Mortgage Terms Glossary –post updated 7-26-23
Abstract of title: A written history of the title transaction of conditions bearing on the title to a designated parcel of land. It covers the period from the source of the title to the present and summarizes all subsequent instruments of public record by seeing forth their material parts.
Accelerated cost recovery system (ACRS): Created by the Economic Recovery Tax Act of 1981, this system establishes the period over which the costs of real property and other assets can be depreciated for accounting purposes.
Accelerated depreciation: Depreciation in which deductions start at their highest annual value in the first year and steadily diminish in later years.
Acceleration clause: A common provision of a mortgage or note providing the holder with the right to demand that the entire outstanding balance be immediately due and payable in the event of default. Without this clause, the mortgagee may have to file separate foreclosure suits as each installment of the mortgage debt falls due and is in default.
Accessibility: Location of a site in terms of how easily it may be reached by its market.
Accommodation party: A party who signs a negotiable instrument (note or bill) as maker, acceptor, or endorser, without receiving any consideration to accommodate another party and enhance the creditworthiness of the paper.
Accretion: A buildup of land by natural forces, such as wind, waves, or the flow of water.
Accrual basis of accounting: An accounting method under which income is reported when earned and expenses are deducted in the year incurred.
Accrued interest: The interest earned for the period that has elapsed since interest was last paid.
Acquisition cost: In a HUD-FHA transaction, the price the borrower paid for the property plus any of the following costs: closing, repairs, or financing (except discount points in other than a refinance transaction) properly paid by the borrower. Does not include prepaid discounts in a purchase transaction, mortgage insurance premiums, etc.
Acre: A measure of land, 43,560 sq feet equals one acre…this is used on the appraisal form and in the appraisal process as to how they measure the land.
Action to quiet title: A court action to remove any interest or claim in or to the title of the property, to remove a cloud on the title.
Ad Valorem taxes: Property taxes on the assessed value of the property.
Add on interest: The full amount of interest calculated on the original principal for the term of a loan. This becomes a part of the face amount of the promissory note.
Adjustable-rate mortgage (ARM): A mortgage in which the interest rate is adjusted periodically according to a preselected index. The terms, adjustment schedule, and index to be used can be negotiated by the borrower and lender. Specific types include the renegotiable rate mortgage and the variable rate mortgage. With this type of loan, the payment will also adjust according to the rate adjustment up or down.
Advance: In real estate, a partial disbursement of funds under a note. Most often used in connection with a construction loan.
Affidavit: A sworn statement in writing before a property official, usually a notary.
After-tax cash flow: The cash flow remaining after the deduction of an allowance for taxes attributable to that income. * in self-employed person
After-tax equity reversion: The sale price of property less transaction costs, outstanding debts, and disposition of taxes.
Alienation: To transfer the title to real property from one person to another.
Alienation clause: A special type of acceleration clause that demands payment of the entire loan balance upon sale or other transfer of the title; also known as a “due on sale” clause.
Allowance for vacancy and income loss: An estimated amount reflecting probable vacancy and non-payment of rent by tenants. *rental property involved
ALTA: American Land Title Association. A national association of title insurance companies, abstractors, and attorneys specializing in real property law. The association speaks for the title insurance and abstracting industry and establishes standard procedures and title policy forms.
Amenity: This is used in property evaluations and is an aspect of a property that enhances its value. Off-street parking reserved parking within a condominium community, the nearness of good public transportation, tennis courts, or a swimming pool are examples. Higher grades of materials such as hardwood, granite, etc.
Annual percentage rate (APR): A term used in the Truth-in-Lending Act to represent the percentage relationship of the total finance charge to the amount of the loan. This is not the interest rate.
Application: A form used to record pertinent information about a prospective borrower and tentative security. Standard forms are as follows: FNMA 1003/FHLMC 65. FHA/VA – now uses conventional applications.
Amortization: Loan payment by equal periodic payments calculated to retire the principal at the end of a fixed period and to pay accrued interest on the outstanding balance.
Amortization schedule: A table showing the amounts of principal and interest due at regular intervals and the unpaid balance of the loan after each payment is made.
Arbitrage: In mortgage banking, the simultaneous purchase and sale of mortgages, futures contracts, or mortgage-backed securities in different markets to profit from price differences.
Arm’s length transaction: A transaction in which the parties involved are entirely independent of each other, deal with each other as strangers, and have no reason for collusion.
Arrears: The opposite of “in advance.” The situation in which mortgage interest and real estate taxes are paid at or after the end of the period or year for which they are due or levied. Also, the state of being delinquent or behind in paying a debt. When you pay a mortgage payment you are paying the prior month’s interest- mortgage payments are paid in arrears.
Assignment of Mortgage: A document that evidences a transfer of ownership of a mortgage from one party to another. **This occurs in the Secondary Market where one lender assigns the mortgage to another lender or investor. There are specific forms used for the transfer and the note will also bear an endorsement that it is being transferred to another lender/investor.
Assignor: One who transfers, assigns, or sets over real property or an interest therein to another.
Associate broker: A person who has qualified as a real estate broker but works for a principal broker licensed in the state.
Assumption agreement: A written agreement by one party to pay an obligation originally incurred by another.
Assumption of mortgage: Assumption by a purchaser of the primary liability for payment of an existing mortgage or deed of trust. The seller remains secondarily liable unless specifically released by the lender. * If an individual is credit qualified, the original applicant is released. The mortgage will indicate if a mortgage can be assumed and how. Most mortgages now require another person to qualify for the mortgage loan just like the previous borrower.
Attorney in fact: One who holds a power of attorney from another to execute documents on behalf of the grantor of the power. It is terminated upon the death, relocation, or court-decided incompetence of the grantor.
An automatic lender or direct lender: A lender who is approved by the agencies to make loans, using their guidelines and then submitting the loans to them for purchase or to become insured by FHA/VA. The direct lender originates the loan, processes the loan, underwrites the loan, and closes and funds the loan. This includes Fannie, Freddie, FHA, and VA. **If the lender does not submit a certain percentage of performing loans; their ability to deliver loans to the agencies can be restricted and/or withdrawn.
Balloon mortgage: A mortgage with periodic installments of principal and interest that do not fully amortize a loan. The balance of the mortgage is due in a lump sum at a specified date in the future, usually at the end of the term and designated in the note instrument.
Basis point: One one-hundredth of one percent. Used to describe the amount of change in yield in many debt instruments, including mortgages.
Before-tax Income: Gross income minus all expenses except income taxes.
Below-market interest rate (BMIR): This applies to certain mortgage insurance programs where the interest rate on the mortgage is below that charged for conventional financing in the area to assist low-and moderate-income families in renting or purchasing dwelling units.
binder insurance: The written evidence of temporary hazard or title coverage that only runs for a limited time and must be replaced by a permanent policy.
Bi-Weekly Mortgage: With a standard 30-year mortgage, borrowers pay off their loan by making 12 monthly payments yearly. The bi-weekly mortgage requires one more monthly payment yearly – you pay 1/2 of your payment bi-weekly or 13 instead of 12. With 13 payments yearly (which are paid every two weeks) this results in paying the loan off early in 18 to 19 years instead of 30. **Note: Fannie no longer offers this product. Therefore, most lenders who submit their loans to the agencies may not offer this product either, unless they have a special commitment with FNMA to buy the loan.
Blanket: This refers to the coverage of more than one piece of property under one instrument. Such as a blanket insurance policy, blanket mortgage, blanket assignment, or blanket survey. Condominiums have blanket insurance policies for the exterior of the dwelling.
Bridge loan- financing: A loan that is made to a client to fill in the gap between the termination of one loan (generally short-term) and the start of another (generally permanent long-term) loan.
**Example: A borrower needs to close on a loan without delay. They are selling a prior home, the sale will not occur for 2 weeks, the lender may make a bridge loan for the amount needed for closing this new loan. It will be secured against the dwelling that will close in 2 weeks. The new home loan is closed and when the prior dwelling sells, the bridge loan is paid in full. Depending upon the circumstances, the borrower may have to qualify with all the payments involved.
Buydown: Money advanced by an individual (builder, seller, etc.) to reduce the monthly payments for a home mortgage usually during the initial, first two years of the loan.
And More Mortgage Terms
Certificate of Eligibility: A document issued by the federal government certifying a veteran’s eligibility for a Veterans Administration mortgage guarantee.
Certificate of occupancy: Written authorization given by a local municipality that allows a newly completed, or substantially completed structure to be inhibited. *refers to construction loans.
Certificate of title: A written statement furnished by an abstract or title company or attorney to a client stating that the title to a piece of property is legally vested in the present owner.
Chain of title: The history of all documents transferring a title to a parcel of real property, starting with the earliest existing documents and ending with the most recent.
Clear title: Title not encumbered or burdened with defects.
Closed-end mortgage: A fixed-amount mortgage where the debt cannot be increased. It is the opposite of an open-end mortgage.
Closing statement /HUD1: A financial disclosure giving an account of all funds received and expected at the closing. This includes escrow deposits for taxes, hazard insurance, and mortgage insurance. *RESPA rules apply
Cloud on the title: Any outstanding claim or lien/encumbrance which, if valid, would affect or impair the transfer of the title to another person. It can be cleared up usually; sometimes by a quitclaim deed, release, or court action.
Co-mortgagor: The person’s name appearing on the application with the mortgagor. The co-mortgagor’s income, assets, and debts are added together with the mortgagors for underwriting and ratio analysis purposes. The co- mortgagor’s name must appear on the FHA Certificate of Commitment, the note, and the deed of trust. For full guarantee under the VA program; the co-mortgagor must be a spouse or another eligible veteran.
Contingency: A clause in a contract that requires the completion of a certain act or the occurrence of a certain event before the contract is binding.
Conventional loan: A mortgage loan not insured by FHA or guaranteed by the VA or Farmers Home Administration
**Additional Mortgage Banking Terms
