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Frequently Asked Questions
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601 VESTAVIA PKWY, VESTAVIA, AL. 35216
(205) 822-9322
Finance & Mortgages
Chapter 11 — Real Estate Finance & Mortgages
Tap or click a card to flip it.
1003 mortgage application form
The industry standard form used by nearly all mortgage lenders in the United States.
Acceleration clause
A clause stating that upon default the lender can demand immediate payment of the entire amount owed (remaining principal balance and interest).
Adjustable-rate mortgage loan (ARM)
A home loan with an interest rate based on an index and margin, causing the rate and payment amounts to vary; the margin is constant while the index is variable.
Amortized loan
A loan that is paid back in installments (payments) over a set amount of time.
Annual MIP
Required for FHA loans as part of MIP; a continuous fee paid over the lifetime of the loan, usually paid monthly.
Annual percentage rate (APR)
A percentage expressing the effective annual cost of borrowing, including all finance charges such as interest, prepaid finance charges, prepaid interest, and service fees.
Arrears
An expense paid after the service is rendered or the timeframe has passed; e.g., property taxes are paid in arrears (the year after).
Back-end ratio
The sum of all recurring debt payments (including PITI, student loans, auto loans, credit cards, etc.) divided by gross monthly income; an average limit is 42%, but varies by lender and loan type.
Balloon payment
A large payment usually at the end of a loan that pays the remaining principal balance due.
Beneficiary
The lender that holds the note and collects payments in a deed of trust loan.
Blanket loan (blanket mortgage)
A loan used to fund the purchase of more than one parcel of real property, all serving as collateral; popular with builders and developers who subdivide large tracts.
Bridge loan
A short-term loan used until permanent financing is secured or an existing obligation is removed, providing immediate cash flow to meet current obligations.
Certificate of Eligibility
Documentation from the Department of Veterans Affairs (VA) proving to a lender that a veteran has met the VA’s service requirement to receive a VA loan.
Certificate of Reasonable Value
A document issued by the VA that establishes the maximum value and loan amount for a VA loan.
Closing costs
The charges and fees paid when a house purchase is finalized.
Closing Disclosure (“CD”)
A five-page form providing final details about the mortgage loan, including terms, projected payments, and closing costs; must be given to the borrower three business days before closing.
Collateral
Something pledged as security for repayment of a loan, forfeited on default; in a mortgage loan the home serves as collateral.
Conforming loans
Loans that conform to Fannie Mae and Freddie Mac guidelines so they can be sold on the secondary mortgage market.
Construction loan (interim loan)
A non-amortized, short-term loan with a high interest rate used to finance building projects for a short period of time.
Consumer Financial Protection Bureau (CFPB)
A federal agency charged with overseeing financial products and services offered to consumers and the federal financial laws that protect them.
Conventional loan
A mortgage from a private lender not guaranteed or insured by any government agency; requires PMI when the down payment is less than 20%.
Credit history
A record of a consumer’s ability to repay debts and demonstrated responsibility in repaying them.
Debt ratios (debt-to-income ratios)
A percentage representing the borrower’s monthly financial obligations versus monthly income; two types are front-end and back-end ratios.
Deed in lieu of foreclosure
A situation where the borrower voluntarily relinquishes title to the lender to satisfy a defaulted loan and avoid foreclosure proceedings.
Deed of trust
A security instrument involving three parties: a borrower (trustor), lender (beneficiary), and impartial third party (trustee); once the loan is repaid, the trustee transfers bare title to the trustor via a release deed.
Defeasance clause (Paid in full clause)
A clause stating that when the loan debt is paid in full, the lender must release the property from the lien so the borrower can gain legal title.
Deficiency
The difference between what a property sold for at a foreclosure sale and the amount of the defaulted loan.
Deficiency judgment
A court judgment allowing the lender to collect the deficiency from the original borrower when a foreclosure sale doesn’t cover the amount owed.
Department of Veteran Affairs (VA)
A cabinet-level government agency providing healthcare and non-healthcare benefits to eligible veterans, including home loans.
Discount points
A fee charged by a lender to lower the interest rate for the borrower and increase the yield for the lender; one point costs 1% of the loan and lowers the rate by 0.125%.
Dodd–Frank Wall Street Reform and Consumer Protection Act
A 2010 federal act passed in response to the 2007–08 financial crisis that authorized the creation of the CFPB.
Down payment
A percentage the buyer pays out of pocket to the lender on the sale of the property; the amount depends on the type of loan.
Draws
Payments of funds in a construction loan.
Due-on-sale clause (alienation clause)
A clause stating that the lender must be paid in full when the property is sold.
Earnest money deposit (good faith deposit)
A sum a buyer pays when entering the contract to demonstrate that the buyer is serious about following through.
Entitlement
The total amount the VA will guarantee for a VA loan.
Equal Credit Opportunity Act (ECOA)
A federal law giving all legal individuals an equal opportunity to apply for loans by prohibiting credit discrimination based on race, color, religion, national origin, sex, marital status, age, or public assistance; enforced by the FTC.
Equitable right of redemption
The borrower’s right to keep the home by completely paying off the mortgage before the foreclosure process is finalized, even if the loan is in default.
Equitable title (equitable interest)
Title an individual holds while making payments on a loan, giving the right to enjoy the property without technically owning it; full legal title comes after the loan is paid.
Equity
The difference between the current market value and any liens on the property.
Event of default
When conditions required for a loan to remain in good standing are not met (e.g., timely payments, property taxes, insurance, keeping the property in good repair).
Fair and Accurate Credit Transactions Act (FACTA)
A federal act requiring that certain information such as credit reports received by businesses be disposed of in a secure manner.
Fannie Mae
The Federal National Mortgage Association, a GSE and publicly traded corporation that buys conforming loans and pools them into mortgage-backed securities.
FHA loan
A government-backed loan with a minimum 3.5% down payment for low-to-middle income buyers; requires a mortgage insurance premium (MIP) if the down payment is less than 20%.
FICO score
A credit score created by the Fair Isaac Corporation, used by lenders to assess credit risk based on payment history, level of debt, types of credit, length of credit history, and new credit.
Foreclosure
The legal process in which a lender takes possession of a financed property because of the borrower’s failure to make timely payments, hoping to sell it to cover the loan.
Foreclosure sale
When a lender sells a foreclosed property at auction to recoup the money from the loan.
Fraud
Wrongful or criminal deception intended to result in financial or personal gain, usually involving a false statement, misrepresentation, or deceitful conduct.
Freddie Mac
The Federal Home Loan Mortgage Corporation, a GSE and publicly traded corporation that buys conforming loans and pools them into mortgage-backed securities.
Front-end ratio
The anticipated monthly PITI payment divided by gross income before taxes; an average limit is 28%, but varies by lender and loan type.
Fully-amortized loan
A loan in which equal installments are paid over the term so that the principal balance is zero (paid in full) on the final payment.
Funding fee
A one-time fee charged at the creation of a VA loan to provide a safety net to lenders; 2.3% of the contract price for first-time users and 3.6% for subsequent uses.
Ginnie Mae
The Government National Mortgage Association, a government agency within HUD that guarantees conforming loans to cover losses lenders would suffer if a homeowner defaults.
Good Faith Estimate (GFE)
A form given to mortgage applicants breaking down mortgage payments and charges; replaced by the Loan Estimate in 2015 with TRID.
Government Sponsored Enterprises (GSEs)
Privately-owned companies sponsored by the U.S. government that buy conforming loans and pool them into mortgage-backed securities to sell to investors.
HUD-1 settlement statement
A document issued by a lender listing all charges and credits to the buyer and seller in a real estate settlement, or all charges in a mortgage refinance.
Index
A variable financial marker to which the interest rate in an ARM is tied, making monthly payments go up or down.
Inspection contingency
A clause giving the buyer the right to have the home inspected within a specified period; based on the findings, the buyer can cancel the contract or negotiate repairs.
Interest
A fee a lender charges to loan money; interest is always paid in arrears.
Judicial foreclosure
A foreclosure carried out under the supervision of the courts.
Land contract
A purchase-money mortgage involving the owner/seller (vendor) and buyer (vendee) in which the seller finances part or all of the price; the vendor holds legal title until the debt is paid in full.
Lease purchase
A lease agreement combining a rental agreement with an exclusive option to purchase later; part of the monthly payment is applied to the price of the property.
Legal title
Interest in real property with a full bundle of rights; the holder owns, can enjoy, and may convey the property; can be split into equitable title and bare title with certain security instruments.
List price
The price the seller sets on the property when placing it on the market.
Loan
A sum of money borrowed from a lender, expected to be paid back with interest; consists of a promissory note and a security instrument.
Loan estimate (LE)
A three-page form the borrower receives after applying for a mortgage disclosing the estimated interest rate, monthly payment, and total closing costs; must be given within three business days of applying.
Loan modification
A permanent restructuring of the mortgage where one or more terms are changed to provide a more affordable payment.
Loan pre-approval
The step where a potential borrower submits an official 1003 application with an application fee and required documentation such as pay stubs, W-2s, and bank statements.
Loan pre-qualification
The step where a borrower supplies financial basics (debt, income, assets) from which the lender estimates the mortgage amount, subject to proof of income and funds.
Loan-To-Value Ratio (LTV%)
The ratio between the loan and the contract price or appraised value, expressed as a percentage.
Margin
A fixed percentage rate added to an index value to determine the interest rate in an ARM.
Mortgage
A security instrument involving the lender (mortgagee) and borrower (mortgagor); the lender holds a promissory note and collects payments while the borrower holds full legal title.
Mortgage insurance premium (MIP)
An insurance policy added to FHA loans to protect the lender if the loan defaults; required if the down payment is less than 20%; consists of upfront MIP and annual MIP.
Mortgagee
The lender in a mortgage loan that holds the note and receives payments.
Mortgagor
The borrower in a mortgage loan that holds legal title.
Non-amortized loan
A loan in which payments only cover interest; at the end of the term, the principal is due as one large balloon payment; also called interest-only, straight, or term loan.
Non-judicial foreclosure
A foreclosure typically executed without the involvement of the courts.
Origination fee
A fee charged by the lender to cover administrative tasks associated with creating the loan.
P&I payment
The amount due to the lender each month including a portion for principal and a portion for interest.
Partial-release clause (Release clause)
Most often part of a blanket mortgage; a clause allowing individual parcels to be sold according to a release schedule, preventing the entire loan from becoming due.
Partially-amortized loan
A loan in which installments are paid over the term, but the remaining principal is due as one large balloon payment at the end.
Payment
The amount due to the lender each month including principal and interest (P&I); some also include taxes and insurance (PITI).
PITI Loan (budget loan)
A loan in which payments cover principal, interest, taxes, and insurance; funds for taxes and insurance are held in an escrow account.
PITI payment
The monthly amount including principal, interest, taxes and insurance; the lender holds the tax and insurance amounts in an escrow account to pay them when due.
Power-of-sale
A clause in a promissory note authorizing the lender to sell the property without court oversight in the event of default to repay the debt.
Prepayment clause
Allows the borrower to pay the loan in full before maturity or make additional principal payments without penalty; FHA and VA loans have no prepayment penalties.
Primary mortgage market
A virtual marketplace where borrowers and lenders connect to secure a home loan.
Principal
The total amount of money borrowed.
Principal balance
The unpaid part of the amount borrowed.
Private mortgage insurance (PMI)
An insurance policy added to conventional loans to protect the lender if the loan defaults; required if the down payment is less than 20%; drops off after the balance reaches 80%.
Promissory note
A financial legal document in which one party promises in writing to pay a determinate sum under specific terms, containing the loan amount, interest rate, due dates, and late charges; often called the “note.”
Purchase-money mortgage
A blanket term for owner-financing arrangements where the seller handles the mortgage instead of a financial institution; also called owner financing or seller financing.
Real Estate Settlement Procedures Act (RESPA)
A 1974 federal law protecting homeowners through education about the lending process and regulating it by prohibiting kickbacks and referral fees.
Reconveyance clause
For a deed of trust, a clause instructing that after the loan is paid in full, the trustee releases bare title to the trustor via a release deed.
Redlining
The act of lenders refusing to negotiate loans in certain geographic areas even when the borrower qualifies; often affects older neighborhoods.
Regulation Z
The set of regulations that implemented the Truth-In-Lending Act (TILA).
Release deed (deed of reconveyance)
A deed issued by the trustee in a deed of trust when the trustor has paid the loan in full; recorded to give constructive notice that the loan is paid and the borrower holds full legal title.
Reverse mortgage loan
A loan for senior homeowners (ages 62 and older) allowing them to convert home equity into cash income with no monthly mortgage payments.
Right of redemption
A borrower’s chance to get their home back before or after foreclosure by repaying the debt in full; two types are equitable and statutory right of redemption.
Satisfaction
A document signed by a mortgagee acknowledging that a mortgage has been fully paid; recorded to give constructive notice that the loan is paid and there is no longer a lien; also called a release or discharge.
Secondary mortgage market
The virtual resale market where lenders sell their home loans to government agencies and investors such as Fannie Mae, Freddie Mac and Ginnie Mae.
Security instrument (financing instrument)
A legal document by which the borrower pledges his interest as collateral and grants the lender rights to take the property on default; the three main types are mortgages, deeds of trust, and land contracts.
Short sale
A sale where the lender agrees to let the borrower sell the property for less than what is owed instead of proceeding with foreclosure.
Statutory right of redemption
A right allowing borrowers a certain period after a foreclosure is finalized to reclaim the property by paying the foreclosure sale price plus fees and expenses.
Strict foreclosure
A foreclosure of a mortgage without a sale of the mortgaged property.
Subordination
The act of yielding priority.
Subordination clause
A clause allowing a new loan to take priority over previous loans that have seniority; common in mortgages securing unimproved land to help the borrower obtain a construction loan.
Subprime mortgage
A mortgage issued to borrowers with low credit ratings at a higher interest rate to compensate the lender for carrying more risk.
Take-Out loan
Long-term financing consisting of amortizing fixed payments that usually replaces a short-term construction loan.
Term
The length of time the borrower must repay the borrowed money to the lender.
The Federal Housing Administration (FHA)
A federal agency established by the National Housing Act of 1934 to regulate interest rates and mortgage terms after the banking crisis of the 1930s.
The Federal Reserve System
The central bank of the United States, created by Congress to provide a safer, more flexible, more stable monetary and financial system; regulates the flow of money by controlling reserve requirements and discount rates.
The Truth-In-Lending Act (TILA)
A 1968 federal consumer protection law helping borrowers understand the costs of borrowing by requiring disclosures about loan terms and costs; implemented by Regulation Z.
Three-day right of rescission period
A “cooling off” period allowed by TILA when a consumer is refinancing a mortgage or securing a home equity line of credit.
TILA-RESPA Integrated Disclosures (TRID)
Financial rules integrating RESPA and TILA disclosures to make lending more transparent; created the Loan Estimate (LE) and Closing Disclosure (CD); took effect in 2015.
Title theory
A concept where, when a mortgage is used, the lender holds legal title and the borrower holds equitable title; upon default the lender is entitled to immediate possession with no judicial foreclosure required.
Triggering terms
Vague verbiage in a loan advertisement that triggers the need for more information (payment amounts, finance charges, down payment, terms); stating only the APR does not trigger additional disclosures.
Trust deed
A deed used in a deed of trust that transfers bare title to the trustee, typically a title company. (Also called a deed of trust; a trustee’s deed is unrelated.)
Trustee
An impartial third party that holds bare title in a deed of trust loan.
Trustor
The borrower that holds equitable title in a deed of trust loan.
Truth-in-Lending disclosure
A required statement including the loan amount, APR, finance charges, payment schedule, and total repayment amount; replaced by the CD and LE in 2015 with TRID.
Underwriter
The individual responsible for reviewing the entire loan package and issuing an approval based on debt ratios, credit scoring and credit history.
Underwriting
The stage in loan approval where the application package is carefully reviewed and a decision is made based on credit history, employment history and other financial criteria.
United States Department of Agriculture (USDA)
The federal department responsible for laws related to farming, forestry, rural economic development, and food; also known as the Agriculture Department.
Upfront MIP
Required for FHA loans as part of MIP; a fee charged at loan creation and added to the loan balance; currently 1.75% of the loan amount.
USDA home loan
A home loan with a 0% down payment for eligible rural and suburban homebuyers, issued through the USDA.
VA funding fee
A one-time fee charged by the lender at the creation of a VA loan; typically 2.15% for first-time use and 3.3% for subsequent uses; waived if the veteran is receiving disability.
VA loan
A government-backed loan with a 0% down payment for active-duty and retired military to purchase residential property; requires a VA funding fee.
Value
The monetary worth of a property or the amount of money an investor has invested.
Vendee
The borrower in a land contract that holds equitable title.
Vendor
The owner/seller in a land contract that holds bare title.
Yield
The interest earned over the lifetime of a loan.
