Northern Pines Lending Real Estate and Mortgage Glossary

Abstract or Title Search: The process of reviewing all publicly recorded transactions to determine whether any title defects exist that could interfere with a clear transfer of property.

Acceleration Clause: A clause that provides the mortgagee (lender) the right to demand immediate repayment of the loan balance upon default of the mortgagor (borrower). “Acceleration” is also triggered by the due on sale clause (demands immediate repayment if the house is sold).

Acceptance: The seller’s written approval of a buyer’s offer.

Addendum: An addition or change to an existing contract between two or more parties.

Additional Principal Payment: Additional funds outside of the scheduled loan payment to reduce the principal balance and shorten the term of the loan.

Adjustable Rate Mortgage: An adjustable-rate mortgage (ARM) means the interest rate changes over the life of the loan – according to the terms specified in advance.

Adjustment Period: The amount of time between interest rate adjustments in an adjustable-rate mortgage.

Amortization Table: Mathematical tables used to calculate a borrower’s monthly payment.

Amortization: The process of paying the principal and interest on a loan through regularly scheduled payments.

Appraisal: A professional opinion of the value of a property by a licensed real estate appraiser.

Appraised Value: A professional opinion of the current market value of a property.

APR (annual percentage rate): A measure of interest that expresses the cost of a mortgage as a yearly rate on the loan balance.

Assessed Value: A tax assessor’s determination of the value of a home in order to calculate a tax base.

Assessment: The estimated value of a piece of real estate or a special levy placed in addition to taxes.

Assets: Items of value which include cash, real estate, securities, and investments.

Assignment: The transfer of rights to pay a debt from one party to another, with the original party remaining liable for the debt if the second party defaults.

Assumable Mortgage: A mortgage that can be transferred to another borrower.

Back End Ratio: A calculation used by lenders to compare a borrower’s total debt to their gross monthly income.

Balloon Mortgage: With a balloon mortgage you start by making payments as you would with a full term loan, but after a certain period the balance of the mortgage comes due.

Bridge Loan: A short-term loan for borrower’s who need more time to find permanent financing.

Broker: Anyone who acts as a go-between between a buyer and seller. For example, a real estate broker is licensed to handle property transactions and negotiate between a buyer and seller. A mortgage broker acts as a go-between with the lender and the borrower.

Cap: A limit on the amount the interest rate or monthly payment can increase in an adjustable rate mortgage.

Carry back Financing: Financing in which a seller agrees to hold back a note for a set amount of the sales price.

Cashier’s Check: A check the bank draws on itself rather than on a depositor’s account.

Cash-out Refinance: The refinancing of a mortgage in which the money received from the new loan is greater than the amount due on the old loan.

Certificate of Occupancy (CO): A document stating that a home or other building has met all building codes and is suitable for habitation.

Chain of Title: The official record that details the ownership history of a piece of property.

Clear Title: The official record that details the ownership history of a piece of property.

Closing Costs: Expenses related to the sale of real estate including loan, title, and appraisal fees. These costs are above and beyond the price of the property and are paid at closing. Most closing costs are on-time expenses however a few are recurring.

Closing Statement: A document which details the final financial details of a property sale between a buyer and seller and the costs paid by each party.

Closing: The final procedure in which loan and title documents are signed between the buyer and seller and their respective representation.

Cloud on Title: An invalid encumbrance on real property.

Commitment: A promise by a lender to make a loan with specific terms for a specified period.

Comparables: Properties used as comparisons to determine the value of a certain property.

Compound Interest: The interest paid on the principal balance of a mortgage plus accrued interest.

Conforming Loan: A home loan that meets qualifications to be purchased by Fannie Mae or Freddie Mac.

Construction Loan: A short term loan for construction. Lenders usually disburse funds from construction loans in draws according to completion of defined stages throughout the construction process.

Construction-to-Permanent Financing: Construction-to-permanent financing is an excellent choice when you want to finance the construction of your new home by a contractor. It is a streamlined way to cover costs for the building, renovation or home improvement of your property as well as the long term financing of your home.

Conventional Loan: A long term loan a lender makes for the purchase of a home.

Co-signer: A second party who also signs a promissory note and takes responsibility for the debt.

Courier Fee: Fee charged at closing to cover the delivery of documents between lenders, escrow companies, and other third parties during a real estate transaction.

Credit History: A file detailing an individual’s current and past debt payments and financial obligations.

Credit Life Insurance: Insurance that pays off a mortgage in the event of the borrower’s death.

Credit Rating: The degree of creditworthiness assigned to a person based on their credit history and financial status.

Credit Report: A detailed account of an individual’s credit, employment, and residence history. A lender uses this report to determine a loan applicant’s creditworthiness. The three largest credit bureaus are Trans Union, Equifax and Experian.

Credit Score: A credit score is a statistical summary of the information in a consumer’s credit report. The most well know type of credit score is the Fair Isaac or FICO score. This score represents the answer from a mathematical formula that assigns numerical values to various pieces of information in a credit report.

Deed of Trust: A document that gives a lender the right to foreclose on a piece of property if the borrower defaults on the loans.

Deed: the legal document that transfers property ownership from the seller to the buyer.

Default: The failure to fulfill a duty or discharge and obligation – such as making monthly mortgage payments.

Delinquency: Failure to make mortgage payments on time. Severe delinquency can lead to foreclosure.

Delinquent Mortgage: A mortgage that involves a borrower who is behind on payments. If the borrower cannot bring the payments up to date within a specified number of days the lender may begin foreclosure proceedings.

Deposit: Funds provided by the buyer with an offer to purchase property. Also referred to as “earnest money”.

Discount Points: Fees charged by a lender to provide a lower interest rate. One discount point equals one percent (1%) of the loan amount.

Document Needs List: A list of documents required by a lender from a potential borrower submitting a loan application. Documents requested can range from paycheck stubs to bank statements.

Down Payment: The difference between the purchase price and the portion financed by a mortgage lender.

Draw: A payment made to contractors, subcontractors, home builders or suppliers from the proceeds of a construction loan.

DTI (debt-to-income ratio): The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her gross monthly income.

Due on Sale Clause: Standard language in a mortgage that states the loan must be repaid upon sale.

Earnest Money: Money a buyer provides with an offer to purchase a property. Also called a deposit.

Easement: A right given to a third party to use a portion of the property for certain purposes, such as power lines or sewage mains.

Encumbrance: Any right or interest in property interfering with its use or transfer.

End Loan: The conversion from a construction loan to permanent financing.

Equal Credit Opportunity Act (ECOA): Federal law prohibits a lender or other creditor from refusing to grant credit on the applicant’s sex, marital status, race, religion, national origin or age.

Equity: The value of a property after existing liens are deducted.

Escrow Account: An account that a mortgage lender or mortgage servicing company establishes to hold funds for the payment of expenses such as homeowners insurance and property taxes.

Escrow Agent: A neutral third party who ensures that all conditions of a real estate transaction are met before any transfer of funds or property is recorded.

Escrow: A neutral third party holds documents and money for a real estate transaction and ensures that all conditions of a sale are met before any disbursement of funds or articles.

Estate: the total assets of a person, including real property, at the time of death.

Estimated Closing Costs: An estimate of expenses related to the sale of real estate including title and appraisal fees.

Estimated Hazard insurance: An estimate of hazard insurance, also known as homeowners insurance, to cover physical risks such as fire and wind damage.

Estimated Property Taxes: An estimate of property taxes payable on the property to state and county tax rates. The amount due is based on the property’s assessed value which is based on the most recent sale price plus any assessment updates.

Examination of Title: An inspection by a title company of public records and other documents to determine the chain of ownership of a property.

Executed Contract: Contracts in which all parties have fulfilled their promises.

Fair Credit Reporting Act: Federal law designed to regulate procedures and prevent old or inaccurate information from staying in consumer credit files. This act provides individuals the right to inspect their own credit files, although the credit bureau may charge a fee.

Fair housing Act: Federal law making it illegal to refuse rent or sell to anyone based on race, color, religion, sex, national origin, family status or disability.

Fannie Mae: The official name of the Federal national Mortgage Association – it is a congressionally chartered, shareholder-owned company that buys mortgages from lenders and resells them as securities on the secondary market.

Federal Home Loan Mortgage Corporation (FHLMC): The Federal Home Loan Mortgage Corporation is commonly known as Freddie Mac. The corporation buys mortgages from lending institutions, pools them with other loans and sells shares to investors.

First Mortgage: The primary mortgage on a property. As the most senior voluntary lien, the first mortgage takes priority over all other voluntary liens.

Fixed Rate Mortgage: A fixed-rate mortgage means the interest rate and principal payments remain the same for the entire life of the loan. (Taxes and insurance may change.)

Flood Certification: The process of determining whether a property is located within a known flood zone.

Flood Insurance: Insurance coverage that is required in designated flood areas.

For Sale By Owner (FSBO): A selling method whereas the owner of the property acts as the selling agent and handles the sales process directly with the buyer or buyer’s agent. This is most commonly done by owners in order to avoid having to pay a listing commission.

Freddie Mac: A congressionally chartered institution that buys mortgages from lenders and resells them as securities on the secondary mortgage market. Freddie Mac is the common name for the Federal Home Loan Mortgage Corporation (FHLMC).

Front-end Ratio: A lender calculation that compares a borrower’s monthly housing expense (principal, interest, taxes and insurance to gross monthly income.

Gift: Funds a borrower receives from a relative or other source. Mortgage lenders usually require a gift letter from the giver of this “gift money” stating that the money does not have to be repaid.

Good Faith Estimate: An estimate from a mortgage lender or broker showing all of the costs associated with obtaining a home loan including loan processing, title and inspection fees.

Grace Period: A specified amount of time in which a borrower may make a loan payment after its due date without penalty.

Gross Income: The total household incomes before taxes or expenses are subtracted.

Hazard Insurance: Hazard insurance provides coverage for damage from items as fire and wind. Mortgage lenders require coverage for at least the replacement value of the home. (Also known as homeowner’s insurance or fire insurance).

Home Equity Line of Credit: A Home Equity Line of Credit or a HELOC is a secure line of credit using the available equity in the property as collateral. The loan is for a certain pre-approved amount and can be drawn on as needed.

Home Equity Loan: A loan that allows owners to borrow against the equity in their homes however unlike a home equity line this product provides a defined amount at closing without an option to redraw in the future.

Home Inspection: An examination of a home’s condition by a licensed inspector prior to purchase.

Home Inspector: A licensed professional who evaluates the structural soundness and operating systems of a residence.

Home Price: The price agreed upon by a buyer and seller, usually based on an appraisal of the house, in addition to personal liability and theft coverage.

Homeowner’s Insurance: Insurance that includes coverage for any damages that may affect the value of a house, in addition to personal liability and theft coverage.

Homestead: A parcel of land used by the owner as a primary residence.

Housing Expense Ratio: The percentage of gross monthly income devoted to housing costs.

HUD-1 Uniform Settlement Statement: A closing statement or settlement sheet that outlines all closing costs on a real estate transaction or refinancing for the buyer and seller.

Income Property: Property that is not occupied by the owner but is used to generate income.

Index: Financial tables used by lenders to calculate interest rates on adjustable mortgages. Commonly used indexes are the Prime Rate, LIBOR and Treasury bills.

Initial Interest Rate: The original interest rate on an adjustable rate mortgage. This rate may be subject to various adjustments at points throughout the mortgage.

Initial Rate Cap: A specific limit defined by some adjustable rate loans (ARM’S) for the maximum amount the interest rate may increase at the expiration of the initial interest rate.

Inspection Fee: The fee paid to a licensed property inspector in order to determine the present physical condition of the property.

Inspection Report: A licensed property inspector’s written report of the properties condition.

Insurance binder: A temporary insurance arrangement usually put in force until a permanent policy can be obtained.

Insured Mortgage: A mortgage that is insured (guaranteed) by the Federal Housing Administration (FHA) or by private mortgage insurance (PMI).

Interest accrual rate: The rate at which interest accrues on a mortgage.

Interest Only Loan: The borrower pays only the interest that accrues on the loan balance each month. Because each payment goes toward interest, the outstanding balance of the loan does not decline with each payment.

Interest Paid Over Life of Loan: The total amount paid to the lender for the use of money during the time the money is borrowed.

Interest Rate Cap: The maximum interest rate charge allowed on the monthly payment of an adjustable rate mortgage during an adjustment period.

Interest Rate Ceiling: The highest interest rate a lender can charge for an adjustable rate mortgage.

Interest rate Floor: For an adjustable-rate mortgage (ARM), the minimum possible interest rate, as specified in the mortgage note.

Interest Rate: The fee, expressed as a percentage, charged for a loan.

Interim Financing: Short-term financing used by sellers to bridge the gap between the sale of one house and the purchase of another (also known as bridge or swing loans). A construction loan is also a form of interim financing.

Investment Property: Real Estate that generates income, such as an apartment building or a rental home.

Join Liability: The responsibility of two or more people to fulfill the terms of a home loan or other financial debt.

Joint Tenancy: Ownership by two or more people that gives equal shares to a piece of property. Rights pass to the surviving owner or owners.

Late Charge: A fee imposed by a lender when the borrower does not make a payment on time.

Late Payment: A payment a lender receives after the due date has passed.

Leasehold: The limited interest in a property help by a tenant; primarily the right to inhabit it for a specified period of time. At the end of the lease, the property reverts to the owner or landlord.

Legal Blemish: Blemishes on a piece of property such as a zoning violation or fraudulent title claim.

Legal Description: A specific way of identifying and location a piece of real estate that is acceptable to a court.

Lender: A bank, savings institution or mortgage company that offers home loans.

Liabilities: A borrower’s debts and financial obligations.

Lien: A claim laid by one person or company on the property of another as security for money owed.

Life Cap: Limits the amount a loan’s interest rate can change during the mortgage term. For example, if the rate on an adjustable-rate mortgage begins at 4 percent and has a life cap of 6 percentage points, it can not go over 10 percent.

Loan Application: A document that details a borrower’s income, debt and other obligations to determine credit worthiness. It also includes information on the subject property.

Loan Commitment: A promise by a lender or other financial institution to make or insure a loan for a specified amount and on specific terms.

Loan Officer: An official lending institution representative who is empowered to act on behalf of the lender within certain limits.

Loan Origination Fee: A fee charged by lenders to cover the direct costs of arranging the loan.

Loan Term: The time set by a lender for a buyer to pay a mortgage. Most conforming loans have 30 or 15-year terms.

Lock-in: A lender’s commitment to a borrower to guarantee (or ‘lock-in’) a specific interest rate for a limited amount of time.

LTV (loan-to-value ratio): The ratio of the total loan amount to the value of the property. For lending purposes, the property value is equal to the purchase price or the appraised value, whichever is lower.

Margin: A percentage added to the index and fixed for the life of the loan. When the initial interest rate on an adjustable-rate loan has expired, the interest rate moves toward the sum of its index plus a margin.

Market Value: The price a piece of property sells for at a particular point in time.

Merged Credit Report: A report that draws information from the three (3) main credit-reporting agencies including: Equifax, Experian and Trans Union.

Modification: A change in terms of a loan agreement.

Mortgage Acceleration Clause: A clause that allows a mortgage lender to demand repayment of the entire loan balance in a lump sum under certain circumstances, such as when the home is sold, title is changes, the loan is refinanced or the borrower defaults on a scheduled payment.

Mortgage Broker: An individual that matches lenders with prospective borrowers who meet the criteria of lenders the broker is approved to deal with.

Mortgage Insurance: Required by lenders on some loans to protect lenders from a possible default. Most conventional loans with down payments or home equity percentages that are less than 20 percent of the home value require private mortgage insurance (PMI).

Mortgage Interest Deduction: The tax write-off that the Internal Revenue Service allows most owners to claim for annual interest payments made on real estate loans.

Mortgage: A sum of money borrowed to purchase a home using the property as collateral. A mortgage is the legal document that pledges the property as collateral for a loan.

Negative Amortization: Occurs when a borrower’s monthly payment is too small to cover both the principal and interest of a loan, so the outstanding balance of the loan actually grows larger with each payment. Many adjustable rate mortgages are susceptible to this.

Net Worth: The worth of a person or company based on the difference between total assets and liabilities.

No-Documentation Loan: A loan application that does not require verification of income or assets and is generally based on a combination of strong credit with a large down payment.

Non-Assumption Clause: A loan provision that prohibits the transfer of a mortgage to another borrower without lender approval.

Non-Conforming Loan: A non-conforming loan is any loan that doesn’t meet the qualifications or is too large to be purchased by Fannie Mae or Freddie Mac.

Note: A legal document that requires a borrower to repay a mortgage at a certain interest rate over a specified period of time.

Original Principal Balance: The amount of principal owed on a loan before a borrower makes any payments.

Origination Fee: A fee charged by most mortgage lenders to cover costs of arranging the loan.

Payment Cap: A limit on the amount a monthly payment can increase on an adjustable rate mortgage.

Payment Change Date: The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.

Per-Diem Interest: Interest charged or accrued daily.

PITI (principal, interest, taxes and insurance): A payment amount calculated by a mortgage lender to include the total payment of all principal, interest, taxes and insurance due monthly.

Point: Fees charged by a lender to provide a lower interest rate. One point equals one percent (1%) of the loan amount. Also referred to as a discount point.

Pre-Approval: A thorough assessment made by a lender of a potential borrower’s ability to pay for a home and a confirmation of the amount to be borrowed.

Pre-Approval Letter: A letter from a lender that states the amount of money a potential buyer can obtain.

Prepaid Fees: Funds collected by the lender from the borrower to pay certain recurring items in advance, including interest, property taxes, hazard insurance and, if applicable, private mortgage insurance (PMI).

Prepaid Interest: Interest paid before it is due.

Prepayment Penalty: A penalty that a lender may impose on a borrower who pays a loan off before its expected end date.

Prequalification: A lender’s preliminary assessment of a buyer’s ability to pay for a home and an estimate of how much the buyer may borrow.

Principal: The amount of money originally borrowed in a mortgage, minus any payments made subsequently.

Private Mortgage Insurance: A form of insurance required by a lender when the borrower’s down payment or home equity percentage is less than 20% of the home value.

Processing Fee: A fee charged by some lenders for gathering information necessary to process the loan.

Property Tax: Tax paid on privately owned property.

Purchase-money Mortgage (PMM): A mortgage obtained by a borrower as a partial payment for a property.

Qualifying Ratio: A ratio calculated by a lender to determine how much a potential buyer can borrow.

Quitclaim Deed: A document that releases a party from any interest in a piece of real estate.

Rate & Term Refinance: When the amount of the new mortgage covers the remaining balance of the first loan plus closing costs and any liens, and yields no more than 1% of the new loan’s principal in cash.

Recording Fee: A fee charged by real estate agents for conveying the sale of a piece of property into the public record.

Regulation Z: A federal code issued under the Truth in Lending Act that requires a borrower be advised in writing of all costs associated with the credit portion of a financial transaction.

Reverse Mortgage: A special type of loan available to equity-rich, older home owners. Repayment is not necessary until the borrower sells the property.

Right to Rescission: A provision in the federal Truth in Lending Act that allows borrowers to cancel certain kinds of loans within three (3) days of signing.

Second Mortgage: A second loan placed on a piece of property.

Settlement or Closing Fees: Fees paid to the escrow agent for carrying out the written instructions of the agreement between buyer and seller and/or borrower and lender.

Subordinate Loan: A second or third mortgage.

Survey: A precise measurement of a piece of property by a licensed surveyor.

Tax Lien: A lien placed against a property for nonpayment of taxes (property and/or personal).

Tax Service Fee: A fee collected to set up a third-party monitoring of the borrower’s property tax payments. This is done to ensure that the payments are made on time and to prevent tax liens from occurring to the detriment of the lender.

Teaser Rate: A low, short term interest rate offered on a mortgage to entice the borrower.

Tenancy in Common: A form of ownership in which two or more owners hold an undivided (though not necessarily equal) interest in the property, with no right of survivorship.

Title: The legal document conferring ownership of a piece of real estate.

Title Exam: An examination of the public record to determine that the seller is the legal owner and there are no encumbrances affecting the property.

Title Insurance: A policy issued to lenders and buyers to protect against loss due to disputed property ownership at a later date.

Title Search: The process of reviewing all recorded transactions in the public record to determine whether any title defects exist that could interfere with the clear transfer of ownership of the property.

Underwriting: The process in which lenders evaluate the risks posed by a particular borrower and set appropriate conditions for the loan.

Underwriting Fee: A fee charged by mortgage lenders to verify information on the loan application and make a final decision about whether or not to approve the loan.

Verification of Deposit (VOD): A part of the loan process a lender may ask the borrower’s employer for confirmation of the borrower’s account balances and history.

Verification of Employment (VOE): As part of the loan process a lender may ask the borrower’s employer for confirmation of the borrower’s position and salary.

Yield Spread: A form of compensation some brokers receive from a lender for originating and processing a loan. The yield spread is based on the interest rate of the loan and can usually vary anywhere from zero to 6%.