The Ultimate Florida Mortgage Glossary

If you’re thinking about buying a home, you’re up to your eyeballs in paperwork. Not only that, but you are probably being bombarded with more keywords, industry terms and acronyms than you can shake a stick at. With that in mind, Florida Home Loan has researched, compiled and edited this comprehensive glossary. Below, you’ll literally find all there is to know about mortgages… from A to Z.

ACCELERATION CLAUSE
This is a clause in your mortgage agreement that 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. This is also known as a “call down.”

ADJUSTABLE-RATE MORTGAGE (ARM)
A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. ARMs are all tied to various financial indexes. See our guide to different types of mortgages for more details!

AMORTIZATION
Paying off a loan consists of a portion which will be applied to pay the accruing interest on a loan, with the remainder being applied to the principal. Amortization is process in which the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is amortized (i.e. paid off) in the specified time. An amortization schedule is one that 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 overall balance from the day you close until it reaches $0.

ANNUAL PERCENTAGE RATE (APR)
The value created by a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. At least in theory. Confused? Use this as a guideline: deduct closing costs from your loan amount, then using your actual loan payment, calculate what the interest rate would be on this amount instead of the actual loan amount. You will come up with a number close to the APR.

APPLICATION
The form a borrower uses to apply for a mortgage, containing information about his or her income, savings, assets, debts, credit, and a whole host of additional things. For more information, please see our guide to the mortgage process.

APPRAISAL
A written assessment of the suggested price, or value of a property, based on an analysis of comparable sales of similar homes in the vicinity. The appraised value is really only 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, the appraisal usually comes out to about the purchase price.

APPRAISER
An unbiased third party qualified by education, training, and experience to estimate the value of real estate. Although some appraisers work directly on behalf of mortgage lenders, most are independent individuals or companies.

APPRECIATION
The increase in the value of a property due. Can be caused by inflation, local and national economic conditions, or other factors.

ASSESSMENT
Shield your eyes from this one. It’s the process by which a value is placed on a property by a public tax assessor. Property taxes are coming, and there is no escape. An assessor is usually a public official of a town / municipality.

ASSET
Any item of value owned by an individual. You will probably have to establish your assets in order to get a mortgage. Assets that can be quickly converted into cash, such as bank accounts, stocks, bonds and mutual funds, are considered “liquid assets.” Other assets include real estate, personal property, and debts owed to an individual by others.

ASSIGNMENT
It is called an assignment when ownership of your mortgage is transferred from one company or individual to another.

ASSUMABLE MORTGAGE
A mortgage that can be assumed by the buyer when a home is sold. Usually, the borrower must “qualify” in order to assume the loan.

ASSUMPTION
The term applied when a buyer assumes the seller’s mortgage.

BANKRUPTCY
Declarations of bankruptcy have major impacts on your ability to receive loans or lines of credit of any kind. The basic gist is that by filing for bankruptcy protection in federal court, individuals can restructure or relieve themselves of debts and liabilities. The most common type of bankruptcy for an individual seems to be “Chapter 7 No Asset” which most types of the borrower’s debts. A borrower cannot usually qualify for an loan for a period of two years after the bankruptcy has been discharged and must re-establish an ability to repay debt.

BILL OF SALE
A written document that transfers the title to personal property. For example, if selling an automobile to acquire funds which will be used as a source of down payment or for mortgage closing costs, the lender will usually require the bill of sale (in addition to other items) to help document the source of funding.

BI-WEEKLY MORTGAGE
A mortgage in which you make payments every two weeks instead of once a month. Every two weeks equates to slightly more frequently than once a month, so essentially it’s like making 13 monthly payments instead of 12 - which reduces the principal significantly and allows for faster repayment of your 30-year mortgage. Some independent companies encourage borrowers to set up bi-weekly payment schedules on 30-year loans. In such cases, your funds are deposited into a trust account from which your monthly payment is then made, with the excess funds remaining in the account until enough has accrued to make the additional payment which will then be paid and reduce your principle. You can basically do the same thing yourself, however, by just making an extra payment every so often.

BRIDGE LOAN
Bridge loans are obtained by those who have not yet sold their previous property, but must close on a purchase property. Not as common in this generation of lower rates and bigger loans. When used, the bridge loan becomes the source of funds for the applicant’s down payment. Reasons for their decline in popularity include an increase in second mortgage lenders and sellers who will only accept offers from buyers who have already sold their property.

BROKER
What you will be if you aren’t careful. Just kidding. The term “broker” has several meanings in different situations. Most realtors are “agents” who work under a “broker.” Some agents are brokers as well, either working form themselves or under another broker. In the mortgage industry, a broker usually refers to a company or individual that does not lend money itself, but brokers loans to lenders or investors. Technically a broker is anyone who acts as an agent, bringing two parties together for any type of transaction and earns a fee for doing so.

CAP
Adjustable Rate Mortgages (ARMs) have fluctuating interest rates, but those fluctuations are usually limited to a certain amount. Those limitations may apply to how much the loan may adjust over a six-month period, a 12-month period, and over the life of the loan. The limitations are known as “caps.” Some ARMs allow the interest rate to fluctuate freely and require a certain minimum payment which can change annually, in spite of their lifetime cap. There is a limit on how much said payment can change each year - a limit also referred to as a cap.

CASH-OUT REFINANCE
This is seen when a borrower refinances his mortgage at a higher amount than the current loan balance with the intention of withdrawing money for personal use.

CHAIN OF TITLE
An analysis of the transfers of title to a piece of property for however many years it is a matter of record.

CLEAR TITLE
A title that is free of liens or legal questions as to ownership of the property.

CLOSING
Although this has different meanings in different states, it’s basically when all is said and done. In some states a real estate transaction is not consider “closed” until the documents are recorded at the local recorder’s office. In others, the “closing” is a meeting between the parties where the documents are signed and the money changes hands. In any case, it’s the end of the road.

CLOSING COSTS
This gets trickier. Closing costs are separated into what are called “non-recurring closing costs” and “pre-paid items.” Non-recurring closing costs are, as their name suggests, costs that don’t occur again. In other words, any items paid just once as a result of buying the property or obtaining a loan. “Pre-paid” costs are items which recur over time, such as property taxes and homeowners insurance. The lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items in their “good faith estimate” that they issue to the borrower within three days of receiving his or her home loan application.

CLOUDS
What you see in the sky on almost any given day, but also a term for any conditions revealed by a title search that adversely affect the title to real estate. Usually clouds on title cannot be removed except by deed, release, or court action.

COLLATERAL
With any loan, collateral provides the issuer security. In the case of a home loan, the property is the collateral. The borrower risks losing the property if the loan is not repaid according to the terms of the mortgage or deed of trust.

COMMISSION
As in all business, salespeople earn commissions for the work that they do, and there are a number of such professionals involved in nearly all real estate transactions. Realtors, loan officers, title company representatives, lawyers, escrow administrators, home inspectors, appraisers, insurance agents — the list is never-ending. Commissions are paid by the buyer or seller, depending on the circumstances or service, as the parties move forward towards the transaction. Realtors generally earn the largest commissions, followed by lenders and further on down the line.

COMPARABLE SALES (COMPS)
Also referred to as “comps,” this means recent sales of similar properties in nearby areas and used to help determine the market value of a property.

CONDOMINIUM
Often mistakenly referred to as a type of construction or building / development, it actually refers to the type of ownership. A condominium is all of the owners own the property, common areas and the physical building(s) together, with the exception of the interior of the unit to which they have title. This type of ownership - along with the types of construction in which it is generally practiced - is becoming more common in major growth areas as population increases and empty-nest baby boomers look to downsize.

CONTINGENCY
Before a contract is legally binding, it must meet any contingencies stipulated by either party. For instance, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains an appraisal and/or a satisfactory inspection report from an qualified appraiser or home inspector, respected. You can find a greater explanation and a list of sample contingencies in our guide to making an offer on a house.

CONVENTIONAL LOAN
Refers to any home mortgages other than government loans (VA and FHA).

CONVERTIBLE ADJUSTABLE-RATE MORTGAGE (ARM)
A car with no roof? You wish. It’s an adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-rate mortgage within a specific time.

CREDIT
An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date. One’s credit history is a record of an individual’s repayment of debt. Credit histories are reviewed my mortgage lenders as one of the main underwriting criteria in determining risk - and the interest rate you receive as a result.

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 risk credit worthiness. A creditor is any person or company to whom money is owed, and all will factor into your report.

DEBT-TO-INCOME (DTI) RATIO
The primary calculation used in determining whether a borrower can qualify for a mortgage. It is a calculation of the borrower’s monthly housing costs (PITI, homeowners association fees, etc.) as a percentage of monthly income. Some variations also include housing costs along with other monthly debt.

DEED
The legal document conveying title to a property.

DEED-IN-LIEU
Short for “deed in lieu of foreclosure,” this conveys title to the lender when the borrower is in default and wants to avoid foreclosure. The lender may or may not cease foreclosure activities if a borrower provides a deed-in-lieu. Regardless of whether the lender accepts the deed-in-lieu, the avoidance and non-repayment of debt will most likely show on a credit history. A deed-in-lieu may prevent having the documents leading up to a foreclosure being recorded and made public record.

DEED OF TRUST
Some states, most notably California, do not record mortgages. Instead, they record a deed of trust which is essentially the same thing. They also have an obsession with direct democracy and a former movie star as Governor, so you never know what you are going to find out West!

DEFAULT
Failure to make the mortgage payment within a specified period of time. For first mortgages or first trust deeds, if a payment has still not been made within 30 days of the due date, the loan is considered to be in default.

DELINQUENCY
Failure to make mortgage payments when due. For most mortgages, payments are due on the first day of the month. Even though the lender may not charge a “late fee” for a number of days, the payment is still considered to be late and the loan’s status delinquent. When a loan payment is more than 30 days late, most lenders consider the loan default and report the situation to one or more credit bureaus.

DEPOSIT
Money given in advance of a larger amount expected in the near future. In real estate it is often called an “earnest money deposit.”

DEPRECIATION
A decline in the value of property, or, in accounting terms, the declining monetary value of an asset.

DISCOUNT POINTS
This term is usually used in only in reference to government loans, meaning FHA and/or 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 overall loan amount.

DOWN PAYMENT
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage. Some lenders allow you to not put any money down, while many people opt for down payments of 20 percent or more.

DUE-ON-SALE PROVISION
A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.

EARNEST MONEY DEPOSIT (EMD)
A deposit made by the potential home buyer to show that he or she is serious about buying the house. It will be placed in escrow until the contract is either cancelled or signed by both parties.

EASEMENT
A right of way giving persons other than the owner access to or over a property.

EFFECTIVE AGE
An appraiser’s estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age.

EMINENT DOMAIN
The right of a government to take private property for public use upon payment of its fair market value. Eminent domain is the basis for condemnation proceedings, and has become a widely controversial issue in the past year with the Supreme Court’s landmark ruling in the Kelo v. New London (Conn.) case.

ENCROACHMENT
When the defensive linemen enter the neutral zone before the ball is snapped. Just kidding. It’s when an improvement made on one home or property intrudes illegally on another’s land.

EQUITY
The homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage (as well as other liens). With each mortgage payment, the principal balance paid turns to equity and increases your net worth.

ESCROW
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the earnest money deposit is put into escrow until delivered to the seller when the transaction is closed. Once you close your purchase transaction, you may have an escrow with your lender. This means the amount you pay each month includes an amount above what would be required if you were only paying your principal and interest. The extra money is held in your impound account (escrow account) for the payment of items like property taxes and homeowner’s insurance when they are due. The lender pays them with your money instead of you paying them yourself. The use of escrow funds to pay real estate taxes, hazard insurance and other property expenses as they become due is known as escrow disbursement.

EXAMINATION OF TITLE
The report on the title of a property from the public records of the title.

EXCLUSIVE LISTING
A written contract that gives a licensed real estate agent an exclusive right to sell a specific property for a specified length of time.

FAIR CREDIT REPORTING ACT
A law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies. This consumer protection law also establishes procedures for correcting mistakes on consumers’ credit records.

FAIR MARKET VALUE (FMV)
The highest price that a buyer would pay (a buyer who is willing but not obligated to buy) and the lowest a seller, who is likewise willing but not required to sell, would accept for a property.

FANNIE MAE (FNMA)
Fannie Mae stands for the Federal National Mortgage Association, which is a congressionally chartered, shareholder-owned company. As the nation’s largest supplier of home mortgage funds, Fannie Mae’s community based lending program provides an income-based community lending model. Mortgage insurers and Fannie Mae offer flexible underwriting guidelines increase a low- or moderate-income family’s buying power and to decrease the total amount of cash needed to purchase a home.

FEDERAL HOUSING ADMINISTRATION (FHA)
An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is providing insurance for residential mortgage loans made by private lenders. The FHA sets standards for underwriting and construction but does not lend money or plan / physically develop housing.

FHA MORTGAGE
A mortgage that is insured by the Federal Housing Administration (FHA). Along with VA loans, an FHA loan will often be referred to as a government loan.

FIRST MORTGAGE
The mortgage that is first - in terms of the date in which loans are recorded - among any loans recorded against a property.

FIXED-RATE MORTGAGE
A mortgage in which the interest rate does not change during the entire term of the loan. The most standard type of mortgage is a 30-year, fixed-rate loan.

FLOOD INSURANCE
It’s just what you think it is, and you may not have a choice of whether or not to buy it. This is insurance that compensates for physical property damage resulting from flooding, and it’s required for properties located in federally designated flood areas.

FORECLOSURE
The legal process by which a borrower in default is removed of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt. Check out the real estate section of your newspaper and you will usually see a few homes being sold under these provisions.

GOVERNMENT LOAN / MORTGAGE
All “non-conventional” loans. A government loan or mortgage is one that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS).

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
Also known as Ginnie Mae, this is another government-owned corporation performs the same role as Fannie Mae and Freddie Mac in providing funds to lenders for making home loans - with the only difference being that Ginnie Mae provides funds for government loans (FHA and VA).

GRANTEE
The person to whom an interest in real estate / property is conveyed.

GRANTOR
The person conveying an interest in real estate / property.

HAZARD INSURANCE
In addition to basic homeowner’s insurance (see below), this insurance covers you in the event of physical damage to a property from fire, wind, vandalism, or other hazards. The U.S. will likely see more hazard insurance claims in 2005 than any prior year in its history.

HOME EQUITY LINE OF CREDIT
A mortgage loan that allows the borrower to obtain cash drawn against the equity of his or her home, up to a predetermined amount and at a predetermined rate of interest.

HOME INSPECTION
A thorough inspection by a professional that evaluates the structural / mechanical conditions of a property. A satisfactory home inspection by an unbiased third party is often included as a contingency by the potential buyer.

HOMEOWNERS’ ASSOCIATION (HOA)
An association that manages the common areas of planned unit development (PUD) or condominium projects. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to the common elements. While non-profit, the HOA will likely require monthly or annual fees from residents in order to perform its duties.

HOMEOWNER’S INSURANCE
A required insurance policy that combines personal liability and hazard insurance coverage for a property and its contents.

HOMEOWNER’S WARRANTY
A type of insurance often purchased by home buyers to cover repairs to certain items, such as air conditioning or heating systems, for a certain period of time. The buyer often requests the seller to pay for this coverage as a condition of the sale, but buyers can pay independently as well.

HOUSING AND URBAN DEVELOPMENT (HUD)
The United States Government agency whose mission is to increase home ownership, support community development and increase access to affordable housing free of discrimination.

JUMBO LOANS
Yup, they’re big. Jumbo loans are mortgages that exceed Fannie Mae’s and Freddie Mac’s loan limits, established at $359,650 as of January 1, 2005. Also called a nonconforming loan.

LEASE
You know all about this if you have rented an apartment, or had tenants reside in a place that you own. A lease is a written agreement between the property owner and a tenant that stipulates the payment and conditions by which the tenant may possess the real estate for a specified time.

LEASE OPTION
This alternative financing option allows home buyers to lease a home with an option to buy. Each month’s rent may consist of the rent and an additional amount which can be applied toward the down payment on an already specified price.

LIABILITIES
A person’s financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others. Liability insurance is usually part of a homeowner’s insurance policy, and provides protection against claims alleging that a property owner’s negligence or inappropriate action resulted in bodily injury or property damage to another party.

LIEN
A legal claim against a property that must be paid off when the property is sold. A mortgage is considered a lien.

LIFE CAP
For an adjustable-rate mortgage (ARM), a life cap is the limit on the amount that the enterest rate can rise or drop over the duration of the loan.

LINE OF CREDIT
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount (and for a certain time) to an applicant.

LIQUID ASSETS
Cash, or an assets that are easily converted into cash.

LOAN
A sum of borrowed money repaid with interest. The original sum is known as the principal, with the accumulating interest tacked on as an annual percentage rate.

LOAN OFFICER
Also referred to by a variety of other terms, such as lender, loan representative, loan “rep,” account executive, and others. The loan officer has responsibilities that include: soliciting loans, representing the lending institution, and representing the borrower to the lending institution.

LOAN ORIGINATION
How a lender refers to the process of obtaining new loans.

LOAN SERVICING
After you obtain a loan, the company you make the payments to is “servicing” your loan. The loan company processes payments, sends statements, manages the escrow, provides collection efforts on delinquent accounts, ensures that insurance and property taxes are made on the property, and so on.

LOAN-TO-VALUE (LTV)
The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower).

LOCK-IN
No, it’s not when you’re trapped in the lender’s office and can’t get out. Rather, a lock-in is an agreement in which the mortgage lender guarantees a specified interest rate for a certain amount of time. The time period during which the lender has guaranteed a rate to a borrower is known as the lock-in period.

MATURITY
What you need in order to understand and navigate through this process. Just kidding - although it does not hurt. In this case, maturity refers to the date upon which the principal balance of a loan becomes due and payable.

MODIFICATION
If any changes are made to the terms of your mortgage, it is called a modification. A lender will sometimes agree to modify the terms without requiring you to refinance.

MORTGAGE
A legal document that pledges a home or property to the lender as security for payment of a debt.

MORTGAGE BROKER
A company that originates loans, then places the loans with a variety of other lending institutions with whom it has pre-established relationships. A mortgage banker, conversely, is generally assumed to originate and fund its own loans, which are then sold on the secondary market - usually to Fannie Mae, Freddie Mac, et cetera. However, firms often loosely apply this term to themselves, whether they are true mortgage bankers or simply mortgage brokers or correspondents. An individual can also be a licensed mortgage broker.

MORTGAGEE
No, that’s not a typo! Rather, it’s the lender in any mortgage agreement.

MORTGAGE INSURANCE (MI)
Often mistakenly referred to as PMI, which is actually the name of one of the larger mortgage insurers, this is insurance that covers the lender against losses incurred as a result of a default on a home loan. Mortgage insurance is usually required in one form or another on all loans that have a loan-to-value (LTV) ratio higher than eighty percent. Mortgages above 80 percent LTV are usually a made at higher interest rates. Rather than the borrower paying the insurance premiums directly, they pay a higher interest rate to the lender, which then pays the mortgage insurance itself. FHA loans and certain first-time buyer programs require mortgage insurance regardless of LTV. The amount paid by the borrower is known as the mortgage insurance premium (MIP).

MORTGAGE LIFE / DISABILITY INSURANCE
A type of term life insurance often bought by borrowers. The amount of coverage decreases as the principal balance declines. In the event that the borrower dies while the policy is in force, the debt is satisfied by insurance proceeds. Some policies also cover the event of disability. In the case of disability insurance, the insurance will make the mortgage payment for a specified amount of time during the disability.

MORTGAGOR
The weirdest-looking word of all time. Also, the borrower in a mortgage agreement.

MULTI-FAMILY HOME
A property that consists of a structure providing living space (dwelling units) for two to four families, although ownership of the structure is evidenced by a single deed. Often times, the owner will reside in one unit while renting out the others to help defray the cost of the mortgage.

NEGATIVE AMORTIZATION
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all the interest normally due at the current interest rate. Essentially, the borrower is deferring the interest payment. The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.

NO-COST LOAN
Many lenders offer loans that you can obtain at “no cost.” Better read the fine print, because most of the time it really is too good to be true. You should inquire whether this means there are no “lender”costs” associated with the loan, or if it also covers the other costs you would normally have — title insurance, escrow fees, appraisal, etc. These fees and costs may be associated with buying a home or obtaining a loan, but are not charged directly by the lender. Keep in mind that, like a “no-point” loan, the interest rate will be higher than a loan that has costs associated with it. Almost all lenders offer loans at “no points.” You will find the APR on a “no points” loan is approximately 0.25 percent higher than on a loan where you pay one point.

NO DOC LOANS
A mortgage that can be secured without the usual list of documents providing income and credit verification. Please see our guide to no doc loans for a more thorough explanation.

ORIGINAL PRINCIPAL BALANCE
The total amount of principal owed on a mortgage before any payments are made.

ORIGINATION FEE
The loan origination fee refers to the total number of points a borrower pays when dealing with conventional loans. On a government loan the loan origination fee is one percent of the loan amount, but additional points may be charged which are called “discount points.” One point equals one percent of the loan amount.

PAYMENT CHANGE DATE
The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM). Generally, the payment change date occurs in the month immediately after the interest rate adjustment.

PERIODIC PAYMENT CAP
For an adjustable-rate mortgage where the interest rate and the minimum payment amount fluctuate independently of each other, this is a limit on the amount that payments can increase or decrease during any one adjustment period.

PERIODIC RATE CAP
On an adjustable-rate mortgage, it’s the limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the related index(es) might be.

PITI
See Principal, Interest, Taxes & Insurance (below)

POINTS
A point is 1 percent of the amount of the mortgage.

PRE-APPROVAL
When a borrower has completed a loan application and provided debt, income, and savings documentation and has had his/her application reviewed and approved by a representative of the lending institution. A pre-approval is usually done at a certain loan amount and making assumptions about what the interest rate will be at the time the loan is actually made. It also estimates the amount that will be paid for taxes, insurance and other expenses. Once a property is chosen, it must also meet the guidelines of the lender. See also “Pre-Qualification.”

PREPAYMENT
An amount paid to reduce the principal of a loan before its due date. Payment in full on a mortgage may result from a sale of the property, the owner’s decision to pay off the loan in full, or foreclosure. In any case, prepayment means any payment occurring before the loan has fully amortized.

PREPAYMENT PENALTY
A fee that may be assessed to a borrower that pays off a loan before its due date. May not be applicable with certain lenders or loans.

PRE-QUALIFICATION
This refers to the loan officer’s written opinion of the ability of a borrower to qualify for a home loan for a specific property, after the officer has made inquiries about debt, income and savings/assets. The information provided to the officer may have been presented verbally or in the form of documentation, and the loan officer may review a credit report on the borrower.

PRIME RATE
The interest rate that banks charge to their preferred customers. Fluctuations in the prime rate are widely publicized in the news media and are used as the indexes in some adjustable rate mortgages, especially home equity lines of credit.

PRINCIPAL
The amount borrowed, or remaining unpaid, on your mortgage. Or, the part of the monthly payment that reduces the remaining balance. The principal balance is the outstanding balance of principal on a mortgage, and does not include interest or any other charges.

PRINCIPAL, INTEREST, TAXES & INSURANCE (PITI)
The four components of a monthly mortgage payment on impounded loans. Principal refers to the part of the payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the amounts paid into an escrow account each month for property taxes and mortgage / hazard insurance. The lender still calculates this amount and uses it as part of determining your debt-to-income ratio.

PRIVATE MORTGAGE INSURANCE (PMI)
Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

PROMISSORY NOTE
A written promise to repay a specified amount over a specified period of time.

PURCHASE AGREEMENT
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

REAL ESTATE
Land and property, including anything of a permanent nature such as structures, trees, minerals, and the interest, benefits, and inherent rights thereof.

REAL ESTATE AGENT
A person licensed to negotiate and transact the sale of real estate.

REALTOR
A real estate agent, broker or an associate who holds active membership in a local real estate board that is affiliated with the National Association of Realtors.

RECORDER
The official who keeps records of transactions that affect real estate in the area. Sometimes known as a “Registrar of Deeds” or “Town / County Clerk.” A recording is kept in the registrar’s office. It can be a properly executed legal document, such as a deed, mortgage note, satisfaction of mortgage, an extension of mortgage, anything made a part of the public record.

REFINANCING
The process of paying off one loan with the money from a new loan using the same property as collateral.

REMAINING TERM
The original amortization term minus the number of payments that have already been made.

RESERVES
The cash a borrower must have after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes and insurance (PITI) “reserves” must equal the amount of PITI that the borrower would pay over a predefined number of months - usually two or three.

REVERSE MORTGAGE
Also called a Home Equity Conversion Mortgage (HECM), what makes this type of mortgage unique is that instead of making payments to a lender, the lender makes payments to you. It enables older home owners to use their equity and convert it to cash, in the form of monthly payments. Unlike traditional home equity loans, a borrower can qualify solely on the value of his / her home. The loan doesn’t have to be repaid until the recipient no longer occupies the home. Please see our guide to the various types of mortgages to learn more.

REVOLVING DEBT
A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods or services. The borrower is billed for the actual amount borrowed plus any interest due.

RIGHT OF FIRST REFUSAL
A provision in an agreement in which the owner of a property agrees, legally, to give one specific party the first opportunity to purchase / lease the property before it is offered for sale / lease to others.

RIGHT OF INGRESS
The right to enter or leave designated premises. Most landlords reserve this right in the lease agreements their tenants sign.

SECOND MORTGAGE
A mortgage that has a lien position subordinate to the first mortgage. See “lien” and “first mortgage.” Even while making payments on their first mortgage, individuals can borrow again from the same lender or a different one.

SECONDARY MARKET
The buying and selling of existing mortgages.

SECURED LOAN
A loan backed by collateral.

SERVICING
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer. An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts is called a “servicer.” The servicer often services mortgages purchased in the secondary mortgage market.

SURVEY
A drawing or map showing the legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other features.

TITLE
The legal document proving a person’s right to or ownership of a property. This is the most important document you will have, as it is official evidence that the home or land is, in fact, yours. Title companies are agencies that specialize in examining and insuring real estate titles. During the purchasing process, a title check of any records is often performed to ensure the seller is the legal owner of the property and that there are no liens or claims pending.

TITLE INSURANCE
Insurance that protects the lender or buyer (there are separate lender and owner policies) against any loss related to disputes over a property’s ownership.

TRANSFER OF OWNERSHIP
Any means by which the ownership of a property changes hands. All of the following situations are considered to be transfers of ownership: the purchase of a property using or “subject to” a mortgage, the assumption of the mortgage by the property purchaser, and any exchange of possession of the property under a land sales contract or land trust device. Transfer tax may apply.

TREASURY INDEX
A major index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury holds for its bills and securities or is derived from the U.S. Treasury’s daily yield curve - a figre based on the closing bid yields on actively traded securities in the over-the-counter (OTC) market.

TRUTH-IN-LENDING
The federal law requiring lenders to fully disclose the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

TWO-STEP MORTGAGE
An adjustable-rate mortgage (ARM) that has one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term.

VA LOAN / MORTGAGE
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). See below.

VETERANS ADMINISTRATION (VA)
An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and therefore encourages lenders to issue mortgages to veterans. Once an applicant’s eligibility is confirmed, a Certificate of Eligibility is issued. Then, when the appraisal has been performed on a property being bought with a VA loan, the Veterans Administration issues a CRV.

VESTING
Having the right to use a portion of a fund such as an individual retirement fund. For example, individuals who are 100 percent vested can withdraw all of the funds that are set aside for them in a retirement fund. However, taxes may be due on any funds that are actually withdrawn.