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adjustable-rate
mortgage (ARM)
A mortgage whose interest rate changes periodically
based on the changes in a specified index.
adjustment date
The date on which the interest rate changes for an
adjustable-rate mortgage (ARM).
adjustment period
The period that elapses between the adjustment dates for an
adjustable-rate mortgage (ARM).
amortization
The repayment of a mortgage loan by installments with
regular payments to cover the principal and interest.
amortization term
The amount of time required to amortize the mortgage loan.
The amortization term is expressed as a number of months.
For example, for a 30-year fixed-rate mortgage, the
amortization term is 360 months.
annual percentage rate (APR)
The cost of a mortgage stated as a yearly rate; includes
such items as interest, mortgage insurance, and loan
origination fee (points).
application
A form, commonly referred to as a 1003 form, used to apply
for a mortgage and to provide information regarding a
prospective mortgagor and the proposed security.
appraisal
A written analysis of the estimated value of a property
prepared by a qualified appraiser.
appraiser
A person qualified by education, training, and experience to
estimate the value of real property and personal property.
appreciation
An increase in the value of a property due to changes in
market conditions or other causes. The opposite of
depreciation.
asset
Anything of monetary value that is owned by a person. Assets
include real property, personal property, and enforceable
claims against others (including bank accounts, stocks,
mutual funds, and so on).
assignment
The transfer of a mortgage from one person to another.
assumable mortgage
A mortgage that can be taken over ("assumed") by
the buyer when a home is sold.
assumption
The transfer of the seller's existing mortgage to the buyer.
assumption clause
A provision in an assumable mortgage that allows a buyer to
assume responsibility for the mortgage from the seller. The
loan does not need to be paid in full by the original
borrower upon sale or transfer of the property.
assumption fee
The fee paid to a lender (usually by the purchaser of real
property) resulting from the assumption of an existing
mortgage.
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balance sheet
A financial statement that shows assets, liabilities, and
net worth as of a specific date.
balloon mortgage
A mortgage that has level monthly payments that will
amortize it over a stated term but that provides for a lump
sum payment to be due at the end of an earlier specified
term.
balloon payment
The final lump sum payment that is made at the maturity date
of a balloon mortgage.
bankrupt
A person, firm, or corporation that, through a court
proceeding, is relieved from the payment of all debts after
the surrender of all assets to a court-appointed trustee.
bankruptcy
A proceeding in a federal court in which a debtor who owes
more than his or her assets can relieve the debts by
transferring his or her assets to a trustee.
basis point
A basis point is 1/100th of a percentage point. For
example, a fee calculated as 50 basis points of a loan
amount of $100,000 would be 0.50% or $500.
before-tax income
Income before taxes are deducted.
beneficiary
The person designated to receive the income from a
trust, estate, or a deed of trust.
binder
A preliminary agreement, secured by the payment of an
earnest money deposit, under which a buyer offers to
purchase real estate.
biweekly payment mortgage
A mortgage that requires payments to reduce the debt
every two weeks (instead of the standard monthly payment
schedule). The 26 (or possibly 27) biweekly payments are
each equal to one-half of the monthly payment that would be
required if the loan were a standard 30-year fixed-rate
mortgage, and they are usually drafted from the borrower's
bank account. The result for the borrower is a substantial
savings in interest.
blanket mortgage
The mortgage that is secured by a cooperative project,
as opposed to the share loans on individual units within the
project.
bond
An interest-bearing certificate of debt with a maturity
date. An obligation of a government or business corporation.
A real estate bond is a written obligation usually secured
by a mortgage or a deed of trust.
breach
A violation of any legal obligation.
bridge loan
A form of second trust that is collateralized by the
borrower's present home (which is usually for sale) in a
manner that allows the proceeds to be used for closing on a
new house before the present home is sold. Also known as
"swing loan."
broker
A person who, for a commission or a fee, brings parties
together and assists in negotiating contracts between them.
buydown mortgage
A temporary buydown is a mortgage on which an initial
lump sum payment is made by any party to reduce a borrower's
monthly payments during the first few years of a mortgage. A
permanent buydown reduces the interest rate over the entire
life of a mortgage.
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call option
A provision in the mortgage that gives the mortgagee the
right to call the mortgage due and payable at the end of a
specified period for whatever reason.
cap
A provision of an adjustable-rate mortgage (ARM) that
limits how much the interest rate or mortgage payments may
increase or decrease.
capital improvement
Any structure or component erected as a permanent
improvement to real property that adds to its value and
useful life.
cash-out refinance
A refinance transaction in which the amount of money
received from the new loan exceeds the total of the money
needed to repay the existing first mortgage, closing costs,
points, and the amount required to satisfy any outstanding
subordinate mortgage liens. In other words, a refinance
transaction in which the borrower receives additional cash
that can be used for any purpose.
Certificate of Eligibility
A document issued by the federal government certifying a
veteran's eligibility for a Department of Veterans Affairs
(VA) mortgage.
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs
(VA) that establishes the maximum value and loan amount for
a VA mortgage.
certificate of title
A statement provided by an abstract company, title
company, or attorney stating that the title to real estate
is legally held by the current owner.
chain of title
The history of all of the documents that transfer title
to a parcel of real property, starting with the earliest
existing document and ending with the most recent.
change frequency
The frequency (in months) of payment and/or interest
rate changes in an adjustable-rate mortgage (ARM).
clear title
A title that is free of liens or legal questions as to
ownership of the property.
closing
A meeting at which a sale of a property is finalized by
the buyer signing the mortgage documents and paying closing
costs. Also called "settlement."
closing cost item
A fee or amount that a home buyer must pay at closing
for a single service, tax, or product. Closing costs are
made up of individual closing cost items such as origination
fees and attorney's fees. Many closing cost items are
included as numbered items on the HUD-1 statement. Expenses
(over and above the price of the property) incurred by
buyers and sellers in transferring ownership of a property.
Closing costs normally include an origination fee, an
attorney's fee, taxes, an amount placed in escrow, and
charges for obtaining title insurance and a survey. Closing
costs percentage will vary according to the area of the
country.
closing statement
Also referred to as the HUD-1. The final statement of
costs incurred to close on a loan or to purchase a home.
cloud on title
Any conditions revealed by a title search that adversely
affect the title to real estate. Usually clouds on title
cannot be removed except by a quitclaim deed, release, or
court action.
collateral
An asset (such as a car or a home) that guarantees the
repayment of a loan. The borrower risks losing the asset if
the loan is not repaid according to the terms of the loan
contract.
collection
The efforts used to bring a delinquent mortgage current
and to file the necessary notices to proceed with
foreclosure when necessary.
combination loan
With this type of loan, you receive a first mortgage for
80 percent of the loan amount, and a second mortgage at the
same time for the remainder of the balance. If avoiding PMI
(mortgage insurance) is important to you, consider
combination loans--known as 80/10/10 loans or 80/20's.
combined loan-to-value (CLTV)
The unpaid principal balances of all the mortgages on a
property (first and second usually) divided by the
property's appraised value.
co-maker
A person who signs a promissory note along with the
borrower. A co-maker's signature guarantees that the loan
will be repaid, because the borrower and the co-maker are
equally responsible for the repayment. See endorser.
commission
The fee charged by a broker or agent for negotiating a
real estate or loan transaction. A commission is generally a
percentage of the price of the property or loan.
commitment letter
A formal offer by a lender stating the terms under which
it agrees to lend money to a home buyer. Also known as a
"loan commitment."
common areas
Those portions of a building, land, and amenities owned
(or managed) by a planned unit development (PUD) or
condominium project's homeowners' association (or a
cooperative project's cooperative corporation) that are used
by all of the unit owners, who share in the common expenses
of their operation and maintenance. Common areas include
swimming pools, tennis courts, and other recreational
facilities, as well as common corridors of buildings,
parking areas, means of ingress and egress, etc.
Community Home Improvement Mortgage Loan
An alternative financing option that allows low- and
moderate-income home buyers to obtain 95 percent financing
for the purchase and improvement of a home in need of modest
repairs. The repair work can account for as much as 30
percent of the appraised value.
community property
In some western and southwestern states, a form of
ownership under which property acquired during a marriage is
presumed to be owned jointly unless acquired as separate
property of either spouse.
comparables
An abbreviation for "comparable properties";
used for comparative purposes in the appraisal process.
Comparables are properties like the property under
consideration; they have reasonably the same size, location
, and amenities and have recently been sold. Comparables
help the appraiser determine the approximate fair market
value of the subject property.
condominium
A real estate project in which each unit owner has title
to a unit in a building, an undivided interest in the common
areas of the project, and sometimes the exclusive use of
certain limited common areas.
condominium conversion
Changing the ownership of an existing building (usually
a rental project) to the condominium form of ownership.
conforming loan
The current conforming loan limit is $333,700 and below.
Conforming loan limits change annually.
construction loan
A short-term, interim loan for financing the cost of
construction. The lender makes payments to the builder at
periodic intervals as the work progresses.
consumer reporting agency (or bureau)
An organization that prepares reports that are used by
lenders to determine a potential borrower's credit history.
The agency obtains data for these reports from a credit
repository as well as from other sources.
contingency
A condition that must be met before a contract is
legally binding. For example, home purchasers often include
a contingency that specifies that the contract is not
binding until the purchaser obtains a satisfactory home
inspection report from a qualified home inspector.
contract
An oral or written agreement to do or not to do a
certain thing.
conventional mortgage
A mortgage that is not insured or guaranteed by the
federal government.
convertibility clause
A provision in some adjustable-rate mortgages (ARMs)
that allows the borrower to change the ARM to a fixed-rate
mortgage at specified timeframes after loan origination.
convertible ARM
An adjustable-rate mortgage (ARM) that can be converted
to a fixed-rate mortgage under specified conditions.
cooperative (co-op)
A type of multiple ownership in which the residents of a
multiunit housing complex own shares in the cooperative
corporation that owns the property, giving each resident the
right to occupy a specific apartment or unit.
corporate relocation
Arrangements under which an employer moves an employee
to another area as part of the employer's normal course of
business or under which it transfers a substantial part or
all of its operations and employees to another area because
it is relocating its headquarters or expanding its office
capacity.
cost of funds index (COFI)
An index that is used to determine interest rate changes
for certain adjustable-rate mortgage (ARM) plans. It
represents the weighted-average cost of savings, borrowings,
and advances of the 11th District members of the Federal
Home Loan Bank of San Francisco.
covenant
A clause in a mortgage that obligates or restricts the
borrower and that, if violated, can result in foreclosure.
credit
An agreement in which a borrower receives something of
value in exchange for a promise to repay the lender at a
later date.
credit history
A record of an individual's open and fully repaid debts.
A credit history helps a lender to determine whether a
potential borrower has a history of repaying debts in a
timely manner.
credit report
A report of an individual's credit history prepared by a
credit bureau and used by a lender in determining a loan
applicant's creditworthiness.
credit repository
An organization that gathers, records, updates, and
stores financial and public records information about the
payment records of individuals who are being considered for
credit.
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debt
An amount owed to another.
deed
The legal document conveying title to a property.
deed-in-lieu
A deed given by a mortgagor to the mortgagee to satisfy
a debt and avoid foreclosure.
deed of trust
The document used in some states instead of a mortgage;
title is conveyed to a trustee.
default
Failure to make mortgage payments on a timely basis or
to comply with other requirements of a mortgage.
delinquency
Failure to make mortgage payments when mortgage payments
are due.
deposit
A sum of money given to bind the sale of real estate, or
a sum of money given to ensure payment or an advance of
funds in the processing of a loan.
depreciation
A decline in the value of property; the opposite of
appreciation.
down payment
The part of the purchase price of a property that the
buyer pays in cash and does not finance with a mortgage.
due-on-sale provision
A provision in a mortgage that allows the lender to demand
repayment in full if the borrower sells the property that
serves as security for the mortgage.
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earnest money deposit
A deposit made by the potential home buyer to show that
he or she is serious about buying the house.
easement
A right of way giving persons other than the owner
access to or over a property.
effective age
An appraiser's estimate of the physical condition of a
building. The actual age of a building may be shorter or
longer than its effective age.
effective gross income
Normal annual income including overtime that is regular
or guaranteed. The income may be from more than one source.
Salary is generally the principal source, but other income
may qualify if it is significant and stable.
eighty-ten-ten loan
See combination loan.
encumbrance
Anything that affects or limits the fee simple title to
a property, such as mortgages, leases, easements, or
restrictions.
endorser
A person who signs ownership interest over to another
party. Contrast with co-maker.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors
to make credit equally available without discrimination
based on race, color, religion, national origin, age, sex,
marital status, or receipt of income from public assistance
programs.
equity
A homeowner's financial interest in a property. Equity
is the difference between the fair market value of the
property and the amount still owed on its mortgage.
escrow
An item of value, money, or documents deposited with a
third party to be delivered upon the fulfillment of a
condition. For example, the deposit by a borrower with the
lender of funds to pay taxes and insurance premiums when
they become due, or the deposit of funds or documents with
an attorney or escrow agent to be disbursed upon the closing
of a sale of real estate.
escrow account
The account in which a mortgage servicer holds the
borrower's escrow payments prior to paying property
expenses.
escrow analysis
The periodic examination of escrow accounts to determine
if current monthly deposits will provide sufficient funds to
pay taxes, insurance, and other bills when due.
escrow collections
Funds collected by the servicer and set aside in an
escrow account to pay the borrower's property taxes,
mortgage insurance, and hazard insurance.
escrow disbursements
The use of escrow funds to pay real estate taxes, hazard
insurance, mortgage insurance, and other property expenses
as they become due.
escrow payment
The portion of a mortgagor's monthly payment that is
held by the servicer to pay for taxes, hazard insurance,
mortgage insurance, lease payments, and other items as they
become due. Known as "impounds" or
"reserves" in some states.
estate
The ownership interest of an individual in real
property. The sum total of all the real property and
personal property owned by an individual at time of death.
eviction
The lawful expulsion of an occupant from real property.
examination of title
The report on the title of a property from the public
records or an abstract of the title.
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Fair Credit Reporting Act
A consumer protection law that regulates the disclosure
of consumer credit reports by consumer/credit reporting
agencies and establishes procedures for correcting mistakes
on one's credit record.
fair market value
The highest price that a buyer, willing but not
compelled to buy, would pay, and the lowest a seller,
willing but not compelled to sell, would accept.
Fannie Mae
A congressionally chartered, shareholder-owned company
that is the nation's largest supplier of home mortgage
funds.
Fannie Mae's Community Home Buyer's Program
An income-based community lending model, under which
mortgage insurers and Fannie Mae offer flexible underwriting
guidelines to increase a low- or moderate-income family's
buying power and to decrease the total amount of cash needed
to purchase a home. Borrowers who participate in this model
are required to attend pre-purchase home-buyer education
sessions.
Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban
Development (HUD). Its main activity is the insuring of
residential mortgage loans made by private lenders. The FHA
sets standards for construction and underwriting but does
not lend money or plan or construct housing.
fee simple
The greatest possible interest a person can have in real
estate.
FHA mortgage
A mortgage that is insured by the Federal Housing
Administration (FHA). Also known as a government mortgage.
finder's fee
A fee or commission paid to a mortgage broker for
finding a mortgage loan for a prospective borrower.
first adjustment
When you can expect the first rate adjustment in your
ARM loan.
first mortgage
A mortgage that is the primary lien against a property.
fixed-rate mortgage (FRM)
A mortgage in which the interest rate does not change
during the entire term of the loan.
fixed second mortgage
See home equity loan.
flood insurance
Insurance that compensates for physical property damage
resulting from flooding. It is required for properties
located in federally designated flood areas.
foreclosure
The legal process by which a borrower in default under a
mortgage is deprived of his or her interest in the mortgaged
property. This usually involves a forced sale of the
property at public auction with the proceeds of the sale
being applied to the mortgage debt.
fully amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment
that is sufficient to amortize the remaining balance, at the
interest accrual rate, over the amortization term.
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good faith estimate
An estimate of charges which a borrower is likely to
incur in connection with a settlement.
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hazard insurance
Insurance protecting against loss to real estate caused
by fire, some natural causes, vandalism, etc., depending
upon the terms of the policy.
home equity line of credit
a credit line that is secured by a second deed of trust
on a house. Equity lines of credit are revolving accounts
that work like a credit card, which can be paid down or
charged up for the term of the loan. The minimum payment due
each month is interest only.
home
equity loan
a loan secured by a second deed of trust on a house,
typically used as a home improvement loan.
housing ratio
The ratio of the monthly housing payment in total (PITI
- Principal, Interest, Taxes, and Insurance) divided by the
gross monthly income. This ratio is sometimes referred to as
the top ratio or front end ratio.
HUD
The U.S. Department of Housing and Urban Development.
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index
A published interest rate to which the interest rate on
an Adjustable Rate Mortgage (ARM) is tied. Some commonly
used indices include the 1 Year Treasury Bill, 6 Month LIBOR,
and the 11th District Cost of Funds (COFI).
Impound Account
An impound account is an account established by the
lender to pay a borrower's tax and insurance costs. The
borrower's monthly mortgage payment is then increased to
cover these costs, with the additional amount being held in
the impound account and disbursed by the lender when the
payments are due. Lenders typically prefer this arrangement
because it reduces the possibility of a lapse in tax or
insurance payments that could diminish the value of the
lender's investment (your house). Therefore, while it is
often possible to opt out of an impound account it will
result in additional charges.
Interest-only loan option
Loan payments have two components, principal and
interest. An interest-only loan has no principal component
for a specified period of time. These special loans minimize
your monthly payments by eliminating the need to pay down
your balance during the interest-only period, giving you
greater cash flow control and/or increased purchasing power.
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jumbo mortgage
The current loan limit for a conforming loan is
$333,700. Loan amounts of $333,701 and above are considered
non-conforming or jumbo mortgages and are usually subject to
higher pricing.
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lien
An encumbrance against property for money due, either
voluntary or involuntary.
lender
The bank, mortgage company, or mortgage broker offering
the loan.
LIBOR
LIBOR stands for London Inter-Bank Offered Rate. This is
a favorable interest rate offered for U.S. dollar deposits
between a group of London banks. There are several different
LIBOR rates, defined by the maturity of their deposit. The
LIBOR is an international index that follows world economic
conditions. LIBOR-indexed ARMs offer borrowers aggressive
initial rates and have proven to be competitive with popular
ARM indexes like the Treasury bill.
lifetime cap
A provision of an ARM that limits the highest rate that
can occur over the life of the loan.
loan to value ratio (LTV)
The unpaid principal balance of the mortgage on a
property divided by the property's appraised value. The LTV
will affect programs available to the borrower and
generally, the lower the LTV the more favorable the terms of
the programs offered by lenders.
lock period
The amount of time that a lender will guarantee a loan's
interest rate. Once you've locked in the interest rate on a
loan, the lender will guarantee that rate for a certain
period of time, usually for 30, 45 or 60 days.
lock-in
A written agreement guaranteeing the home buyer a
specified interest rate provided the loan is closed within a
set period of time. The lock-in also usually specifies the
number of points to be paid at closing.
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margin
The number of percentage points a lender adds to the
index value to calculate the ARM interest rate at each
adjustment period.
mortgage
A legal document that pledges a property to the lender
as security for payment of a debt
mortgage disability insurance
A disability insurance policy which will pay the monthly
mortgage payment in the event of a covered disability of an
insured borrower for a specified period of time.
mortgage insurance (MI)
Insurance written by an independent mortgage insurance
company protecting the mortgage lender against loss incurred
by a mortgage default. Usually required for loans with an
LTV of 80.01% or higher.
mortgager
The person or company who receives the mortgage as a
pledge for repayment of the loan. The mortgage lender.
mortgagor
The mortgage borrower who gives the mortgage as a pledge
to repay.
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no income verification
See stated income.
non-conforming loan
Also called a jumbo loan. Conventional home mortgages
not eligible for sale and delivery to either Fannie Mae
(FNMA) or Freddie Mac (FHLMC) because of various reasons,
including loan amount, loan characteristics or underwriting
guidelines. Non-conforming loans usually incur a rate and
origination fee premium. The current non-conforming loan
limit is $333,701 and above.
note
A written agreement containing a promise of the signer
to pay to a named person, or order, or bearer, a definite
sum of money at a specified date or on demand.
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origination fee
A fee imposed by a lender to cover certain processing
expenses in connection with making a real estate loan.
Usually a percentage of the amount loaned, such as one
percent.
owner financing
A property purchase transaction in which the property
seller provides all or part of the financing.
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periodic cap
The maximum rate increase for a specific period for a
specific loan (ARM) only.
PITI
Principal, interest, taxes and insurance--the components
of a monthly mortgage payment.
Planned Unit Developments (PUD)
A subdivision of five or more individually owned lots
with one or more other parcels owned in common or with
reciprocal rights in one or more other parcels.
points
Charges levied by the mortgage lender and usually
payable at closing. One point represents 1% of the face
value of the mortgage loan.
prepaids
Those expenses of property which are paid in advance of
their due date and will usually be prorated upon sale, such
as taxes, insurance, rent, etc.
prepayment penalty
A charge imposed by a mortgage lender on a borrower who
wants to pay off part or all of a mortgage loan in advance
of schedule.
principal
Amount of debt, not including interest. The face value
of a note or mortgage.
private mortgage insurance (PMI)
Insurance provided by nongovernment insurers that
protects lenders against loss if a borrower defaults. Fannie
Mae generally requires private mortgage insurance for loans
with loan-to-value (LTV) percentages greater than 80%.
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qualifying ratios
The ratio of your fixed monthly expenses to your gross
monthly income, used to determine how much you can afford to
borrow. The fixed monthly expenses would include PITI along
with other obligations such as student loans, car loans, or
credit card payments.
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rate
The annual rate of interest on a loan, expressed as a
percentage of 100.
rate cap
A limit on how much the interest rate can change, either
at each adjustment period or over the life of the loan.
rate lock-in
A written agreement in which the lender guarantees the
borrower a specified interest rate, provided the loan closes
within a set period of time.
rebate
Compensation received from a wholesale lender which can
be used to cover closing costs or as a refund to the
borrower. Loans with rebates often carry higher interest
rates than loans with "points".
refinancing
The process of paying off one loan with the proceeds
from a new loan using the same property as security.
residential mortgage credit report (RMCR)
A report requested by your lender that utilizes
information from at least two of the three national credit
bureaus and information provided on your loan application.
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seller carry back
An agreement in which the owner of a property provides
financing, often in combination with an assumed mortgage.
stated/documented income
Some loan products require only that applicants
"state" the source of their income without
providing supporting documentation such as tax returns.
subordination
If you are refinancing your first mortgage and have an
existing second or home equity line, one option is to
"subordinate" the second mortgage: request that
your second mortgage holder go back into the second lien
position when you replace your existing first mortgage with
the new refinance loan.
survey
A print showing the measurements of the boundaries of a
parcel of land, together with the location of all
improvements on the land and sometimes its area and
topography.
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tenants-in-common
An undivided interest in property taken by two or more
persons. The interest need not be equal. Upon death of one
or more persons, there is no right of survivorship.
term
The period of time which covers the life of the loan.
For example, a 30 year fixed loan has a term of 30 years.
title
The evidence one has of right to possession of land.
title insurance
Insurance against loss resulting from defects of title
to a specifically described parcel of real property.
title search
An investigation into the history of ownership of a
property to check for liens, unpaid claims, restrictions or
problems, to prove that the seller can transfer free and
clear ownership.
total debt ratio
Monthly debt and housing payments divided by gross
monthly income. Also known as Obligations-to-Income Ratio or
Back-End Ratio.
Truth-in-Lending Act
A federal law requiring a disclosure of credit terms
using a standard format. This is intended to facilitate
comparisons between the lending terms of different financial
institutions.
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Veterans Administration (VA)
A government agency guaranteeing mortgage loans with no
down payment to qualified veterans.
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