buydown results in the rate being 7% (9%-2%) for the first year, 8% (9%-1%) for the second year, and 9% thereafter.

Buyers Broker

An agent hired by a buyer to locate a property for purchase. The broker represents the buyer and negotiates with the sellers broker for the best possible deal for the buyer.

Buyers Market

Market conditions that favor buyers i.e. there are more sellers than buyers in the market. As a result buyers have ample choice of properties and may negotiate lower prices. Buyers markets may be caused by an economic slump or overbuilding.

Bylaws

A set of regulations by which an organization conducts its business.

Example : A condominium association prepares bylaws that state the minimum number of owners to conduct a meeting to decide policies.

Capital Gains

Profit earned from the sale of real estate. A seller may defer taxes on the capital gain of his/her primary residence by buying a higher priced residence within 2 years.

Cash Flow

The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.).

Caveat Emptor

A legal term meaning "let buyer beware". The buyer must examine the property and buy at his/her own risk.

Example : A property may be offered in an "as is" condition with no expressed or implied guarantee of quality or condition.

CC&Rs - Covenants, conditions, and restrictions.

The basic rules establishing the rights and obligations of owners of real property within a condominium, townhouse, PUD, subdivision or other tract of land. An association is organized for the purpose of operating and maintaining property commonly owned by the individual owners. The association is normally made up of property owners.

Certificate of Eligibility

The document issued by the Veterans Administration to those that qualify for a VA loan which may be used to buy a house with 0 down. Certificates of eligibility may be obtained by sending the form DD-214 to the local VA office along with VA form 1880.

Certificate of Reasonable Value (CRV)

An appraisal performed by an VA approved appraiser which establishes the property's current market value. This value establishes the ceiling on the maximum VA mortgage loan principal.

Certificate of Occupancy

Document issued by a local governmental agency that states a property meets the local building standards for occupancy and is in compliance with public health and building codes. This document is normally required by a lender prior to closing the loan.

Certificate of Title

An opinion rendered by an attorney as to the status of title to a property, according to the public records. This certificate does not the same level of protection as title insurance.

Chain of Title

The chronological order of conveyance of a parcel of land from the original owner to the present owner.

Example : An abstractor can research title to property going back to the date that the property was granted to the United States.

Clear Title

A marketable title, free of clouds and disputed interests. Most lenders require a clear title prior to closing.

Closing

1. The act of transferring ownership of a property from seller to buyer in accordance with a sales contract.

2. The time when a closing takes place.

Closing Costs

Expenses incurred by the buyer and seller in a real estate or mortgage transaction. There are two types of costs : recurring and non recurring.

Non-recurring costs are one time transactional costs which include

• Discount and origination points
• Lender fees - underwriting, processing, document preparations, flood certificate, tax service, wire transfer, courier, etc.
• Title insurance fees
• Escrow, attorney or closing agent fees
• Recording fees
• Inspection and appraisal fees
• Real estate brokerage commissions

Recurring fees are costs associated with owning the property and they recur month after month. These costs may include hazard insurance, interest, property taxes, mortgage insurance (PMI), and association fees. A pro-rated amount of these fees may have to be paid at closing including

• Pre-paid interest - interest charges from the date of closing to the end of the month
• Property taxes if due
• Hazard insurance, fire insurance or homeowner's insurance has to be paid for one year
• Mortgage insurance (PMI) - may be required if the loan amount is more than 80% of the value of the property. In the past a whole year of PMI had to be paid up front, however in recent years many PMI companies only require 1-2 months up front. Mortgage insurance premiums are normally paid every month with the loan payment
• Impound account may need money to be set up for future payments

Cloud on Title

An outstanding claim or encumbrance that, if valid, would affect or impair the owner's title. Compare with Clear title.

Commitment

A written document provided by a lender to agreeing to make a loan on specific terms to a borrower or builder.

Condemnation

1. Taking private property for a public use with compensation to the owner under eminent domain. Used by governments to acquire land for streets, schools, freeways, etc and by utilities to acquire necessary property.

2. Declaring a structure unfit for use because of violations in housing codes or other reasons.

Conditional Commitment

A written document provided by a lender agreeing to make a loan provided certain conditions are met prior to closing.

Condominium

Individual ownership of a dwelling unit and an individual interest in the common areas and facilities which serve the multi-unit project.

Construction loan

A short term loan to pay for the construction of buildings or homes. These loans typically provide periodic disbursements to the builder as each stage of the building is completed. When construction is completed a take-out or permanent loan is used to pay off the construction loan.

Consideration

Anything of value given to induce another to enter into a contract. Earnest money deposit on a sales contract is consideration.

Contingency

Conditions which must be satisfied before the buyer can close the purchase of a property. Contingencies are generally outlined in the purchase contract between the buyer and seller.

Example : The buyer has 14 days to remove the property contingency under the sales contract. In this case the buyer has 14 days to inspect the property and request the seller to perform repairs. If the buyer is not satisfied with the condition of the property or if the buyer and the seller cannot agree on repairs, the buyer may back out of the contract with no penalty. After 14 days the buyer no longer has the right to back out with no penalty as a result of a problem with the condition of the property.

Contract

An agreement between competent parties to do or not do certain things for consideration.

Example : To have a valid contract for the sale of real estate there must be :

1. an offer
2. an acceptance
3. competent parties
4. consideration
5. legal purpose
6. written documentation
7. description of the property
8. signatures by principals or their attorney-in-fact

Contract of Sale

Same as the Agreement of Sale

Contract sale or deed

A real estate installment selling arrangement where the buyer may occupy the property but the seller retains the title until the agreed upon sales price has been paid. Also known as an installment land contract.

Example : John sells Mary a house. Mary has to put $10,000 and pay $1,000 per month for 24 months, after which time she will receive title to the property.

Conventional Loan

Any mortgage loan other than a VA or an FHA loan. A convention loan may be conforming or non-conforming.

Conveyance

The transfer of title of real from one party to another.

Co-op - cooperative

An apartment building or a group of dwellings owned by a corporation, the stockholders of which are the residents of the dwellings. It is operated for their benefit by their elected board of directors. In a cooperative, the corporation or association owns title to the real estate. A resident purchases stock in the corporation which entitles him to occupy a unit in the building or property owned by the cooperative. While the resident does not own his unit, he has an absolute right to occupy his unit for as long as he owns the stock.

Convertible ARMs

Some variable loans come with options to convert them to a fixed loan based on a pre-determined formula, during a given time period. For example the 1-year tbill adjustable may be converted to a fixed during the first five years on the adjustment date. The means that you could convert during the 13th, 25th, 37th, 49th and 61th months of the loan.

Credit Report

A report detailing a borrowers credit history including payment history on revolving accounts (eg. credit cards) and installment accounts (e.g.. car loan). A credit report also includes information found from public records including tax liens and judgements.

Deed

A written document by which title to real property is transferred from one owner to another. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the State where the property is located, and should be delivered to the buyer at closing.

Deed of Trust

Used in many states in lieu of a mortgage to secure the payment of a note. In a deed of trust there are three parties - the borrower, the trustee, and the lender, (or beneficiary). In such a transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the debt to the lender or beneficiary. If the borrower pays the debt as agreed, the deed of trust becomes void. If, however, he/she defaults in the payment of the debt, the trustee may sell the property without a court proceeding.

Deed Restriction

A clause in a deed that limits the use of land.

Example : A deed might require that a road cannot be built on the land.

Default

Failure to meet legal obligations in a contract - such as the failure to make the monthly mortgage payment.

Defective Title

Any recorded instrument that would prevent a grantor/seller from giving a clear title.

Example : The seller has a contractor lien on the property that was filed when he/she failed to pay the contractor for the kitchen remodel. The seller may obtain clear title by paying the contractor and removing the lien.

Deficiency Judgment

Personal claim against the debtor when the sale of foreclosed property does not yield sufficient proceeds to pay off the mortgages, accrued interest, legal fees, etc.

Depreciation

Decline in the value of a house due to wear and tear, obsolescence, adverse changes in the neighborhood, or any other reason.

Discount Points

Fees paid to a lender to reduce the interest rate.

Documentary Tax Stamps

Stamps affixed to a deed showing the amount of transfer tax.

Dower

The rights of a widow or child to part of a deceased husband's or fathers property.

Downpayment

The amount paid for the purchase of a property in addition to the mortgage, but not including any closing costs.

Example : John buys a house for $100,000 and obtains a loan for $80,000. His downpayment is $20,000.

Due on Sale Clause

A clause in the Deed of Trust or Mortgage that states that the entire loan is due upon the sale of the property.

Dragnet Clause

A provision in a mortgage that pledges several properties as collateral. A default in the mortgage could lead to foreclosure proceedings on any of the properties in the dragnet.

Earnest Money

A deposit made by a buyer of real estate towards the down payment to evidence good faith. This money is typically held by the real estate brokers or the escrow company.

Easement

The right to use the land of another for a specific purpose. Easements may be temporary or permanent.

Example : The utility company may need an easement to run electric lines.

Eminent Domain

The right of the government or a public utility to acquire property for necessary public use by condemnation, with proper compensation to the owner.

Encroachment

A building, a part of a building, or an obstruction (e.g.. a fence or a wall) that physically intrudes upon or overlaps into the property of another.

Encumbrance

A legal right or interest in land that affects a good or clear title, and diminishes the land's value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes, or restrictive covenants. An encumbrance does not legally prevent transfer of the property to another. A title search is all that is usually done to reveal the existence of such encumbrances, and it is up to the buyer to determine whether he wants to purchase with the encumbrance, or what can be done to remove it.

Equity

Equity=Property Value - Loans/Liens Against the property.
Equity is typically expressed as a percentage of the property value.

Equity Sharing

Joint ownership of a property between the owner/occupant and the owner/investor, that results in tax advantages for both parties. Upon sale of the property the joint owners split profits based on the percentage they own.

Escrow

1. Neutral third party that handles all funds in a real estate transaction. The buyer puts his deposit into escrow, the lender funds the loan into escrow. Escrow pays the real estate brokers commission, pays off any loans/liens against the property, pays real estate taxes and any other fees associated with the transaction and sends the balance of the money to the seller.

2. Escrow payment - see impound account.

Escheat

The reversion of property to the state in the event that the owner dies without leaving a will and has no legal heirs.

Executor (Executrix - feminine for Executor)

A person named in a will to carry out its provisions for the disposition of the estate.