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1031 /
Buying preconstruction |
Glossary of Terms
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Frequently Asked Questions (FAQ)
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GLOSSARY - LETTERS A THROUGH J
- ABSTRACT OF TITLE: A written document produced
by a title insurance company (trustee), giving the
history of who owned the property from the first owner
forward. It also indicates any liens or encumbrances that
may affect the title. A lender will not make a loan, nor
can a sale be affected until the title to the property is
clear.
- ACCELERATION CLAUSE: This accelerates the
payments in a mortgage, where the entire amount becomes
immediately due and payable. Most mortgages have this
clause, which comes into effect when, for example, you
sell the property. This is also called the "Alienation
Clause."
- ACCRUED INTEREST: Interest that has
accumulated but has not been paid.
- ACQUISITION LOAN: Money borrowed to purchase a
property.
- ADJUSTABLE RATE MORTGAGE (ARM): A mortgage
loan that allows the interest rate to be changed or
adjusted at specific periods over the entire life of the
loan.
- ADJUSTMENT DATE: The day on which an
adjustment is made in an adjustable rate mortgage. It may
occur monthly, every 6 months, or once a year, or
whenever agreed upon.
- AGREEMENT OF SALE: Also known as the Purchase
Contract, Purchase Agreement, or Sales Agreement. It
outlines the agreement of the seller to sell and the
buyer to buy a certain property. It must be signed by
both parties in order to be legally binding.
- ALIENATION CLAUSE: The clause that specifies
that if the property is sold or transferred to another
person, the mortgage becomes immediately due and payable.
- AMERICAN INSTITUTE OF REAL ESTATE APPRAISERS
(MAI): An association whose members undergo a
rigorous training process as appraisers.
- AMERICAN LAND TITLE ASSOCIATION (ALTA): The
more complete and extensive policy of land title
insurance that most lenders insist upon. It involves a
physical inspection and often guarantees the property's
boundaries. Lenders will often insist on an ALTA policy
with themselves named as beneficiaries.
- AMERICAN SOCIETY OF APPRAISERS: A professional
organization of appraisers.
- AMORTIZATION: Gradual repayment of a loan
(principal) by way of regular installments.
- AMORTIZATION SCHEDULE: A table that shows
monthly payments, interest and principal requirements,
and unpaid balances over the life of a loan.
- ANNUAL CAP: The limit on the number of times
an interest rate can be adjusted on an adjustable-rate
mortgage over a 12-month period.
- ANNUAL PERCENTAGE RATE (APR): The rate of
interest for a loan over a one year period, expressed as
a percentage value. This disclosure is required by the
federal Truth-In-Lending Law.
- ANNUITY: Series of equal or near-equal monthly
payments.
- APPLICATION FEE: A fee for applying for a
mortgage. This fee often includes the cost of a full
credit report on the borrower, and a property appraisal.
The typical amount may be $350.
- APPRAISAL: Estimate (or professional
opinion)of the value of a property, given by a
professional appraiser who visits the property being sold
or bought and estimates its market value. This kind of
information included in the appraisal ranges from the
type of property, its condition, and its comparable value
in the area of its location.
- ASSIGNMENT OF MORTGAGE: The lender may sell
your mortgage without permission from you (which he is
entitled to do), and the document that records the
transfer of the mortgage from lender A to lender B is the
assignment.
- ASSUMABLE LOAN: A mortgage loan that lets a
purchaser of a home assume the obligation of the mortgage
already on that house, without any changes to the loan
terms. This is possible for loans that do not have a
due-on-sale clause, and FHA and VA mortgages (see
Glossary for these terms).
- ASSUMPTION OF MORTGAGE: Purchase of property
where the buyer accepts and assumes the mortgage that
already exists on the property. The seller, in turn,
remains responsible to the lender for the loan.
- AUTOMATIC GUARANTEE: Some lenders who make VA
loans are empowered to guarantee the loans without first
checking with the VA. Such lenders can often make the
loans quicker.
- BALLOON PAYMENT: Final payment on a loan that
is greater than the previous monthly installments. This
pays off the loan entirely and in full.
- BIWEEKLY MORTGAGE: Payments are made twice a
month (or every two weeks), and the additional payment is
used to reduce the principal amount.
- BLANKET MORTGAGE: A single mortgage that
covers several properties. It is often used by developers
and builders.
- BRIDGE LOAN: Financing that "bridges" the
period between the end of one loan and the beginning of
another.
- BUY-DOWN: The payment of additional Discount
Points (see Glossary) to a lender in return for a reduced
interest rate on a loan.
- CAP: Limit placed on the number of adjustments
in order to protect the borrower from large increases in
interest rates or payment levels.
- CERTIFICATE OF ELIGIBILITY: Issued by the
Veterans Administrations to those who may qualify for VA
loans.
- CERTIFICATE OF REASONABLE VALUE (CRV): When
getting a VA loan, the Veteran's Association will secure
an appraisal of the property, and will issue the
Certificate establishing what they deem the maximum value
of the property.
- CHAIN OF TITLE: This gives the history of
ownership of a property. The title to property forms a
chain going back to the first owner.
- CLOSING: The act of transferring ownership of
a property from seller to buyer according to the sales
contract. Also, that period of time when a closing is to
take place.
- CLOSING COSTS: The fees and expenses paid by
the buyer and seller at the time of a real estate closing
(these are also known as Transaction or Settlement
Costs).
- CO-BORROWER: Another party who signs for the
mortgage loan. Income, debts, assets and credit histories
of both borrowers are combined in order to qualify for
the mortgage.
- COMMITMENT: A written promise by a lender
given to the borrower to offer a mortgage at a set
amount, a certain interest rate, and cost. Such a
commitment will have a time limit on it; usually 30-60
days.
- CO-MORTGAGOR: A co-signer of a mortgage who is
jointly responsible for the repayment of the loan amount.
Such a person also receives a share of ownership in the
mortgaged property.
- CONFORMING LOAN: Also called a Conventional
Mortgage that adheres to the loan amounts and mortgage
guidelines set by the Federal National Mortgage
Association (FNMA, or Fannie Mae) and/or the guidelines
of the Federal Home Loan Mortgage Corporation (FHLMC, or
Freddie Mac). A conforming loan is a mortgage under
$203,150. A non-conforming or jumbo loan exceeds
$203,150.
- CONSTRUCTION LOAN: Used to finance subdivision
costs or property improvements.
- CONVENTIONAL LOAN: A mortgage loan that is
other than the one guaranteed by the Veterans
Administration or insured by the Federal Housing
Administration.
- CO-SIGNOR: A second borrower who signs in
conjunction with the first borrower for the mortgage
loan. A co-signor is equally responsible for the
repayment of the loan.
- CREDIT RATING: The evaluation of a person's
history and capacity of debt repayment. Such a rating is
available from a credit bureau in the form of a report.
- CREDIT REPORT: A report of a person's credit
history issued by one of three national credit bureaus.
The report mentions any delinquent payments, or any
failures to pay, as well as bankruptcies and
foreclosures. Lenders use such reports to determine the
credit-worthiness of a borrower.
- DEED OF TRUST: A legal instrument used in many
states in place of a mortgage, where title to the
property is vested in one or more trustees to secure the
repayment of the loan.
- DEFAULT: The failure to fulfill a promise or
pledge such as the timely (monthly) repayment of a loan.
- DEFICIENCY JUDGMENT: A court order stating
that the borrower still owes money when the security for
a loan does not fully satisfy a defaulted loan.
- DISCOUNT POINTS: Amounts paid to the lender
(often by the seller) to make up the difference between
the market interest rate and the lower face rate of the
Note (see Glossary).
- DOWN PAYMENT: The amount paid for a property
in addition to the mortgage loan; usually expressed as a
percentage value.
- DUE-ON-ENCUMBRANCE: A seldom-used clause in
mortgages that allows the lender to foreclose if the
borrower gets additional financing, such as a second
mortgage.
- DUE-ON-SALE CLAUSE: Provision in a mortgage
that states that the loan is due upon the sale of the
property.
- EFFECTIVE RATE: The true rate of return that
takes into account all relevant financing expenses.
- ENCUMBRANCE: Also known as a Lien, where a
claim is made against a property by a third party. Such
an act ensures that a property cannot be transferred
without first clearing such a Lien or Encumbrance.
- EQUITY: The true value that an owner has in a
property over and above the debt upon it.
- ESCROW: The placing of property or funds with
a third party (usually an attorney) for safe-keeping,
pending the fulfillment or performance of a condition or
act.
- EXCULPATORY CLAUSE: A provision in a mortgage
that allows the borrower to surrender the property to the
lender without personal liability for the loan.
- FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC):
A private corporation authorized by federal law to
provide secondary mortgage market support for
conventional real estate loans. It is popularly known as
"Freddie Mac."
- FEDERAL HOUSING ADMINISTRATION (FHA): An
agency of the U.S. government, Department of Housing and
Urban Development, that administers many loan programs,
loan guarantee programs and loan insurance programs in
order to make housing more widely available.
- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA):
A federally chartered, semi-public corporation that
purchases conventional and government guaranteed real
estate loans. Their stock is traded on the New York Stock
Exchange. The FNMA is popularly known as "Fannie Mae."
- FIRST MORTGAGE: That mortgage which has
priority as a lien (see Glossary) or debt over all other
mortgages. In case of foreclosure, the first mortgage
must be paid before any other mortgage or lien.
- FIXED RATE MORTGAGE: A mortgage loan that has
a constant interest rate for the entire term of the loan.
- FORECLOSURE: Termination of all rights of
ownership of a borrower in a property covered by the
mortgage. Statutory foreclosure can be effected without a
court-order.
- GRADUATED PAYMENT MORTGAGE: A mortgage where
the payments vary over the term of the loan, usually
starting low, then slowly rising, until they reach a
plateau where they remain for the remainder of the term.
This mortgage is useful if you want low initial payments.
It is often used by first-time home buyers and is often
combined with a fixed-rate or an adjustable-rate
mortgage.
- GROWING EQUITY MORTGAGE: A rarely used type of
mortgage where the payments increase according to set a
schedule. The purpose is to pay additional money into the
principal in order to pay off the loan earlier, and save
interest charges.
- GUARANTEE: The agreement to indemnify the
holder of a loan all or some of the unpaid principal
balance in case of default by the borrower.
- INDEX: A measurement of an established
interest rate used to establish the periodic rate
adjustments for adjustable-rate mortgages. There are a
wide variety of indexes used, including Treasury bill
rates, cost of funds to lenders, and a few others.
- INSURANCE: The policy purchased by a borrower
which shall indemnify the lender in case of foreclosure
of the loan.
- INTERIM FINANCING: A loan where the property owner is
unable or unwilling to arrange permanent financing. Such
financing is usually arranged for less than 3 years.
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JUNIOR MORTGAGE: A mortgage which is paid only
after prior mortgages are settled.
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