Glossary - CLS Financial
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Get definitions on the mortgage terms that may come up throughout your loan process, as well as any specific mortgage terms that may be unfamiliar to you. CLS FInancial wants to ensure that you have a complete understanding of the transaction.

Our mortgage glossary will help you to speak to mortgage professionals with confidence.


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1003 Form
Commonly used mortgage loan application developed by Fannie Mae. Sometimes called the Uniform Residential Loan Application.

Abstract of Title
A historical summary provided by a title insurance company of all records affecting the title to a property.

The right of the lender to demand payment on the outstanding balance of a loan.

Adjustable Rate Mortgage (ARM)
A mortgage that has a fixed rate of interest for only a set period of time, usually one, three or five years. During the initial period the interest rate is lower, and after that period it will adjust based on an index.

Adjustment Date
The actual date that the interest rate is changed for an ARM.

Features of your home that fit your preferences and can increase the value of your property. Some examples include the number of bedrooms, bathrooms, or vicinity to public transportation.

The liquidation of a debt by regular, usually monthly, installments of principal and interest. An amortization schedule is a table showing the payment amount, interest, principal and unpaid balance for the entire term of the loan.

Amortization Schedule
A schedule of how the loan is intended to be repaid. For example, a typical amortization schedule will include the amount borrowed, the interest rate, and the term. The result will be a month-by-month breakdown of how much every month is paid in interest versus how much is paid down on the principal.

Annual Percentage Rate (APR)
A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is a higher rate than the simple interest of the mortgage.

Appraisals are conducted to give an estimate of the value of a property. They are conducted by certified professionals who evaluate a piece of property based on a physical inspection and the selling price of comparable houses that have recently been sold.

An increase in property value.

Charges levied against a property for tax purposes or to pay for municipality or association improvements such as curbs, sewers, or grounds maintenance.

The transfer of a contract or a right to buy property at given rates and terms from a mortgagee to another person.

An agreement between a buyer and a seller, requiring lender approval, where the buyer takes over the payments for a mortgage and accepts the liability. Assuming a loan can be advantageous for a buyer because there are no closing costs and the loan's interest rate may be lower than current market rates. Depending on what is in the mortgage or deed of trust, the lender may raise the interest rate, require the buyer to qualify for the mortgage, or not permit the buyer to assume the loan at all.

Balloon Loan or Mortgage
A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.

Bi-Weekly Mortgage
Compared to typical mortgages that are paid once a month, bi-weekly mortgages are paid twice a month. More frequent payments reduce interest costs and decrease the length of the mortgage.

A certificate serving as security for payment of a debt. Bonds backed by mortgage loans are pooled together and sold in the secondary market.

Bridge Loan
A loan to "bridge" the gap between the termination of one mortgage and the beginning of another, such as when a borrower purchases a new home before receiving cash proceeds from the sale of a prior home. Also known as a swing loan.

An intermediary between the borrower and the lender. The broker may represent several lending sources and charges a fee or commission for services.

Where the buyer pays additional discount points or makes a substantial down payment in return for a below market interest rate; or the seller offers 3-2-1 interest payment plans or pays closing costs such as the origination fee. During times of high interest rates, buy-downs may induce buyers to purchase property they may not otherwise have purchased.

A limit on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage.

Certificate of Reasonable Value (CRV)
A Veteran's Administration appraisal that establishes the maximum VA mortgage loan amount for a specified property.

Certificate of Title
Document rendering an opinion on the status of a property's title based on public records.

Clear Title
A property title that has no defects. Properties with clear titles are marketable for sale.

Closed-End Mortgage
A mortgage principal amount that is fixed and cannot be increased during the life of the loan. See also

The final step in purchasing a property where the title is transferred from the seller to the buyer. Closing occurs at a meeting between the buyer, seller, settlement agent, and other agents. At the closing the seller receives payment for the property. Also known as settlement.

Closing Costs
Closing costs are the costs involved with buying a house, typically including attorney fees, recording fees and other costs associated with the mortgage closing.

One who is obligated to repay a mortgage loan should the borrower default but who does not share ownership in the property. See also

Security in the form of money or property pledged for the payment of a loan. For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made.

An individually owned unit within a multi-unit building where others or the Condominium Owners Association share ownership of common areas such as the grounds, the parking facilities and the tennis courts.

Conforming Loan
A loan that conforms to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. See also

Construction Mortgage
These are used when a borrower is having a house built. The lender will advance cash based on the construction schedule of the builder. When the home is finished, the mortgage will convert into a permanent mortgage.

Consumer Handbook on Adjustable Rate Mortgages (C.H.A.R.M.)
A disclosure required by the federal government to be given to any borrower applying for an adjustable rate mortgage (ARM).

Conventional Loan
A mortgage loan that is not insured, guaranteed or funded by the Veterans Administration (VA), the Federal Housing Administration (FHA) or Rural Economic Community Development (RECD) (formerly Farmers Home Administration).

Convertible Mortgage
An adjustable rate mortgage (ARM) that allows a borrower to switch to a fixed-rate mortgage at a specified point in the loan term.

Rules and restrictions governing the use of property.

The borrower's privilege to make payments on a loan's principal before they are due. Paying off a mortgage before it is due may incur a penalty if so specified in the mortgage's prepayment clause.

Money owed to repay someone.

Deed of Trust
A document, used in many states in place of a mortgage, held by a trustee pending repayment of the loan. The advantage of a deed of trust is that the trustee does not have to go to court to proceed with foreclosure should the borrower default on the loan.

The inability to make timely monthly mortgage payments or otherwise comply with mortgage terms. A loan is considered in default when payment has not been paid after 60 to 90 days. Once in default the lender can exercise legal rights defined in the contract to begin foreclosure.

Department of Housing and Urban Development (HUD)
The U.S. government agency that administers FHA, GNMA and other housing programs.

Discount Points
Amounts paid to the lender based on the loan amount to buy the interest rate down. Each point is one percent of the loan amount; for example, two points on a $100,000 mortgage is $2,000.

Down Payment
The amount of the purchase price that the buyer pays at the time of closing. Generally, lenders require a specific down payment in order to qualify for a mortgage.

Down Payment Assistance Program (DPA)
Down Payment Assistance Programs are funds given to buyers to assist with the purchase of a home. Buyers do not have to repay these funds. To learn what types of DPA programs are available, ask your lender about local programs available in your area.

A clause in a mortgage or deed of trust allowing a lender to require immediate payment of the balance of the loan if the property is sold (subject to the terms of the security instrument).

Dwelling divided into two units.

Earnest Money
Money put down b a potential buyer to show that they are 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. During the contingency period the money may be returned to the buyer if the contingencies are not met to the buyer's satisfaction.

Anything that affects title to a property, such as loans, leases, easements, or restrictions.

The difference between the value of the home and the borrowed principal still outstanding. As a borrower makes payments and the falue of the home increases, the equity of the home generally increases

Funds held in an account to be used by the lender to pay for home insurance and property taxes. The funds may also be held by a third party until contractual conditions are met and then paid out.

Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) is the act that regulates the collection of credit information and access to your credit report. It was passed in 1970 to ensure fairness, accuracy and privacy of the personal information contained in the files of the credit reporting agencies.

Fair Housing Act
A law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

Fair Market Value
The price a property can realistically sell for, based upon comparable selling prices of other properties in the same area.

Fannie Mae
Nickname for Federal National Mortgage Association (FNMA).

FHA Loan
An FHA loan is a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low-to-moderate income borrowers who are unable to make a large down payment.

FHA Mortgage Insurance
All types of Mortgage Insurance protect the lender in the event of default. There are two types of FHA Mortgage Insurance that must be paid on all FHA loans

Fixed Rate Mortgage
A mortgage where the interest rate and the term of the loan is set for the life of the loan.

This includes amounts from a relative or a grant from the borrower's employer, a municipality, non-profit religious organization, or non-profit community organization that does not have to be repaid.

Ginnie Mae
Nickname for Government National Mortgage Association (GNMA).

Good Faith Estimate
Estimate on closing costs and monthly mortgage payments provided by the lender to the home-buyer within 3 days of applying for a loan.

Government National Mortgage Association (GNMA or Ginnie Mae)
A government organization that participates in the secondary market, securitizing pools of FHA, VA, and RHS loans.

Graduated Payment Mortgage (GPM)
A fixed-interest loan with lower payments in the early years than the later years. The amount of the payment gradually increases over a period of time and then levels off at a payment sufficient to pay off the loan over the remaining amortization period.

Hazard Insurance
A form of insurance that protects the insured property against physical damage such as fire and tornadoes. Mortgage lenders often require a borrower to maintain an amount of hazard insurance on the property that is equal at least to the amount of the mortgage loan.

Home Equity Loan
A loan backed by the value of a home. If the borrower defaults or does not pay the loan, the lender has some rights to the property.

Home Inspection
A thorough review of the physical aspects and condition of a home by a professional home inspector. This inspection should be completed prior to closing so that any repairs or changes can be completed before the home is sold.

Housing Affordability Index
Indicates what proportion of home-buyers can afford to buy an average-priced home in specified areas. The most well known housing affordability index is published by the National Association of Realtors.

Housing and Urban Development. (HUD)
The U.S. government agency that administers FHA, GNMA and other housing programs.

Income Approach to Value
A method used by real estate appraisers to predict a property's anticipated future income. Income property includes shopping centers, hotels, motels, restaurants, apartment buildings, office space and so forth.

A published interest rate compiled from other indicators such as U.S. Treasury bills or the monthly average interest rate on loans closed by savings and loan organizations. Mortgage lenders use the index figure to establish rates on adjustable rate mortgages (ARMs).

As a part of PITI, the amount of the monthly mortgage payment that does not include the principal, interest, and taxes. Also see

A fee charged for the use of borrowing money.

Interest Rate
The amount of interest charged on a monthly loan payment, expressed as a percentage.

Jumbo Loan
A nonconforming loan that is larger than the limits set by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines.

Key Lot
Real estate deemed highly valuable because of its location.

A legal claim against property that must be satisfied when the property is sold. A lien is a defect on the title and needs to be settled before transfer of ownership. A lien release is a written report of the settlement of a lien and is recorded in the public record as evidence of payment.

Life Cap
A limit on the range interest rates can increase or decrease over the life of an adjustable-rate mortgage (ARM).

The capability of an asset to be readily converted into cash.

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 down payment.

The guarantee of a specific interest rate and/or points for a specific period of time. Some lenders will charge a fee for locking in an interest rate.

Maintenance Costs
The cost of the upkeep of the house. These costs may be minor in cost and nature (replacing washers in the faucets) or major in cost and nature (new heating system or a new roof) and can apply to either the interior or exterior of the house.

The amount a lender adds to the index on an adjustable rate mortgageto establish the final interest rate.

Market Value
The price a property can realistically sell for, based upon comparable selling prices of other properties in the same area.

A change in the terms of the mortgage note, such as a reduction in the interest rate or change in maturity date.

A mortgage is the lien on a property that allows the lender to collect payments on the loan and to foreclose if the loan obligations are not met. The property acts as collateral for the loan.

Mortgage Banker
A lender that originates, closes, services and sells mortgage loans to the secondary market.

Mortgage Broker
An intermediary between a borrower and a lender. A broker's expertise is to help borrowers find financing that they might not otherwise find themselves.

Mortgage Insurance
Money paid to insure the lender against loss due to foreclosure or loan default. Mortgage insurance is required on conventional loans with less than a 20 percent down payment. FHA mortgage insurance requires a payment of 1.5 percent of the loan amount to be paid at closing, as well as an annual fee of 0.5 percent of the loan amount added to each monthly payment.

Mortgage Interest
Interest rate charge for borrowing the money for the mortgage. It is a used to calculate the interest payment on the mortgage each month.

Mortgage Term
The length of time that a mortgage is scheduled to exist. Example

The lender.

The borrower.

Negative Amortization
A situation in which a borrower is paying less interest than what is actually being charged for a mortgage loan. The unpaid interest is added to the loan's principal. The borrower may end up owing more than the original amount of the mortgage.

Non-assumption Clause
In a mortgage contract, a statement that prohibits a new buyer from assuming a mortgage loan without the approval of the lender.

Non-conforming Loan
A loan that does not conform to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. Jumbo loans are nonconforming. See also

A signed document that acknowledges a debt and shows the borrower is obligated to pay it.

Open-end Mortgage
A mortgage allowing the borrower to receive advances of principal from the lender during the life of the loan. See also

Origination Fee
When applying for a mortgage loan, borrowers are often required to pay an origination fee to the lender. This fee may include an application fee, appraisal fee, fees for all the follow-up work and other costs associated with the loan.

Abbreviation for principal and interest.

Principal, Interest, Taxes, and Insurance

A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $95,000, one point means you pay $950 to the lender. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to increase the yield on the mortgage and to cover loan closing costs. These points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.

Tentative establishment of a borrower's qualification for a mortgage loan amount of a specific range, based on the borrower's assets, debts, and income.

Payment of the mortgage loan before the scheduled due date; may be subject to a prepayment penalty.

Prime Rate
The interest rate commercial banks charge their most creditworthy customers.

The amount of money borrowed that has not yet been paid back to the lender. This does not include the interest paid to borrow that money. In other words, principal is the original loan amount minus the total repayments of principal made.

Private Mortgage Insurance
Insurance purchased by a buyer to protect the lender in the event of default. The cost of mortgage insurance is usually added to the monthly payment. Mortgage insurance may be available through a government agency, such as the Federal Housing Administration (FHA) or the Veterans Administration (VA), or through private mortgage insurance companies (PMI).

Property Tax
A tax charged by local government and used to fund municipal services such as schools, police, or street maintenance. The amount of property tax is determined locally by a formula, usually based on a percent per $1,000 of assessed value of the property.

To proportionally divide amounts owed by the buyer and the seller at closing.

As determined by a lender, the ability of the borrower to repay a mortgage loan based on the borrower's credit history, employment history, assets, debts and income.

Recording Fees
Charges for recording a deed with the appropriate government agency.

This act was designed to protect potential homeowners and enable them to become more intelligent consumers. RESPA requires that lenders provide greater amounts of information to prospective borrowers at certain points in the loan settlement process.

Reverse Annuity Mortgage
A type of mortgage loan in which the lender makes periodic payments to the borrower. The borrower's equity in the home is used as security for the loan.

Rural Housing and Community Service

Right of First Refusal
Purchasing a property under conditions and terms made by another buyer and accepted by the seller.

Right of Rescission
When a borrower's principal dwelling is going to secure a loan, the borrower has three business days following signing of the loan documents to rescind or cancel the transaction. Any and all money paid by the borrower must be refunded upon rescission. The right to rescind does not apply to loans to purchase real estate or to refinance a loan under the same terms and conditions where no additional funds will be added to the existing loan.

At the end of the construction loan period, the borrower's file is delivered to "Bank One Mortgage Loan Servicing Dept." Prior to delivery, "CLD" contacts the borrower and obtains funds for the tax and insurance escrows, a final title policy and homeowner's policy. This process is called a rollover.

Rural Housing and Community Development Service
A federal agency that administers mortgage loans for buyers in rural areas.

Second Mortgage
A loan that is junior to a primary or first mortgage and often has a higher interest rate and a shorter term.

Secondary Market
A market comprising investors like GNMA, FHLMC and FNMA, which buy large numbers of mortgages from the primary lenders and sell them to other investors.

The responsibility of collecting monthly mortgage payments and properly crediting them to the principal, taxes and insurance, as well as keeping the borrower informed of any changes in the status of the loan.

A physical measurement of property done by a registered professional showing the dimensions and location of any buildings as well as easements, rights of way, roads, etc.

Tax Deed
A written document conveying title to property repossessed by the government due to default on tax payments.

Tax Savings
The amount of money that the homeowner is not required to pay the government in taxes because he or she owns a home.

As a part of PITI, the amount of the monthly mortgage payment which does not include the principal, interest, and insurance.

Joint Tenancy - equal ownership of property by two or more parties, each with the right of survivorship. Tenancy by the Entireties - ownership of property only between husband and wife in which neither can sell without the consent of the other and the property is owned by the survivor in the event of death of either party. Tenancy in Common - equal ownership of property by two or more parties without the right of survivorship. Tenancy in Severalty - ownership of property by one legal entity or a sole party. Tenancy at Will - a license to use or occupy a property at the will of the owner.

A formal document establishing ownership of property.

A professional who approves or denies a loan to a potential homebuyer based on the homebuyer's credit history, employment history, assets, debts and other factors such as loan guidelines.

Uniform Settlement Statement
A standard document prescribed by the Real Estate Settlement Procedures Act containing information for closing which must be supplied to both buyer and seller.

A USDA home loan from the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, is a mortgage loan offered to rural property owners by the United States Department of Agriculture.

Utility Costs
Periodic housing costs for water, electricity, natural gas, heating oil, etc.

VA Loan
A VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs (VA). The loan may be issued by qualified lenders. The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry).

Veterans Administration (VA)
The federal agency responsible for the VA loan guarantee program as well as other services for eligible veterans. In general, qualified veterans can apply for home loans with no down payment and a funding fee of 1 percent of the loan amount.

Walk Through
The final inspection of a property being sold by the buyer to confirm that any contingencies specified in the purchase agreement such as repairs have been completed, fixture and non-fixture property is in place and confirm the electrical, mechanical, and plumbing systems are in working order.

Warranty Deed
A document protecting a homebuyer against any and all claims to the property.

The rate of earnings from an investment.

The ability of local governments to specify the use of private property in order to control development within designated areas of land. For example, some areas of a neighborhood may be designated only for residential use and others for commercial use such as stores, gas stations, etc.