words and terms to know

Question 1

acceleration clause

Answer 1

A clause in your mortgage which allows the lender to demand payment of the
outstanding loan balance for various reasons. The most common reasons for
accelerating a loan are if the borrower defaults on the loan or transfers title to
another individual without informing the lender.

Question 2

adjustable-rate mortgage (ARM)

Answer 2

A mortgage in which the interest changes periodically, according to
corresponding fluctuations in an index. All ARMs are tied to indexe

Question 3

adjustment date

Answer 3

The date the interest rate changes on an adjustable-rate mortgage

Question 4

amortization

Answer 4

The loan payment consists of a portion which will be applied to pay the accruing
interest on a loan, with the remainder being applied to the principal. Over time,
the interest portion decreases as the loan balance decreases, and the amount
applied to principal increases so that the loan is paid off (amortized) in the
specified time.

Question 5

amortization schedule

Answer 5

A table which shows how much of each payment will be applied toward principal
and how much toward interest over the life of the loan. It also shows the gradual
decrease of the loan balance until it reaches zero.

Question 6

annual percentage rate (APR)

Answer 6

This is not the note rate on your loan. It is a value created according to a
government formula intended to reflect the true annual cost of borrowing,
expressed as a percentage. It works sort of like this, but not exactly, so only use
this as a guideline: deduct the closing costs from your loan amount, then using
your actual loan payment, calculate what the interest rate would be on this
amount instead of your actual loan amount. You will come up with a number
close to the APR. Because you are using the same payment on a smaller
amount, the APR is always higher than the actual not rate on your loan.

Question 7

application

Answer 7

The form used to apply for a mortgage loan, containing information about a
borrower’s income, savings, assets, debts, and more.

Question 8

appraisal

Answer 8

A written justification of the price paid for a property, primarily based on an
analysis of comparable sales of similar homes nearby.

Question 9

appraised value

Answer 9

An opinion of a property’s fair market value, based on an appraiser’s knowledge,
experience, and analysis of the property. Since an appraisal is based primarily on
comparable sales, and the most recent sale is the one on the property in
question, the appraisal usually comes out at the purchase price.

Question 10

appraiser

Answer 10

An individual qualified by education, training, and experience to estimate the
value of real property and personal property. Although some appraisers work
directly for mortgage lenders, most are independent.

Question 11

appreciation

Answer 11

The increase in the value of a property due to changes in market conditions,
inflation, or other causes.

Question 12

assessed value

Answer 12

The valuation placed on property by a public tax assessor for purposes of
taxation.

Question 13

assessment

Answer 13

The placing of a value on property for the purpose of taxation.

Question 14

assessor

Answer 14

A public official who establishes the value of a property for taxation purposes.

Question 15

asset

Answer 15

Items of value owned by an individual. Assets that can be quickly converted into
cash are considered “liquid assets.” These include bank accounts, stocks, bonds,
mutual funds, and so on. Other assets include real estate, personal property, and
debts owed to an individual by others.

Question 16

assignment

Answer 16

When ownership of your mortgage is transferred from one company or individual
to another, it is called an assignment.

Question 17

assumable mortgage

Answer 17

A mortgage that can be assumed by the buyer when a home is sold. Usually, the
borrower must “qualify” in order to assume the loan.

Question 18

assumption

Answer 18

The term applied when a buyer assumes the seller’s mortgage.

Question 19

balloon mortgage

Answer 19

A mortgage loan that requires the remaining principal balance be paid at a
specific point in time. For example, a loan may be amortized as if it would be paid
over a thirty year period, but requires that at the end of the tenth year the entire
remaining balance must be paid.

Question 20

balloon payment

Answer 20

The final lump sum payment that is due at the termination of a balloon mortgage.

Question 21

bankruptcy

Answer 21

By filing in federal bankruptcy court, an individual or individuals can restructure or
relieve themselves of debts and liabilities. Bankruptcies are of various types, but
the most common for an individual seem to be a “Chapter 7 No Asset”
bankruptcy which relieves the borrower of most types of debts. A borrower
cannot usually qualify for an “A” paper loan for a period of two years after the
bankruptcy has been discharged and requires the re-establishment of an ability
to repay debt.

Question 22

bill of sale

Answer 22

A written document that transfers title to personal property. For example, when
selling an automobile to acquire funds which will be used as a source of down
payment or for closing costs, the lender will usually require the bill of sale (in
addition to other items) to help document this source of funds.

Question 23

biweekly mortgage

Answer 23

A mortgage in which you make payments every two weeks instead of once a
month. The basic result is that instead of making twelve monthly payments
during the year, you make thirteen. The extra payment reduces the principal,
substantially reducing the time it takes to pay off a thirty year mortgage. Note:
there are independent companies that encourage you to set up bi-weekly
payment schedules with them on your thirty year mortgage. They charge a set-up
fee and a transfer fee for every payment. Your funds are deposited into a trust
account from which your monthly payment is then made, and the excess funds
then remain in the trust account until enough has accrued to make the additional
payment which will then be paid to reduce your principle. You could save money
by doing the same thing yourself, plus you have to have faith that once you
transfer money to them that they will actually transfer your funds to your lender

Question 24

bond market

Answer 24

Usually refers to the daily buying and selling of thirty year treasury bonds.
Lenders follow this market intensely because as the yields of bonds go up and
down, fixed rate mortgages do approximately the same thing. The same factors
that affect the Treasury Bond market also affect mortgage rates at the same
time. That is why rates change daily, and in a volatile market can and do change
during the day as well.

Question 25

bridge loan

Answer 25

Not used much anymore, bridge loans are obtained by those who have not yet
sold their previous property, but must close on a purchase property. The bridge
loan becomes the source of their funds for the down payment. One reason for
their fall from favor is that there are more and more second mortgage lenders
now that will lend at a high loan to value. In addition, sellers often prefer to
accept offers from buyers who have already sold their property.

Question 26

broker

Answer 26

Broker has several meanings in different situations. Most Realtors are “agents”
who work under a “broker.” Some agents are brokers as well, either working form
themselves or under another broker. In the mortgage industry, broker usually
refers to a company or individual that does not lend the money for the loans
themselves, but broker loans to larger lenders or investors. (See the Home Loan
Library that discusses the different types of lenders). As a normal definition, a
broker is anyone who acts as an agent, bringing two parties together for any type
of transaction and earns a fee for doing so.

Question 27

buydown

Answer 27

Usually refers to a fixed rate mortgage where the interest rate is “bought down”
for a temporary period, usually one to three years. After that time and for the
remainder of the term, the borrower’s payment is calculated at the note rate. In
order to buy down the initial rate for the temporary payment, a lump sum is paid
and held in an account used to supplement the borrower’s monthly payment.
These funds usually come from the seller (or some other source) as a financial
incentive to induce someone to buy their property. A “lender funded buydown” is
when the lender pays the initial lump sum. They can accomplish this because the
note rate on the loan (after the buydown adjustments) will be higher than the
current market rate. One reason for doing this is because the borrower may get
to “qualify” at the start rate and can qualify for a higher loan amount. Another
reason is that a borrower may expect his earnings to go up substantially in the
near future, but wants a lower payment right now.

Question 28

call option

Answer 28

Similar to the acceleration clause

Question 29

cap

Answer 29

Adjustable Rate Mortgages have fluctuating interest rates, but those fluctuations
are usually limited to a certain amount. Those limitations may apply to how much
the loan may adjust over a six month period, an annual period, and over the life
of the loan, and are referred to as “caps.” Some ARMs, although they may have
a life cap, allow the interest rate to fluctuate freely, but require a certain minimum
payment which can change once a year. There is a limit on how much that
payment can change each year, and that limit is also referred to as a cap

Question 30

cash-out refinance

Answer 30

When a borrower refinances his mortgage at a higher amount than the current
loan balance with the intention of pulling out money for personal use, it is referred
to as a “cash out refinance.”

Question 31

certificate of deposit

Answer 31

A time deposit held in a bank which pays a certain amount of interest to the
depositor.

Question 32

certificate of deposit index

Answer 32

One of the indexes used for determining interest rate changes on some
adjustable rate mortgages. It is an average of what banks are paying on
certificates of deposit.

Question 33

Certificate of Eligibility

Answer 33

A document issued by the Veterans Administration that certifies a veteran’s
eligibility for a VA loan.

Question 34

Certificate of Reasonable Value (CRV)

Answer 34

Once the appraisal has been performed on a property being bought with a VA
loan, the Veterans Administration issues a CRV

Question 35

chain of title

Answer 35

An analysis of the transfers of title to a piece of property over the years.

Question 36

clear title

Answer 36

A title that is free of liens or legal questions as to ownership of the property.

Question 37

closing

Answer 37

This has different meanings in different states. In some states a real estate
transaction is not consider “closed” until the documents record at the local
recorders office. In others, the “closing” is a meeting where all of the documents
are signed and money changes hands.

Question 38

closing costs

Answer 38

Closing costs are separated into what are called “non-recurring closing costs”
and “pre-paid items.” Non-recurring closing costs are any items which are paid
just once as a result of buying the property or obtaining a loan. “Pre-paids” are
items which recur over time, such as property taxes and homeowners insurance.
A lender makes an attempt to estimate the amount of non-recurring closing costs
and prepaid items on the Good Faith Estimate which they must issue to the
borrower within three days of receiving a home loan application.

Question 39

closing statement

Answer 39

See Settlement Statement.

Question 40

cloud on title

Answer 40

Any conditions revealed by a title search that adversely affect the title to real
estate. Usually clouds on title cannot be removed except by deed, release, or
court action.

Question 41

co-borrower

Answer 41

IAn additional individual who is both obligated on the loan and is on title to the
property

Question 42

collateral

Answer 42

In a home loan, the property is the collateral. The borrower risks losing the
property if the loan is not repaid according to the terms of the mortgage or deed
of trust.

Question 43

collection

Answer 43

When a borrower falls behind, the lender contacts them in an effort to bring the
loan current. The loan goes to “collection.” As part of the collection effort, the
lender must mail and record certain documents in case they are eventually
required to foreclose on the property.`

Question 44

commission

Answer 44

Most salespeople earn commissions for the work that they do and there are
many sales professionals involved in each transaction, including Realtors, loan
officers, title representatives, attorneys, escrow representative, and
representatives for pest companies, home warranty companies, home inspection
companies, insurance agents, and more. The commissions are paid out of the
charges paid by the seller or buyer in the purchase transaction. Realtors
generally earn the largest commissions, followed by lenders, then the others.

Question 45

common area assessments

Answer 45

In some areas they are called Homeowners Association Fees. They are charges
paid to the Homeowners Association by the owners of the individual units in a
condominium or planned unit development (PUD) and are generally used to
maintain the property and common areas.

Question 46

common areas

Answer 46

Those portions of a building, land, and amenities owned (or managed) by a
planned unit development (PUD) or condominium project’s homeowners’
association (or a cooperative project’s cooperative corporation) that are used by
all of the unit owners, who share in the common expenses of their operation and
maintenance. Common areas include swimming pools, tennis courts, and other
recreational facilities, as well as common corridors of buildings, parking areas,
means of ingress and egress, etc.

Question 47

common law

Answer 47

An unwritten body of law based on general custom in England and used to an
extent in some states.

Question 48

community property

Answer 48

In some states, especially the southwest, property acquired by a married couple
during their marriage is considered to be owned jointly, except under special
circumstances. This is an outgrowth of the Spanish and Mexican heritage of the
area

Question 49

comparable sales

Answer 49

Recent sales of similar properties in nearby areas and used to help determine
the market value of a property. Also referred to as “comps.”

Question 50

condominium

Answer 50

A type of ownership in real property where all of the owners own the property,
common areas and buildings together, with the exception of the interior of the
unit to which they have title. Often mistakenly referred to as a type of
construction or development, it actually refers to the type of ownership.

Question 51

condominium conversion

Answer 51

Changing the ownership of an existing building (usually a rental project) to the
condominium form of ownership.

Question 52

condominium hotel

Answer 52

A condominium project that has rental or registration desks, short-term
occupancy, food and telephone services, and daily cleaning services and that is
operated as a commercial hotel even though the units are individually owned.
These are often found in resort areas like Hawaii.

Question 53

construction loan

Answer 53

A short-term, interim loan for financing the cost of construction. The lender
makes payments to the builder at periodic intervals as the work progresses.

Question 54

contingency

Answer 54

A condition that must be met before a contract is legally binding. For example,
home purchasers often include a contingency that specifies that the contract is
not binding until the purchaser obtains a satisfactory home inspection report from
a qualified home inspector.

Question 55

contract

Answer 55

An oral or written agreement to do or not to do a certain thing.

Question 56

conventional mortgage

Answer 56

Refers to home loans other than government loans (VA and FHA)

Question 57

convertible ARM

Answer 57

IAn adjustable-rate mortgage that allows the borrower to change the ARM to a
fixed-rate mortgage within a specific time.

Question 58

cooperative (co-op)

Answer 58

A type of multiple ownership in which the residents of a multiunit housing
complex own shares in the cooperative corporation that owns the property, giving
each resident the right to occupy a specific apartment or unit.

Question 59

cost of funds index (COFI)

Answer 59

One of the indexes that is used to determine interest rate changes for certain
adjustable-rate mortgages. It represents the weighted-average cost of savings,
borrowings, and advances of the financial institutions such as banks and savings
& loans, in the 11th District of the Federal Home Loan Bank.

Question 60

credit

Answer 60

An agreement in which a borrower receives something of value in exchange for a
promise to repay the lender at a later date.

Question 61

credit history

Answer 61

A record of an individual’s repayment of debt. Credit histories are reviewed by
mortgage lenders as one of the underwriting criteria in determining credit risk.

Question 62

creditor

Answer 62

A person to whom money is owed.

Question 63

credit report

Answer 63

A report of an individual’s credit history prepared by a credit bureau and used by
a lender in determining a loan applicant’s creditworthiness.

Question 64

credit repository

Answer 64

An organization that gathers, records, updates, and stores financial and public
records information about the payment records of individuals who are being
considered for credit.

Question 65

debt

Answer 65

An amount owed to another.

Question 66

deed

Answer 66

The legal document conveying title to a property.

Question 67

deed-in-lieu

Answer 67

Short for “deed in lieu of foreclosure,” this conveys title to the lender when the
borrower is in default and wants to avoid foreclosure. The lender may or may not
cease foreclosure activities if a borrower asks to provide a deed-in-lieu.
Regardless of whether the lender accepts the deed-in-lieu, the avoidance and
non-repayment of debt will most likely show on a credit history. What a deed-inlieu may prevent is having the documents preparatory to a foreclosure being
recorded and become a matter of public record.

Question 68

deed of trust

Answer 68

Some states, like California, do not record mortgages. Instead, they record a
deed of trust which is essentially the same thing.

Question 69

default

Answer 69

Failure to make the mortgage payment within a specified period of time. For first
mortgages or first trust deeds, if a payment has still not been made within 30
days of the due date, the loan is considered to be in default.

Question 70

delinquency

Answer 70

Failure to make mortgage payments when mortgage payments are due. For most
mortgages, payments are due on the first day of the month. Even though they
may not charge a “late fee” for a number of days, the payment is still considered
to be late and the loan delinquent. When a loan payment is more than 30 days
late, most lenders report the late payment to one or more credit bureaus.

Question 71

deposit

Answer 71

A sum of money given in advance of a larger amount being expected in the
future. Often called in real estate as an “earnest money deposit.”

Question 72

depreciation

Answer 72

A decline in the value of property; the opposite of appreciation. Depreciation is
also an accounting term which shows the declining monetary value of an asset
and is used as an expense to reduce taxable income. Since this is not a true
expense where money is actually paid, lenders will add back depreciation
expense for self-employed borrowers and count it as income.

Question 73

discount points

Answer 73

In the mortgage industry, this term is usually used in only in reference to
government loans, meaning FHA and VA loans. Discount points refer to any
“points” paid in addition to the one percent loan origination fee. A “point” is one
percent of the loan amount.

Question 74

discount points

Answer 74

In the mortgage industry, this term is usually used in only in reference to
government loans, meaning FHA and VA loans. Discount points refer to any
“points” paid in addition to the one percent loan origination fee. A “point” is one
percent of the loan amount.

Question 75

down payment

Answer 75

The part of the purchase price of a property that the buyer pays in cash and does
not finance with a mortgage.

Question 76

due-on-sale provision

Answer 76

A provision in a mortgage that allows the lender to demand repayment in full if
the borrower sells the property that serves as security for the mortgage.

Question 77

earnest money deposit

Answer 77

A deposit made by the potential home buyer to show that he or she is serious
about buying the house.

Question 78

easement

Answer 78

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

Question 79

effective age

Answer 79

An appraiser’s estimate of the physical condition of a building. The actual age of
a building may be shorter or longer than its effective age.

Question 80

eminent domain

Answer 80

The right of a government to take private property for public use upon payment of
its fair market value. Eminent domain is the basis for condemnation proceedings.

Question 81

encroachment

Answer 81

An improvement that intrudes illegally on another’s property.

Question 82

encumbrance

Answer 82

Anything that affects or limits the fee simple title to a property, such as
mortgages, leases, easements, or restrictions.

Question 83

Equal Credit Opportunity Act (ECOA)

Answer 83

A federal law that requires 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

Question 84

equity

Answer 84

A homeowner’s financial interest in a property. Equity is the difference between
the fair market value of the property and the amount still owed on its mortgage
and other liens.

Question 85

escrow

Answer 85

An item of value, money, or documents deposited with a third party to be
delivered upon the fulfillment of a condition. For example, the earnest money
deposit is put into escrow until delivered to the seller when the transaction is
closed.

Question 86

escrow account

Answer 86

Once you close your purchase transaction, you may have an escrow account or
impound account with your lender. This means the amount you pay each month
includes an amount above what would be required if you were only paying your
principal and interest. The extra money is held in your impound account (escrow
account) for the payment of items like property taxes and homeowner’s
insurance when they come due. The lender pays them with your money instead
of you paying them yourself.

Question 87

escrow analysis

Answer 87

Once each year your lender will perform an “escrow analysis” to make sure they
are collecting the correct amount of money for the anticipated expenditures.

Question 88

escrow disbursements

Answer 88

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

Question 89

estate

Answer 89

The ownership interest of an individual in real property. The sum total of all the
real property and personal property owned by an individual at time of death.

Question 90

eviction

Answer 90

The lawful expulsion of an occupant from real property.

Question 91

examination of title

Answer 91

The report on the title of a property from the public records or an abstract of the
title

Question 92

exclusive listing

Answer 92

A written contract that gives a licensed real estate agent the exclusive right to sell
a property for a specified time.

Question 93

executor

Answer 93

A person named in a will to administer an estate. The court will appoint an
administrator if no executor is named. “Executrix” is the feminine form.

Question 94

Fair Credit Reporting Act

Answer 94

A consumer protection law that regulates the disclosure of consumer credit
reports by consumer/credit reporting agencies and establishes procedures for
correcting mistakes on one’s credit record.

Question 95

fair market value

Answer 95

The highest price that a buyer, willing but not compelled to buy, would pay, and
the lowest a seller, willing but not compelled to sell, would accept.

Question 96

Fannie Mae (FNMA)

Answer 96

The Federal National Mortgage Association, which is a congressional
chartered, shareholder-owned company that is the nation’s largest supplier of
home mortgage funds. For a discussion of the roles of Fannie Mae, Freddie Mac
(FHLMC), and Ginnie Mae (GNMA), see the Library.

Question 97

Fannie Mae’s Community Home Buyer’s Program

Answer 97

An income-based community lending model, under which mortgage insurers and
Fannie Mae offer flexible underwriting guidelines to increase a low- or moderateincome family’s buying power and to decrease the total amount of cash needed
to purchase a home. Borrowers who participate in this model are required to
attend pre-purchase home-buyer education sessions.

Question 98

Federal Housing Administration (FHA

Answer 98

An agency of the U.S. Department of Housing and Urban Development (HUD).
Its main activity is the insuring of residential mortgage loans made by private
lenders. The FHA sets standards for construction and underwriting but does not
lend money or plan or construct housing.

Question 99

fee simple

Answer 99

The greatest possible interest a person can have in real estate

Question 100

fee simple estate

Answer 100

An unconditional, unlimited estate of inheritance that represents the greatest
estate and most extensive interest in land that can be enjoyed. It is of perpetual
duration. When the real estate is in a condominium project, the unit owner is the
exclusive owner only of the air space within his or her portion of the building (the
unit) and is an owner in common with respect to the land and other common
portions of the property.

Question 101

FHA mortgage

Answer 101

A mortgage that is insured by the Federal Housing Administration (FHA). Along
with VA loans, an FHA loan will often be referred to as a government loan.

Question 102

firm commitment

Answer 102

A lender’s agreement to make a loan to a specific borrower on a specific
property.

Question 103

first mortgage

Answer 103

The mortgage that is in first place among any loans recorded against a property.
Usually refers to the date in which loans are recorded, but there are exceptions.

Question 104

fixed-rate mortgage

Answer 104

A mortgage in which the interest rate does not change during the entire term of
the loan.

Question 105

fixture

Answer 105

Personal property that becomes real property when attached in a permanent
manner to real estate.

Question 106

flood insurance

Answer 106

Insurance that compensates for physical property damage resulting from
flooding. It is required for properties located in federally designated flood areas.

Question 107

foreclosure

Answer 107

The legal process by which a borrower in default under a mortgage is deprived of
his or her interest in the mortgaged property. This usually involves a forced sale
of the property at public auction with the proceeds of the sale being applied to the
mortgage debt.

Question 108

401(k)/403(b)

Answer 108

An employer-sponsored investment plan that allows individuals to set aside taxdeferred income for retirement or emergency purposes. 401(k) plans are
provided by employers that are private corporations. 403(b) plans are provided
by employers that are not for profit organizations.

Question 109

401(k)/403(b) loan

Answer 109

Some administrators of 401(k)/403(b) plans allow for loans against the monies
you have accumulated in these plans. Loans against 401K plans are an
acceptable source of down payment for most types of loans.

Question 110

government loan (mortgage)

Answer 110

A mortgage that is insured by the Federal Housing Administration (FHA) or
guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing
Service (RHS). Mortgages that are not government loans are classified as
conventional loans

Question 111

Government National Mortgage Association (Ginnie Mae)

Answer 111

A government-owned corporation within the U.S. Department of Housing and
Urban Development (HUD). Created by Congress on September 1, 1968, GNMA
performs the same role as Fannie Mae and Freddie Mac in providing funds to
lenders for making home loans. The difference is that Ginnie Mae provides funds
for government loans (FHA and VA)

Question 112

grantee

Answer 112

The person to whom an interest in real property is conveyed.

Question 113

grantor

Answer 113

The person conveying an interest in real property.

Question 114

hazard insurance

Answer 114

Insurance coverage that in the event of physical damage to a property from fire,
wind, vandalism, or other hazards.

Question 115

Home Equity Conversion Mortgage (HECM)

Answer 115

Usually referred to as a reverse annuity mortgage, what makes this type of
mortgage unique is that instead of making payments to a lender, the lender
makes payments to you. It enables older home owners to convert the equity they
have in their homes into cash, usually in the form of monthly payments. Unlike
traditional home equity loans, a borrower does not qualify on the basis of income
but on the value of his or her home. In addition, the loan does not have to be
repaid until the borrower no longer occupies the property.

Question 116

home equity line of credit

Answer 116

A mortgage loan, usually in second position, that allows the borrower to obtain
cash drawn against the equity of his home, up to a predetermined amount.

Question 117

home inspection

Answer 117

A thorough inspection by a professional that evaluates the structural and
mechanical condition of a property. A satisfactory home inspection is often
included as a contingency by the purchaser.

Question 118

homeowners’ association

Answer 118

A nonprofit association that manages the common areas of a planned unit
development (PUD) or condominium project. In a condominium project, it has no
ownership interest in the common elements. In a PUD project, it holds title to the
common elements.

Question 119

homeowner’s insurance

Answer 119

An insurance policy that combines personal liability insurance and hazard
insurance coverage for a dwelling and its contents.

Question 120

homeowner’s warranty

Answer 120

A type of insurance often purchased by homebuyers that will cover repairs to
certain items, such as heating or air conditioning, should they break down within
the coverage period. The buyer often requests the seller to pay for this coverage
as a condition of the sale, but either party can pay.

Question 121

HUD median income

Answer 121

Median family income for a particular county or metropolitan statistical area
(MSA), as estimated by the Department of Housing and Urban Development
(HUD).

Question 122

HUD-1 settlement statement

Answer 122

A document that provides an itemized listing of the funds that were paid at
closing. Items that appear on the statement include real estate commissions,
loan fees, points, and initial escrow (impound) amounts. Each type of expense
goes on a specific numbered line on the sheet. The totals at the bottom of the
HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at
closing. It is called a HUD1 because the form is printed by the Department of
Housing and Urban Development (HUD). The HUD1 statement is also known as
the “closing statement” or “settlement sheet.”

Question 123

joint tenancy

Answer 123

A form of ownership or taking title to property which means each party owns the
whole property and that ownership is not separate. In the event of the death of
one party, the survivor owns the property in its entirety.

Question 124

judgment

Answer 124

A decision made by a court of law. In judgments that require the repayment of a
debt, the court may place a lien against the debtor’s real property as collateral for
the judgment’s creditor.

Question 125

judicial foreclosure

Answer 125

A type of foreclosure proceeding used in some states that is handled as a civil
lawsuit and conducted entirely under the auspices of a court. Other states use
non-judicial foreclosure

Question 126

jumbo loan

Answer 126

A loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits, currently at
$227,150. Also called a nonconforming loan. Freddie Mac and Fannie Mae loans
are referred to as conforming loans

Question 127

late charge

Answer 127

The penalty a borrower must pay when a payment is made a stated number of
days. On a first trust deed or mortgage, this is usually fifteen days.

Question 128

lease

Answer 128

A written agreement between the property owner and a tenant that stipulates the
payment and conditions under which the tenant may possess the real estate for a
specified period of time.

Question 129

leasehold estate

Answer 129

A way of holding title to a property wherein the mortgagor does not actually own
the property but rather has a recorded long-term lease on it.

Question 130

lease option

Answer 130

An alternative financing option that allows home buyers to lease a home with an
option to buy. Each month’s rent payment may consist of not only the rent, but an
additional amount which can be applied toward the down payment on an already
specified price.

Question 131

legal description

Answer 131

A property description, recognized by law, that is sufficient to locate and identify
the property without oral testimony.

Question 132

lender

Answer 132

A term which can refer to the institution making the loan or to the individual
representing the firm. For example, loan officers are often referred to as
“lenders.”

Question 133

liabilities

Answer 133

A person’s financial obligations. Liabilities include long-term and short-term debt,
as well as any other amounts that are owed to others.

Question 134

liability insurance

Answer 134

Insurance coverage that offers protection against claims alleging that a property
owner’s negligence or inappropriate action resulted in bodily injury or property
damage to another party. It is usually part of a homeowner’s insurance policy.

Question 135

lien

Answer 135

A legal claim against a property that must be paid off when the property is sold. A
mortgage or first trust deed is considered a lien.

Question 136

life cap

Answer 136

For an adjustable-rate mortgage (ARM), a limit on the amount that the interest
rate can increase or decrease over the life of the mortgage.

Question 137

line of credit

Answer 137

An agreement by a commercial bank or other financial institution to extend credit
up to a certain amount for a certain time to a specified borrower.

Question 138

liquid asset

Answer 138

A cash asset or an asset that is easily converted into cash.

Question 139

loan

Answer 139

A sum of borrowed money (principal) that is generally repaid with interest.

Question 140

loan officer

Answer 140

Also referred to by a variety of other terms, such as lender, loan representative,
loan “rep,” account executive, and others. The loan officer serves several
functions and has various responsibilities: they solicit loans, they are the
representative of the lending institution, and they represent the borrower to the
lending institution.

Question 141

loan origination

Answer 141

How a lender refers to the process of obtaining new loans.

Question 142

loan servicing

Answer 142

After you obtain a loan, the company you make the payments to is “servicing”
your loan. They process payments, send statements, manage the
escrow/impound account, provide collection efforts on delinquent loans, ensure
that insurance and property taxes are made on the property, handle pay-offs and
assumptions, and provide a variety of other services.

Question 143

loan-to-value (LTV)

Answer 143

The percentage relationship between the amount of the loan and the appraised
value or sales price (whichever is lower).

Question 144

lock-in

Answer 144

An agreement in which the lender guarantees a specified interest rate for a
certain amount of time at a certain cost

Question 145

lock-in period

Answer 145

The time period during which the lender has guaranteed an interest rate to a
borrower

Question 146

margin

Answer 146

The difference between the interest rate and the index on an adjustable rate
mortgage. The margin remains stable over the life of the loan. It is the index
which moves up and down.

Question 147

maturity

Answer 147

The date on which the principal balance of a loan, bond, or other financial
instrument becomes due and payable.

Question 148

merged credit report

Answer 148

A credit report which reports the raw data pulled from two or more of the major
credit repositories. Contrast with a Residential Mortgage Credit Report (RMCR)
or a standard factual credit report.

Question 149

modification

Answer 149

Occasionally, a lender will agree to modify the terms of your mortgage without
requiring you t refinance. If any changes are made, it is called a modification.

Question 150

mortgage

Answer 150

A legal document that pledges a property to the lender as security for payment of
a debt. Instead of mortgages, some states use First Trust Deeds

Question 151

mortgage banker

Answer 151

For a more complete discussion of mortgage banker, see “Types of Lenders.” A
mortgage banker is generally assumed to originate and fund their own loans,
which are then sold on the secondary market, usually to Fannie Mae, Freddie
Mac, or Ginnie Mae. However, firms rather loosely apply this term to themselves,
whether they are true mortgage bankers or simply mortgage brokers or
correspondents.

Question 152

mortgage broker

Answer 152

A mortgage company that originates loans, then places those loans with a variety
of other lending institutions with whom they usually have pre-established
relationships.

Question 153

mortgagee

Answer 153

The lender in a mortgage agreement

Question 154

mortgage insurance (MI)

Answer 154

Insurance that covers the lender against some of the losses incurred as a result
of a default on a home loan. Often mistakenly referred to as PMI, which is
actually the name of one of the larger mortgage insurers. Mortgage insurance is
usually required in one form or another on all loans that have a loan-to-value
higher than eighty percent. Mortgages above 80% LTV that call themselves “No
MI” are usually a made at a higher interest rate. Instead of the borrower paying
the mortgage insurance premiums directly, they pay a higher interest rate to the
lender, which then pays the mortgage insurance themselves. Also, FHA loans
and certain first-time homebuyer programs require mortgage insurance
regardless of the loan-to-value.

Question 155

mortgage insurance premium (MIP)

Answer 155

The amount paid by a mortgagor for mortgage insurance, either to a government
agency such as the Federal Housing Administration (FHA) or to a private
mortgage insurance (MI) company.

Question 156

mortgage life and disability insurance

Answer 156

A type of term life insurance often bought by borrowers. The amount of coverage
decreases as the principal balance declines. Some policies also cover the
borrower in the event of disability. In the event that the borrower dies while the
policy is in force, the debt is automatically satisfied by insurance proceeds. In the
case of disability insurance, the insurance will make the mortgage payment for a
specified amount of time during the disability. Be careful to read the terms of
coverage, however, because often the coverage does not start immediately upon
the disability, but after a specified period, sometime forty-five days.

Question 157

mortgagor

Answer 157

The borrower in a mortgage agreement.

Question 158

multidwelling units

Answer 158

Properties that provide separate housing units for more than one family, although
they secure only a single mortgage.

Question 159

negative amortization

Answer 159

Some adjustable rate mortgages allow the interest rate to fluctuate independently
of a required minimum payment. If a borrower makes the minimum payment it
may not cover all of the interest that would normally be due at the current interest
rate. In essence, the borrower is deferring the interest payment, which is why this
is called “deferred interest.” The deferred interest is added to the balance of the
loan and the loan balance grows larger instead of smaller, which is called
negative amortization.

Question 160

no cash-out refinance

Answer 160

A refinance transaction which is not intended to put cash in the hand of the
borrower. Instead, the new balance is calculated to cover the balance due on the
current loan and any costs associated with obtaining the new mortgage. Often
referred to as a “rate and term refinance.”

Question 161

no-cost loan

Answer 161

Many lenders offer loans that you can obtain at “no cost.” You should inquire
whether this means there are no “lender” costs associated with the loan, or if it
also covers the other costs you would normally have in a purchase or refinance
transactions, such as title insurance, escrow fees, settlement fees, appraisal,
recording fees, notary fees, and others. These are fees and costs which may be
associated with buying a home or obtaining a loan, but not charged directly by
the lender. Keep in mind that, like a “no-point” loan, the interest rate will be
higher than if you obtain a loan that has costs associated with it.

Question 162

note

Answer 162

A legal document that obligates a borrower to repay a mortgage loan at a stated
interest rate during a specified period of time.

Question 163

note rate

Answer 163

The interest rate stated on a mortgage note.

Question 164

no-cost loan

Answer 164

Almost all lenders offer loans at “no points.” You will find the interest rate on a
“no points” loan is approximately a quarter percent higher than on a loan where
you pay one point.

Question 165

notice of default

Answer 165

A formal written notice to a borrower that a default has occurred and that legal
action may be taken

Question 166

original principal balance

Answer 166

The total amount of principal owed on a mortgage before any payments are
made.

Question 167

origination fee

Answer 167

On a government loan the loan origination fee is one percent of the loan amount,
but additional points may be charged which are called “discount points.” One
point equals one percent of the loan amount. On a conventional loan, the loan
origination fee refers to the total number of points a borrower pays.

Question 168

owner financing

Answer 168

A property purchase transaction in which the property seller provides all or part of
the financing.

Question 169

partial payment

Answer 169

A payment that is not sufficient to cover the scheduled monthly payment on a
mortgage loan. Normally, a lender will not accept a partial payment, but in times
of hardship you can make this request of the loan servicing collection
department.

Question 170

payment change date

Answer 170

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

Question 171

periodic payment cap

Answer 171

For an adjustable-rate mortgage where the interest rate and the minimum
payment amount fluctuate independently of one another, this is a limit on the
amount that payments can increase or decrease during any one adjustment
period.

Question 172

periodic rate cap

Answer 172

For an adjustable-rate mortgage, a limit on the amount that the interest rate can
increase or decrease during any one adjustment period, regardless of how high
or low the index might be.

Question 173

personal property

Answer 173

Any property that is not real property.

Question 174

PITI

Answer 174

This stands for principal, interest, taxes and insurance. If you have an
“impounded” loan, then your monthly payment to the lender includes all of these
and probably includes mortgage insurance as well. If you do not have an
impounded account, then the lender still calculates this amount and uses it as
part of determining your debt-to-income ratio.

Question 175

PITI reserves

Answer 175

A cash amount that a borrower must have on hand after making a down payment
and paying all closing costs for the purchase of a home. The principal, interest,
taxes, and insurance (PITI) reserves must equal the amount that the borrower
would have to pay for PITI for a predefined number of months.

Question 176

planned unit development (PUD)

Answer 176

A type of ownership where individuals actually own the building or unit they live
in, but common areas are owned jointly with the other members of the
development or association. Contrast with condominium, where an individual
actually owns the airspace of his unit, but the buildings and common areas are
owned jointly with the others in the development or association.

Question 177

point

Answer 177

A point is 1 percent of the amount of the mortgage.

Question 178

power of attorney

Answer 178

A legal document that authorizes another person to act on one’s behalf. A power
of attorney can grant complete authority or can be limited to certain acts and/or
certain periods of time.

Question 179

pre-approval

Answer 179

A loosely used term which is generally taken to mean that a borrower has
completed a loan application and provided debt, income, and savings
documentation which an underwriter has reviewed and approved. A pre-approval
is usually done at a certain loan amount and making assumptions about what the
interest rate will actually be at the time the loan is actually made, as well as
estimates for the amount that will be paid for property taxes, insurance and
others. A pre-approval applies only to the borrower. Once a property is chosen, it
must also meet the underwriting guidelines of the lender. Contrast with prequalification

Question 180

prepayment

Answer 180

Any amount paid to reduce the principal balance of a loan before the due date.
Payment in full on a mortgage that may result from a sale of the property, the
owner’s decision to pay off the loan in full, or a foreclosure. In each case,
prepayment means payment occurs before the loan has been fully amortized.

Question 181

prepayment penalty

Answer 181

A fee that may be charged to a borrower who pays off a loan before it is due.

Question 182

pre-qualification

Answer 182

This usually refers to the loan officer’s written opinion of the ability of a borrower
to qualify for a home loan, after the loan officer has made inquiries about debt,
income, and savings. The information provided to the loan officer may have been
presented verbally or in the form of documentation, and the loan officer may or
may not have reviewed a credit report on the borrower.

Question 183

prime rate

Answer 183

The interest rate that banks charge to their preferred customers. Changes in the
prime rate are widely publicized in the news media and are used as the indexes
in some adjustable rate mortgages, especially home equity lines of credit.
Changes in the prime rate do not directly affect other types of mortgages, but the
same factors that influence the prime rate also affect the interest rates of
mortgage loans.

Question 184

principal

Answer 184

The amount borrowed or remaining unpaid. The part of the monthly payment that
reduces the remaining balance of a mortgage.

Question 185

principal balance

Answer 185

The outstanding balance of principal on a mortgage. The principal balance does
not include interest or any other charges. See remaining balance.

Question 186

principal, interest, taxes, and insurance (PITI)

Answer 186

The four components of a monthly mortgage payment on impounded loans.
Principal refers to the part of the monthly payment that reduces the remaining
balance of the mortgage. Interest is the fee charged for borrowing money. Taxes
and insurance refer to the amounts that are paid into an escrow account each
month for property taxes and mortgage and hazard insurance.

Question 187

private mortgage insurance (MI)

Answer 187

Mortgage insurance that is provided by a private mortgage insurance company to
protect lenders against loss if a borrower defaults. Most lenders generally require
MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Question 188

promissory note

Answer 188

A written promise to repay a specified amount over a specified period of time.

Question 189

public auction

Answer 189

A meeting in an announced public location to sell property to repay a mortgage
that is in default.

Question 190

Planned Unit Development (PUD)

Answer 190

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

Question 191

purchase agreement

Answer 191

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

Question 192

purchase money transaction

Answer 192

The acquisition of property through the payment of money or its equivalent.

Question 193

qualifying ratios

Answer 193

Calculations that are used in determining whether a borrower can qualify for a
mortgage. There are two ratios. The “top” or “front” ratio is a calculation of the
borrower’s monthly housing costs (principle, taxes, insurance, mortgage
insurance, homeowner’s association fees) as a percentage of monthly income.
The “back” or “bottom” ratio includes housing costs as will as all other monthly
debt.

Question 194

quitclaim deed

Answer 194

A deed that transfers without warranty whatever interest or title a grantor may
have at the time the conveyance is made.

Question 195

rate lock

Answer 195

A commitment issued by a lender to a borrower or other mortgage originator
guaranteeing a specified interest rate for a specified period of time at a specific
cost.

Question 196

real estate agent

Answer 196

A person licensed to negotiate and transact the sale of real estate.

Question 197

Real Estate Settlement Procedures Act (RESPA

Answer 197

A consumer protection law that requires lenders to give borrowers advance
notice of closing costs

Question 198

real property

Answer 198

Land and appurtenances, including anything of a permanent nature such as
structures, trees, minerals, and the interest, benefits, and inherent rights thereof.

Question 199

Realtor®

Answer 199

A real estate agent, broker or an associate who holds active membership in a
local real estate board that is affiliated with the National Association of Realtors.

Question 200

recorder

Answer 200

The public official who keeps records of transactions that affect real property in
the area. Sometimes known as a “Registrar of Deeds” or “County Clerk.”

Question 201

recording

Answer 201

The noting in the registrar’s office of the details of a properly executed legal
document, such as a deed, a mortgage note, a satisfaction of mortgage, or an
extension of mortgage, thereby making it a part of the public record.

Question 202

refinance transaction

Answer 202

The process of paying off one loan with the proceeds from a new loan using the
same property as security.

Question 203

remaining balance

Answer 203

The amount of principal that has not yet been repaid. See principal balance.

Question 204

remaining term

Answer 204

The original amortization term minus the number of payments that have been
applied.

Question 205

rent loss insurance

Answer 205

Insurance that protects a landlord against loss of rent or rental value due to fire
or other casualty that renders the leased premises unavailable for use and as a
result of which the tenant is excused from paying rent.

Question 206

repayment plan

Answer 206

An arrangement made to repay delinquent installments or advances.

Question 207

replacement reserve fund

Answer 207

A fund set aside for replacement of common property in a condominium, PUD, or
cooperative project – particularly that which has a short life expectancy, such as
carpeting, furniture, etc.

Question 208

revolving debt

Answer 208

A credit arrangement, such as a credit card, that allows a customer to borrow
against a preapproved line of credit when purchasing goods and services. The
borrower is billed for the amount that is actually borrowed plus any interest due.

Question 209

right of first refusal

Answer 209

A provision in an agreement that requires the owner of a property to give another
party the first opportunity to purchase or lease the property before he or she
offers it for sale or lease to others.

Question 210

right of ingress or egress

Answer 210

The right to enter or leave designated premises.

Question 211

right of survivorship

Answer 211

In joint tenancy, the right of survivors to acquire the interest of a deceased joint
tenant.

Question 212

sale-leaseback

Answer 212

A technique in which a seller deeds property to a buyer for a consideration, and
the buyer simultaneously leases the property back to the seller.

Question 213

second mortgage

Answer 213

A mortgage that has a lien position subordinate to the first mortgage

Question 214

secondary market

Answer 214

The buying and selling of existing mortgages, usually as part of a “pool” of
mortgages.

Question 215

secured loan

Answer 215

A loan that is backed by collateral.

Question 216

security

Answer 216

The property that will be pledged as collateral for a loan.

Question 217

seller carry-back

Answer 217

An agreement in which the owner of a property provides financing, often in
combination with an assumable mortgage.

Question 218

servicer

Answer 218

An organization that collects principal and interest payments from borrowers and
manages borrowers’ escrow accounts. The servicer often services mortgages
that have been purchased by an investor in the secondary mortgage market.

Question 219

servicing

Answer 219

The collection of mortgage payments from borrowers and related responsibilities
of a loan servicer.

Question 220

settlement statement

Answer 220

See HUD1 Settlement Statement

Question 221

subdivision

Answer 221

A housing development that is created by dividing a tract of land into individual
lots for sale or lease.

Question 222

subordinate financing

Answer 222

Any mortgage or other lien that has a priority that is lower than that of the first
mortgage.

Question 223

survey

Answer 223

A drawing or map showing the precise legal boundaries of a property, the
location of improvements, easements, rights of way, encroachments, and other
physical features.

Question 224

sweat equity

Answer 224

Contribution to the construction or rehabilitation of a property in the form of labor
or services rather than cash.

Question 225

tenancy in common

Answer 225

As opposed to joint tenancy, when there are two or more individuals on title to a
piece of property, this type of ownership does not pass ownership to the others in
the event of death.

Question 226

third-party origination

Answer 226

A process by which a lender uses another party to completely or partially
originate, process, underwrite, close, fund, or package the mortgages it plans to
deliver to the secondary mortgage market.

Question 227

title

Answer 227

A legal document evidencing a person’s right to or ownership of a property.

Question 228

title company

Answer 228

A company that specializes in examining and insuring titles to real estate.

Question 229

title insurance

Answer 229

Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy)
against loss arising from disputes over ownership of a property.

Question 230

title search

Answer 230

A check of the title records to ensure that the seller is the legal owner of the
property and that there are no liens or other claims outstanding.

Question 231

transfer of ownership

Answer 231

Any means by which the ownership of a property changes hands. Lenders
consider all of the following situations to be a transfer of ownership: the purchase
of a property “subject to” the mortgage, the assumption of the mortgage debt by
the property purchaser, and any exchange of possession of the property under a
land sales contract or any other land trust device.

Question 232

transfer tax

Answer 232

State or local tax payable when title passes from one owner to another.

Question 233

Treasury index

Answer 233

An index that is used to determine interest rate changes for certain adjustablerate mortgage (ARM) plans. It is based on the results of auctions that the U.S.
Treasury holds for its Treasury bills and securities or is derived from the U.S.
Treasury’s daily yield curve, which is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market.

Question 234

Truth-in-Lending

Answer 234

A federal law that requires lenders to fully disclose, in writing, the terms and
conditions of a mortgage, including the annual percentage rate (APR) and other
charges.

Question 235

two-step mortgage

Answer 235

An adjustable-rate mortgage (ARM) that has one interest rate for the first five or
seven years of its mortgage term and a different interest rate for the remainder of
the amortization term.

Question 236

two- to four-family property

Answer 236

A property that consists of a structure that provides living space (dwelling units)
for two to four families, although ownership of the structure is evidenced by a
single deed.

Question 237

trustee

Answer 237

A fiduciary who holds or controls property for the benefit of another.

Question 238

VA mortgage

Answer 238

A mortgage that is guaranteed by the Department of Veterans Affairs (VA)

Question 239

vested

Answer 239

Having the right to use a portion of a fund such as an individual retirement fund.
For example, individuals who are 100 percent vested can withdraw all of the
funds that are set aside for them in a retirement fund. However, taxes may be
due on any funds that are actually withdrawn.

Question 240

Veterans Administration (VA)

Answer 240

An agency of the federal government that guarantees residential mortgages
made to eligible veterans of the military services. The guarantee protects the
lender against loss and thus encourages lenders to make mortgages to veterans.