Real Estate Glossary

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

Acceleration Clause Allows a lender to declare the entire outstanding balance of a loan immediately due and payable should a borrower violate loan provisions or default on the loan.

Adjustable Rate Mortgage (ARM) A variable or flexible rate mortgage with an interest rate that varies according to the financial index it is based upon. To limit the borrower’s risk, the ARM may have a payment or rate cap.

Adverse Selection With respect to mortgage pricing, a process that results in lenders obtaining only the “worst” loans. For example, a lender using average cost pricing is taking a risk that the best loans will go to a competing firm that uses risk-based pricing to offer those borrowers a lower interest rate. The remaining business available to the cost-based pricing company represents an “adverse” pool of loans.

Affordable Gold Freddie Mac’s family of mortgage products designed specifically to meet the needs of lower-income borrowers who typically earn 100 percent or less of area median income.

Amenities Features of your home to your preferences that can increase the value of your property. For example number of bedrooms, bathrooms, vicinity to public transportation, school district etc.

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

Annual Cap See Cap.

Annual Percentage Rate (A.P.R.) The actual interest rate, accounting for points and other finance charges, for the projected life of a mortgage. Disclosure of APR is required by the Truth-in-Lending Law and allows borrowers to compare the actual costs of different mortgage loans.

Appraisal An estimate of a property’s value on a given date, determined by a qualified professional appraiser. The value may be based on the replacement cost, the sales of comparable properties or the property’s ability to produce income.

Appreciation Increase in the value of the property due to inflation, rising demand or other economic factors.

Arrearage Amount borrower owes to lender for missed payments and the associated costs of collecting the debt.

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

Asset-Backed Security (ABS) Debt obligation repaid from the future cash flows of different types of property or rights. This type of security often carries credit enhancements that limit investor exposure to the credit risk of the seller.

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

Assumption 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 the terms of 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 Mortgage Mortgage with a final lump-sum payment that is greater than preceding payments. The lump-sum payment is required to pay the loan in full. This is most often used in commercial loans. And when the balloon comes due, the borrower usually refinances.

Basis Point One one-hundredth of a percent; for example, 100 basis points equals 1 percentage point. Often used as a unit of measurement to convey differences in mortgage-interest rates.

Biweekly Mortgage A loan requiring payments of principal and interest at two-week intervals. This type of loan amortizes much faster than monthly payment loans. The payment for a biweekly mortgage is half what a monthly payment would be. However, since there are 52 weeks in a year, the borrower ends up making payments equivalent to 13 monthly payments over the course of a year.

Bond 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. This is sometimes called as a swing loan.

Broker An intermediary between the borrower and the lender or between buyer and seller. The broker may represent several lending sources in the case of mortgages or several buyers or sellers in the case of real estate sales. The broker charges a fee or commission for his or her services.

Buy-down Where the buyer pays additional discount points for a below-market interest rate. During times of high interest rates, buy-downs may induce buyers to purchase property they may not otherwise have purchased or qualified for.

Call Option The right, but not the obligation, to buy something at a specified price in the future. A mortgage essentially gives the borrower a call option on the loan because the homeowner can refinance at any time without triggering a prepayment fee, unless the loan is a prepayment-protection mortgage. [See lease option.]

Cap A cap is a limit on the monthly payment. An Interest Rate Cap is a limit on the amount of the interest rate. A Payment Cap is a limit on the monthly payment. A life-of-Loan Cap restricts the amount the interest rate or monthly payment or both can increase over the entire term of the loan. An Annual Cap limits the amount the interest rate, payment, or both can increase over a twelvemonth period. A periodic payment cap without a periodic interest rate cap can lead to negative amortization. [See negative amortization.]

Cash-Out Refinance A refinance transaction resulting in a new mortgage that is larger than the outstanding balance of the old mortgage. Excess loan proceeds represent additional property equity the borrower has converted to debt to use for other purposes.

Certificate of Reasonable Value (CRV) A Veteran’s Administration appraisal that determines/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.

Closed-end Mortgage A mortgage in which the principal amount is fixed and cannot be increased during the life of the loan.

Closing Costs Costs payable by both seller and buyer at the time of closing or settlement. These costs (for buyer and seller combined) can be up to ten percent of the purchase price and usually include but are not limited to the following:

Fees Paid to the Lender Loan Origination fee Discount points Credit report fee Appraisal fee Assumption fee if loan is assumed

Fees Paid in Advance Interest from the closing date to the beginning of the 1st payment Hazard insurance premium Mortgage insurance premium

Other Charges Title search and title insurance Sales commissions Legal and recording fees Inspection and survey fees Property taxes and other adjustments Processing and document preparation/handling fees

Cloud A claim against the title of a property that, if valid, would prevent a purchaser from obtaining a clear title.

Collateral Something of value pledged as security for a loan. In mortgage lending, the property itself serves as collateral for a mortgage loan.

Collateralized Mortgage Obligation (CMO) Type of bond that divides cash flows from a pool of mortgages into multiple classes with different maturities or risk profiles.

Commitment Fee A fee charged when an agreement is reached between a lender and a borrower for a loan on specific terms.

Community Reinvestment Act (CRA) 1977 federal law requiring depository institutions to serve the credit needs of the communities in which they do business, including low- and moderate-income communities. Regulators’ approval of mergers and expansions is determined partly by assessments of CRA compliance.

Co-mortgagor One who is individually and jointly obligated to repay a mortgage loan and shares ownership of the property with one or more borrowers.

Comparative Market Analysis A method for gauging the fair market value of a property by comparing it with recent sales of similar properties in the same neighborhood. A CMA can often be provided by a real estate agent free of charge or for a nominal fee and is not as comprehensive as an appraisal. Banks will only accept appraisals by their approved appraisers for underwriting purposes. They will not accept CMAs.

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

Conforming Mortgage (Loan) A loan that conforms to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines and the original mortgage amount does not exceed an annually adjusted dollar threshold. In 2003, for example, the conforming-loan limit for a one-family home is $322,700. For two-family properties, the limit is $413,100; for three-unit properties, it is $499,300, and four Four-unit properties, it is $620,500. Limits in Alaska, Hawaii, Guam and the U.S. Virgin Islands are 50% higher.

Construction Loan A short-term loan financing for improvements to real estate, such as the building of a new home. The lender advances funds to the borrower as needed while construction progresses. Upon completion of the construction, the borrower must obtain permanent financing or pay the construction loan in full.

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).

Contract Rate Actual interest rate, as specified in the mortgage note that the borrower has agreed to pay.

Conventional Mortgage Home Price Index (CMHPI) Index jointly developed by Freddie Mac and Fannie Mae to track changes in the prices of detached, one-unit, single-family homes that serve as collateral for mortgages funded by the two secondary-mortgage-market firms. The index is constructed using regression techniques and observations of actual sales prices or appraised values for the same homes over time. After identifying consecutive transactions by matching street addresses, price changes are calculated for each set of consecutive events pertaining to the same property. The CMHPI database contains records of more than 11.4 million repeat-transactions.

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 time in the loan term.

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

Counterparty Opposing party in a financial transaction.

Covenants Rules and restrictions governing the use of property.

Credit Markets Marketplace in which investors trade securities on the basis of their respective appetites for return versus the risk of default.

Credit-Rating Agency A firm that supports lenders and investors in mortgages by analyzing, reporting and monitoring the credit risk of borrowers. The agency formulates a relative credit rating after collecting and analyzing relevant credit-related information. Investors use the rating to help determine whether to invest in that mortgage.

Credit Risk Chance of loss to an investor arising from the loan default of a borrower who fails to make promised interest.

Credit Score S tatistical summary of information contained in an individual’s credit report that serves as a measure of the person’s creditworthiness. It is calibrated to predict a certain type of outcome, such as a default on a mortgage or a declaration of bankruptcy. The most commonly used credit score is the FICO score. The acronym comes from Fair, Isaac & Co., which developed a credit-rating system that all the major credit-reporting agencies have adopted.

Credit Spread Difference between the interest rate on an asset and an analogous riskfree asset, such as a Treasury security. The wider the spread, the greater the investor’s return, or compensation, for taking on the higher credit risk of investment asset. Also considered a measure of relative credit risk.

Credit Union Cooperative organization of stockholding consumer members joined by a common bond, such as employment, association or residence. The institution serves members only, taking their deposits and extending mortgages and loans to them.

Credit-Bureau Score Statistical summary of information contained in an individual’s credit report that serves as a measure of the person’s creditworthiness. When used in the mortgage-lending industry, the score is calibrated to predict the likelihood of a loan going into default. For example, Fair, Isaac & Co., one of the country’s more prominent scoring-system developers, employs a spectrum of “FICO” values that range from an extremely high-default-risk score of around 350 to an extremely low-default-risk score of 850.

Cure When a borrower makes restitution for loan arrearages by repaying missing installments, refinancing the loan or paying off the mortgage by selling the collateral property.

Curtailments The borrower’s privilege to make payments on a loan’s principal before they are due without pre-payment penalty. Paying off a mortgage before it is due may incur a penalty if so specified in the mortgage’s prepayment clause.

Debt Money owed to someone.

Debt Ratio Measure used by lenders to gauge the ability of a borrower to repay a mortgage. The measure takes two forms. The housing expense ratio (or front-end ratio) reflects how much of a borrower’s monthly income would go toward paying the principal, interest, taxes and insurance (PITI), plus any homeowner dues or condo maintenance fees. The total obligations ratio (or back-end ratio) expresses how much of monthly income would go toward making payment on all debts, including PITI and adding all installments and revolving debt such as car payments and credit cards. Generally, lenders prefer to approve borrowers with a housing expense ratio of 28 percent or less and a total obligations ratio of 36 percent or less. However, a growing number of new loan programs are providing greater latitude in these areas.

Debt Restructuring Term used in commercial real estate lending when a lender agrees to modify the terms of a loan, given the inability of the borrower to repay the debt as agreed. Often, the debt is restructured to include unpaid interest, penalties and other fees, and the borrower is given an extended time to pay. Debt restructuring also can include a new mortgage rate.

Deed of Trust A document, used in many states in place of a mortgage. The deed is held by a trustee pending repayment of the loan. The benefit 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.

Default When a borrower fails to make timely payments or is otherwise in breach of the terms of a mortgage loan, thereby entitling the lender to initiate foreclosure proceedings.

Default Risk Chance of loss to an investor arising from a borrower’s failure to make promised interest or principal payments when due. Default risk is the principal type of Credit Risk.

Deflation Decrease in the economy’s general price level, as measured, for example, by the consumer price index.

Delinquency Delinquency occurs when all or part of the borrower’s monthly installment of principal and interest remain unpaid after the due date.

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

Department of Veterans Affairs (VA) Federal agency that, among its functions, provides lenders with partial guarantees for mortgage financing offered to eligible veterans.

Deposit Insurance Government-backed insurance of banks, thrifts and credit unions that protects depositors in the event of an organization’s failure. The fund, financed through premiums charged to insured institutions, currently covers losses up to $100,000 per deposit account.

Depreciation Decline in the value of a property or other asset. Also, a tax deduction. Investors in real property may deduct annual depreciation (a non-cash cost) from their rental income.

Desktop Underwriter Fannie Mae’s automated underwriting program. Approved lenders can use this software to approve a buyer per Fannie Mae guidelines without having to go to Fannie Mae for approval, expediting the loan process.

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, one point on a $200,000 mortgage is $2,000.

Down Payment The difference between the purchase price and mortgage amount. The down payment is the owner’s initial equity in the property. Typically it should be cash savings, but — with some loans — it can also be a gift from a third party or borrowed money secured by assets.

Due Date Contractually established date, often the first day of the month, at which time a mortgage borrower must make scheduled monthly payments.

Dual-Indexed Mortgage Adjustable mortgage built around two variable indexes: the interest rate shifts in response to changes in market interest rates; and the borrower’s monthly payment fluctuates with wage changes.

Due-on-Sale 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.

Duplex Dwelling divided into two units.

Earnest Money Deposit in the form of cash or a note, given to a seller by a buyer as good faith assurance that the buyer intends to complete all the transactions for the purchase of a property.

Easement The right one party has in regard to the property of another, such as the right of a public utility company or a cable/telephone company to lay lines.

Equal Credit Opportunity Act A federal law prohibiting borrowers from discrimination based on race, color, sex, religion, national origin, age, marital status, receipt of public assistance or because an applicant has exercised his or her rights under the Consumer Credit Protection Act.

Equity The value of a property beyond any liens against the property. This is also sometimes referred to as owner’s interest.

Escape Clause A provision that will cancel all, or part of the contract, if certain events happen or fail to happen. For instance, upon inspection of a property by a professional, most contracts allow the buyer to cancel his offer to purchase the property without penalty if significant defects have been found with the property. Similarly, if a buyer fails to obtain financing within a specified period, most contacts allow the buyer, seller, or both to cancel the purchase contract without penalty.

Escrow Money placed with a third party either for final closing on a property or for payment of taxes and insurance throughout the year.

Factory-Built Housing Generic term for the type of housing constructed in a factory and transported to a residential site, as opposed to assembled piece by piece at the construction site. Examples of factory-built housing include manufactured, modular and panelized housing.

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

Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) A quasi-governmental, federally sponsored organization that acts as a secondary market investor to buy and sell mortgage loans. FHLMC sets many of the guidelines for conventional mortgage loans, as does FNMA.

Federal Housing Administration (FHA) An agency within the Department of Housing and Urban Development that sets standards for underwriting and insures residential mortgage loans made by private lenders. FHA’s purported goal is to ensure affordable mortgages to those with low or moderate income. FHA loans may be high loan-to-value (up to 97.75% of purchase price). There are limits to the maximum loan amount. For instance, in 2003, the maximum loan amount for single-family residences in much of New York State was $155,000. Yet, in New York’s most expensive counties — those limits were approximately $281,000. FHA mortgage insurance requires a fee (1.5% of the loan amount) to be paid at closing, as well as an annual fee (0.5 percent of the loan amount) added to each monthly payment.

Federal National Mortgage Association (FNMA or Fannie Mae) A private corporation that acts as a secondary mortgage investor to buy and sell mortgage loans. FNMA is the largest buyer and seller of mortgages in the country. As such, it sets many of the guidelines for conventional mortgage loans, as does FHLMC.

Fee Simple The maximum form of ownership, with the right to occupy a property and sell it to a buyer at any time. Upon the death of the owner, the property goes to the owner’s designated heirs. This term is also known as Fee Absolute.

FICO Credit Score Statistical credit evaluation score provided by Fair, Isaac and Co., one of the country’s leading scoring-system developers. The spectrum of “FICO” values ranges from a high default-risk score of around 00 to a low defaultrisk score of around 850. Generally, the higher your FICO score, the lower your interest rate will be.

Fifteen-Year Mortgage A loan with a term of 15 years. Although the monthly payment on a 15-year mortgage is higher than that of a 20 or 30-year mortgage with the same interest rate, the amount of interest paid over the life of the loan is substantially less.

Fixed-rate Mortgage A mortgage where the interest rate remains constant throughout the life of the mortgage.

Flood Insurance The Federal Flood Disaster Protection Act of 1973 requires that federally regulated lenders determine if real estate/property to be used to secure a loan is located in a Specially Flood Hazard Area (SFHA). If the property is located in a SFHA area, the borrower must obtain and maintain flood insurance on the property.

Foreclosure A legal proceeding initiated by a lender to take possession of the collateral property to secure a defaulted mortgage, or initiated by another lien-holder (such as the county or federal government for failure to pay taxes).

Forward Loan Commitment Legally binding contract to provide a loan at some future point. For example, a lender might agree to provide a long-term mortgage to replace a short-term construction loan once a rental project under construction is completed, occupied and leased.

Fully Indexed Rate Interest rate on an adjustable-rate mortgage that is determined by the value of the underlying index plus the margin — but before lifetime or periodic rate caps, are applied.

Funding Risk Probability that interest rates will rise, making it more expensive for investors to fund mortgages or more costly for investors to hold fixed rates of return when higher-yield opportunities become available.

Ginnie Mae Federal government corporation that issues and guarantees securities backed by residential mortgages insured or guaranteed primarily by the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA). Ginnie Mae, officially known as the Government National Mortgage Association, was created in 1968.

Gift Gift 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. Gifts can be used as partial down payments in certain loan programs.

Good Faith Estimate Federally required estimate on closing costs and monthly mortgage payments provided by the lender to the homebuyer within 3 days of applying for a loan.

Government-Backed Mortgage Residential loan insured or guaranteed by the federal government against borrower default through programs administered by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or Rural Housing Service (RHS) programs.

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.

Government-Sponsored Enterprise (GSE) Any entity created by Congress that operates with private capital under a government-defined mission and charter. Housing-related GSEs include Freddie Mac and Fannie Mae, even though both are now fully privately owned corporations.

Grace Period In the mortgage business, a time interval specified by the lender that begins the day after the official mortgage due date and typically runs for one or two weeks. When a borrower fails to make the scheduled payment by the conclusion of the grace period, a late fee is imposed.

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.

Guarantee With respect to mortgage-backed securities, a pledge to investors that the issuing company will bear the default risk on the collateral pool of loans, thereby ensuring the timely payment of principal and interest owed to investors.

Guarantee Fee Compensation charged for undertaking responsibility for another’s debt. The original debtor still is liable for payment, but the guarantor must honor the obligation if the debtor defaults. Secondarymortgage- market companies charge guarantee fees — typically about one quarter of a percentage point of the loan amount for bearing the default risk on loans pooled into securities.

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 mortgage on the borrower’s principal residence, usually for the purpose of making home improvements or debt consolidation.

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.

Homeowners Insurance A form of insurance that protects the insured property against loss from theft, liability and most common disasters.

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

Housing Affordability Index Indicates what proportion of homebuyers 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.

HUD Code Name by which the Federal Manufactured Home Construction and Safety Standards law is known because it is administered by the Department of Housing and Urban Development (HUD). The code, first drawn up in 1976, addresses design, construction techniques, strength and durability issues, fire resistance and energy efficiency.

Income Approach to Value A method used by real estate appraisers to predict a property’s anticipated future income. The income propertyappraisal approach is often used with shopping centers, hotels, motels, restaurants, apartment buildings, and office space, though it can also be used with residential properties, in addition to the comparable sales appraisal approach.

Index A widely 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).

Inflation Overall upward price movement of goods and services in an economy, usually as measured by the growth rate in the Consumer Price Index (CPI) from 12 months earlier.

Initial-Adjustment Period Interval of time from the origination of an adjustable-rate mortgage (ARM) to the first scheduled adjustment. The loan’s initial interest rate is locked in place for a designated time frame, for example, one, three, five or 10 years. At the end of that time, the rate adjusts to reflect prevailing market interest rates.

Initial Interest Rate Interest rate, often discounted below the fully indexed rate, which is in effect during the period before the first rate change of adjustable-rate mortgage (ARM).

Institutional Investor Securities buyer acting on behalf of an institution, such as an insurance company, bank, pension fund or mutual fund. Institutional investors often buy mortgage loans originated by banks and other lenders.

Insurance As a part of PITI (Principal, Interest, Taxes, Insurance), the amount of the monthly mortgage payment that does not include the principal, interest, and taxes.

Interest The amount of the entire mortgage loan that does not include the principal. Also, as a part of PITI, the amount of the monthly mortgage payment which does not include the principal, taxes, and insurance.

Interest Cap See Cap.

Interest Rate The simple interest rate, stated as a percentage, charged by a lender on the principal amount of borrowed money.

Interest-Rate Cap Limit on the amount an interest rate may increase and/or decrease during an adjustment period or over the life of an adjustable-rate mortgage (ARM).

Interest-Rate Ceiling A provision in an adjustable rate mortgage that protects the borrower from a rise in a particular interest rate above a certain level.

Interest-Rate Floor A provision in an adjustable rate mortgage that protects the lender from a decline in a particular interest rate below a certain level.

Interest-Rate Risk A mortgage investor’s risk of loss due to fluctuations in interest rates that cause a change in the value of a mortgage or other fixed-income instrument. Generally, a rise in rates causes a decline in the price of an existing mortgage, while a decline in rates causes a rise in its market value.

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. For instance, in 2003 the FNMA loan limit for single-family homes in the contiguous US states was $322,700. A loan for a single family home that was larger than that amount in those states would be a jumbo loan.

Junk Bonds Non-investment debt obligations bearing a high degree of default risk. Also, known as “high-yield” bonds.

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

Late-Fee Assessment Date Point at which the grace period ends and the borrower must pay a late charge for failing to pay a regular installment payment when due. Generally, the fee is calculated as a percentage typically in the range of 1 percent to 5 percent of the monthly payment. For example, if a monthly payment is due on the first of the month, and a borrower is given a 15-day grace period, the late-fee assessment date would fall on the 16th of the month.

Lease An agreement between landlord and tenant conveying the right to use and possess a particular property for a stated period of time for a stated rent.

Lease Option A lease contract where the lessee has the right but not the obligation to purchase the leased property at a pre-determined price by a certain date. Typically, portions of the Lessee’s monthly lease payments are applied towards the down payment — if the lessee decides to execute this option.

Leverage The practice of using borrowed money for investment purposes. A person who borrows 80% of the purchase price of a property is said to be using a leverage ratio of 4 to 1, that is, four parts borrowed money to one part his own capital. A person who borrows 90% of the purchase price is using a leverage ratio of 9 to 1.

LIBOR Rate (London Interbank Offer Rate) Average of daily lending rates from several major London banks. It reflects the interest rate that creditworthy international banks dealing in Eurodollars would charge each other on a large loan. It is commonly used as an international interest-rate index, increasingly employed for ARMs.

Lien A claim against a property for the payment of a debt. A mortgage is a lien; other types of property liens include a tax lien for unpaid taxes or a mechanics lien for unpaid debt to a contractor.

Liquidity The capability of an asset to be readily converted into cash. Real estate is not considered a liquid investment.

Liquidity Risk Chance of loss due to a firm’s inability to quickly convert non-cash assets into cash or to obtain cash to pay upcoming debts. Real estate is generally an illiquid asset. It often takes months to sell a piece of property and there are significant transaction costs involved.

Loan Modification Restructuring of a mortgage for a borrower who faces a long-term financial problem but can demonstrate the ability to meet the modified payment terms. The modification can include lowering the original interest rate or extending the loan term in which the borrower has to repay the entire amount of the loan.

Loan Officer Employee at a loan company who works with individuals to identify and explain the various loan products available to mortgage borrowers. The loan officer typically conducts the initial review of the mortgage application.

Loan Processor Loan company employee who reviews the mortgage loan application and gathers required verifying documentation on the applicant and the real estate property.

Loan Prospector Freddie Mac’s automated underwriting service that tells a lender within minutes whether Freddie Mac will purchase a particular mortgage. This determination is based on pre-determined formulas for gauging the probability of whether the loan applicant will default or not on the loan. That probability is, based on an analysis of income, stability of income, net assets, credit history and the property information provided.

Loan-to-Value Ratio (LTV) The relationship expressed as a percentage, between the amount of the proposed loan and a property’s appraised value or purchase price, whichever is less. For example, a $150,000 loan on a property appraised at $200,000 is a 75% Loan-to-Value.

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

London InterBank Offer Rate See LIBOR

Loss Mitigation Agreement reached by a lender and borrower to satisfy a delinquent mortgage obligation through a course of action that serves as an alternative to foreclosure. These efforts can range from simply bringing the loan immediately current to working out an alternative repayment plan.

Low Income Term, often used in the public policy arena, to designate households earning 80% or less of area median income. Some special loan programs are restricted to low-income and median-income applicants.

Maintenance Costs Maintenance cost is the cost to maintain or upkeep a property. These costs may be minor in cost and nature (replacing door knobs) or major in cost and nature (new air conditioning system heating system or a new roof) and can apply to either the interior or exterior of the house.

Manufactured Housing Housing structures built in accordance with the HUD code. Unlike other forms of housing built to a state or local construction code, manufactured housing units must have an integral chassis and must be transported on their own axles and wheels in one or more sections from the factory.

Margin The amount a lender adds to the index of an adjustable rate mortgage to establish an adjusted interest rate. For example, a margin of 2.00 added to a 5.5 percent index establishes an adjusted interest rate of 7.50 percent.

Market Break Sudden, large price move, either up or down.

Market Risk Chance of loss due to changes in interest rates, exchange rates, commodity prices or stock prices. Both the volatility of these market prices and the sensitivity of an investor’s portfolio value to these movements determine his or her market-risk exposure.

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

Minimum Capital Standard Capital-adequacy measure of the least amount of capital required by regulators of a financial institution to offset the firm’s risk of generating losses to the depository-insurance fund (and therefore to taxpayers). For Freddie Mac and Fannie Mae, this level is roughly equal to 2.5 percent of aggregate on-balance-sheet assets and 0.45 percent of the unpaid principal balance of outstanding mortgage-backed securities.

Mobile Home Manufactured-housing unit that either was built before 1976 or does not comply with the HUD code.

Moderate Income Term, often used in the public policy arena, to designate households earning more than 80 percent but no more than 100 percent of area median income.

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

Modular Housing Residential structures built in sections in a factory and then transported by trailer to home sites, where they are lifted onto foundations and permanently anchored.

Mortgage A legal instrument in which property serves as security for the repayment of a loan. In some states, a deed of trust is used rather than a mortgage.

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. Private Mortgage Insurance (PMI) is required on conventional loans with less than a 20 percent down payment. The FHA requires a Mortgage Insurance Premium (MIP) 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-Backed Security (MBS) Financial instrument representing an interest in a pool of loans secured by mortgages. Principal and interest payments on the underlying mortgages are used to pay principal and interest on the securities. The generic term encompasses pass through securities and mortgage backed bonds. Freddie Mac and Fannie Mae guarantee the timely payment of principal and interest on the mortgage-backed securities they issue.

Mortgage Term The length of time that a mortgage is scheduled to exist. At the end of the term, the mortgage loan is paid in full — either through amortization or a final balloon payment. The most common mortgage term for residential mortgages is 30 years.

Mortgage Underwriter Loan company employee — or an independent agent contracted by the lender — who reviews a loan applicant’s credit, loan repayment ability and the value of the collateral property to assess the amount of risk involved in making a loan. Based on the risk analysis, an underwriter recommends whether the lender should make or reject the mortgage and may match the risk to an appropriate rate of interest and term structure.

Mortgagee The lender.

Mortgagor The borrower.

Multi-Lender Platform World Wide Web site established as a cooperative venture between several lenders, where borrowers can review a broad selection of mortgage products and rates and use different analytical tools to best match a loan product with their needs.

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, therefore, may end up owing more than the original amount of the mortgage — even though the borrower has made all required payments on time.

Negative Equity Condition achieved when the market value of a property declines to a point below the outstanding loan balance on the property. For example, suppose a borrower puts down $25,000 to buy a home, and the value of the property promptly declines by more than $30,000. The negative equity would amount to $5,000 in this case. If the borrower were to sell the property today, he would owe $5,000 more than he would receive for the property (not counting closing costs).

No-Closing-Cost Mortgage Loan that transfers to a lender the borrower’s responsibility to pay the fees associated with executing a mortgage. This arrangement frees borrowers of the need to bring cash to the closing.

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. It is usually reflected in the Due-on-Sale clause.

Non-conforming Loan A loan that does not conform to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. For example, jumbo loans are nonconforming.

Non-callable Debt Liability that prohibits the issuer from redeeming the debt before the scheduled maturity date.

Non-performing Loan Mortgage that is in foreclosure or is past due according to the terms of the note.

Note 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. As the borrower gains equity in the property through appreciation and amortization, an open-end mortgage gives the borrower the ability to obtain advances on the original loan.

Origination Fee The amount charged by a lender to originate and close a mortgage loan. Origination fees are usually expressed in points (each point equals 1% of the loan amount e.g. one point on a loan amount of $100,000 will cost $1,000).

Option Contract An agreement giving an investor the right but not the obligation to buy a property at a prearranged price within a specified time period. The optionee pays the option or (property owner) a fee for this right. (See Lease Option.)

Panelized Housing Residential structures built from wall panels assembled at the factory and then transported to the construction site.

Page 20 Participation Certificate (PC) Name by which Freddie Mac refers to mortgage securities issued and guaranteed by the company.

Payment Cap Limit on the amount a loan payment or interest rate may increase or decrease periodically or over the life of an adjustable-rate-mortgage.

Performing Loans Mortgages that are being repaid as scheduled.

Personal Cash As defined by Freddie Mac’s underwriting guidelines, the following loan-applicant funds can count as part of a borrower’s down payment: savings, checking account money on deposit, loan proceeds when fully secured by the borrower’s owned assets, proceeds from the sale of owned assets, net proceeds from the trade-in of a prior home, prior rent credit, trust fund disbursements, verifiable cash deposits and pooled funds from extended family members. The value of lots owned by the loan applicant qualifies as well.

P&I Abbreviation for principal and interest.

PITI Abbreviation for principal, interest, taxes and insurance.

Points Charges levied by the lender based on the loan amount. Each point equals one percent of the loan amount; for example, three points on a $100,000 mortgage is $3,000. Discount points are used to buy down the interest rate. Points can also refer to loan origination fees, which are often charged as percentage points of the loan amount.

Pool Insurance Credit enhancement that lowers the cost of default insurance for liabilities that are grouped together. The collateral required for each loan can be reduced when loans are part of a pool because the chance of a single loan going into default is higher than the chance of all loans in a pool going into default, assuming the reasons for default are unrelated.

Pre-approval Process where a lender takes information from you regarding income, assets, credit history and other matters related to your ability to pay back a mortgage loan. The information is verified by your providing supporting documents, including income tax returns, pay stubs, bank statements, etc. Based on the documentation you provide, the lender indicates a willingness to lend you a certain amount of money on qualifying properties. A pre-approval letter from a lender lets sellers know you are a serious buyer, and is stronger than a pre-qualification letter. (See Pre-qualification.)

Prepayment Payoff of the remaining principal balance of a loan occurring before the stated maturity date. Also can refer to an amount paid to reduce the principal balance of a loan in excess of the agreed-upon amortization schedule.

Prepayment Risk Risk to the lender that it will receive either full or partial principal payments before they are due. A full prepayment often results from the sale or refinance of a mortgaged property. A partial prepayment typically occurs when a borrower applies additional money toward the reduction of the principal owed on a mortgage. Prepayments also create reinvestment risk, given the possibility that an investor must reinvest the prepaid principal at a lower interest rate than the first investment was paying.

Pre-qualification Process where a lender takes information from you regarding income, assets, credit history and other matters related to your ability to pay back a mortgage loan. The information is taken at face value and is not yet verified at the pre-qualification stage. Based on the information you provide, the lender indicates the loan amount you can qualify for and the best type of loan to meet your particular needs. A pre-qualification letter from a lender can let sellers know you are a serious buyer, but it is not as strong as a pre-approval letter. (See Pre-approval.)

Present Value Concept used by financial analysts to account for the fact that a dollar today is worth more than a dollar at some point in the future. Calculating the present value of future income involves discounting future payments by an interest rate equal to the opportunity cost of funds.

Prime Mortgage Market Main residential mortgage market, which primarily deals with lending business that is highly creditworthy and therefore represents the least risk of borrower default. Prime Rate The interest rate commercial banks charge their most creditworthy customers. Many adjustable rate mortgages use the prime rate as their index.

Principal The amount of the entire mortgage loan, not counting interest. Also, as a part of PITI, the amount of the monthly mortgage payment that goes towards reducing the loan balance.

Private Mortgage Insurance Credit enhancement required by a lender, typically on mortgages with down payments of 20 percent or less. Generally, the borrower pays a monthly premium to offset the risk of loan losses to the lender or investor in the event the borrower defaults.

Page 22 Private-Label Issuer Companies other than Freddie Mac, Fannie Mae and Ginnie Mae that create and sell mortgage-backed securities or other bonds. Private-label mortgage-backed securities frequently are collateralized by loans that are ineligible for purchase by Freddie Mac.

Private-Label Security In the housing-finance business, a mortgage-backed security or other bond created and sold by a company other than a government-sponsored enterprise. The security frequently is collateralized by loans that are ineligible for purchase by Freddie Mac or Fannie Mae.

Property Tax The amount that the state and/or locality assesses as a tax on a piece of property.

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

Purchase-Money Mortgage Seller financing in the sale of a property, as opposed to a mortgage obtained through a bank, S&L or other third-party.

Qualification The ability of the borrower to repay a mortgage loan based on the borrower’s credit history, employment history, assets, debts and income. It is determined by the lender’s underwriter.

Real Appreciation Home-price appreciation less general consumer price inflation.

Real Estate Investment Trust (REIT) A trust created for the purpose of investing in real estate. Many large REITs are traded on public stock exchanges.

Real Estate Settlement Procedures Act (RESPA) 1974 law requiring mortgage lenders to provide borrowers with advance disclosures regarding loan settlement costs and charges as well as information about the settlement itself. RESPA prohibits fees for referring settlement business.

Real Interest Rate The nominal interest rate minus the inflation rate.

Real Terms Price changes expressed in constant purchasing-power dollars. The value of an object, such as a home, is measured relative to the value of a fixed bundle of goods and services, thus removing the contribution of inflation and isolating the real price change.

Receivership Clause A provision in a mortgage that allows the lender (with judicial approval) to take over an income-producing property that is in default until the default is cured or the property is sold at a foreclosure auction.

Recourse In mortgage finance, a liability arising when a lender or investor sells a loan but remains responsible for the payment of any outstanding debt in the event of its default. By contrast, a mortgage sold without recourse means the new holder bears the default risk.

Refinance The process of replacing an existing mortgage loan with a new one.

Refinancing Incentive Financial benefit obtained by a borrower from refinancing an existing mortgage. Measured as the benefits gained from trading an existing mortgage for a new mortgage with a lower interest rate, different term, or different structure and clauses.

REO (Real-Estate Owned) Residential property acquired by a lender or investor in mortgage notes through a foreclosure in satisfaction of a mortgage debt. The property is then held in the investors’ inventory of foreclosure homes until it is sold.

Repayment Plan Agreement reached between lender and borrower that increases the size of the borrower’s monthly loan contributions for a period of time until arrearages are repaid.

Repeat-Mortgage Transaction Refers to a property for which Freddie Mac has funded at least two loans over time for either acquisition or refinancing purposes. Freddie Mac maintains a loan-level database of these transactions that includes information about the terms of the old and new mortgages and the amount of appreciation on the property since the origination of the old mortgage.

Reserves Cash-equivalent assets available to a borrower at settlement after all closing funds are deducted. One month’s reserve is equal to one monthly mortgage payment (including PITI). Reserves generally must be verified as a condition of obtaining a home loan.

Reverse Annuity Mortgage A type of mortgage loan, primarily for senior citizens on fixed incomes, in which the lender makes periodic

Page 24 payments to the borrower. The borrower’s equity in the home is used as security for the loan.

Right of First Refusal The contractual right (but not an obligation) to purchase a property under conditions and terms offered 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 the loan documents to rescind or cancel the transaction. Any and all money paid by the borrower must be refunded upon rescission.

Rural Housing Service Program within the U.S. Department of Agriculture that insures and guarantees mortgages on residences located primarily in rural areas and owned by low- and moderate-income borrowers. It is the successor to the Farmers’ Home Administration loan program.

Seasoned Loan Any loan more than one year old.

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 primary lenders and sell them to other investors.

Serious Delinquency Point at which a mortgage payment is overdue by at least 90 days or a loan has entered into foreclosure.

Servicer Company that manages the mortgage payment process. This includes the routine collection of monthly payments from borrowers, transferring principal and interest to investors, overseeing escrow accounts and handling delinquency foreclosure problems that may arise. Lending firms that originate mortgages occasionally run in-house servicing operations but frequently contract with outside firms to have the loans serviced.

Servicing 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.

Settlement Costs Same as closing costs.

Short Payoff Sale Transaction in which an investor such as Freddie Mac accepts less than the full amount of a mortgage in exchange for a quick sale of the house by the borrower before a pending foreclosure occurs.

Site-Built Housing Residential structures built to state or local construction standards that are constructed (stick-built) or assembled (modular or panelized) at the property site.

Spread The difference in yields of one security or mortgage versus another. The most commonly used spread is the yield premium of any given security or mortgage over U.S. Treasury securities.

Standard Mortgage Loan made in accordance with generally accepted underwriting criteria for qualifying borrowers of all income levels.

Starting Rate See Initial Interest Rate

Structured Note Financial instrument in which the interest rate or maturity is linked to some external factor, which, for example, could be a time-period trigger or a different interest-rate index.

Subordinated Debt Debt that carries a lower-priority claim on issuer’s income or assets than that of other (senior) debt.

Subprime Mortgage Market A market niche, which finances mortgages that do not meet traditional underwriting standards. This market serves borrowers who have past credit problems or unconventional borrowing needs.

Survey 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, setbacks, etc.

Sweat Equity Under certain mortgage programs, credit given toward a down payment for labor performed on the mortgaged premises by the borrower or for materials furnished by the borrower.

Targeted Mortgage Loan made under a special-affordable lending program limited to lower income households typically earning 100 percent or less of area median income and based on less strict borrower-qualifying criteria than is normally the case.

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

Tenancy 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.

Third-Party Credit Enhancement Agreement made by a party other than the issuer or the investor to boost the credit rating of an obligation by assuming some of the risk. Examples include Private Mortgage Insurance and a letter of credit issued by a bank promising to make good on a debt extended by another institution.

Title A bundle of rights that adhere to ownership of a property, including the rights to possess, modify, use and sell the property.

Title Insurance A policy issued by a title insurance company insuring the purchaser against any errors in the title search. The cost of title insurance may be paid for by the buyer, the seller or both.

Treasury Securities Bonds issued by the U.S. government to satisfy a variety of borrowing needs. The market views these securities as virtually free of risk because they are backed by the full faith and credit of the federal government. Treasury indexes are often used as indexes for adjustable rate mortgages.

Truth In Lending Act (TILA) The Truth In Lending Act requires lenders to disclose the Annual Percentage Rate and other associated costs such as estimated closing cost and escrow amount to homebuyers within three working days of the loan application.

Underwriter A professional who approves or denies a loan to a loan applicant based on the applicant’s credit history, employment history, assets, debts and other factors.

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.

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

Variable Rate Mortgage (VRM) Refer to the definition of adjustable rate mortgage.

Veterans Administration (VA) The federal agency responsible for the VA loan guarantee program as well as other services for eligible veterans. For qualifying veterans, the VA will guarantee up to 25% of a mortgage loan or $60,000 of a mortgage loan, whichever is less. In general, veterans can apply for home loans with no down payment.

Walk-Through A final inspection of a property by the prospective buyer prior to closing on a mortgage usually held on the same day of closing.

Warranty Deed A document whereby the grantor of the deed (the property seller) warrants to protect the grantee (the buyer) against any and all claims on the property.

Workout Agreement between a borrower (experiencing an involuntary but temporary financial setback) and the note-holder to help to bring a mortgage loan current.

Yield Rental income as a percentage of the cost of a property investment. It can be described as the gross yield — the gross rental income divided by the gross cost of the property. It can also be described as the net yield — income after all carrying costs (including the mortgage) and expenses as a percentage of the total out-of-pocket investment in the property.

Zoning The ability of local governments to specify the permissible use of private property in order to control development within designated areas. For example, some areas of a neighborhood may be designated only for residential use and others for commercial use such as stores, gas stations, repair facilities, warehouses etc. Others properties may be zoned for dual use — meaning the owner can use them as residential or commercial properties.