Credence Mortgage, Inc., provides these definitions of real estate terms to
help you understand the content of documents you encounter and all discussions
you have in your search for the mortgage which is best for you.
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Amortization:
repayment of a mortgage loan through monthly installments of principal and
interest; the monthly payment amount is based on a schedule that will allow you
to own you home at the end of a specific time period (for example, 15 or 30
years)
APR:
Annual Percentage Rate; calculated by using a standard formula, the APR shows
the cost of a loan; expressed as a yearly interest rate, it includes the
interest, points, mortgage insurance, and other fees associated with the loan
Application/1003:
the first step in the loan
approval process; this form is used to record important information
about the potential borrower necessary to the underwriting process
Appraisal:
a document that gives an estimate of a property's fair market value; an
appraisal is generally required by a lender before loan approval to ensure that
the mortgage loan amount is not more than the value of the property
Appreciation:
an increase in the value of a property
ARM:
Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates;
when rates change, ARM monthly payments increase or decrease at intervals
determined by the lender; the change in monthly payment amount is usually
subject to a Cap
Asset:
a valuable possession; all property of a person or business that can be applied
to cover liabilities
Assignment:
the transfer of a mortgage from one institution to another
Assumable Mortgage:
a mortgage that can be transferred from a seller to a buyer; once the buyer
assumes the loan, the seller is no longer responsible for repaying it
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Balloon Mortgage:
a mortgage that typically offers low rates for an initial period of time
(usually 5,7, or 10 years); after that period elapses, the balance of the loan
is due or is refinanced by the borrower
Bankruptcy:
a federal law whereby a person's assets are turned over to a trustee and used
to pay off outstanding debts
Biweekly Payment Mortgage:
A mortgage that requires payments every two weeks instead of the standard
monthly payment schedule. The 26 biweekly payments are each equal to 1/2 of the
monthly payment that would be required if the loan were a standard 30-year
fixed-rate mortgage.
Borrower:
a person who has been approved to receive a loan and is then obligated to repay
it and any additional fees according to the loan terms
Bridge Loan:
An interim loan typically used when the buyer is unable to sell his/her house
but needs money to close the transaction on the house he/she is buying. The
bridge loan is made on the buyer's current residence to finance the buyer's new
residence. The loan is paid off when the buyer's current residence is sold.
Broker:
a person hired for a commission or fee to negotiate purchases, contracts, or
sales
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Cap:
a limit, such as that placed on an adjustable rate mortgage, on how much a
monthly payment or interest rate can increase or decrease
Cash-out Refinance:
a refinance transaction in which there is cash left over after all monies
needed for closing (closings
costs, payoffs, etc.) have been distributed
Cash Reserve:
a cash amount sometimes required by the lender to be held in reserve in
addition to the down payment and closing
costs
Certificate of Title:
a document provided by a qualified source (title company) that shows the
property legally belongs to the current owner
Closing:
the time at which the property is formally sold and transferred from the seller
to the buyer; at this time, the borrower takes on the loan obligation, pays all
closing costs, and receives title from the seller
Closing Costs:
customary costs above and beyond the sale price of the property that must be
paid to cover the transfer of ownership at
closing
Collateral:
property used to guarantee the repayment of a loan
Commission:
an amount, usually a percentage of the property sales price, that is collected
by a real estate professional as a fee for negotiating the transaction
Condominium:
a form of ownership in which individuals purchase and own a unit of housing in
a multi-unit complex; the owners also share financial responsibility for common
areas
Conventional Loan:
a private sector loan, on that is not guaranteed or insured by the government
Cooperative (Co-op):
residents purchase stock in a cooperative corporation that owns a structure;
each stockholder is then entitled to live in a specific unit of the structure
and is responsible for paying a portion of the loan
Credit History:
history of an individual's debt payment; used by a lender to gauge a potential
borrower's ability to repay a loan
Credit Report:
a record that lists all past and present debts and the timeliness of their
repayment
Credit Bureau Scores:
a number representing the possibility a borrower may default; it is based upon
credit history and is used to determine ability to qualify for a mortgage loan
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Deed:
the document that transfers ownership of a property
Default:
the inability to pay monthly mortgage payments in a timely manner or to
otherwise meet the mortgage terms
Delinquency:
failure of a borrower to make timely mortgage payments under a loan agreement
Depreciation:
a decrease in the value of a property
Down Payment:
part of the purchase price paid by the buyer upfront that is not financed as
part of a mortgage
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Earnest Money:
money put down by a potential buyer to show that her or she is serious about
purchasing the home; it becomes part of the down payment if the offer is
accepted, is returned if the offer is rejected, or is forfeited if the buyer
pulls out of the deal
Equity:
an owner's financial interest in a property; calculated by subtracting the
amount still owed on the mortgage loan from the fair market value of the
property
Escrow Account:
a separate account into which the lender puts a portion of each monthly
mortgage payment; an escrow account provides the funds needed for such expenses
as property taxes, hazard insurance, mortgage insurance, etc.
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Fair Market Value:
the hypothetical price that a willing buyer and seller will agree upon when
they are acting freely and with complete knowledge of the situation
Fannie Mae:
Federal National Mortgage Association (FNMA); a federally-chartered enterprise
owned by private stockholders that purchases residential mortgages and converts
then into securities for sale to investors; by purchasing mortgages, Fannie Mae
supplies funds that lenders may loan to potential homebuyers
FHA:
Federal Housing Administration; established in 1934 to advance homeownership
opportunities for all Americans; assists homebuyers by providing mortgage
insurance to lenders to cover most losses that may occur when a borrower
defaults; this encourages lenders to make loans to borrowers who might not
qualify for conventional mortgages
Fixed-rate Mortgage:
mortgage in which the interest rate does not change during the entire life of
the loan
Flood Insurance:
insurance that protects homeowners against losses from a flood; if a home is
located in a flood plain, the lender will require flood insurance before
approving the loan
Foreclosure:
a legal process in which mortgaged property is sold to pay the loan of the
defaulting borrower
Freddie Mac:
Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered
corporation that purchases residential mortgages, securities them, and sells
them to investors; this provides lenders with funds for new homebuyers
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Good Faith Estimate:
an estimate of all
closing fees including pre-paid and escrow items, as well as lender
charges; must be given to the borrower within 3 days after submission of a
loan application
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Hazard Insurance:
an insurance policy that combines protection against damage to a dwelling and
its contents with protection against claims of negligence or inappropriate
action that result in someone's injury or property damage
HUD:
U.S. Department of Housing and Urban Development; established in 1965, HUD
works to create a decent home and suitable living environment for all
Americans; it does this by addressing housing needs, improving and developing
American communities, and enforcing fair housing laws
HUD 1 Statement:
also known as the
"settlement sheet," it itemizes all
closing costs; must be given to the borrower at or before closing
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Index:
a measurement used by lenders to determine changes to the interest rate charged
on an adjustable rate mortgage
Interest:
the number of dollars in circulation exceeds the amount of goods and services
available for purchase; inflation results in a decrease in the dollar's value
Interest Rate:
the amount of interest charged on a monthly loan payment; usually expressed as
a percentage
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Lien:
legal claim against property that must be satisfied when the property is sold
LTV Ratio:
Loan-to-Value Ratio; a percentage calculated by dividing the amount borrowed by
the price or appraised value of the home to be purchased; the higher the LTV,
the less cash a borrower is required to pay as a down payment
Lock-in:
guarantees a specific interest rate if the loan is closed within a specific
time
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Margin:
an amount the lender adds to an index to determine the interest rate on an
Adjustable Rate Mortgage
Mortgage:
a lien on the property that secures the promise to repay a loan
Mortgage Insurance:
a policy that protects lenders against some or most of the losses that can
occur when a borrower defaults on a mortgage loan; mortgage insurance is
required primarily for borrowers with a down payment of less than 20% of the
property's purchase price
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Note:
document signed by the borrower containing a promise to pay the lender a
definite sum of money by a specific date
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Origination Fee:
a fee charged by a lender for processing expenses in connection with making a
mortgage loan
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PITI:
Principal, Interest, Taxes, and Insurance; the four elements of a monthly
mortgage payment; payments of principal and interest go directly towards
repaying the loan while the portion that covers taxes and insurance (hazard and
mortgage, if applicable) goes into an escrow account to cover the fees when
they are due
PMI:
Private Mortgage Insurance; privately-owned companies that offer standard and
special affordable mortgage insurance programs for qualified borrowers with
down payments less than 20% of a purchase price
Points:
one point equals 1% of the face value of the loan; charged by the lender
Pre-approved:
lender commits to lend to a potential borrower; commitment remains as long as
the borrower still meets the qualification requirements at the time of
closing
Prepayment Penalty:
charged by the lender to a borrower who pays off part or all of a loan before
the last scheduled payment
Principal:
amount of a loan, not including interest
PUD:
Planned Unit Development; a subdivision of five or more individually owned lots
with one or more other areas owned in common .
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Real Estate Agent:
an individual who is licensed to negotiate and arrange real estate sales; works
for a real estate broker
Realtor:
a real estate agent or broker who is a member of the National Association of
Realtors, and its local and state associations
Refinancing:
a method of paying off one loan with the proceeds of a new loan using the same
property as collateral
RESPA:
Real Estate Settlement Procedures Act; a law protecting consumers from abuses
during the residential real estate purchase and loan process by requiring
lenders to disclose all settlement costs, practices, and relationships
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Settlement:
another name for closing
Subordinate:
to place in a rank of lesser importance or to make one claim secondary to
another
Survey:
a property diagram that indicates legal boundaries, easements, encroachments,
rights of way, improvement locations, etc.
Sweat Equity:
using labor to build or improve a property as part of the down payment
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Title:
evidence an individual has of right to possession of land
Title Insurance:
insurance that protects the
lender against any claims that arise for arguments about ownership of the
property; also available for homebuyers
Truth-in-Lending:
a federal law obligating a lender to give full written disclosure of all fees,
terms, and conditions associated with the loan
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Underwriting:
the process of analyzing a loan
application to determine the amount of risk involved in making the
loan; it includes a review of the potential borrower's credit history and a
judgment of the property value
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