Mortgage Glossary

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Abstract Of Title

A summary of recorded transactions concerning a property. (An attorney or title insurance company examines an abstract of title for any title defects which must be cleared before a buyer can purchase clear, marketable, and insurable title.)

Acceleration Clause

Condition in a mortgage that gives the lender the right to require immediate repayment of the loan balance if regular mortgage payments are not made, or for breach of other conditions of the mortgage.

Accrued Interest

Interest which has been incurred but not paid.

Adjustable Rate Mortgage (ARM)

A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Subject to certain limitations, the rate and payments on an ARM loan rise and fall with the market.

Adjustment Interval or Adjustment Period

The length of time between rate adjustments on an Adjustable Rate Mortgage (ARM).

Agreement Of Sale

Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Alternative Documentation

A substitute method of providing the documentation necessary to approve a loan. For example, bank statements may be substituted if it is not possible to provide written verification of the bank balance directly from the borrower's bank.

Amortization

The process of paying off a mortgage in regular increments.

Amortization Schedule

A monthly repayment schedule outlining how a loan will be paid off in fixed payments combining principal and interest.

Annual Percentage Rate (APR)

A calculation that expresses the total cost of a mortgage loan as a yearly rate (according to a federally mandated procedure). The APR calculation takes into account monthly interest payments, mortgage insurance, points, and certain fees paid at origination. It generally results in a rate slightly higher than the stated interest rate on the loan.

Application

An initial statement of personal and financial information required to approve a loan provided by the borrower and necessary to intitiate the approval process for a loan.

Application Fee

Fees charged by lender at loan closing to cover the initial costs of processing a loan application.

Appraisal

A written estimate of a property's current market value, based on recent sales information for similar properties, the condition of the property, and the neighborhood's impact on future property value.

Appraisal Fee

A fee charged by a licensed, certified appraiser to provide an appraisal.

APR

See Annual Percentage Rate.

ARM

See Adjustable Rate Mortgage.

Assessment

A local tax levied against a property for a specific purpose, such as road or sidewalk construction or sewer or street light installation.

Asset Documentation

We will require recent verification of assets needed to close. This is required on all of our loan programs except our NoDoc program.

Assignment

The transfer of property rights by one person, the assignor, to another, the assignee.

Assumability

A loan feature that allows the loan to be transferred from the seller to the purchaser of a home with the same terms and conditions, subject to lender approval.

Balance Sheet

A document showing the financial situation--assets, liabilities, and net worth--of a company at a specific point in time.

Balloon Mortgage

A short-term, fixed-rate loan with low payments for a set number of years and a large balloon payment of the remainder of the principal due at the end of the term.

Bankruptcy

Proclamation by a court of an individual's (or organization's) state of insolvency, or inability to pay debts. Petition may be brought by an individual or creditors, with a goal of orderly and equitable settlement of obligations.

Bearer

The legal owner of a piece of property.

Bequest

A gift of personal property by will.

Bill Of Sale

A document by which one transfers ownership of goods to another.

Bi-weekly Mortgage

A payment plan under which the borrower pays one half of a monthly payment every two weeks.

Blanket Mortgage

A mortgage covering at least two or more pieces of real estate, both of which together serve as collateral for the loan.

Bona Fide

In good faith.

Bond

A document representing a right to certain payments on underlying collateral.

Borrower (or Mortgagor)

An individual who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Bridge Loans

Our bridge financing is for homeowners who plan to construct a new owner-occupied primary residence by accessing equity in their current owner-occupied residence, which they intend to sell and use as the down payment requirement on a Construction-To-Permanent Loan.

Broker

An individual who assists in arranging funding or negotiating contracts for a client but does not loan money himself.

Budget

The budget is comprised of the total costs involved in the construction of the home, the amount of costs that the borrower may have already paid, and the costs remaining to be paid to complete the home. This will quickly identify the borrower's equity already paid, and the amount of borrower funding needed at closing, if any.

Buy-Down

A situation in which the seller contributes money, allowing the lender to give the buyer a lower rate and payment, usually in exchange for an increase in sales price.

Buyer's Broker

An agent hired by a buyer to locate a property for purchase and to represent the buyer in negotiations with the seller's broker.

Buyers' Market

Market conditions that favor buyers. With more sellers than buyers in the market, buyers have ample choice of properties and can negotiate lower prices.

Call Option

A loan feature that allows the lender to require repayment of the loan in full before the term of the loan is up.

Caps

Limits on changes in ARM interest rates or monthly payments, either in an adjustment period or over the life of the loan.

Caps (Interest)

Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage can change in an adjustment interval and/or over the life of the loan.

Caps (Payment)

Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. Since they do not limit the amount of interest the lender is earning, payment caps may cause negative amortization.

Cash Out

A refinance for more than the balance of the current mortgage. The excess money taken out reduces the borrower's equity.

Cashier's Check (or Bank Check)

A check whose payment is guaranteed because it was paid for in advance and is drawn on the bank's account instead of the customer's.

CC&Rs

See Covenants, Conditions and Restrictions.

Ceiling

The maximum allowable interest rate of an adjustable rate mortgage.

Certificate Of Eligibility

Document issued by the Veterans Administration to qualified veterans which entitles them to VA-guaranteed loans. Obtainable through local VA offices by submitting form DD-214 (Separation Paper) and VA form 1880 (request for Certificate of Eligibility).

Certificate Of Occupancy

Document issued by local government agency stating that a property meets the requirements of health and building codes.

Certificate Of Reasonable Value (CRV)

A property appraisal performed by a VA approved appraiser which establishes the limit on the principal of the VA loan.

Certificate Of Title

Written opinion of the status of title to a property, given by an attorney or title company. This certificate does not offer the protection given by title insurance.

Certificate Of Veteran Status

Document given to veterans or reservists who have served 90 days of continuous active duty (including training time) which enables them to obtain lower down payments on certain FHA/VA-insured loans. This certificate is obtainable through local VA offices by submitting form DD-214 (Separation Paper) with form 26-8261a (request for certificate of veteran status).

Certified Check

A check drawn on the issuer's account for funds that have been segregated by the bank, thus guaranteeing sufficient funds for payment.

Chain of Title

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

Clear Title

A marketable title, free of clouds and disputes.

Closing (or Settlement)

Meeting between the buyer, seller, and lender or their agents, at which property and funds legally change hands. Closing Agent - Neutral third party appointed to act as a custodian for documents and funds during the transfer of property from seller to buyer. Depending on local law and custom, this could be an attorney, escrow agent, or title company.

Closing Costs

Costs associated with the closing of the loan (e.g. title costs, loan fees, discount fees, inspection fees, appraisals, etc.).

Closing/Settlement Statement

A form prepared by the closing agent that itemizes the closing costs associated with purchasing or refinancing a home. Also see HUD-1.

Cloud on Title

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

Combined Loan To Value (CLTV)

The percentage of the property value borrowed through a combination of more than one loan (for example, first mortgage and home equity line of credit). Mathematically, the combined loan and line of credit amounts divided by property value equals Combined Loan To Value Ratio.

COFI - See Cost of Funds Index.

Collateral

Assets that secure a loan. (In the case of a mortgage, real property serves as collateral.)

Commission

Money paid to a real estate agent or broker by the seller (usually 6-7% of the sale price of the house).

Commitment

A formal offer by a lender to a borrower to make a loan under certain terms or conditions.

Condominium

A form of property ownership in which the homeowner holds title to an individual dwelling unit and an interest in common areas and facilities of a multi-unit project.

Conforming Loan

A mortgage loan eligible for purchase by the two federally sponsored housing agencies, Fannie Mae and Freddie Mac.

Construction APR

A calculation that expresses the cost of a mortgage loan as a yearly rate (according to a federally mandated procedure) over the life of the loan, including the construction phase. The APR calculation takes into account monthly interest payments, mortgage insurance, points, and certain fees paid at origination. It generally results in a rate higher than the stated interest rate on the Note, as well as the estimated APR disclosed on the permanent financing phase of the loan term. You may receive two APRs, one for the construction period of your loan and the other for the permanent financing of your loan, or the APR can be combined for both the construction and permanent periods of your loan.

Contract Of Sale

The agreement between the buyer and seller on the purchase price, terms, and conditions of a sale.

Contingency

A condition which must be satisfied before a contract is legally binding--before a sale can close.

Conventional Loan Loan

A mortgage not insured by the FHA or guaranteed by the VA.

Conversion Clause

A provision in some ARMs that allows changing an ARM to a fixed-rate loan, usually after the first adjustment period. The new fixed rate is based on a formula tied to current rates, and there may be a charge for the conversion feature.

Convertible ARMs

ARMs with the option of conversion to a fixed loan during a given time period (see "Conversion Clause").

Conveyance

The transfer of a deed, lease, or mortgage.

Cost Of Funds Index (COFI)

A common index used in adjustable rate loans based on the weighted-average interest rate paid for deposits by savings institutions that are members of the 11th Federal Home Loan Bank District.

Course Of construction

This policy is in the form of an "all risk" policy with fire, extended coverage, builder's risk, replacement cost, vandalism, and malicious mischief insurance coverage. The owner is named insured with insurable value equal to the replacement cost of the improvement or the loan amount, whichever is lower. Once the improvements are completed and the permanent mortgage begins, the course of construction policy is usually converted to a standard "all risk" policy.

Covenants, Conditions, and Restrictions (CC&Rs)

A document that defines the use, requirements and restrictions of a condominium or Planned Unit Development (PUD).

Credit Report

A report detailing the credit history of a prospective borrower, used by lenders to help determine creditworthiness.

Debt-To-Income Ratio

A figure, expressed as a ratio, that compares the amount of recurring debt payments a borrower is obligated to make to the amount of their income.

Deed

Legal document by which title to a property is transferred from one owner to another. The deed contains a description of the property and is signed, witnessed, and delivered to the buyer at closing.

Deed Of Trust

Document creating a lien on a property as security for the payment of a debt. In some states, a mortgage is used instead.

Default

Failure to meet legal obligations in a contract, including failure to make payments on a loan. A mortgage is generally considered to be in default when a payment is 30 days past due.

Deferred Interest

Amount added to the balance of a loan when monthly payments are insufficient to cover the interest incurred. This results in negative amortization.

Delinquency

Failure to make required payments on time.

Deposit

Cash paid to the seller when a formal sales contract is signed.

Depreciation

Decline in property value.

Discount Points

See Points.

Documentary Stamps

A state tax, in the forms of stamps, required on deeds and mortgages when real estate title passes from one owner to another.

Document Review

Fee charged by lender for review of documents necessary to fund a loan.

Down Payment

In a home purchase, the difference between the purchase price and the mortgage amount.

Earnest Money

Deposit made by a buyer toward the down payment as evidence of good faith when the purchase agreement is signed.

ECOA

See Equal Credit Opportunity Act.

Effective Interest Rate

The cost of a mortgage expressed as a yearly rate, usually higher than the interest rate on the mortgage since this figure factors into the up-front costs of acquiring the loan.

Encumbrance

A legal right or interest in a property that affects title and may lessen the property value.

Equal Credit Opportunity Act (ECOA)

Federal law requiring creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity

The difference between the current market value of a property and the outstanding mortgage balance.

Equity Loan

A loan based on the borrower's equity in his or her home.

Escrow

1. Neutral third party appointed to act as a custodian for documents and funds during the transfer of property from seller to buyer or in the course of refinancing property. 2. Account held by lender containing funds collected in conjunction with monthly mortgage payments. The funds in the escrow account are used by the lender to pay annual expenses such as taxes and insurance on behalf of the borrower.

Escrow Account

Account held by lender containing funds collected in conjunction with monthly mortgage payments. Also known as impounds, the funds in this account are held in trust by the lender on behalf of the borrower, and are used to pay expenses such as property taxes and homeowner's insurance.

Escrow Officer

See Closing Agent

Estimated Settlement (or Closing) Statement

A document provided by the closing agent a few days before closing, detailing all costs and indicating the final sum the buyer will be required to bring to the closing.

Expense-To-Income Ratio

Also known as Back-End Ratio and Debt-to-Income Ratio. The figure derived by dividing a borrower's monthly financial obligations by his/her gross monthly income.

Fannie Mae (FNMA)

Corporation created by Congress that buys and sells residential mortgages. Fannie Mae provides funds for one in seven mortgages.

Farmer's Home Administration (FmHA)- An agency of the U.S. Department of Agriculture that provides financing for purchasers of homes and farms in small towns and rural areas.

FDIC

See Federal Deposit Insurance Corporation.

Federal Deposit Insurance Corporation (FDIC)

Independent deposit insurance agency created by Congress to maintain stability and public confidence in the nation's banking system.

Federal Home Loan Bank Board (FHLBB)

Former name for the regulatory and supervisory agency of federally chartered savings institutions, now called the Office of Thrift Supervision.

Federal Housing Administration (FHA)

Government agency, division of the Department of Housing and Urban Development, which insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans.

Federal Reserve

Central bank of the United States and major regulatory agency for many commercial banks.

Fee Simple

Absolute ownership of real property.

FHA

See Federal Housing Administration.

FHA

See Federal Housing Administration.

FHA Loan

Loan insured by the FHA for low to middle income homes, open to all qualified home purchasers.

FHLBB

See Federal Home Loan Bank Board.

FHLMC

See Federal Home Loan Mortgage Corporation.

First Mortgage

The primary lien against a property.

Fixed Rate

An interest rate that is fixed for the term of the loan.

Fixed-Rate Mortgage

A mortgage whose interest rate does not change for the life of the loan. Payments are also fixed.

Federal Home Loan Mortgage Corporation (FHLMC)

See Freddie Mac.

Floor

The minimum interest rate payable on an Adjustable Rate Mortgage.

Federal National Mortgage Association (FNMA)

See Fannie Mae.

FICO Score

A credit evaluation score developed by Fair, Isaac, and Co., used by lenders as one factor in making a loan decision. Some methods of improving a score are to establish and maintain a payment history on credit accounts, keep public records (bankruptcies, judgments, etc.) and collection accounts to a minimum, pay down loans, keep credit cards well below their limits, avoid late payments, and limit applying for new credit.

Fixed Price Contract

A construction contract between the borrower and contractor defining the cost of building and improving a residence. The contract should have a start date and a finish date.

Forbearance- Grace period given when a lender postpones foreclosure to give the borrower time to catch up on overdue payments.

Foreclosure (or Repossession)

Legal process by which the lender forces the sale of a property when the borrower has not met the mortgage terms.

Freddie Mac (FHLMC)

Quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

General Liability

Insurance in the form of a comprehensive general policy or included as a broad form liability endorsement. This can be provided by the borrower or the general contractor. If the insurance is provided by the borrower, a minimum amount of $300,000 for each occurrence is required, extended to both property and personal injury. If the contractor is providing the insurance, a comprehensive general policy of at least $1,000,000 or a policy including broad form liability endorsement is required.

Ginnie Mae

See Government National Mortgage Association.

GNMA

See Government National Mortgage Association.

Government National Mortgage Association (GNMA, or Ginnie Mae)

Government agency that provides funds for VA and FHA loans.

Good Faith Estimate

Written estimate of costs the borrower will pay at closing, provided by a lender within three days of loan application.

Graduated Payment Mortgage (GPM)

Mortgage in which initial low payments (with potential negative amortization) increase regularly for several years and then level off.

Grace Period

Period of time during which a loan payment may be made after its due date without incurring a late penalty.

Gross Income

Total income before taxes or expenses are deducted.

Growing Equity Mortgage

A fixed-rate loan in which payments increase by a predetermined amount each year, reducing the outstanding balance of the loan. This accelerated payment plan allows repayment of a 30-year loan in 15 to 20 years.

Guarantee or Guaranty

A promise by one party to pay a debt or perform an obligation contracted by another in the event of that person's default.

Gross Monthly Income

Total monthly income before taxes or expenses are deducted. Used in the loan origination process to calculate borrower's ability to make payments on a loan.

Hazard Insurance

A policy that protects the insured against loss due to fire or certain natural disasters in exchange for a premium paid to the insurer. Also known as Home Owner's Insurance or fire insurance.

Home Equity Loan

An additional mortgage secured by the equity in the home. All funds for this loan are disbursed at closing. (In contrast, see Home Equity Line Of Credit).

Home Equity Line Of Credit

A revolving line of credit secured by the equity in the home. Unlike a Home Equity Loan, these funds may be drawn and repaid like a credit card.

Homeowner's Warranty

A type of insurance that covers repairs to specified parts of a house for a specific period of time.

Housing and Urban Development (HUD)

A U.S. government agency established to implement federal housing and community development programs; oversees the Federal Housing Administration.

Housing Code

Local government ordinance that sets minimum standards of safety and sanitation for existing residential buildings.

Housing Expense-To-Income Ratio

The ratio, expressed as a percentage, that is result of dividing a borrower's housing expenses by his/her gross monthly income.

HUD

See Housing and Urban Development.

HUD

See Housing and Urban Development.

HUD-1 Settlement Statement

A form mandated by the federal government that itemizes the closing costs associated with purchasing a home. Also see Estimated Settlement Statement.

Impound (or Reserves)

Portion of a borrower's monthly payments held by the lender to pay for taxes, insurance, and other items as they become due.

Impound Account

See Escrow Account.

Index

A published rate used by lenders to calculate interest adjustments on adjustable rate mortgages (Index + Margin = Interest Rate). Common indexes include 1-Year Treasury securities, COFI (Cost Of Funds Index), and Six-Month LIBOR (London Interbank Offered Rate).

Initial Rate

The rate charged during the first interval of an adjustable rate mortgage.

Insolvency

Condition of a person unable to pay debts as they fall due.

Interest

Charge paid for borrowing money.

Interest Rate

The rate, expressed as a percentage, of the outstanding balance used to calculate interest charges.

Interest Rate Cap

A safeguard built into ARMs to prevent drastic changes in interest rates.

Interest Reserve

During the construction period, an account is established to pay the estimated interest costs during the construction of the home. Since the borrower is only charged interest on the amount of funds disbursed, an estimate of the average disbursed amount is made.

Investor Rehab Financing

This program is designed to provide a loan for investors to acquire and rehabilitate a property for future rental use.

Joint Liability

Liability shared among two or more people, each of whom is liable for the full debt.

Joint Tenancy

The ownership of property by two or more persons with the survivor taking the share of the deceased.

Jumbo Loan

A mortgage with a principal balance that exceeds the amount eligible for purchase by Fannie Mae and Freddie Mac. Jumbo loans generally carry a higher interest rate.

Junior Mortgage

A mortgage subordinate or secondary to another mortgage. In the case of a foreclosure, a senior mortgage will be paid first.

Late Charge

Penalty paid by a borrower when a payment is made after the due date.

Lease-Purchase Mortgage Loan

An alternative financing option that allows low- and moderate-income homebuyers to lease a home from a nonprofit organization with an option to buy. Monthly rental payments cover mortgage payments and include an additional amount that is saved toward a down payment.

Lease purchase

Assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.

Lender

The bank, mortgage company, or mortgage broker offering the loan.

Lender's Contingency

This is a reserve to cover unforeseen circumstances in the construction of the home. At a minimum, 5% of the "on-site costs" will be established in the contingency account (separate from the contractor's).

LIBOR (London Interbank Offered Rate)

The interest rate charged among banks for short-term Eurodollar loans, and a common index for adjustable rate mortgages.

Lien

A legal claim against a property that must be paid when the property is sold.

Lifetime Interest Rate Cap

The highest interest rate that can be charged for an adjustable rate mortgage during the life of the loan.

Loan Administration (or Loan Servicing)

The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans and remitting payments to investors).

Loan Application

Document required by lenders prior to loan approval containing detailed information about the borrower and property.

Loan Application Fee

Fee paid by prospective buyer to lender when applying for a mortgage.

Line Item Cost Breakdown

This is the form that a contractor furnishes to a consumer detailing the costs of building the home. This form serves as the basis of a percentage of completion disbursement schedule..

Loan Origination Fee

Fee charged by a lender that compensates for the work in evaluating and processing the loan.

Loan Servicing (or Loan Administration)

Lock (or Lock In)

A lender's guarantee of an interest rate and related points for a set period of time, usually between loan application and loan closing. Protects borrower against rate increases during that time.

Loan To Value (LTV) Ratio

The percentage of the property value borrowed (loan amount/property value = loan to value ratio).

Lot Value/Cost

If the borrower already owns the land, include a copy of the HUD-1 closing statement, regardless of when the lot was purchased. If the lot has been owned for more than 12 months, enter the appraised value of the lot in the first column. If the borrower has owned the lot for less than 12 months, indicate the purchase price from the HUD-1 in the first column. If the borrower has an existing lien against the lot, indicate the borrower's equity in the second column (cost or appraised value minus the lien amount).

Margin

The percentage amount added to an index to calculate the interest rate of an adjustable rate mortgage at each adjustment.

Marketable Title

A title that is free and clear of liens, clouds, or other defects which would prevent the sale of the property.

Market Value

The value that a willing seller would accept and a willing buyer would offer given a reasonable time for the seller to market a property.

MIP (Mortgage Insurance Premium)

Insurance purchased by borrower to insure against default on government (FHA or VA) loans.

Monthly Housing Expense

Total monthly expense of principal, interest, taxes, and insurance.

Mortgagee

The lender in a mortgage loan transaction.

Mortgage

Document creating a lien on a property as security for the payment of a debt. In some states, a Deed of Trust is used instead.

Mortgage Banker

A lender that originates and funds, then sells and services mortgage loans.

Mortgage Broker

A person or entity that arranges financing for borrowers, but places loans with lenders rather than funding them with the broker's own money.

Mortgage Insurance

Insurance purchased by a buyer to cover the lender's risk of loss. Mortgage Insurance is generally required by lenders when the down payment is less than 20% of the purchase price.

Mortgage Loan

A loan for which real estate serves as collateral to provide for repayment in case of default.

Mortgage Note

Legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time. The agreement is secured by a mortgage.

Mortgagor

The borrower in a mortgage loan transaction.

Negative Amortization

Increase in principal balance that occurs when monthly payments are not large enough to pay all interest incurred on a loan, usually caused when payment caps prevent sufficient payment increases. Deferred interest is added to the loan balance, resulting in the borrower owing more than the original amount of the loan.

Non-Assumption Clause

A statement in a mortgage contract forbidding the assumption of the mortgage by another borrower without the prior approval of the lender.

Nondischargeable Debt

Debt, such as taxes, that cannot be forgiven in a bankruptcy liquidation.

Notice Of Default

Written notice to a borrower that a default has occurred and that legal action may be taken.

No Doc Loan

A loan for which neither income, employment, or assets are stated on application. Borrowers must have a perfect credit history.

No Ratio Loan

This loan program is offered for borrowers who have a strong asset base and perfect credit history; the loan application must be fully completed except for any reference to income.

Note

Legal document stating the terms of a debt and a promise to repay it.

Office Of Comptroller Of The Currency

The oldest federal financial regulatory body which oversees the nation's federally chartered banks.

Office Of Thrift Supervision

Regulatory and supervisory agency for federally chartered savings institutions.

Off-Site Costs

These are indirect site costs. Permit fees, engineering fees, architectural fees, and other costs associated with building the home but not directly a part of the actual construction costs. Many times the borrower has already paid some of these costs. To consider these paid items as “equity,” the borrower must document the cost with a bill and a cancelled check or a paid receipt.

One Time Close

Often, getting approved for a construction loan can be tricky. In many cases, two loans are required: one for construction and one for permanent financing. Usually you will have to pay closing costs on both loans, not to mention the extra paperwork, time, and hassle involved.

On-Site Costs

These are direct site costs. The actual cost of construction covering all materials and labor associated with the building of the home. Typically the borrower will enter into a contract with a contractor to build the property. Like a purchase contract for an existing home, this contract will set forth the work to be done and the costs associated with that work. All contracts must be for a fixed price; “Cost Plus” contracts are not acceptable. To support this cost, we require a signed and dated copy of the contract along with a budget (Cost Breakdown) form prepared by the contractor.

Origination Fee

See Loan Origination Fee.

Owner Financing- A purchase in which the seller provides all or part of the financing.

Payment Cap

Limit on the amount by which a borrower's adjustable rate mortgage payments may increase, regardless of rise in interest rates. May result in negative amortization.

Per Diem Interest

Interest calculated per day. Depending on the day of the month on which closing takes place, borrower pays interest from the date of closing to the end of the month. The first mortgage payment of a loan is generally due on the first of the following month.

Periodic Interest Rate Cap

A limit on the amount that interest rates can change at each adjustment period.

Permanent Loan

A long term mortgage of 10 years or more.

Pledged Account Mortgage (PAM)

Money is placed in a pledged savings account. This fund, plus earned interest, is used to gradually reduce mortgage payments.

PITI

Abbreviation for Principal, Interest, Taxes, and Insurance, the components of a monthly mortgage payment; also called Monthly Housing Expenses.

Plans/Specifications

These documents consist of a legible set of architectural drawings (building plans) usually prepared by an architect and approved through city or county plan check. They typically include a floor plan showing all dimensions, a foundation plan showing all dimensions, outside elevations of the building, electrical and plumbing details, as well as other details of the actual construction of the improvements. You will need to obtain two sets of plans signed by both the borrower and the contractor; one will be provided to the appraiser and one to HCL in your loan submission package. It is necessary to have them signed so that all parties acknowledge that these are the plans that will be used to construct the home.

PMI (or Private Mortgage Insurance)

We require PMI for loans with LTVs greater than 80%. We will hold 2-month PMI payments in reserve on the borrowers behalf. These reserves will be paid out to insurer at time loan s to permanent mortgage.

Points (or Discount Points)

Money paid to a lender at closing in exchange for a lower interest rate. Each point is equal to 1% of the loan amount.

Power Of Attorney

Legal document authorizing one person to act on behalf of another.

Pre-approve

Lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.

Prepaid Expenses

Taxes, insurance, and assessments paid in advance of due dates.

Prepaid Interest

Interest charged to a borrower at closing to cover interest on the loan between closing and the end of the month in which the loan closes.

Prepayment

Full or partial payment of the principal before the due date. This might occur if the borrower makes extra payments, sells the property, or refinances the existing loan.

Prepayment Penalty

Fee that may be charged by a lender for early payment of debt.

Prequalification

The process of estimating how much money a prospective homebuyer will be eligible to borrow prior to application for a loan.

Primary Mortgage Market

Includes banks, savings and loans, credit unions, and mortgage banks that make mortgage loans directly to borrowers. These lenders sometimes sell their mortgages to lenders such as FNMA in the secondary mortgage market.

Prime Rate

Lowest commercial interest rate charged by a bank on short-term loans to its most credit-worthy customers. Often used as an index for home equity lines of credit.

Principal

The amount of debt, not counting interest, left on a loan.

Private Mortgage Insurance (PMI)

Generally, we require PMI for loans with LTVs greater than 80%. We will hold 2-month PMI payments in reserve on the borrowers behalf. These reserves will be paid out to insurer at time loan s to permanent mortgage.

Profit and Loss Statement

Financial statement showing sales, expenses, and profits over a period of time. Often a requirement for self-employed borrowers.

Property Tax

A government tax based on the market value of a property.

PUD (Planned Unit Development)

A project or subdivision that includes common property that is owned and maintained by a homeowners' association for the benefit and use of the individual PUD unit owner.

Purchase Agreement

Contract signed by buyer and seller stating the terms and conditions under which a property will be purchased.

Radon

A radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems

Rate Lock (or Lock In)

A lender's guarantee of an interest rate and related points for a set period of time, usually between loan application and loan closing. Protects borrower against rate increases during that time.

Real Estate Broker

An agent who represents a buyer or seller in a real estate transaction.

Real Estate Settlement Procedures Act

Law requiring lenders to give borrowers advance notice of closing costs.

Real Property

Land and everything that is permanently affixed to it.

Realtor

Real estate professional who is a member of the National Association of Realtors.

Re-Amortize

The function to provide a new graduated payment amount as it relates to a new loan amount or a new interest rate.

Recision

The cancellation of a mortgage loan, permitted by law within three days of signing when the loan is not used to purchase a home.

Reclamation

The right of the person with title to a property to recover it from the debtor in the event of a bankruptcy.

Reconveyance

The transfer of property back to the owner when a mortgage is fully repaid.

Recording

The act of entering documents concerning title to a property into the public records.

Recording Fee

Money paid to an agent for entering the sale of a property into the public records.

Reduced Doc Loan

This program eliminates the need to verify income. Income stated on the 1003 is used for qualification. Borrowers who receive W2 income are not qualified for this type of loan. Two years of continuous self-employment income or an established or consistent 2 years' source of income is required.

Refinancing

The process of paying off one loan with the proceeds from a new loan secured by the same property.

Rent With Option To Buy

See Lease-Purchase Mortgage Loan.

Repossession (or Foreclosure)

Legal process by which the lender forces the sale of a property because the borrower has not met the mortgage terms.

Re-Pricing

The function of taking the current loan and re-qualifying it at the current market mortgage interest rate.

Rescission

Federal law that guarantees the consumer the right to cancel a mortgage for a period of three business days following the signing of the documents if the subject loan is a refinance of the borrower's primary residence.

RESPA

See Real Estate Settlement Procedures Act.

Reverse Annuity Mortgage (RAM)

Type of mortgage applicable to senior citizens in which the lender makes periodic payments to the borrower from the borrower's equity in their home, thus providing the borrower with a cash annuity.

Sale Agreement

Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Satisfaction

The payment of a debt which satisfies an obligation.

Second Mortgage

A subordinate mortgage made in addition to a first mortgage.

Secondary Mortgage Market

The market into which primary mortgage lenders sell the mortgages to obtain funds to originate more new loans. Includes investors like Fannie Mae and Freddie Mac.

Servicing (or Loan Administration)

The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans, and remitting payments to investors).

Settlement (or Closing)

Meeting between the buyer, seller, and closing agent at which property and funds legally change hands.

Settlement Costs

See Closing Costs

Settlement Sheet

The computation of costs payable at closing which determines the seller's net proceeds and the buyer's net payment.

Shared Appreciation Mortgage (SAM)

Loan in which the borrower is given a below-market interest rate and the lender receives a portion of the future appreciation of the property value.

Simple Interest

Interest computed only on the principal balance.

Subsidized Second Mortgage

Alternative financing option for low- and moderate-income households that also includes a down payment and a first mortgage, with funds for the second mortgage provided by city, county, or state housing agencies, foundations, or nonprofit corporations. Payment on the second mortgage is often deferred and carries a low interest rate (if any). Part of the debt may be forgiven for each year the family remains in the home.

Sweat Equity

Value added to a property by improvements made by the owner.

Settlement Cost (HUD guide)

Booklet published by the department of Housing and Urban Development (HUD) that provides an overview of the lending process, given to consumers after completing their loan applications.

Survey

A measurement of land, prepared by a licensed surveyor, showing a property's boundaries, elevations, improvements, and relationship to surrounding tracts.

Tax Impound

See Escrow Account.

Tax Lien

Claim against a property for unpaid taxes.

Tax Sale

Public sale of property by a government authority as a result of non-payment of taxes.

Term

The number of years it will take to pay off a loan.

Title

Document which gives evidence of ownership of a property and the rights of ownership and possession of that property.

Title Company

A company that insures title to property.

Title Insurance

Insurance which protects the lender (lender's policy) or the buyer (owner's policy) against loss due to disputes over ownership of a property.

Title Search

Examination of municipal records to ensure that the seller is the legal owner of a property and that no liens or other claims exist against the property.

Transfer Tax

Tax paid when title passes from one owner to another. Not applicable in all jurisdictions.

Trust Account

Account maintained by a broker or escrow company to handle all money collected for clients.

Trustee

Someone given legal responsibility to hold property in the best interest of another.

Truth-In-Lending Act

Federal law requiring written disclosure of the terms of a mortgage by a lender to a prospective borrower within three business days of application.

Two-Step Mortgage

Mortgage with a low fixed interest rate for 5, 7, or 10 years, which is then adjusted to a new rate for the rest of the loan.

Underwriting

The process of verifying data and evaluating a loan for approval.

Usury

Interest charged in excess of the legal rate established by law.

VA Loan

Home loan available to veterans with little or no down payment and guaranteed by the U.S. Veteran's Administration.

Variable Rate Mortgage- See Adjustable Rate Mortgage.

Variable Rate- Interest rate that changes periodically in relation to an index.

Verification Of Deposit (VOD)

Document signed by the borrower's bank or other financial institution verifying the borrower's account balance and history.

Verification Of Employment (VOE)

Document signed by the borrower's employer verifying the borrower's position and salary.

Waiver

Voluntary relinquishment or surrender of some right or privilege.

Walk-Through

A final inspection of a home to check for problems that may need to be corrected before closing.

Worker's Compensation

This is a policy or endorsement covering the contractor, subcontractor and others who will be working on the subject property. This policy is typically provided by the contractor, thus the contractor should be named as the insured. It states that in cases in which worker's comp insurance is not required or the borrower is acting as his or her own general contractor, a waiver is required to be executed.

Wrap-Around Mortgage

Loan arrangement in which an existing loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate.

Zoning Ordinances (or Zoning Regulations)

Local law establishing building codes and usage regulations for properties in a specified area.