Abstract of Title
A historical summary provided by a title insurance company of all records affecting the title to a property.
Acceleration Clause
Allows a lender to declare the entire outstanding balance of a loan immediately due and payable should a borrower violate specific loan provisions or default on loan.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage is a type of mortgage in which the interest rate applied to the outstanding balance varies throughout the life of the loan. Usually, the initial interest rate is fixed for some time, after which it resets periodically, often every year or even monthly. The interest rate resets based on a benchmark or index plus an additional spread, called an ARM margin.
Amenity
Benefits of a property whose existence increases the value or desirability of that property. An amenity can be either tangible, such as a swimming pool or gym, or intangible, such as proximity to a local school or supermarket.
Amortization
Amortization is the paying off of debt with a fixed repayment schedule in regular installments over, for example with a mortgage or a car loan. It also refers to the spreading out of capital expenses for intangible assets over a specific period (usually over the asset’s useful life) for accounting and tax purposes.
Annual Percentage Rate (APR)
An annual percentage rate (APR) is the annual rate charged for borrowing or earned through investment and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does not take compounding into account. As loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties, and other factors, a standardized computation such as the APR provides borrowers with a bottom-line number; they can quickly compare to rates charged by other lenders.
Appraisal
An appraisal is a valuation of property, such as real estate, a business, or an antique, by the estimate of an authorized person. To make an accurate appraisal, the authorized person must have a designation from a regulatory body governing the jurisdiction of the appraiser. Appraisals are typically used for taxation purposes or to determine a possible selling price for the property in question. The appraiser can use any number of valuation methods to determine the appropriate value to assign, including the current market value of similar properties, quality of the property, and valuation models.
Appraiser
A practitioner who has the knowledge and expertise necessary to estimate the value of an asset, or the likelihood of an event occurring, and the cost of such an occurrence. Ideally, an appraiser acts independently of the buying and selling parties in a transaction to arrive at the fair value of an asset without bias.
Assessor
A local government official who determines the value of a property for domestic real estate taxation purposes. Assessors are trained to determine the fair market value of the property. The figures that they derive will be used to calculate future property taxes. The assessor estimates the value of real property within a city, town, or village’s boundaries. This value is converted into an assessment, which is one component in the computation of actual property tax bills.
Assumable Mortgage
An assumable mortgage is a type of financing arrangement in which the outstanding mortgage and its terms can be transferred from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid having to obtain his or her mortgage.
Balloon Mortgage
A balloon mortgage is a type of short-term mortgage. Balloon mortgages require borrowers to make regular payments for a specific interval, then pay off the remaining balance within a relatively short time. Some types of balloon mortgages can be interest-only for ten years, and the final “balloon” payment to pay off the balance comes as one large installment at the end of the term.
Borrower
Someone who is considered a below-average credit risk. A prime borrower is deemed to be likely to make loan payments on time and likely to repay the loan in full. Prime borrowers have credit files that show strong histories of using credit wisely and handling loans responsibly. As a result, their credit scores tend toward the higher end of the spectrum, albeit not as high as those of super-prime borrowers. A prime credit score usually falls somewhere in the 640 to 740 range, though the exact score that is considered excellent depends on the scoring model used.
Budget
A budget is an estimation of the revenue and expenses over a specified future period and is compiled and re-evaluated periodically. A surplus budget means profits are anticipated, while a balanced budget means that revenues are expected to equal expenses. A deficit budget means costs will exceed revenues.
Building code
Based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.
Buy-down
A buy-down is a mortgage-financing technique with which the buyer attempts to obtain a lower interest rate for at least the first few years of the mortgage, but possibly its entire life. The builder or seller or the property usually provides payments to the mortgage-lending institution, which, in turn, lowers the buyer’s monthly interest rate and therefore, monthly fee. The home seller, however, increases the purchase price of the home to compensate for the costs of the buy-down agreement.
Cap
The highest point to which an adjustable rate mortgage (ARM) can rise in a given period or the highest rate that investors can receive on a floating-rate type bond.
Cash Reserves
Cash reserves can refer to the money a company or individual keeps on hand to meet short-term and emergency funding needs. Cash reserves can also apply to high liquid investment that earns a low rate of return (perhaps 3% annually), such as investment company Fidelity’s mutual fund called Fidelity Cash Reserves; this is where some individuals keep money that they want to have quick access to.
Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans Administration (VA) that determines the value of a property. The loan amount may not exceed the CRV on a VA loan.
Certificate of Title
A certificate of title is a state or municipal-issued document that identifies the owner or owners of personal or real property. A certificate of title provides documentary evidence of the right of ownership. When issued for real property (such as land or a house) by a title insurance company, the certificate of title is a statement of opinion on the status of the title, based on a thorough examination of specified public records.
Closing
Also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives a title from the seller.
Closing Costs
Closing costs are expenses over and above the price of the property in a real estate transaction. Costs incurred include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees, and credit report charges. Prepaid costs are those that recur over time, such as property taxes and homeowners’ insurance, and the lender states these costs in a “reasonable faith estimate within three days of a home loan application.
Commission
A commission is a service charge assessed by a broker or investment advisor in return for providing investment advice and handling the purchase or sale of a security. Most significant, full-service brokerages derive most of their profits from charging commissions on client transactions. Commissions vary widely from brokerage to brokerage.
Condominium
Condominium refers to a large property complex divided into individual units and sold. Ownership usually includes a nonexclusive interest in specific “common properties” controlled by the condominium management. Condominium management is generally made up of a board of unit owners who sees to the day-to-day operation of the complex, such as lawn maintenance and snow removal.
Conforming Loan
A mortgage that is equal to or less than the dollar amount established by the conforming loan limit set by Fannie Mae and Freddie Mac’s Federal regulator, The Office of Federal Housing Enterprise Oversight (OFHEO) and meets the funding criteria of Freddie Mac and Fannie Mae.
Conventional Mortgage
A conventional mortgage is a type of mortgage in which the underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. About 35-50% of mortgages, depending on market conditions and consumer trends, are conventional mortgages. In other words, Fannie Mae and Freddie Mac guarantee or purchase 35-50% of all mortgages. Conventional mortgages may be fixed-rate or adjustable-rate mortgages.
Credit Bureau
The credit bureau is an agency that researches and collects individual credit information and sells it for a fee to creditors so they can decide on granting loans.
Credit History
A record of a consumer’s ability to repay debts and demonstrated responsibility in repaying debts. A consumer’s credit history consists of information such as number and types of credit accounts, how long each account has been open, amounts owed, amount of available credit used, whether bills are paid on time, and the number of recent credit inquiries. It also contains information regarding whether the consumer has any bankruptcies, liens, judgments, or collections. This information is included in a consumer’s credit report.
Credit Report
A credit report is a detailed report of an individual’s credit history. Credit bureaus collect information and create credit reports based on that information, and lenders use the reports along with other details to determine loan applicants’ creditworthiness. In the United States, there are three major credit reporting bureaus: Equifax, Experian, and TransUnion. Each of these reporting companies collects information about consumers’ personal details and their bill-paying habits to create a unique credit report; although most of the information is similar, there are often small differences between the three reports.
Deed
A legal document that grants the bearer a right or privilege provided that he or she meets several conditions. In order to receive the privilege – usually ownership, the holder must be able to do so without causing others undue hardship. A person who poses a risk to society as a result of holding a deed may be restricted in his or her ability to use the property.
Default
Default is the failure to pay interest or principal on a loan or security when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment, and it also refers to cases in which one party fails to perform on a futures contract as required by an exchange.
Delinquent
Delinquent describes something or someone that fails to accomplish what is required by law or duty, such as the failure to make a required payment or perform a specific action. A delinquent is an individual or corporation with a contractual obligation to make payments against a loan in a timely manner, such as through a mortgage, but payments are not made on time. In the case of a mortgage, the lender can initialize foreclosure proceedings if the mortgage is not brought up to date within a certain amount of time.
Discount Points
Discount points are a type of prepaid interest or fees mortgage borrowers can purchase that lowers the amount of interest they have to pay on subsequent payments. Each discount point generally costs 1% of the total loan amount and depending on the borrower; each point lowers the loan’s interest rate by one-eighth to one one-quarter of a percent. Discount points are tax deductible only for the year in which they were paid.
Down Payment
A down payment is a type of payment made in cash during the onset of the purchase of an expensive good or service. The payment typically represents only a percentage of the full purchase price; in some cases, it is not refundable if the deal falls through. In most cases, the purchaser makes financing arrangements to the cover the remaining amount owed to the seller.
Earnest Money
Earnest money is a deposit made to a seller showing the buyer’s good faith in a transaction. Often used in real estate transactions, earnest money allows the buyer additional time when seeking financing. Earnest money is typically held jointly by the seller and buyer in a trust or escrow account.
Energy Improvement Mortgage (EEM)
A mortgage that sets money aside for home improvements that will increase energy efficiency within the home. Energy improvement mortgages are available when a house is being purchased or refinanced. A certified home energy rater will examine the home and suggest improvements; once the improvements have been made and confirmed, the lender will repay the expenses (which have already been approved under the mortgage contract) to the borrower from an escrow account.
Equal Credit Opportunity Act (ECOA)
A regulation created by the U.S. government that aims to give all legal individuals an equal opportunity to apply for loans from financial institutions and other loan granting organizations. The Equal Credit Opportunity Act (ECOA) states that individuals cannot be discriminated against factors that are not directly related to their creditworthiness. It prohibits creditors and lenders from considering a consumer’s race, color, national origin, sex, religion, or marital status in deciding whether to approve their loan or credit application. Financial institutions also cannot deny credit based on age, as long as the applicant is of legal age and has the mental capacity to enter into a contract, nor can they deny credit because the applicant is receiving public assistance.
Equity
Equity is calculated by the amount of principal you have repaid on your mortgage, plus any appreciation in your home’s value. Any other existing liens will be subtracted, lowering the total equity figure.
Escrow
Escrow is a legal concept in which a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. The funds or assets are held by the escrow agent until it receives the appropriate instructions or until predetermined contractual obligations have been fulfilled. Money, securities, funds, and other assets can all be held in escrow.
Escrow Agent
An escrow agent is a person or entity that holds property in trust for third parties while a transaction is finalized, or a disagreement is resolved. The role of the escrow agent is often played by an attorney (or notary in civil law jurisdictions). The escrow agent has a fiduciary responsibility to both parties to the escrow agreement.
FAIR HOUSING ACT
The Fair Housing Act (Title VIII of the Civil Rights Act of 1968) prohibits discrimination in the buying, selling, rental or financing of housing based on race, skin color, sex, nationality, religion or any other protected class characteristics. Protections for persons with disabilities and children were added to the Fair Housing Act in 1988.
FAIR MARKET VALUE
Fair market value (FMV) is, in its simplest expression, the price that a person reasonable interested in buying a given asset would pay to a person reasonably interested in selling it for the purchase of the asset or asset would fetch in the marketplace. To establish FMV, it must be assumed that prospective buyers and sellers are reasonably knowledgeable about the asset, that they are behaving in their own best interests, that they are free of undue pressure to trade and that a reasonable time period is given for completing the transaction.
FEDERAL HOUSING ADMINISTRATION (FHA)
The Federal Housing Administration (FHA) is a U.S. agency that offers mortgage insurance to lenders that are FHA-approved and meet specified qualifications. Such insurance allows for the protection of lenders against losses that may arise with mortgage defaults. If a borrower defaults on a loan, the FHA pays the lender a specified claim amount.
FIXED RATE MORTGAGE
A fixed-rate mortgage is a mortgage that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a fixed-rate mortgage is that the interest rate over every time period of the mortgage is known at the time the mortgage is originated. The benefit of a fixed-rate mortgage is that the homeowner will not have to contend with varying loan payment amounts that fluctuate with interest rate movements.
FLOOD INSURANCE
Flood insurance is a financial instrument that protects real property owners from water damage to the structure and contents of their property. While flood insurance can be purchased through many different insurance companies, all policies are federally regulated, so the same policy costs the same amount no matter which company it is purchased through.
Foreclosure (FCL)
A situation in which a homeowner is unable to make full principal and interest payments on persons mortgage, which allows the lender to seize the property, evict the homeowner and sell the home, as stipulated in the mortgage contract. One month after the homeowner misses a mortgage payment, he/she is in default and will be notified by the lender. Three to six months after the homeowner misses a mortgage payment, assuming the mortgage is still delinquent, and the homeowner has not made up the missed payments within a specified grace period, the lender will begin to foreclose. The farther behind the borrower falls, the more difficult it becomes to catch up since lenders add fees for payments that are 10 to 15 days late.
Good Faith Estimate
An estimate of the fees due at closing for a mortgage loan that must be provided by a lender to a borrower within three days of the lender taking a borrower’s loan application. A good faith estimate is required by the Real Estate Settlement Procedures Act (RESPA). While the form of the estimate is standardized across the industry to allow borrowers to compare costs between lenders, it is key to note that it is only an estimate, and the actual figure can sometimes be different.
Hazard Insurance
Insurance that protects a property owner against damage caused by fires, severe storms, earthquakes, or other natural events. As long as the specific event is covered within the policy, the property owner will receive compensation to cover the cost of any damage incurred. Typically, the property owner will be required to pay for a year’s worth of premiums at the time of closing, but this will depend on the exact details of the policy.
Help
Home buyer Education Learning Program; an educational program from the FHA that counsels people about the home buying proceeds; HELP covers topics like budgeting, finding a home, getting a loan, and home maintenance; in most cases, completion of the program may entitle the Home buyer to a reduced initial FHA mortgage insurance premium-from 2.25% to 1.75% of the home purchase price.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) is a line of credit extended to a homeowner that uses the borrower’s home as collateral. Once a maximum loan balance is established, the homeowner may draw on the line of credit at his or her discretion. Interest is charged on a predetermined variable rate, which is usually based on prevailing prime rates.
Once there is a balance owing on the loan, the homeowner can choose the repayment schedule as long as minimum interest payments are made monthly. The term of a HELOC can last anywhere from less than five to more than 20 years, at the end of which all balances must be paid in full.
Home Inspection
An examination of a real estate property’s condition usually performed in connection with the property’s sale. A qualified home inspector can assess the condition of a property’s roof, foundation, heating and cooling systems, plumbing, electrical work, water and sewage, and some fire and safety issues. Also, the home inspector will look for evidence of insect, water or fire damage or any other issue that may affect the value of the property.
Home Warranty
A home warranty is not the same thing as homeowner’s insurance, nor is it a replacement for homeowner’s insurance. Homeowners insurance covers major hazards, such as fires, hail, property crimes, and certain types of water damage that could affect the entire structure and/or the homeowner’s personal possessions. A home warranty does not cover these hazards.
A home warranty is a contract between a homeowner and a home warranty company that provides for discounted repair and replacement service on a home’s major components, such as the furnace, air conditioning, plumbing, and electrical system. A home warranty may also cover major appliances such as washers and dryers, refrigerators, and swimming pools. Most plans have a basic component that provides all homeowners who purchase a policy with certain coverages. Homeowners can also purchase one or more optional components that provide additional coverage at additional cost.
Homeowners insurance
Homeowners insurance is a form of property insurance designed to protect an individual’s home against damages to the house itself or possessions in the home. Homeowners insurance also provides liability coverage against accidents in the home or on the property.
Index
An index is an indicator or measure of something, and in finance, it typically refers to a statistical measure of the change in a securities market. In the case of financial markets, stock and bond market indices consist of an imaginary portfolio of securities representing a particular market or a portion of it. In reference to mortgages, it refers to a benchmark interest rate created by a third party.
Inflation
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation and avoid deflation in order to keep the economy running smoothly.
Impound
An account maintained by mortgage companies to collect amounts such as hazard insurance, property taxes, private mortgage insurance and other required payments from the mortgage holders; these payments are necessary to keep the home but are not technically part of the mortgage. Impound accounts are often required of borrowers who put down less than 20%, but are usually optional in other cases. The purpose of the impound account is to protect the lender. Because low down-payment borrowers are considered high risk, the impound account assures the lender that the borrower will not lose the home because of liens or loss, as the lender pays insurance, taxes, etc. from the impound account when they are due.
Jumbo Loan
A mortgage with a loan amount exceeding the conforming loan limits set by the Office of Federal Housing Enterprise Oversight (OFHEO), and therefore, not eligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac. OFHEO sets the conforming loan limit size on an annual basis.
Lien
A lien is a legal right granted by the owner of property, by a law or otherwise acquired by a creditor. A lien serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize the asset that is the subject of the lien.
The loan-to-value ratio (LTV ratio)
The loan-to-value ratio (LTV ratio) is a lending risk assessment ratio that financial institutions and other lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is approved, the loan generally costs the borrower more to borrow.
Locked In
Locked in is situation where an investor is unwilling or unable to exit a position because of the regulations, taxes or penalties associated with doing so. This may be an investment vehicle, such as a retirement plan, which cannot be accessed until a specified retirement date.
If there is an increase in value of stocks held by an individual, they will be subject to a capital gains tax (with some exceptions). To reduce their tax burden, an investor could shelter these gains in a defined retirement account. The individual is considered locked in because if a portion of this investment is withdrawn prior to maturity the owner will be taxed at a higher rate than if they waited.
Lost Payee Clause
Lost Payee Clause or loss payable clause, in a contract of insurance that provides in the event of payment being made under the policy in relation to the insured risk, that the payment will be made to the third party rather than to the insured beneficiary of the policy.
Margin
Margin is the difference between a product or service’s selling price and its cost of production or to the ratio between a company’s revenues and expenses. It also refers to the amount of equity contributed by an investor as a percentage of the current market value of securities held in a margin account. Margin is the portion of the interest rate on an adjustable-rate mortgage added to the adjustment-index rate.
Mortgage Clause
Mortgage Clause is a clause in an insurance policy that protects the interest of the lender to recover the process even if the borrower is at fault.
Mortgage or Deed of Trust
A trust deed is a notice of the release of merchandise to a buyer from a bank, with the bank retaining the ownership title to the released assets. The bank remains the owner of the merchandise, but the buyer is allowed to hold the merchandise in trust for the bank, for manufacturing or sales purposes. The buyer of merchandise subject to a trust deed is required to maintain the merchandise, and any proceeds of the sale of the merchandise, for remittance to the bank. In this way, the buyer is permitted use of the merchandise for his business activities, but the bank’s interest in the ownership of the merchandise is protected.
Mortgage Insurance
Mortgage insurance is an insurance policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments, dies, or is otherwise unable to meet the contractual obligations of the mortgage. Mortgage insurance can refer to private mortgage insurance (PMI), mortgage life insurance, or mortgage title insurance. What these have in common is an obligation to make the lender or property holder whole in the event of specific cases of loss.
Private mortgage insurance may be called “lender’s mortgage insurance” (LMI) if the premium on a PMI policy is paid by the lender and not the borrower. This is typically done in exchange for a higher rate or fee structure on the mortgage itself.
Mortgage Fraud
Intentionally falsifying information on a mortgage loan application. The intention of mortgage fraud is typically to receive a larger loan amount than would have been permitted if the application had been made honestly.
Mortgagee
A mortgagee is an entity that lends money to a borrower for the purpose of purchasing a piece of real property. By accepting a mortgage on the real property, the lender creates security in the full repayment of the loan in the future.
Negative Amortization
An increase in principal balance that occurs when monthly payments are not large enough to pay all interest due on a loan, usually caused when payment caps prevent sufficient payment increases. Unpaid deferred interest is added to the loan balance, causing the borrower to owe more than the loan’s original amount.
Net
After taxes.
Net Effective Income
Gross income minus estimated federal income tax.
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.
Non-Conforming Loan
A conventional loan that cannot be sold to Fannie and Freddie Mac. Often, these loans are larger than the conforming loan amount.
Non-Dischargeable Debt
Debt, such as taxes, that cannot be forgiven in a bankruptcy liquidation.
Note
A note is a financial security that generally has a longer term than a bill but a shorter term than a bond. U.S. Treasury notes, for example, are sold in $100 increments, pay interest in six-month intervals and pay investors face value upon maturity. There are numerous types of notes, including mortgage-backed notes, unsecured notes, municipal notes, bank notes, euro notes, promissory notes, demand notes, and structured notes.
Non-Dischargeable Debt
Written notice to a borrower that a default has occurred, and that legal action may be taken.
Offer
An offer is when one party expresses interest to buy or sell an asset from another party. The offering price is often the highest the buyer will pay to purchase an asset, and the lowest that the seller will accept.
Origination
Origination is the multi-step process every individual must go through when obtaining a mortgage or home loan, as well as other types of personal loans. During this process, borrowers must submit various types of financial information and documentation to a mortgage lender, including tax returns, payment history, credit card information, and bank balances. Mortgage lenders use this information to determine the type of loan and the interest rate for which the borrower is eligible.
Origination Fee
An origination fee is an up-front fee charged by a lender for processing a new loan application, used as compensation for putting the loan in place. Origination fees are quoted as a percentage of the total loan and are generally between 0.5 and 1% on mortgage loans in the United States.
Principal, Interest, Taxes, Insurance (PITI)
Principal, Interest, Taxes, Insurance (PITI) refers to the components of a mortgage payment. Principal is the money used to pay down the balance of the loan; interest is the charge paid to the lender for the privilege of borrowing the money; taxes refer to the property taxes paid as a homeowner; insurance refers to both property insurance and private mortgage insurance.
Private Mortgage Insurance (PMI)
A risk-management product that protects lenders against loss if a borrower default. Most lenders require private mortgage insurance (PMI) for loans with loan-to-value (LTV) percentages in excess of 80% (the buyer put down less than 20% of the home’s value upon purchase). This allows borrowers to make a smaller down payment of 3% to 19.99%, instead of 20%, allowing them to obtain a mortgage sooner since they don’t have to save up as much money. Borrowers pay their PMI monthly until they have accumulated enough equity in the home that the lender no longer considers them high risk.
Prepayment Penalty
A prepayment penalty is a clause in a mortgage contract stating that a penalty will be assessed if the mortgage is prepaid within a certain time period. The penalty is based on a percentage of the remaining mortgage balance or a certain number of months’ worth of interest. A prepayment penalty that applies to both the sale of a home and a refinancing transaction is called a “hard” prepayment penalty. A prepayment penalty that applies to refinancing only is called a “soft” prepayment penalty.
Pre-Approval
An evaluation of a potential borrower by a lender that determines whether the borrower qualifies for a loan from the lender, or the maximum amount that the lender would be willing to lend. The pre-approval process involves a thorough look into the income and expenses of the borrower, including a look at the borrower’s credit report and score.
Pre-Qualification
An initial evaluation of the credit worthiness of a potential borrower that is used to determine the estimated amount that the person can afford to borrow. Pre-qualification is a relatively simple and quick process of examining the potential borrower’s income and expenses in order to generate an estimated borrowing range that they would likely be able to repay to the lender.
Prime Rate
The prime rate is the interest rate that commercial banks charge their most credit-worthy customers. Generally, a bank’s best customers consist of large corporations. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate that banks use to lend to one another; the prime rate is also important for individual borrowers, as the prime rate directly affects the lending rates available for a mortgage, small business loan or personal loan.
Principle
A principal is most commonly used to refer to the amount borrowed, or the amount still owed on a loan, separate from interest. If you take out a $50,000 loan, for example, the principal is $50,000, so if you pay off $30,000, the remaining $20,000 left to repay is also called the principal.
Qualifying Ratio
A comparison of a borrower’s expenses (housing or total debt) to his income.
Real Estate Settlement Procedures Act (RESPA)
This act was designed to protect potential homeowners and enable them to become more intelligent consumers. RESPA requires that lenders provide greater amounts of information to prospective borrowers at certain points in the loan settlement process. It also prohibits the various parties involved from paying kickbacks to each other.
Refinance
A refinance occurs when a business or person revises a payment schedule for repaying debt. Mechanically, the old loan is paid off and replaced with a new loan offering different terms. When a company refinances, it typically extends the maturity date. Companies or individuals refinancing loans may have to pay a penalty or fee.
Right of Rescission
A right of rescission is a right under American federal law set forth by the Truth in Lending Act (TILA) that gives a borrower the right to cancel a home equity loan or line of credit with a new lender, or to cancel a refinance transaction done with another lender other than the current mortgagee within three days of closing. The right is provided on a no-questions-asked basis, and the lender must give up its claim to the property and refund all fees within 20 days of exercising the right of rescission.
Short Refinance
The refinancing of a mortgage by a lender for a borrower currently in default on his or her payments. This is done to avoid foreclosure. Typically, the new loan amount is less than the existing outstanding loan amount and the difference is typically forgiven by the lender. A lender might do this because it is more cost effective than foreclosure proceedings.
Short Sale
A short sale is a transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal number of shares at some point in the future. A short seller makes money if the stock goes down in price, while a long position makes money when the stock goes up. In real estate, short sale means selling a house for less than the mortgage owed with the lender’s approval.
Title Insurance
Title insurance is an insurance policy that covers the loss of ownership interest in a property due to legal defects and is required if the property is under the mortgage. The most common type of title insurance is a lender’s title insurance, which is paid for by the borrower but protects only the lender. However, owner’s title insurance can be taken out as a separate policy and is paid for by the seller to protect the buyer’s equity in the property.
Title Search
An examination of public records to determine and confirm a property’s legal ownership and find out what claims are on the property. A title search is usually performed by a title company or an attorney, who researches the vested owner, the liens or other judgments on the property, the loans on the property and the property taxes due.
Underwriting
Underwriting is the process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing either equity or debt securities. The word “underwriter” originally came from the practice of having each risk-taker write his name under the total amount of risk he was willing to accept at a specified premium. This centuries-old practice continues, in a way, as new issues are usually brought to market by an underwriting syndicate, in which each firm takes the responsibility, as well as the risk, of selling its specific allotment.
VA Loan
A mortgage loan program established by the United States Department of Veterans Affairs to help veterans and their families obtain home financing. The Department of Veterans Affairs does not directly originate VA loans; instead, they establish the rules for those who may qualify, dictate the terms of the mortgages offered, and insure VA loans against default.
Variable Rate
An interest rate that changes periodically in relation to an index.
Verification of Deposit (VOD)
A document signed by the borrower’s bank or other financial institution that verifies the borrower’s account balance and history.
Verification of Employment (VOE)
A document signed by the borrower’s employer that verifies 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.
Warehouse Fee
Mortgage firms often borrow funds from a warehouse lender on a short-term basis in order to originate loans that will later be sold to investors in the secondary mortgage market. Lenders may charge a warehouse fee to cover an expense charged by the warehouse lender.
Zoning
The ability of local governments to specify the use of private property in order to control development within designated areas of land. For example, some areas of a neighborhood may be designated only for residential use and others for commercial use such as stores, gas stations, etc.n
