Mortgage & Loan Glossary

Please feel free to use our Mortgage & Loan Glossary to help understand real estate industry terms.

A  

Abstract of Title
A historical summary of all the recorded transactions that affect the title to the property. An attorney or a title company will review an abstract of title to determine if there are any problems affecting the title to the property. All such problems must be cleared before the buyer can be issued a clear and insurable title.

Acceleration Clause
A clause in your mortgage which allows the lender to demand payment of the outstanding loan balance for various reasons. The most common reasons for accelerating a loan are if the borrower defaults on the loan or transfers title to another individual without informing the lender.

Accelerated Mortgage Plan
A plan that increases the amount or frequency of loan payments so as to pay down the principal owed on a property before the standard term expires. If done correctly, an accelerated mortgage plan can save thousands of dollars in interest and provide full ownership of a property in less time than would be required if only the minimum required payment were made throughout the life of the loan.

Acknowledgment
Formal declaration before a public official (typically a Notary Public) that one has signed a document. Required before recording real estate legal documents, such as a deeds of trust.

Acre
A measure of land equal to 43,560 square feet.

Adjustable-Rate Mortgage (ARM)
A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. All ARMs are tied to indexes.

Adjustment Period
This is the length of time for which the interest rate is fixed on an adjustable. Therefore if the adjustment period is six months, then the interest rate will remain fixed for six months, after which time it will adjust.

Agreement of Sale
A written signed agreement between the seller and the purchaser in which the purchaser agrees to buy certain real estate and the seller agrees to sell upon terms of the agreement. Also known as contract of purchase, purchase agreement, offer and acceptance, earnest money contract or sales agreement.

Amortization
Payment of a debt in regular, periodic installments of principal and interest as opposed to interest only payments.

Annual Percentage Rate (APR)
A term used in the Truth-in-Lending Act to represent the percentage relationship of the total finance charge to the amount of the loan. The APR reflects the cost of your mortgage loan as a yearly rate. It will be higher than the interest rate stated on the note because it includes, in addition to the interest rate, loan discount points, fees and mortgage insurance.

Application
A printed form used by a mortgage lender to record necessary information concerning a prospective mortgage.

Application Fee
A sum of money paid towards estimated initial mortgage processing expenses such as appraisal and credit report.

Appraisal
A report made by a qualified person setting forth an opinion or estimate of property value. The term also refers to the process by which this estimate is obtained.

Appreciation
The increase in the value of a property due to changes in market conditions, inflation, or other causes.

As Separate Property
Ownership in real property which is to be specifically excluded from community property.

Assessed Valuation
The value that a taxing authority places on real or personal property for the purpose of taxation.

Assessment
A charge against a property for purpose of taxation. This may take the form of a levy for a special purpose or a tax in which the property owner pays a share of the cost of community improvements according to the valuation of his or her property.

Asset
Items of value owned by an individual. Assets that can be quickly converted into cash are considered “liquid assets.” These include bank accounts, stocks, bonds, mutual funds, and so on. Other assets include real estate, personal property, and debts owed to an individual by others.

Assumable Mortgage
A mortgage loan which allows a new home buyer to take over the obligation of making loan payments with no change in the terms of the loan. Assumable loans do not have a due-on-sale clause. The lender has to be notified and agree to the assumption. The lender may require the buyer to qualify for the loan and may charge an assumption fee. The seller should obtain a written release from the lender stating clearly that he/she is no longer liable to make mortgage payments.

Attorney In Fact
One who is authorized to act for another under a power of attorney which may be general or limited in scope.

Balloon Mortgage
A mortgage loan that requires the remaining principal balance be paid at a specific point in time. For example, a loan may be amortized as if it would be paid over a thirty year period, but requires that at the end of the tenth year the entire remaining balance must be paid.

Bankruptcy
By filing in federal bankruptcy court, an individual or individuals can restructure or relieve themselves of debts and liabilities. Bankruptcies are of various types, but the most common for an individual seem to be a “Chapter 7 No Asset” bankruptcy which relieves the borrower of most types of debts. A borrower cannot usually qualify for an “A” paper loan for a period of two years after the bankruptcy has been discharged and requires the re-establishment of an ability to repay debt.

Beneficiary
The person who receives or is to receive the benefits resulting from certain acts. Example: The lender is named as the beneficiary on a mortgage loan.

Bill of Sale
A written document that transfers title to personal property.

Binder
(1) A title insurance binder is the written commitment of a title insurance company to insure title to the property subject to the conditions and exclusions shown on the binder.
(2) Preliminary agreement, normally secured with earnest money, between a buyer and a seller as an offer to purchase real estate.

Bi-Weekly Mortgage
A mortgage in which you make payments every two weeks instead of once a month. The basic result is that instead of making twelve monthly payments during the year, you make thirteen. The extra payment reduces the principal, substantially reducing the time it takes to pay off a thirty year mortgage.

Blanket Mortgage
A mortgage covering more than one piece of property.

Bond
(1) A debt instrument in the capital markets. The U.S. government, corporations and municipalities use bonds to raise money. Bonds can also be backed by mortgages. The best known bond is the 30-year treasury bond issued by the U.S. government.
(2) A sum of money given to a court to guarantee against a loss. For example if there is a lien on a property, the owner may remove the lien by posting a bond.

Bond Market
Usually refers to the daily buying and selling of thirty year treasury bonds. Lenders follow this market intensely because as the yields of bonds go up and down, fixed rate mortgages do approximately the same thing. The same factors that affect the Treasury Bond market also affect mortgage rates at the same time. That is why rates change daily, and in a volatile market can and do change during the day as well.

Borrower
A person (also known as mortgagor) who receives funds in the form of a loan with an obligation to repay principal with interest.

Bridge Loan
A short-term interim loan. Bridge loans are commonly used to close a transaction on one property while another is being sold.

Broker
As it relates to the real estate, a mortgage broker does not lend money, but acts as an agent between the borrower and the lender to secure financing. A broker can often be a more effective means for securing a loan because he or she is able to “shop” for the best rate and term available from several different lending sources at one time, something that would take a borrower much longer to do on his or her own. Brokers earn a profit for this service usually expressed as “points” on a loan.

Buydown
Money advanced by an individual (builder, seller, etc.) to reduce the monthly payments for a home mortgage either during the entire term or for an initial period of years. A “2-1” Buydown can be used to qualify a borrower who otherwise may not qualify for a loan by reducing the interest rate on the first two years of payments, thereby making the mortgage more affordable.

Buyer’s Agent
A real estate agent hired by a buyer to locate a property for purchase. The broker represents the buyer and negotiates with the sellers broker for the best possible deal for the buyer. Buyer’s Agents do not charge for their services; they split the commission with the seller’s Listing Agent instead as compensation for their assistance in selling the property.

Buyers’ Market
Market conditions that favor buyers i.e. there are more sellers than buyers in the market. As a result buyers have ample choice of properties and may negotiate lower prices. Buyers markets may be caused by an economic slump or overbuilding.

C

CC&Rs – Covenants, Conditions and Restrictions
The basic rules establishing the rights and obligations of owners of real property within a condominium, townhouse, PUD, subdivision or other tract of land. An association is organized for the purpose of operating and maintaining property commonly owned by the individual owners. The association is normally made up of property owners.

Cap
Adjustable Rate Mortgages have fluctuating interest rates, but those fluctuations are usually limited to a certain amount. Those limitations may apply to how much the loan may adjust over a six month period, an annual period, and over the life of the loan, and are referred to as “caps.” Some ARMs, although they may have a life cap, allow the interest rate to fluctuate freely, but require a certain minimum payment which can change once a year. There is a limit on how much that payment can change each year, and that limit is also referred to as a cap.

Capital Gains
Profit earned from the sale of real estate or other valuable assets. A seller may defer taxes on the capital gain of his/her primary residence by buying a higher priced residence within 2 years.

Cash Flow
The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.).

Cash-Out Refinance
When a borrower refinances his mortgage at a higher amount than the current loan balance with the intention of pulling out money for personal use, it is referred to as a “cash out refinance.”

Cash to Close
Liquid assets that are readily available to be used to pay the closing costs involved in a closing of a mortgage transaction.

Certificate of Eligibility
The document issued by the Veterans Administration to those that qualify for a VA loan which may be used to buy a house with 0 down. Certificates of eligibility may be obtained by sending the form DD-214 to the local VA office along with VA form 1880.

Certificate of Occupancy
Document issued by a local governmental agency that states a property meets the local building standards for occupancy and is in compliance with public health and building codes. This document is normally required by a lender prior to closing the loan.

Certificate of Reasonable Value
An appraisal performed by an VA approved appraiser which establishes the property’s current market value. This value establishes the ceiling on the maximum VA mortgage loan principal.

Certificate of Title
An opinion rendered by an attorney as to the status of title to a property, according to the public records. This certificate does not provide the same level of protection as title insurance.

Chain of Title
The chronological order of conveyance of a parcel of land from the original owner to the present owner.

Clear Title
A marketable title, free of clouds and disputed interests. Most lenders require a clear title prior to closing.

Closing
The consummation of a real estate transaction. The closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to complete the sale and loan transaction.

Closing Costs
Expenses incurred by the buyer and seller in a real estate or mortgage transaction. There are two types of costs: recurring and non-recurring. Non-recurring closing costs are one time transactional costs which include: discount and origination points, lender fees, underwriting, processing, document preparations, flood certificate, tax service, wire transfer, courier, title insurance, escrow, attorney or closing agent fees, recording fees, inspection fees, appraisal fees and real estate brokerage commissions.

Recurring costs are fees associated with owning the property that recur month after month. These costs may include hazard insurance, interest, property taxes, mortgage insurance (PMI), and association fees. A pro-rated amount of these fees may have to be paid at closing including prepaid interest (interest charged from the date of closing to the end of the month) and property taxes (if due). Hazard insurance, fire insurance or homeowner’s insurance must be paid up for one year. Mortgage insurance (PMI) may be required if the loan amount is more than 80% of the value of the property. Many mortgage insurance companies require 1-3 month’s payment in advance. Mortgage insurance premiums are normally paid every month with the loan payment.

Closing Statement
A form used at closing that gives an account of the funds received and paid at the closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance.

Co-Borrower
Additional borrower(s) whose income contributes to qualifying for a loan and whose name(s) appears on documents with equal legal obligations.

Collateral
Property pledged as security for a debt, such as the real estate pledged as security for a mortgage.

Collection
When a borrower falls behind, the lender contacts them in an effort to bring the loan current. The loan goes to “collection.” As part of the collection effort, the lender must mail and record certain documents in case they are eventually required to foreclose on the property.

Commission
Most salespeople earn commissions for the work that they do and there are many sales professionals involved in each transaction, including Realtors, loan officers, title representatives, attorneys, escrow representative, and representatives for pest companies, home warranty companies, home inspection companies, insurance agents, and more. The commissions are paid out of the charges paid by the seller or buyer in the purchase transaction. Realtors generally earn the largest commissions, followed by lenders, then the others.

Commitment (Loan)
A binding pledge made by the lender to the borrower to make a loan, usually at a stated interest rate within a given period of time for a given purpose, subject to the compliance of the borrower to stated conditions.

Commitment Fee (Loan)
Any fee paid by a potential borrower to a lender for the lender’s promise to lend money at a specified rate and within a given time period.

Commitment Letter
A formal offer by a lender stating the terms under which it agrees to loan money to a home buyer.

Community Property
In some states, property acquired by a married couple during their marriage is considered to be owned jointly, except under special circumstances.

Comparable Sales (“Comps”)
Recent sales of similar properties in nearby areas and used to help determine the market value of a property.

Conforming Loan
Conventional home mortgages eligible for sale and delivery to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). These agencies generally purchase first mortgages up to loan amounts mandated by Congressional directive. This amount is currently $300,700.00 or less.

Consideration
Anything of value given to induce another to enter into a contract. Earnest money deposit on a sales contract is consideration.

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.

Contingency
A condition that must be met before a contract is legally binding.

Contract
An agreement between competent parties to do or not do certain things for consideration.

Contract Sale or Deed
A real estate installment selling arrangement where the buyer may occupy the property but the seller retains the title until the agreed upon sales price has been paid. Also known as an installment land contract.

Conventional Mortgage
A mortgage not obtained under a government insured program (such as FHA or VA). A conventional loan may be conforming or non-conforming.

Convertible ARM (Adjustable Rate Mortgage)
An adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-rate mortgage within a specific time.

Conveyance
The transfer of title of real property from one party to another.

Cost of Funds Index (COFI)
One of the indexes that is used to determine interest rate changes for certain adjustable-rate mortgages. It represents the weighted-average cost of savings, borrowings, and advances of the financial institutions such as banks and savings & loans, in the 11th District of the Federal Home Loan Bank.

Credit Rating
Borrowers are rated by lenders according to the borrower’s credit-worthiness or risk profile. Credit ratings are expressed as letter grades such as A-, B, or C+. These ratings are based on various factors such as a borrower’s payment history, available credit, and derogatory information, among others. There is no exact science to rating a borrower’s credit, and different lenders may assign different grades to the same borrower. A FICO Score is used as a measure of creditworthiness, and is represented as a numerical score assigned by each of the three primary credit repositories.

Credit Report
A report detailing an individual’s credit history.

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.

D

Debt-to-Income Ratio (DIR)
Used as one of the primary considerations for a loan approval, a borrower’s debt-to-income ratio is expressed as a percentage of the total amount of monthly payment obligations for secured and unsecured debt compared to total gross monthly income. The ratio of debt to income is 50% or less in order to qualify for a loan in most circumstances.

Deed
A written document by which title to real property is transferred from one owner to another. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the State where the property is located, and should be delivered to the buyer at closing.

Deed of Trust
An instrument used in many states (including California) in place of a mortgage. Property is transferred to a trustee by the borrower (trustor), in favor of the lender (beneficiary) and reconveyed upon payment in full.

Deed Restriction
A clause in a deed that limits the use of land. Example: A deed might require that a road cannot be built on the land.

Default
Failure to make the mortgage payment within a specified period of time. For first mortgages or first trust deeds, if a payment has still not been made within 30 days of the due date, the loan is considered to be in default.

Defective Title
Any recorded instrument that would prevent a grantor/seller from giving a clear title. Example: The seller has a lien on the property that was filed when he failed to pay a contractor for work performed. The seller may obtain clear title by paying the contractor and removing the lien.

Deficiency Judgment
Personal claim against the debtor when the sale of foreclosed property does not yield sufficient proceeds to pay off the mortgages, accrued interest, legal fees, etc.

Delinquency
A loan payment that is overdue but within the period allowed before actual default is declared.

DeMinimus PUD
A PUD in which the common property has less than a 2% influence upon the value of the premises. The 2% rule of thumb is calculated by dividing the dollar amount of amenities by the total number of units. Also see PUD.

Deposit
A sum of money given to bind a sale of real estate. Also known as earnest money.

Depreciation
A loss of value in real property brought about by age, physical deterioration, functional or economic obsolescence.

Discount Point
Fees paid to a lender to reduce the interest rate. One point is equal to one percent of the loan amount.

Discounted Loan
When the note rate on a loan is less than the market rate, the lender requires additional points to raise the yield on the loan to the market rate.

Documentary Tax Stamp
Stamp affixed to a deed showing the amount of transfer tax.

Down Payment
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.

Dragnet Clause
A provision in a mortgage that pledges other properties as collateral. A default in the mortgage could lead to foreclosure proceedings on any of the properties in the dragnet.

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.

E

Earnest Money
A portion of the down payment delivered with a purchase offer by the purchaser of real estate to the seller or an escrow agency by the purchaser of real estate with a purchase offer as evidence of good faith. Also known as a deposit.

Easement
The right to use the land of another for a specific purpose. Easements may be temporary or permanent.

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.

Eminent Domain
The right of the government or a public utility to acquire property for necessary public use by condemnation, with proper compensation to the owner.

Encroachment
A building, a part of a building, or an obstruction (e.g.. a fence or a wall) that physically intrudes upon or overlaps into the property of another.

Encumbrance
Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions.

Equal Credit Opportunity Act (ECOA)
A Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, age, marital status, receipt of income from public assistance programs or past exercising of rights under the Consumer Credit Protection Act.

Equity
The ownership interest; i.e. portion of a property’s value over and above the liens against it.

Equity Sharing
Joint ownership of a property between the owner/occupant and the owner/investor, that results in tax advantages for both parties. Upon sale of the property the joint owners split profits based on the percentage they own.

Escheat
The reversion of property to the state in the event that the owner dies without leaving a will and has no legal heirs.

Escrow
A procedure whereby a disinterested third party handles legal documents and funds on behalf of a seller and buyer.

Escrow Account
Once you close your purchase transaction, you may have an escrow account or impound account with your lender. This means the amount you pay each month includes an amount above what would be required if you were only paying your principal and interest. The extra money is held in your impound account (escrow account) for the payment of items like property taxes and homeowner’s insurance when they come due. The lender pays them with your money instead of you paying them yourself.

Escrow Analysis
Once each year your lender will perform an “escrow analysis” to make sure they are collecting the correct amount of money for the anticipated expenditures.

Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

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.

Exclusive Listing
A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time.

Executor (m) Executrix (f)
A person named in a will to carry out its provisions for the disposition of the estate.

F

FSBO (“Fisboe”)
Term meaning “For Sale By Owner”. A property for sale that is not listed with a real estate broker.

Fair Credit Reporting Act (FCRA)
A federal law which requires a lender who is rejecting a loan request because of adverse credit information to inform the borrower of the source of such information. This law also requires consumer reporting agencies to exercise fairness, confidentiality and accuracy in preparing and disclosing credit information.

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.

Farmers Home Administration — FmHA
An agency within the U.S. Department of Agriculture that administers assistance programs for purchasers of homes and farms in small towns and rural areas.

Federal Home Loan Mortgage Corporation – FHLMC (FREDDIE MAC)
A quasi-governmental agency that purchases conventional mortgages in the secondary mortgage market from insured depository institutions and HUD-approved mortgage bankers. It sells participation sales certificates secured by pools of conventional mortgage loans, their principal, and interest guaranteed by the federal government through the FHLMC. It also sells Government National Mortgage Association bonds to raise funds to finance the purchase of mortgages. Popularly know as Freddie Mac.

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.

Federal National Mortgage Association – FNMA (FANNIE MAE)
A taxpaying corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages.

Federal Reserve System – FED
The central federal banking system that regulates and provides services to member commercial banks. Also has the responsibility for conducting federal monetary policy.

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). Along with VA loans, an FHA loan will often be referred to as a government loan.

Fiduciary
A person in a position of trust or responsibility with specific duties to act in the best interest of a client. A real estate broker is a fiduciary for his/her clients.

Finance Charge
Interest charged by a lender.

Firm Commitment
A lender’s agreement to make a loan to a specific borrower on a specific property.

First Mortgage
A real estate loan that has priority over any subsequently recorded mortgages.

Fixed Interest Rate
An interest rate which does not change during the loan term.

Fixture
Personal property that becomes real property when attached in a permanent manner to real estate.

Flood Insurance
Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.

Foreclosure
A legal procedure in which property mortgaged as security for a loan is sold to pay the defaulting borrower’s debt.

Fully Indexed Rate
The Fully Indexed Rate = Value of the index + Margin.

General Warranty Deed
A deed in which the grantor (seller) agrees to the protect the grantee (buyer) against any other claim to title of the property.

Gift Letter
A written explanation signed by the individual giving the gift stating, “This is a bona fide gift and there is no obligation expressed or implied to repay this sum at any time.”

Good Faith Estimate
An estimate of charges which a borrower is likely to incur in connection with a loan closing. Receipt of a Good Faith Estimate is not the same as a Loan Approval, and is subject to change before an actual loan is approved by a lender.

Government Loan (mortgage)
A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Mortgages that are not government loans are classified as conventional loans.

Government National Mortgage Association (Ginnie Mae)
A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD). Created by Congress on September 1, 1968, GNMA performs the same role as Fannie Mae and Freddie Mac in providing funds to lenders for making home loans. The difference is that Ginnie Mae provides funds for government loans (FHA and VA).

Graduated Payment Mortgage (GPM)
A mortgage that has lower payments initially (with potential negative amortization) which increase each year until the loan is fully amortized.

Grantee
The person to whom an interest in real property is conveyed. The Grantor is the seller or giver.

Gross Monthly Income
Total monthly income earned before tax and other deductions.

H

Hazard Insurance
A contract whereby an insurer, for a premium, undertakes to compensate the insured for loss on a specific property due to certain hazards (i.e. fire).

High-Ratio Loan
Mortgage loans in excess of 80 percent of the loan amount divided by the lower of the sales price or appraised value.

Home Equity Conversion Mortgage (HECM/RAM)
Usually referred to as a reverse annuity mortgage, what makes this type of mortgage unique is that instead of making payments to a lender, the lender makes payments to you. It enables older home owners to convert the equity they have in their homes into cash, usually in the form of monthly payments. Unlike traditional home equity loans, a borrower does not qualify on the basis of income but on the value of his or her home. In addition, the loan does not have to be repaid until the borrower no longer occupies the property.

Home Equity Line of Credit (HELOC)
A mortgage loan, usually in second position, that allows the borrower to obtain cash drawn against the equity of his home, up to a predetermined amount.

Home Inspection
A thorough inspection by a professional that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser.

Homeowners’ Association Dues (also known as Common Area Assessments)
The fees imposed by a condominium or homeowners’ association for maintenance of common areas.

Homeowner’s Insurance
An insurance policy that combines personal liability insurance and hazard insurance coverage for a dwelling and its contents.

Homeowner’s Warranty
A type of insurance often purchased by homebuyers that will cover repairs to certain items, such as heating or air conditioning, should they break down within the coverage period. The buyer often requests the seller to pay for this coverage as a condition of the sale, but either party can pay.

Homestead
Status provided to a homeowner’s principal residence in some states that protects the home against judgments up to specified amounts.

Homestead Exemption
Available in some states, this causes the assessed value of a principal residence to be reduced by the amount of the exemption for the purposes of calculating property tax.

Home Warranty Plan
Insurance that covers appliances, heating systems, etc. Typically purchased at the time of closing.

Housing Code
A local government ordinance that sets minimum standards of safety and sanitation for existing residential buildings.

Housing & Urban Development (HUD)
A U.S. government agency established to implement certain federal housing and community development programs.

HUD Median Income
Median family income for a particular county or metropolitan statistical area (MSA), as estimated by the Department of Housing and Urban Development (HUD).

HUD-1 Settlement Statement
A document that provides an itemized listing of the funds that were paid at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow (impound) amounts. Each type of expense goes on a specific numbered line on the sheet. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing. It is called a HUD1 because the form is printed by the Department of Housing and Urban Development (HUD). The HUD1 statement is also known as the “closing statement” or “settlement sheet.”

I

Impound Account
That portion of a borrower’s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as Escrows or Impounds.

Income Approach
A method used by an appraiser to estimate the value of a property based on the income it generates.

Index
A statistic that indicates some current economic or financial condition. Indexes are used to make adjustments in variable rate loans.

Ingress & Egress
The right to go in and out over a piece of property but not the right to park on it.

Insured Loans
A loan insured by HUD-FHA or a private mortgage insurance company.

Interest
Consideration in the form of money paid for the use of money. Also a right, share or title in property.

Interest rate
The percentage of an amount of money which is paid for its use for a specified time. Investment Property Real estate owned with the intent of supplementing income and not intended for owner occupancy.

J

Joint & Several Liability
A creditor can demand full repayment from any and all of those who have borrowed. Each borrower is liable for the full debt, not just the prorated share.

Joint Tenancy
A form of ownership or taking title to property which means each party owns the whole property and that ownership is not separate. In the event of the death of one party, the survivor owns the property in its entirety.

Judgment
A decision made by a court of law. In judgments that require the repayment of a debt, the court may place a lien against the debtor’s real property as collateral for the judgment’s creditor.

Judgment Lien
The claim on the property of a debtor resulting from a judgment.

Jumbo Loan
A loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits, currently at $300,700 or more. Also called a non-conforming loan. Freddie Mac and Fannie Mae loans are referred to as conforming loans.

Junior Mortgage
A mortgage subordinate to another mortgage. In the case of a foreclosure a senior mortgage will be paid prior to a junior mortgage.

L

Land Contract
A real estate installment selling arrangement whereby the buyer may use and occupy land, but no deed is given by seller until the sales price has been paid.

Leasehold Estate
A way of holding title to a property wherein the mortgagor does not actually own the property but rather has a recorded long-term lease on it.

Lease Option Purchase
An alternative financing option that allows home buyers to lease a home with an option to buy. Each month’s rent payment may consist of not only the rent, but an additional amount which can be applied toward the down payment on an already specified price.

Legal Description
A property description, recognized by law, that is sufficient to locate and identify the property without oral testimony.

Lessee
A person to whom property is rented under a lease. (Tenant)

Lessor
A person who rents property to another under a lease. (Landlord)

Liabilities
A person’s financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others.

Liability Insurance
Insurance coverage that offers protection against claims alleging that a property owner’s negligence or inappropriate action resulted in bodily injury or property damage to another party. It is usually part of a homeowner’s insurance policy.

Lien
A legal claim or attachment against property as security for payment of an obligation.

Life Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the mortgage.

Life Estate
An estate in real property for the life of a living person. The estate then reverts back to the grantor or to a third party.

Lis Pendens
Latin for “lawsuit pending.” Recorded notice that litigation is pending on a property. Most lenders will require the clearance of the Lis Pendens prior to closing.

Loan Officer
Also referred to by a variety of other terms, such as lender, loan representative, loan “rep,” account executive, and others. The loan officer serves several functions and has various responsibilities: they solicit loans, they are the representative of the lending institution, and they represent the borrower to the lending institution.

Loan Origination
How a lender refers to the process of obtaining new loans.

Loan Origination Fee
Charge by a lender or broker connected with originating a loan. This is different from discount points which are used to buy down the rate of interest.

Loan Servicing
After you obtain a loan, the company you make the payments to is “servicing” your loan. They process payments, send statements, manage the escrow/impound account, provide collection efforts on delinquent loans, ensure that insurance and property taxes are made on the property, handle pay-offs and assumptions, and provide a variety of other services.

Loan-To-Value Ratio (LTV)
The ratio between the amount of a given mortgage loan and the lower of sales price or appraised value.

Lock-In
An agreement in which the lender guarantees a specified interest rate for a certain amount of time at a certain cost.

M

Margin
The difference between the interest rate and the index on an adjustable rate mortgage. The margin remains stable over the life of the loan. It is the index which moves up and down.

Market Value
The most probable price which a ready, willing and able buyer would pay and a willing seller will accept, both being fully informed under no pressure to act. The market value may be different from the price a property can actually be sold for at a given time (market price).

Marketable Title
Title that is free of liens, clouds and other legal defects and hence is readily acceptable by a buyer.

Maturity
The termination or due date on which final payment on a loan must be paid in full.

Mechanics Lien
The right of an unpaid contractor or subcontractor to file a lien against property to recover the amount due to him/her.

Mello Roos
A special tax imposed on property, individual lots or all property in the neighborhood to pay for improvements: street lights, sidewalks, toll roads,  etc. Also known as Special Assessment.

Merged Credit Report
A credit report which reports the raw data pulled from two or more of the major credit repositories.

Modification
Occasionally, a lender will agree to modify the terms of your mortgage without requiring you t refinance. If any changes are made, it is called a modification.

Monthly Payment
Usually, the amount of PITI (principal, interest, taxes, and insurance) paid each month on a mortgage loan.

Mortgage
A legal document that pledges a property to the lender as security for payment of a debt. Instead of mortgages, some states (such as California) use First Trust Deeds.

Mortgage Backed Security (MBS)
A bond or other financial obligation secured by a pool of mortgage loans.

Mortgage Banker
A mortgage banker is generally assumed to originate and fund their own loans, which are then sold on the secondary market, usually to Fannie Mae, Freddie Mac, or Ginnie Mae.

Mortgage Broker
A mortgage company that originates loans, then places those loans with a variety of other lending institutions with whom they usually have pre-established relationships.

Mortgagee
The lender in a mortgage transaction.

Mortgage Insurance (MI)
Insurance that covers the lender against some of the losses incurred as a result of a default on a home loan. Often mistakenly referred to as PMI, which is actually the name of one of the larger mortgage insurers. Mortgage insurance is usually required in one form or another on all loans that have a loan-to-value higher than eighty percent. Mortgages above 80% LTV that call themselves “No MI” are usually a made at a higher interest rate. Instead of the borrower paying the mortgage insurance premiums directly, they pay a higher interest rate to the lender, which then pays the mortgage insurance themselves. Also, FHA loans and certain first-time homebuyer programs require mortgage insurance regardless of the loan-to-value.

Mortgage Insurance Premium (MIP)
The consideration paid by a mortgagor (borrower) for mortgage insurance – either to the FHA or to a private mortgage insurer.

Mortgage Note
A written promise to pay a sum of money at a stated interest rate during a specified term. The note contains a complete description of the conditions under which the loan is to be repaid and when it is due.

Mortgagor
The borrower in a mortgage transaction who pledges property as security for a debt.

Multi-Dwelling Units
Properties that provide separate housing units for more than one family, although they secure only a single mortgage.

N

Negative Amortization
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes only the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment, which is why this is called “deferred interest.” The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.

Negative Amortization Loan
An adjustable rate mortgage loan, usually based on the 11th District Cost of Funds Index (COFI) plus a margin. This type of loan allows a mortgagor more payment flexibility than a standard ARM by paying simple interest, full interest or interest and principal in any given month. The loan adjusts monthly and has a life cap. Provided a mortgagor has the discipline to make more “full” payments than interest-only (thereby paying down the principal balance), this can be an excellent loan for first-time home buyers, self-employed persons and owners of rental properties whose incomes are inconsistent.

Non-Conforming Loan
Conventional home mortgages not eligible for sale and delivery to either FNMA or FHLMC because of various reasons, including loan amount, loan characteristics or underwriting guidelines.

Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Notice of Default (NOD)
A formal written notice to a borrower that a default has occurred and that legal action may be taken.

O

Occupancy
The use of a property as a full-time residence, either by the title holder (owner-occupancy) or by another party through a formal agreement (rental).

Open End Mortgage
A mortgage permitting the mortgagor to borrow additional money under the same mortgage, with certain conditions.

Origination Fee
An amount which may be charged for services performed by the company handling the initial application and processing of a mortgage loan.

Owner of Record
The individual named on a deed that has been recorded at the county recorders office.

P

Package Mortgage
Mortgage covering both real and personal property.

Partial Release
A provision in a mortgage that allows some of the property secured to be freed from serving as collateral.

Participation Mortgage
A mortgage that allows the lender to share in part of the income or resale proceeds.

Pass Through Certificates
Interests in a pool of mortgages sold by mortgage bankers to investors. Money collected as monthly mortgage payments is distributed to those who own certificates.

Percentage Point
One percent of the loan amount or a measure of the interest rate.

PITI (Principal, Interest, Taxes, and Insurance)
The most common components of a monthly mortgage payment.

Planned Unit Development (PUD)
A zoning classification that allows flexibility in the design of a subdivision. PUDs include individually owned units as well as some common space that is jointly owned. See PUD below.

Plat
A plan or map of a specific land area.

Plat Book
A public record containing maps of land, showing the division of the land into streets, blocks, and lots and indicating the measurements of the individual parcels.

Points
Fees paid to lenders. 1 Point = 1% of the loan amount.
Example: On a $100,000 loan 1 Point is $1,000. Points may be further classified into Origination points or loan “Discount” Points.

Portfolio Loan
A loan that is held as an investment by a bank or savings and loan, and not sold on the secondary market to investors.

Power of Attorney
A written document authorizing a person to act on the behalf of another person. That person does not have to be an attorney.

Pre-Approval
A loosely used term which is generally taken to mean that a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved. A pre-approval is usually done at a certain loan amount and making assumptions about what the interest rate will actually be at the time the loan is actually made, as well as estimates for the amount that will be paid for property taxes, insurance and others. A pre-approval applies only to the borrower.

Preliminary Title Report
The results of a title search by a title company prior to issuing a title binder or commitment to insure clear title.

Prepaid Interest
Prepaid interest is the interest charged to borrowers at closing to pay for the cost of borrowing for a balance of the month. Example: A loan closes on the 19th of the month and the first payment is due on the 1st of the following month, the lender will charge 12 days of prepaid interest.

Prepaids
Expenses such as taxes, insurance and assessments which are paid in advance of their due date and which must be paid by the buyer on a prorated basis at closing.

Prepayment
Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner’s decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized.

Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.

Pre-Qualification
This usually refers to the loan officer’s written opinion of the ability of a borrower to qualify for a home loan, after the loan officer has made inquiries about debt, income, and savings. The information provided to the loan officer may have been presented verbally or in the form of documentation, and the loan officer may or may not have reviewed a credit report on the borrower.

Primary Mortgage Market
Companies that originate and service mortgage loans (banks, savings & loans, credit union, mortgage bankers, institutional lenders) make up the primary mortgage market.

Primary Residence
A residence which the borrower intends to occupy as the principal residence.

Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate are widely publicized in the news media and are used as the indexes in some adjustable rate mortgages, especially home equity lines of credit. Changes in the prime rate do not directly affect other types of mortgages, but the same factors that influence the prime rate also affect the interest rates of mortgage loans.

Principal Balance
The remaining balance due on a debt, exclusive of accrued interest.

Private Mortgage Insurance
Insurance written by a private company protecting the mortgage lender against loss resulting from a mortgage default.

Probate
Court process to establish the validity of the will of a deceased person.

Processing
The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.

Property Tax
A government levy based on the market value (as assessed by the county assessor’s office) of the property.

PUD (Planned Unit Development)
A planned combination of diverse land uses, such as housing, recreation, and shopping in one contained development or subdivision. A major feature of a PUD includes areas of common land for use by the housing unit owners; the association of unit owners generally owns, pays fees, and maintains the common areas. Also see DiMinimus PUD.

Purchase Contract (Agreement/Offer)
An agreement between a buyer and seller of real property, setting forth the price and terms of the sale. Also known as a sales contract.

Purchase Money Mortgage
A mortgage used to finance the purchase of a property.

Qualifying Ratios
Calculations that are used in determining whether a borrower can qualify for a mortgage. There are two ratios. The “top” or “front” ratio is a calculation of the borrower’s monthly housing costs (principle, taxes, insurance, mortgage insurance, homeowner’s association fees) as a percentage of monthly income. The “back” or “bottom” ratio includes housing costs as will as all other monthly debt.

Quiet Title Action
A court action to settle a title dispute.

Quit Claim Deed
A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.

R

Rate Lock Option
An agreement guaranteeing an individual a specified interest rate on a loan provided the loan is closed within a set period of time.

Real Assets
Real estate or real property owned by an individual of business.

Real Estate Broker
An individual who often owns a real estate company or is in a management position, and who is licensed to represent a buyer or a seller in a real estate transaction.

Real Estate Investment Trust (REIT)
A trust that uses investors money to purchase and manage real estate. Investors realize some of the tax advantages in owning real estate.

Real Estate Settlement Procedures Act (RESPA)
A federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs. It also establishes guidelines for escrow account balances.

Realtor
A real estate professional who is a member of the National Association of Realtors.

Real Property
Land and that which is affixed to it.

Reconveyance
When a mortgage is paid off in full, the lender conveys the property back to the owner.

Recorder
The public official who keeps records of transactions that affect real property in the area. Sometimes known as a “Registrar of Deeds” or “County Clerk.”

Recording
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record. A Recording Fee may be charged.

Recourse
The right of the holder of a note secured by a mortgage or deed of trust to claim money from the borrower in default in addition to the property pledged as a collateral.

Refinancing
The repayment of a debt from the proceeds of a new loan using the same property as security.

Regulation Z (Reg Z)
A federal regulation requiring creditors to provide full disclosure of the terms of a loan including the terms of the loan and the annual percentage rate (APR).

Rescission
The cancellation of an already signed contract. When refinancing a mortgage on a principal residence the law gives the homeowner three days to change his mind and cancel (rescind) the contract.

Restrictive Covenants
Private restrictions limiting the use of real property. Restrictive covenants are created by deed and may “run with the land,” binding all subsequent purchasers of the land, or may be “personal” and binding only between the original seller and buyer.

Reverse Mortgage
A mortgage used by the elderly that provides income as long as they live in exchange for title to the property after death. Payments made cause the loan principal to increase.

Example: A lender makes payments on a property to its owner, however, the owner continues to live in it until his death. At that time the property is turned over to the lender. The American Association of Retired Persons (AARP) has great information on this type of mortgage.

Revolving Debt
A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services. The borrower is billed for the amount that is actually borrowed plus any interest due.

Right of First Refusal
A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others.

Right of Survivorship
The right of a surviving joint tenant to acquire the interest of a deceased joint owner.

Rollover Loan
A loan that is amortized over a long period of time (e.g. 30 years) but the interest rate is fixed for a short period (e.g. 5 years). The loan may be extended or rolled over, at the end of the shorter term, based on the terms of the loan.

S

SFR (Single Family Residence)
A type of residential structure designed to include one dwelling.

Satisfaction of Mortgage
The recordable instrument issued by the lender verifying full payment of a mortgage debt.

Savings & Loan (S&Ls)
Depository institutions that specialize in originating, servicing and holding mortgage loans primarily on owner-occupied residential property.

Second Home (Vacation Home, Weekend Home)
A residence other than the borrower’s primary residence which the borrower intends to occupy for a portion of each year. Must be suitable for year-round occupancy.

Second Mortgage
A subordinated lien, created by a mortgage loan, over the amount of a first mortgage. Second mortgages generally carry a higher rate than a first mortgage since they represent a higher risk for an investor.

Secondary Mortgage Market
A market where existing mortgages are bought and sold. It contrasts with the primary mortgage market where mortgages are originated.

Section 8 Housing
Privately owned rental units participating in the low-income rental assistance program. Landlords receive subsidies on behalf of qualified low-income tenants, allowing the tenants to pay a limited proportion of their incomes toward the rent.

Section 32
A trigger on a mortgage loan whereby the interest rate charged by the lender exceeds federally mandated thresholds above comparable federal treasury yields. Enacted as part of the effort to curb predatory lending practices, lenders originating subprime loans that fall under Section 32 must provide full written disclosure to the borrower in advance.

Section 1031 (1031 Exchange)
A section of the IRS Code that deals with tax free exchanges of certain property.

Security
In lending, the collateral given, deposited, or pledged to secure the payment of a debt.

Seller Carry-Back
An agreement in which the owner of a property provides financing, sometimes in combination with an assumable mortgage.

Servicer
An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Settlement Cost (HUD Guide)
A booklet that provides an overview of the lending process and is required to be given to consumers after the loan application is completed.

Settlement Services
Services provided by the lender at the closing of a loan.

Shared Appreciation Mortgage
A residential loan with a fixed interest rate that is below market, with the lender entitled to a specified share of appreciation of the property over an agreed upon time interval.

Spec Home
A single family dwelling constructed by a builder in anticipation of finding a buyer.

Special Assessment 
A special tax imposed on property, individual lots or all property in the neighborhood to pay for improvements: street lights, sidewalks, toll roads,  etc. Also known as Mello-Roos.

Special Warranty Deed
The grantor does not warrant against title defects arising from conditions that existed before he/she owned the property. The seller warrants that he/she has done nothing to impair title.

Standard Uniform Loan Application (FNMA 1003)
A standard loan application widely used in the mortgage industry.

Subject To (purchase Subject To a mortgage)
The buyer agrees to make payments on the existing mortgage, without notifying the lender. The seller remains liable for making payments on the loan if the buyer does not make the mortgage payment. The buyer is not personally liable for mortgage payments, but must make payments to keep the property.

Subordinate Debt
Any mortgage or other lien that has a priority that is lower than that of the first mortgage (such as a second mortgage).

Survey
The measurement and description of land by a registered surveyor.

Sweat Equity
Value added to a property due to improvements made personally by the owner.

T

Takeout Financing
A commitment to provide permanent financing upon completion of construction. The take out loan normally pays off the construction loan.

Tax Lien
Lien for nonpayment of taxes.

Tax Sale
Public sale of a property at an auction by a government authority as a result of non-payment of taxes.

Teaser Rate
A low initial interest rate on a mortgage.

Tenancy by Entirety
A form of ownership by husband and wife whereby each owns the entire property. In event of the death of one, the survivor owns the property without probate.

Tenancy in Common
Ownership of a property by 2 or more persons, each of whom has an undivided interest, without the right of survivorship. Upon the death of one of the owners, the ownership share of the deceased is inherited by the beneficiary designated on the owner’s will.

Tenancy in Severalty
Ownership of property by one person.

Term
The time limit within which a loan must be repaid.

Third-Party Origination
A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

Time Share
A form of property ownership under which a property is held by a number of people, each with the right of possession for a specified time interval. Time sharing is used mostly for vacation properties.

Title
The legal evidence of ownership rights to real property.

Title Insurance Policy
A contract in which an insurer, usually a title insurance company, agrees to pay the insured party a specific amount for any loss caused by defects of title on real estate in which the insured has an interest as purchaser, mortgagee, or otherwise.

Title Report
A document indicating the current state of title. The report includes information on the current ownership, outstanding deeds of trust or mortgages, liens, easements, covenants, restrictions, and any defects.

Title Search
An examination of public records to disclose the past and current facts regarding the ownership of a given piece of real estate.

Townhouse
Residence which normally has 2 or more floors and is attached to other similar units. Town houses are commonly found in planned unit developments (PUDs) and condominiums.

Tract
A parcel of land, generally held for subdividing.

Transfer of Ownership
Any means by which the ownership of a property changes hands. Lenders consider all of the following situations to be a transfer of ownership: the purchase of a property “subject to” the mortgage, the assumption of the mortgage debt by the property purchaser, and any exchange of possession of the property under a land sales contract or any other land trust device.

Transfer Tax
Tax paid to the city, county, state or other government entity upon sale of a property.

Treasury Index
An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or is derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

Triple-Net Lease
One in which the tenant pays all operating expense of the property. Usually expressed in cost-per-foot over and above base cost-per-foot. The landlord receives the net rent.

Trust Account
A separate bank account maintained by a broker or escrow company to handle all money collected by clients. A broker may not co-mingle these funds with his/her own funds.

Trustee
A fiduciary who holds or controls property for the benefit of another.

Truth-in-Lending Act
A Federal law requiring full disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms and financial institutions.

Two-Step Mortgage
An adjustable-rate mortgage (ARM) that has one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term.

U

Underwriting
Analysis of risk and setting of an appropriate rate and terms for a mortgage on a given property for given borrowers.

Undivided Interest
An ownership right to use and possess a property that is shared among co-owners, with no one co-owner having exclusive rights to any portion of the property.

Unencumbered Property
Real estate with free and clear title.

Unimproved Property
Land that has received no development.

Unrecorded Deed
A document that transfers title from the grantor to the grantee without recording (i.e. providing public notice).

V

VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA).

Variable Rate Mortgage
Same as Adjustable Rate Mortgage.

Verification of Deposit (VOD)
A document signed by the borrower’s bank or other financial institution verifying the account balance and history.

Verification of Employment (VOE)
A document signed by the borrower’s employer verifying his/her starting date, job title, salary and probability of continued employment.

Vested
Having the right to use a portion of a fund such as an individual retirement fund. For example, individuals who are 100 percent vested can withdraw all of the funds that are set aside for them in a retirement fund.

Veterans Administration (VA)
An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans.

W

Warehousing
Mortgage bankers and other financial institutions make loans that are then periodically sold on the secondary market. After the loan is made but before it is sold–the loan is said to be in the lenders warehouse.

Warranty Deed
A deed conveying the title to a property with a warranty of a clear marketable title.

Wrap-Around Mortgage
A loan arrangement whereby the existing loan is retained an a new loan is added to the property. Example: The seller sells his/her property for $200,000. The buyer puts $80,000 down. The seller has an existing loan balance of $100,000 for a remaining period of 25 years at an interest rate of 6%. The seller then makes a wraparound mortgage to the buyer, (where the seller acts as a lender) for $120,000 at 8%. The seller has to continue making payments on his old loan. They buyer has to pay the seller on the new loan. The buyer may at a later date refinance the property and close both loans.