Mortgage Terms

ADJUSTABLE RATE MORTGAGE (ARM): A rate used to figure the monthly payment that adjusts over a specific period of time, causing the monthly payment to go up or down over the life of the loan. It usually has a qualifying rate that is 1% to 2%  higher than the start rate. The adjusted rate is based on an index plus a margin and usually has a cap, or maximum rate and a floor, or minimum rate.

ALL INCLUSIVE DEED OF TRUST (AITD): See Wrap Around Mortgage.

AMORTIZATION: The calculation used to determine the amount of equal payments needed to pay off a loan within a certain specified time. Most first mortgages are amortized over 15 to 30 years.

ANNUAL PERCENTAGE RATE (APR): The total amount of the finance charges,  including interest, points and all loan fees (i.e. escrow, processing, etc.) calculated as a  yearly rate.

APPRAISAL: An estimate of the fair market value of a property calculated as a percentage of the borrowed amount and expressed as a prepared by a qualified real estate appraiser. Appraisers usually charge a fee called an Appraisal Fee.

ARMS LENGTH TRANSACTION: A purchase or sale of property where no family or business relationship exists prior to the transaction. Both parties have an equal bargaining position and each party acts to protect it's own interest. Lenders do not look favorably on transactions that are not at an "arms length".

ASSUMPTION: A transaction where one party, usually the buyer, takes over an existing loan from the seller. The lender may, or may not, be aware of the assumption. 

The seller does not give up any obligation to repay the loan after the transaction closes, unless the lender has given written authorization and releases the seller from the loan obligation.

ASSUMPTION FEE: The fee paid to the lender in order to assume someone else's loan.

ASSUMABILITY: Agreement by a buyer to assume liability under an existing agreement between seller an lender. Not all loans or loan terms are "Assumable." The lender typically must approve the new borrower.

NOTE: Fixed rate loans are generally not assumable, Adjustable rate loans usually are assumable and Convertible loans are usually only assumable when they are adjustable and not assumable when they are fixed.

BALLOON PAYMENT: The final payment of a mortgage loan that larger than the regular payment.

BINDER: An offer by an insurance company to insure the property at the close of escrow. Insurance for the new borrowers can not be placed until the property transfers title.

BRIDGE LOAN: See GAP FINANCING

BUY DOWN: A type of financing in which the interest rate is lower in the first few years than in the remaining years.  The beginning rate is lower than the current fixed market rates and may raise to a rate that is higher than the current fixed market rates. Not an adjustable rate mortgage, as there is no margin added to the interest rate to arrive at the new interest rate. Sometimes the rate is bought down by a developer to help sell the houses or it may be offered by the lender in order to get an overall higher yield on the loan.

CC&R's: Covenants, Conditions and Restrictions. When a property is developed the developer and city planning department issue CC&Rs that state how the property can be used by current and future owners.

CLOSING STATEMENT: A financial accounting of all funds used in the purchase and sale of property. Usually given by an Escrow company.

COMBINED LOAN-TO-VALUE (CLTV): When a borrower encumbers one property with 2 or more loans. The 2 loans are added together and divided by the property value.

CONDOMINIUM: Individual ownership of a dwelling unit and an undivided interest in the common areas and facilities which serve the multi-unit project. There is usually a monthly maintenance fee. Important to Condo's are the CC&R's, Articles of Incorporation, By-laws, Budget and Master Insurance Policy (which protects the whole project from hazards). Homeowners must obtain their own contents insurance coverage.

CONFORMING LOAN: Any loan that meets the qualifications to be purchased by Fannie Mae or Freddie Mac. The current conforming loan limit is $275,000 for SFR, Two Family = $351,950, Three Family = $425,400, Four Family = $528,700.

CONTINGENCY: A condition in a sales contract that must be met before the transaction can be completed and the property can transfer to the new owner.

CONVENTIONAL MORTGAGE: A mortgage loan not insured by HUD/FHA or guaranteed by
the Veterans Administration. It is subject to conditions established by the lending institution and state statues.

CONVERTIBLE: Some adjustable rate loans can be converted to a fixed rate during some portion of the life of the loan, usually after the first year and prior to the sixth year. This period is called a "window period" and loans can not be converted before or after the "window period".

NOTE: Convertible loans are usually only assumable when they are adjustable and not assumable when they are fixed.

COVENANT: An agreement to do or not to do a particular act.

CONVEYANCE: Transfer of Title. The document, such as a deed, by which title is officially transferred.

CREDIT REPORT: A formal written report by an agency that has financial institutions and granters of credit who supply information on the paying habits of the payer's. TRW (Experian) is one agency that is supplied information. In conventional loans, lenders require a STANDARD FACTUAL CREDIT REPORT. The standard factual credit report is a combination of usually three credit agency reports, as well as a report from the county records, public records, and out of state credit agencies. Most lenders who make conventional loans at low interest rates require the more extensive standard factual credit report and will not except a TRW report. You are entitled to a copy of the credit report showing any derogatory information found on the report.

NOTE: You may request TRW to provide you with a free credit report, once a year. This credit report can not be used in lieu of or to supplement the credit report required for your loan.

DEED OF TRUST (TRUST DEED): This instrument is used in place of a mortgage in some states_ i.e. California. Title is transferred to a trustee by the borrower, with the lender as beneficiary until the loan balance has been paid.

DPUD (DIMINIMUS PUD): A planned unit development (PUD) that usually has less than 10% of the project as common area. Like condo's and PUD's there are CC&R's, Articles of Incorporation, a Budget and Master Insurance Policy. Unlike Condo's,  the homeowners obtain their own Property (Hazard) Insurance. There is usually a monthly maintenance fee also called Homeowners Association Dues. (see PUD).

DOCUMENT PREPARATION FEE: A fee charged to the lender to prepare loan documents. If drawn incorrectly or changed due to an interest rate change or some other factor that involves the annual percentage rate or vesting of property, a redraw fee is assessed.

ENCUMBRANCE: A legal right or interest in land that affects a good or clear title and effects the land's value. Zoning ordinances, easement rights, claims, mortgagees, liens, charges, pending legal action, unpaid taxes or restrictive covenants are types of encumbrances. An encumbrance does not prevent transfer of the property to another but it may prevent a lender from loaning against the property. Title insurance may or may not be placed, depending on the significance of the encumbrance.

ESCROW: 1) The temporary holding by a neutral third party of deposited funds and documents pending the completion of the terms agreed to in a sales contract. 2) In some states, all instruments necessary to the sale are delivered to a third party, along with instructions as to their use. 3) The term "in Escrow" is used in some areas to refer to the time from the completion of the sales contract to the actual transfer of title. Escrow fees are usually considered part of your closing costs. (See Impound Account) 

NOTE: California uses Escrow Companies, other states use a Real Estate Attorney.

EQUITY: The market value of a property minus the total amount of any existing liens.

EXCHANGE: The trading of the equity in one or more properties for the equity of another property or properties.

FACTOR: Part of a Loan Table. A number used to multiply the loan amount by to arrive at the monthly loan payment, including principle and interest.

FHLMC or "Freddie Mac" _ Federal  Home Loan Mortgage Corporation: A taxpaying publicly chartered agency that buys qualifying residential mortgages from lenders. At one time primarily used to service the Savings and Loan (or Thrift) institutions that made loans in the form of mortgages against real estate property. It purchases and sells mortgages secured by Mortgage-backed Securities and their principal and interest is guaranteed by the federal government.

FIXED RATE MORTGAGE: A rate used to figure the monthly payment on a mortgage. The rate never changes over the life of the loan. NOTE: Fixed rate loans are generally not assumable.

FIXED INTERVAL RATE MORTGAGE (FIRM):  A mortgage where the rate is fixed for a specific period of time then the loan is recast and a new fixed rate, or adjustable rate, in then used for the remaining term of the loan or another specific period of time. The FANNIE MAY (FNMA) and FREDDIE MAC (FHLMC) 30/5 and 30/7 loan programs are FIRM loans. AKA: "Hybrid Loan"

NOTE: FIRM loans are usually only assumable when they are adjustable and not assumable when they are fixed.

FUNDING FEE: A fee charged by the lender to make sure the correct amount of funds are dispersed. Some lenders do not itemize this fee, but just add a fixed amount the overall cost of the loan or origination fee.

FNMA or "FANNIE MAE" (FEDERAL NATIONAL MORTGAGE ASSOCIATION): A taxpaying public corporation created by Congress in 1938 to support the secondary mortgage market. It purchases and sells residential mortgages, on the secondary market, insured by FHA or guaranteed by VA, as well as conventional home mortgages.

GAP FINANCING: A loan arranged on a property, usually currently for sale, to secure the down payment on another property being purchased. Also called a BRIDGE LOAN.

GRANT DEED: A deed, used in California and some other states, where the grantor assures that the property has not been conveyed to another and that the estate is free from encumbrances placed by the grantor.

HAZARD INSURANCE: Property insurance required by the lender for losses to the property due to fire, wind, water or natural hazards. Usually requiring at least 6 months prepayment of the premium.

HOA (Home Owners Association): An association of a group of home owners of a PUD or DPUD that governs the use of areas owned in common among the owners and assess fees to be collected for those areas.

HYBRID LOAN: See Fixed Interval Rate Mortgage, "FIRM"

IMPOUND ACCOUNT: (Also called Escrow Account) This is an account held by the lender for payment of taxes, insurance and other periodic debts against a property. The borrower pays the bills with the accumulated funds in the account as part of the regular monthly payment.

INDEX: A published interest rate used by lenders to adjust a variable rate mortgage. Its movements determine how much a variable rate will adjust, when the margin is added to it. Published indexes include the 3 month and 6 month Treasury Bill, 1 year Treasury Bill, 3 year and 5 year Treasury Bills, 11th District Cost of Funds, Banks Prime Rate and London Interbank Offered Rate, rates for Certificates of Deposit, as well as others. These rates are published in the local and national newspapers.

JUNIOR LIEN: Any lien that has other liens recorded prior to it's recording or has other predominant liens before it.

JUNK FEES: Any fee charged by a lender, originator, or broker that is not based on a real expense, like an application fee.

KICKBACK: Any form of payment by one party to another party for referring business.

LAND CONTRACT or (CONTRACT FOR SALE): Property purchased from an owner who retains title until the contract is fulfilled. The buyer takes possession of the property, but can not make  improvements or encumber the property without the sellers authorization. The seller has title, and if the contract is recorded, can not further encumber the property.

LOAN ORIGINATION FEE: (See POINTS)

LOAN PORTFOLIO: A lenders warehousing or stocking of loans that are not sold to other investors, Banks, Mortgage Bankers, etc. Usually involves loan servicing to collect the interest on the loan.

LOAN-TO-VALUE RATIO (LTV): The amount of the loan as a percentage of the property's appraised value. An 80% LTV, for example, is determined by subtracting a 20% down payment or 20% equity from the property's appraised value, leaving the amount of the loan or liens.

LIEN: A claim against a property in satisfaction of a debt. It can be voluntary, such as a mortgage, or involuntary, such as a lien for back taxes.

MARGIN: The margin is the difference between the ARM "index" and the rate the lender charges. Example: An index rate based on the Eleventh District Cost of Funds of 8% plus a margin of 2.5% would result in a home loan rate of 10.5%. In some areas the margin is referred to as the factor. The margin is fixed and covers the lender's operating expenses and profit margin.

MARKET VALUE: The current value of real estate that a buyer is willing to pay and a buyer is willing to accept.

MORTGAGE: A mortgage is evidence of the security for a loan. It is the document, signed by the borrower, which gives the lender the right to the property if the borrower fails to live up to the loan arrangement.

MORTGAGE INSURANCE: Insurance required by the lender, used to guarantee a portion of the loan against loss of principle and interest due to foreclosure.

NEGATIVE AMORTIZATION: The difference between interest owed and interest paid, which may then be added to the loan's principal balance. This results when the minimum monthly payment is exercised, an option of the borrower, in lieu of paying the new adjusted payment, on an adjustable rate mortgage is not large enough to cover the full amount of interest that is due. Note: Most lenders impose a 110% to 125% cap on the amount the loan can increase, resulting in reamortizing the loan over the remaining life.

NOTARY FEE: A fee charged to certify that the person who is signing a document, usually to be recorded, is the same person named in the document.

OPTION TO PURCHASE: The seller agrees to sell the property to the buyer for a pre-determined future price. Also called RENT TO OWN, in some areas, where some of the rental payments can be used as a down payment.

NOTE: Be careful, not all lenders will allow all of the amount set aside for the down payment to be used. Lenders expect the rents to be fair and in line with normal rents in the area. Lenders may require more of the rental payment to be used as actual rent. Don't expect 100% of the rent to be allowed for down payment purposes.

ORIGINATION FEE(S): (Also called Points or Loan Fees) A fee assessed by the lender for processing the loan. Most lenders' charges are based upon the amount of the loan. One point equals one percent of the loan amount. These fees are normally paid by the borrower at closing. In some cases, however, they may be paid by the seller or shared by both parties in a purchase transaction.

PAYMENT CAP: The maximum amount a payment may reach over a specified period of time. This feature is offered by some ARM lenders instead of an annual interest rate cap and may result in Negative Amortization, if exercised by the borrower.

PITI: Loan payments that include Principal, Interest, Taxes and Insurance. Requires an impound, or escrow, account for Tax and Insurance payments received.

PLANNED UNIT DEVELOPMENT (PUD): A project that has individual ownership of dwelling and an undivided interest in the common areas and facilities which serve the project. The common areas usually exceed 10% of the total development. Whereas a Condominium is usually two or more attached units, a PUD consists of single family units that may or not be attached to each other. Unlike Condo's,  the homeowners obtain their own Property (Hazard) Insurance. There is usually a monthly maintenance fee also called Homeowners Association Dues. (see HOA).

POINTS: (See Origination Fees)

PREPAYMENT PENALTY: (Prepayment Privilege, by some lenders) A fee some lenders charge if the loan is repaid prior to maturity or prior to a specified period, usually 5 years. Usually involves both the sale or refinance of property where the loan is paid off by a new lender. Some lenders do not charge a prepayment penalty on the sale of property.

PRE-APPROVAL: Providing information that is verified to know that an approval is certain, based on the accuracy of the information provided. Allows for a quick conclusion on a loan package. 

PRE-QUALIFY: Providing information to see what you qualify for. Needed to ensure the ability to secure the best financing for a given loan amount. Not as good as a PRE-APPROVAL.

PRINCIPAL: The amount of money borrowed or the loan amount, before interest is added.

PRIVATE MORTGAGE INSURANCE (PMI): Insurance designed to pay the lender a portion of the outstanding balance of a loan in the event that the homeowner defaults on the mortgage. Although paid by the borrower, it only benefits the lender and  is included in the Impound (Escrow) Account. PMI may be required on certain types of loans; if so, the initial premium is usually one of the closing costs, while subsequent premiums are included in the borrower's monthly payments.

PROBATE: Settlement of the estate of a deceased person. The judicial process whereby the will of the deceased person is presented to a court and an Executor (trix) or Administrator (trix) is appointed to carry out the will's instructions.

PROCESSING FEE: A fee charged to the borrower to cover the overhead expenses caused by requesting, compiling and assessing the information collected during the preparation of the loan package for submission for approval.

QUALIFYING RATE: Typical of adjustable rate mortgages that have a low start rate where the borrower must qualify at a higher interest rate. Qualifying at higher interest rates is a safeguard for future payment shock on the scheduled interest and payment adjustments, as well as a protection for the lender against possible foreclosures.

RATE CAP: The maximum amount an adjustable interest rate may reach over a specified period of time. The rate cap can be either over the life of the loan or from one adjustment period to the next.

RECONVEYANCE: When a loan against real estate has been satisfied or paid off, the deed to the property is returned to the property owner and should be recorded with the county clerk as satisfaction of the debt.

RECORDING FEE:  A fee charged by the county of record where the property is located. It gives public notice of ownership, transfer, or some other item of public interest that would be of concern to anyone who may or will have an interest in the status of the property.

REFINANCE: The securing of a new loan either to pay off an existing lien or mortgage on the property or to access equity.

REINSPECTION FEE (442): A fee charged by an appraiser to reinspect a house that has been under construction. The first inspection the appraiser did gave a value _"as is"_ prior to completion of construction while the property was ongoing some phase of construction. The # 442 refers to the form used for the reinspection evaluation.

SECONDARY MORTGAGE MARKET: An assortment of federal agencies (FHLMC) or quasi-federal corporations (FNMA) that buy mortgages on large numbers from primary lenders (banks, thrift and/or mortgage companies). In this fashion, the primary lenders obtain cash for the notes they hold so that the primary lender can lend the cash back into the real estate market.

SUBORDINATION: To make subject to or junior to. To place a pre-recorded lien behind, or junior to a new lien. An old lien usually becomes the dominant or senior lien when financing is arranged and the old lien is not paid off or reconvened. The creditor may allow an older lien to subordinate to a new lien with a subordination agreement.

SURVEY: This may be required by the title company to insure that the house is properly situated on the property. A survey is intended to reveal if the house, fence, pool or patio are built on or too near adjoining property or utility easements. Fees, if any, are normally paid by the borrower.

TAX SERVICE FEE: A fee paid to the lender so the lender can have a report on the status of property tax payments. If not paid, the lender will have to pay the property tax and add it the principle. A frequent cause for foreclosures. The tax service fee is required even if the loan is impounded, in case of any supplemental property tax levies.

TERMITE OR PEST INSPECTION: A fee charged by a company that inspects property for some type of insect and/or fungus that destroys structural members of dwellings and/or improvements adjacent to the property being inspected. Usually only of concern in the transfer of property, it has also been required by the lender on older properties.

TITLE: Ownership or proof of ownership to real property.

TITLE INSURANCE: A Title Company issues insurance protection against the consequences of a previous lien or encumbrance on a property that might be discovered after a change in ownership.

UNDERWRITING: The standards set by the lender which the borrower must meet in order to qualify for the loan or insurance.

VARIABLE RATE MORTGAGE (VRM): See Adjustable Rate Mortgage.

VESTED: Bestowed upon someone; secured by someone, such as title to property.

WARRANTY DEED: A deed that contains express covenants of title. This deed is used in most states, not in California. California uses Grant Deeds which implies certain covenants, limited to matters created by the grantor.

WRAP-AROUND MORTGAGE: (Also called an All Inclusive Deed of Trust, AITD) A junior mortgage which secures a debt that includes the balance due on an existing senior mortgage and an additional amount advanced by the wrap-around mortgage, usually at a higher interest rate than the senior mortgage. The higher interest rate guarantees the original interest on the senior mortgage, as well as a higher yield on the junior portion of the advanced amount.

YIELD: The return on an investors capital investment. The total money earned on a loan, as a percentage, commonly called the Annual Percentage Rate.

ZONING: The classification of use of property. Such as R1, R=residential and 1=the number of living units or dwellings.

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