Loan Glossary

Have you ever wondered who Freddie Mac and Fannie Mae are? Are they related to one another? Well, yes, in a manner of speaking they are. Both are entities that purchase first mortgages. One is a federal agency and the other is a private corporation. Continue reading for an understanding of terms commonly used in real estate transactions.

Acceleration clause - A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed or there is a change of ownership without the lender's consent.

Adjustable Rate Mortgage (ARM) - A mortgage whose interest rate is periodically adjusted to more closely coincide with current rates based on an index.

Agency - Any relationship in which one party (agent) acts for or represents another (buyer/seller) under the authority of the latter.

Alienation clause - A type of acceleration clause calling for a debt under a mortgage deed of trust to be due in its entirety upon transfer of ownership of the secured property. Also called a due-on-sale clause.

Amortization - Payment of debt in regular, periodic installments of principal and interest, as opposed to interest-only payments.

Amortization schedule - A schedule showing each payment, breaking down the payment into the amounts applied to the principal and interest.

Annual percentage rate (APR) - The total interest percentage of a loan calculated on an annual basis. Taken into account is the actual (note) interest rate, loan origination fee (points) and primary mortgage insurance (PMI).

Appraisal report - A written report by an appraiser containing his/her opinion as to the value of a property and the reasoning leading to this opinion. The factual data supporting the opinion, such as sales comparables and appraisal formulas.

Appreciation - An increased value of property due to a positive movement of market conditions or elimination of negative factors.

Assessed value - Value placed upon property for property tax purposes by the county assessor.

Assumable mortgage - A mortgage that can be taken over (assumed) by the buyer of the property.

Assumption fee - Lender's charge for paper work involved in processing records for a new buyer assuming an existing loan.

Balloon note - A note calling for periodic payments which are insufficient to fully amortize the amount of the note prior to maturity, so that a principal sum known as a "balloon" is due at maturity.

Bridge loan - A form of interim loan, generally made between a short-term loan and a permanent (long-term) loan, when the borrower needs to have more time before taking long-term financing.

Cap - A provision in an ARM limiting the amount the interest rate may increase.

Cash reserve - Remaining cash a borrower has at their disposal after the closing of a real estate transaction. A requirement on most real estate mortgages.

CC&R's (covenants, conditions and restrictions) - A term to describe the restrictive limitations which may be placed on property.

Closing - In real estate sales, the final procedure in which documents are executed and/or recorded, and the sale (or loan) is completed.

Closing costs - Expenses incidental to a sale of real estate, such as loan fees, title fees, appraisal gees, etc.

Closing statement - The statement which lists the financial settlement between buyer and seller, and also the costs each must pay.

Clear title - Real property on which there are no liens, especially voluntary liens (mortgages).

Contingency - Commonly, the dependence upon a stated event that must occur before a contract is binding. For example, the sale of a house, contingent upon the buyer obtaining financing.

Conventional mortgage - A mortgage or deed of trust not obtained under a government-issued program such as FHA or VA, or a mortgage in excess of $203,150.

Credit report - A report of an individual's past ability to pay installment payments, Used by the lender to determine credit worthiness.

Deed - One of many coveyancing or financing instruments used to transfer title to property upon sale.

Deed of trust - An instrument used in many states in place of a mortgage. Property is transferred to a trustee by the borrower (trustor), in favor of the lender (beneficiary), and reconveyed upon payment in full.

Defective Title - Title to real property which lacks some of the elements necessary to transfer good title.

Default - Failure to make mortgage payments in a timely manner or comply with the conditions of the mortgage.

Delinquency - A mortgage loan payment that is past due, but not yet in default.

Deposit - Money given by the buyer with an offer to purchase. Shows good faith. Also called earnest money.

Deposit receipt - See purchase agreement.

Disbursements - Payments made during the course of an escrow of at closing.

Documentary transfer tax - A tax based on the sale of real property, based on the sale price or equity transferred, being 55 cents for each $500 of the amount.

Down payment - Cash portion paid by a buyer from his own funds, as opposed to that portion of the purchase price that is financed.

Down stroke - Slang for down payment.

Due-on-sale clause - See alienation clause.

Earnest money - See deposit.

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

Equal Credit Opportunity Act (ECOA) - Federal law prohibiting lenders from denying mortgages on the basis of the borrower's race, color, religion, national origin, age, marital status, or receipt of income from public assistance programs.

Equity line of credit - A combination of a line of credit and equity loan. A mortgage (deed of trust) is recorded against the borrower's property for the amount of the maximum line of credit. The borrower has the right to borrow, as needed, up to the amount of the mortgage.

Escrow - Execution of instructions, documents and retention of funds by a neutral third party prior to closing.

Escrow account - See impound account.

Evidence of title - A document establishing ownership to property. Most commonly, a deed.

Exclusive listing - A written contract between a property owner and real estate broker, whereby the owner promises to pay a fee or commission to the broker if the property is sold during a stated period, regardless of whether the broker is or is not the cause of the sale.

Fair Credit Reporting Act - A federal law giving one the right to see his or her credit report so that errors may be corrected.

Fannie Mae or FNMA - A private corporation dealing in the purchase of first mortgages.

FHA (Federal Housing Association) - A federal agency that insures first mortgages, both conventional and federally insured, from members of the Federal Reserve System, and the Federal Home Loan Bank System.

First mortgage - A mortgage having priority over all other voluntary liens against certain property.

Fixed rate mortgage - A mortgage having a rate of interest that remains the same for the life of the mortgage.

Flood insurance - Insurance coverage against loss by flood damage. Required by lenders in areas federally designated as potential flood areas.

Foreclosure - The process by which a mortgaged property may be sold when a mortgage is in default.

Freddie Mac or FHLMC - A federal agency purchasing first mortgages, both conventional and federally insured, from members of the Federal Reserve System, and the Federal Home Loan Bank System.

Good Faith - Something done with good intentions, without knowledge or fraudulent circumstances, or reason to inquire further. Example, a good faith estimate given by a lender.

Graduated payment mortgage (GPM) - A mortgage, deed or trust beginning with a lower monthly payment and increasing by a predetermined rate at predetermined intervals.

Grant deed - One of the many types of deeds to transfer title to real property.

Hard money mortgage - A mortgage given in return for cash, credit history of the borrower is not generally a consideration in making the loan.

Hazard insurance - Real estate insurance protecting against loss caused by fire, some natural causes, vandalism, etc.

Home warranty insurance - Private insurance insuring a buyer against defects (usually plumbing, heating and electrical) in the home he has purchased.

Impound account - Account held by the lender for payment of taxes, insurance, or other periodic debts against the property.

Interest rate - The percentage of an amount of money that is paid for its use for a specific time.

Interest rate cap - The maximum interest rate increase of an adjustable rate mortgage.

Joint tenancy - A manner in which to hold legal title to real property, giving each tenant equal interest and rights in the property, including the right of survivorship.

Lease with option to buy - A lease under which the lessee has the right to purchase the property. The price and terms of the purchase must be set forth for the option to be valid.

Lien - A legal claim against the property.

Lifetime cap - See interest rate cap.

Loan-to-value ratio (LTV)  -  The ratio between the amount of the mortgage and the value of the property.

Lock in - A specific guaranteed interest rate provided the loan is closed within a designated period of time.

Mortgage banker - A company that originates mortgages with its own funds or for resale on the secondary market.

Mortgage broker - A company that brings together a borrower and a lender. The broker processes the necessary documentation and applications for the borrower to obtain a loan against real property.

Mortgage insurance (PMI) -  Insurance written by an independent mortgage insurance company, protecting the lender against loss incurred by a mortgage default.

Multiple listing - An exclusive listing, submitted to all members of an association of Realtors, benefiting both buyers and sellers by maximizing the exposure of the property to consumers.

Negative amortization - A condition in which a monthly loan payment is less than the amount of the interest. As a result, the amount owing on the mortgage increases over time.

Origination fee (points)  - A fee charged by a lender for making a real estate loan. Usually a percentage of the amount loaned.

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

Payment cap - A maximum amount for a payment under an adjustable rate mortgage, regardless of the increase in the interest rate. If the payment is less than the interest rate alone, negative amortization is created.

PITI (principal, interest, taxes and insurance) - The four major portions of a monthly mortgage payment.

Points - A one-time setup fee charged by the lender. One point is equal to one percentage point.

Prepayment penalty - A penalty charged by a lender to a borrower who pays off a mortgage before its due date.

Principal - Amount of debt, not including interest. The face value of a note, mortgage, etc.

Purchase agreement - An agreement between a buyer and seller of real property, setting forth the price and terms of the sale.

Quitclaim deed - A deed to release any title, interest or claim that the grantor may have in the property.

Qualifying rations - The ratio between a borrower's income and debt that lenders use to determine the loan amount for which a borrower qualifies.

Second mortgage - A mortgage that ranks after a first mortgage in priority.

Secondary mortgage market - The buying and selling of existing first mortgages or trust deeds.

Seller carry-back - See owner financing.

Subordinate - To make subject or junior to.

Settlement statement - See closing statement.

Take-out loan - The "permanent" (long-term) financing of real estate after completion of construction.

Tenant in severalty - One who owns property alone.

Title - The evidence one has of right to possession of real property.

Title insurance - Insurance against loss resulting from defects of title to a specifically described parcel or real property.

Transfer tax - See documentary transfer tax.

Variable interest rate - An interest rate that fluctuates as the prevailing rate moves up or down.