Real Estate Terms A-Z

A

Acceleration: The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgager (borrower), or by using the right vested in the due-on-sale clause.

Adjustable-Rate Mortgage (ARM): A loan on which the monthly payments will increase or decrease over time, based on changes in the ARM's interest rate index. ARM payments typically are adjusted every six months or once a year. Common indices to which ARMs are tied include the 11th District Cost of Funds, one-year T-note and six-month T-bill.

Adjusted Basis: The cost of a property plus the value of any capital expenditure for improvements to the property minus any depreciation taken.

Adjustment Date: The date that the interest rate changes on an adjustable-rate mortgage.

Adjustment Interval: The interval between changes on an adjustable-rate mortgage in the interest rate and/or monthly payment; typically one, three or five years depending on the index.

Adjustment Period: The period elapsing between adjustment dates for an adjustable-rate mortgage.

Affordability Analysis: An analysis of a buyer's ability to afford the purchase of a home. Reviews income, liabilities and available funds. Considers the type of mortgage you plan to use, the area where you want to purchase a home and the probable closing costs.

Amortization: The gradual repayment of a mortgage through monthly (e.g. installment) payments. In the early years of a mortgage, most of the monthly payment goes toward interest. Later in the mortgage, more of the payment goes toward reducing the loan's principal balance.

B

Balloon Mortgage: A loan that is amortized for a longer period than the term of the loan. Usually this refers to a 30-year amortization and a five-year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due.

Balloon Payment: The final lump sum paid at the maturity date of a balloon mortgage.

Biweekly Payment Mortgage: A plan to make mortgage payments every two weeks (instead of the standard monthly payment schedule). The 26 (or 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial saving in interest.

Blanket Mortgage: A mortgage covering at least two pieces of real estate as security for the same mortgage.

Borrower (Mortgager): One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Bridge Loan: A second trust for which the borrower's present home is collateral, allowing the proceeds to be used to close on a new house before the present home is sold. Also known as a "swing loan."

Broker: An individual who assists with arranging funding or negotiating contracts for a client but who does not loan the money himself or herself. Brokers usually charge a fee or receive a commission for their services.

Buy-down: When the lender and/or the homebuilder subsidize a mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

C

Caps: Provisions of an adjustable-rate mortgage limiting how much the interest rate can change at each adjustment period (e.g., every six months, once a year) or over the life of the loan (rate cap). A payment cap limits how much the payment due on the loan can increase or decrease.

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

Certificate of Eligibility: The document given to qualified veterans entitling them to VA-guaranteed loans for homes, businesses and mobile homes. Certificates of eligibility may be obtained by sending form DD-214 (Separation Paper) to the local Veterans Affairs office with VA form 1880 (request for Certificate of Eligibility).

Certificate of Reasonable Value (CRV): An appraisal issued by Veterans Affairs showing the property's current market value.

Certificate of Veteran Status: The document given to veterans or reservists who have served 90 days of continuous active duty (including training time). It may be obtained by sending DD 214 to the local Veterans Affairs office with form 26-8261a (request for certificate of veteran status; this document enables veterans to obtain lower downpayments on certain FHA-insured loans).

Change Frequency: The frequency (in months) of payment and/or interest rate changes on an adjustable-rate mortgage.

Closing: The meeting at which a home sale is finalized. The buyer signs the mortgage, pays closing costs and receives title to the home. The seller pays closing costs and receives the net proceeds from the home sale.

Closing Costs: Expenses in addition to the price of the home incurred by buyers and sellers when a home is sold. Common closing costs include escrow fees, title insurance fees, document recording fees and real estate commissions.

COFI: An adjustable-rate mortgage with a rate that adjusts based on a cost-of-funds index, often the 11th District Cost of Funds.

Construction Loan: A short-term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.

Consumer Reporting Agency (or Bureau): An organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and other sources.

Contingency: A condition that must be fulfilled before a contract is binding.

Contract Sale or Deed: A contract between purchaser and seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.

Conventional Mortgage: A loan not guaranteed, insured or made by the federal or state government.

Conversion Clause: A provision in an adjustable-rate mortgage allowing the loan to be converted to a fixed-rate mortgage at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.

Counteroffer: An offer in response to an original offer.

Credit Report: A report documenting the credit history and current status of a borrower's credit standing.

Credit Risk Score: A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well-known type of credit risk score is the Fair, Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.

D

Default: Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

Deferred Interest: When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance.

Delinquency: Failure to make payments on time. This can lead to foreclosure.

Department of Veterans Affairs (VA): An independent agency of the federal government that guarantees long-term, low- or no-downpayment mortgages to eligible veterans.

Debt-To-Income (DTI) Ratio: The ratio of monthly debt payments to monthly gross income. Lenders use a housing DTI ratio (house payment divided by monthly income) and a total DTI ratio (total debt payments including the house payment divided by monthly income) to determine whether a borrower's income qualifies him or her for a mortgage.

Deed: A legal document conveying ownership of property.

Downpayment: The portion of the home's purchase price the buyer pays in cash.

Due-on-Sale Clause: A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

E

Earnest Money: The deposit given by a buyer to a seller to show that the buyer is serious about purchasing the home. Earnest money usually is refundable to homebuyers in the event a contingency of the sales contract cannot be met.

Entitlement: The Veterans Affairs home loan benefit (i.e., entitlement for a VA-guaranteed home loan). This is also known as eligibility.

Equal Credit Opportunity Act (ECOA): A federal law requiring lenders and other 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 a home's value and the mortgage amount owed on the home.

Escrow: The holding of documents and money by a neutral third party prior to closing.

Escrow Disbursements: The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance and other property expenses as they become due.

Escrow Payment: The part of a mortgager's monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments and other items as they become due.

Exclusive Right to Sell Listing: A contract giving an agent the exclusive right to market a property under a certain time frame.

Exclusive Agency Listing: A contract giving the broker the right to market an owner's property for a certain period of time, but also allowing the owner to sell the property during that period without paying a commission.

F

Farmers Home Administration (FMHA): Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

Federal Housing Administration (FHA): A division of the Department of Housing and Urban Development whose main activity is insuring residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

Federal National Mortgage Association (Fannie Mae): A privately owned corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by Federal Housing Administration or guaranteed by Veterans Affairs. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable. Fannie Mae and Freddie Mac are the key secondary mortgage-market agencies.

FHA Loan: A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately priced homes almost anywhere in the country.

FHA Mortgage Insurance: Requires a fee (up to 2.25 percent of the loan amount) paid at closing to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the downpayment, the more years the fee must be paid.

Firm Commitment: A promise by Federal Housing Administration to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan.

First Mortgage: The primary lien against a property.

Fixed Installment: The monthly payment due on a mortgage loan, including payment of both principal and interest.

Fixed-Rate Mortgage (FRM): A loan on which the interest rate and monthly payment do not change.

For Sale By Owner (FSBO): The owner sells his or her home without a REALTOR® to avoid paying a sales commission.

Foreclosure: A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.

Federal Home Loan Mortgage Corporation (Freddie Mac): A quasi-governmental, privately owned agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers. Fannie Mae and Freddie Mac are the key secondary mortgage-market agencies.

Fully Amortized ARM: An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.

G

Graduated-Payment Mortgage (GPM): A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

Growing-Equity Mortgage (GEM): A fixed-rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.

Guaranty: A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.

Guarantee Mortgage: A mortgage that is guaranteed by a third party.

H

Hazard Insurance: A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.

Homeowner’s Warranty: A policy that covers certain repairs (e.g. plumbing or heating) of a newly purchased home for a certain period of time.

Housing Expenses-to-Income Ratio: The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his or her gross monthly income.

HUD-1 statement: A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points and initial escrow amounts. A separate number within a standardized numbering system represents each item on the statement. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing.

I

Impound Account: An account established by a lender to collect a borrower's property tax and insurance payments. Impound accounts are normally required on mortgages with down payments of 10 percent or less.

Index: A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one-, three- and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Indexed rate: The sum of the published index plus the margin. For example if the index were 9 percent and the margin 2.75 percent, the indexed rate would be 11.75 percent. Often, lenders charge less than the indexed rate the first year of an adjustable-rate mortgage.

Initial Interest Rate: This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It's also known as "start rate" or "teaser."

Installment: The regular periodic payment that a borrower agrees to make to a lender.

Insured Mortgage: A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).

Interest: The fee charged for borrowing money.

Interest Accrual Rate: The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.

Interest Rate Buydown Plan: An arrangement that allows