contract granting the right, but not
the obligation, to purchase a security
at a specified strike price on a
In a mortgage or deed
of trust, a condition that gives the
right to demand or "call in"
the balance of the obligation in the
event of a breach of specified terms
or conditions. In bonds, the
issuerís right to redeem the bond
In a lease or other
contract, a provision detailing
conditions under which each party may
terminate the agreement.
The net worth of a business
represented by the amount that its
assets exceed liabilities. Money
invested to create income.
An asset of a permanent or
fixed nature to be used in a business
or trade and not sold.
The cost of a capital
asset or a property improvement made
to add value to or extend the useful
life of an existing capital asset.
The gain or loss incurred
from the sale or disposition of a
Any structure or
component erected as a permanent
improvement to real property that adds
to its value and useful life.
The financial market for
buying and selling long-term
investments (those with maturities of
greater than one year), such as
mortgages, Treasury bonds, and
certificates of deposit.
The process of converting into present
value a series of anticipated future
installments of net income by
discounting them into a present worth
using a specific desired rate of
The rate of return on net
operating income considered acceptable
for an investor and used to determine
the capitalized value. This rate
should provide a return on, as well as
a return of, capital.
The estimated market value
of business assets in terms of the
present value of anticipated earnings.
Consumer safeguards on
an adjustable-rate mortgage which
limit the amount the interest rate may
change per year and/or over the life
of the loan.
Consumer safeguards on
an adjustable-rate mortgage which
limit the amount monthly payments may
An agreement in which
the seller takes back a note for part
of the purchase price secured by a
junior mortgage, wrap-around mortgage,
or contract for deed.
The charges or costs
incurred for holding property when it
is idle, non-productive, or in interim
use, including the opportunity cost of
nonproductive use of the property.
Basis of Accounting
An accounting method
under which income is reported when
actually received and expenses are
deducted when paid.
A method of
calculating the appraised value of a
property that considers sales and
financing concessions when evaluating
comparable properties. There is no
standard in the appraisal industry for
measuring cash equivalent value, but
investors and mortgage insurers
sometimes insist that cash equivalency
be incorporated in appraised values.
Flow (After Taxes)
Cash received less
cash paid out, including income taxes
Flow (Before Taxes)
Cash received less
cash paid out, before any
consideration for income taxes.
market where mortgages and/or
mortgage-backed securities are bought
and sold for immediate delivery and
cash payment. Also called spot market.
The rate of return on an
investment as measured by cash
returned to the investor, based on the
investorís cash investment and
without regard to income tax savings
or the use of borrowed funds.
When the principal
amount of a new mortgage involved in
refinancing is greater than the
principal amount outstanding of the
existing mortgage being refinanced,
and all or a portion of the equity is
converted to cash.
The process by which a
dollar adjustment rather than a
physical instrument is used to satisfy
the delivery requirement of a given
contract at expiration.
Losses on property
arising from fire, storm, theft, or
similar sudden and unexpected
Board of Trade)
where futures and options contracts
are traded. Residential mortgage
bankers may use futures and options to
hedge their inventories of mortgages.
Board Options Exchange)
largest and most active organized
A contingent promise to
reimburse an insured mortgagee for
certain costs incurred during
foreclosure of an insured mortgage,
provided the proceeds from the sale of
the property are sufficient to cover
the lenderís claim.
A document issued
by an architect or engineer stating
that construction is completed in
accordance with the terms, conditions,
approved plans, and specifications.
of Deposit (CD)
issued by financial institutions with
a stated return or interest rate, and
with a set maturity. The bank pays the
holder in due course at maturity.
A document issued
by the Veteranís Administration
which verifies a veteranís
eligibility for a VA mortgage
authorization given by a local
municipality that allows a newly
completed or substantially renovated
structure to be inhabited.
of Reasonable Value (CRV)
document issued by the Veteranís
Administration which establishes a
maximum value and loan amount for a VA
An affidavit issued the
buyer of real property at a judicial
or tax sale which guarantees the deed
of the parcel purchased, pending court
A confirmation written
by a title attorney or company stating
that the title to a parcel of real
property is legally vested in the
A chronology of documents
which have transferred title to a
parcel of real property from the
original owner to the present owner.
document evidencing a change in
the original plan of construction by a
building owner or general contractor.
For accounting purposes,
a numerical designation assigned to
each asset, liability, and capital
account of a business.
An agreement between a
secured party and a debtor creating a
security interest in personal
Unencumbered title to real property,
free of liens or defects. Also,
"free and clear."
A bank account used by a
mortgage servicer for temporary,
short-term deposit of mortgage
payments collected for transmittal to
investors or for deposit in escrow
A third-party participant
in settling security trades by acting
as a buyer to each seller and a seller
to each buyer, ensuring performance.
A mortgage under which
the mortgagor is prohibited from
borrowing additional funds under the
The interval of time under
a mortgage during which the loan
cannot be prepaid.
In real estate, the delivery of a
deed, financial adjustments, the
signing of notes, and the disbursement
of funds necessary to consummate a
sale of loan transaction.
Fees paid to effect the
closing of a mortgage, such as an
origination fee, discount points,
title insurance fees, survey fees, and
A financial disclosure
giving an account of all funds
received and expected at closing,
including escrow deposits for taxes,
hazard insurance, and mortgage
insurance. All FHA, VA, and most
conventionally financed loans us e a
uniform settlement statement called
Any outstanding claim or
encumbrance which, if valid, would
affect or impair title. It can be
removed by a quit-claim deed, release,
or court action.
A zoning procedure where
there is a prescribed amount of
residential or unit density for an
entire area. The developer is
permitted to concentrate or disperse
the density within the area in
accordance with flexible site-planning
criteria. This differs from a
traditional zoning plan that dictates
density on a lot-by-lot basis,
prescribing the same maximum density
for all single structure lots within
the zoning district.
Certified Mortgage Banker. A
professional designation awarded by
the Mortgage Bankers Association of
America (MBA) to those in the industry
who have demonstrated superior
knowledge and skills in the field of
real estate finance. Candidates must
be employed by MBA member firms and
meet various educational, experience,
and examination requirements.
A type of insurance where the insured
agrees to carry a specified proportion
of the policy amount to the actual
value of the property insured at the
time of loss. Thus, a portion of the
property value is self insured. In
federal multi-family housing programs,
it refers to a sharing of the risk of
mortgage default between a mortgage
firm and the federal government.
Under a HUD program, an
eligible multi-family lender who is
permitted to conduct the processing of
multi-family projects from initial
application through loan closing.
pledged as security for a debt, for
example, mortgaged real estate.
Mortgage Obligation (CMO)
multiple class mortgage-backed
security that is normally treated as a
debt obligation of the issuer for
federal tax and financial accounting
purposes. CMO bond classes (or
tranches) are characterized by
differing maturities calculated to
match various investor preferences.
servicing procedure followed to bring
a delinquent mortgage current and to
file the required notices to begin
foreclosure when necessary.
The form used by a
mortgage servicer in reporting
collection from mortgagors, including
payments in full, repayment of
advances, tax and insurance funds for
foreclosed mortgages, and any other
items not remitted as regular
An act that indicates good
title, but in fact contains some
In retail leasing, where
a lease becomes effective when signed
but rent payments do not begin until
occupancy or opening of business.
unsecured notes of highly reputable
funds (such as escrows) into one
account that should be accounted for
and deposited into separate accounts.
agentís compensation for negotiating
a real estate or loan transaction,
often expressed as a percentage of the
agreement, often in writing, between a
lender and a borrower, to loan money
at a future date, subject to specified
conditions. In secondary marketing, an
agreement, in writing, between a
lender and an investor to buy and sell
mortgages under specific terms.
An agreement by a
lender to provide long-term financing
to a builder, secured by an existing
proposed building. The commitment
usually provides for the substitution
of a to-be-approved owner/occupant at
a higher loan amount than committed to
Any fee paid by a potential
borrower to a potential lender for the
lenderís promise to loan money at a
specified date in the future. The
lender may or may not expect to fund
the commitment. In secondary
marketing, a fee paid by the loan
seller to the investor in return for
the investorís promise to purchase a
loan or package of loans at a future
area owned by the owners or tenants of
a complex or subdivision, for the
common use of residents.
ownership of an apartment in which
each owner is a tenant-in-common.
A group composed of
property owners that serves to protect
and maintain a neighborhood or
commonly owned properties.
Development Block Grant (CDBG)
title 1 of the Housing and Community
Development Act of 1974, eight former
categorical grant and loan programs
were replaced by a system of unified
block grants under which communities
of over 50,000 people are entitled to
receive funding, while other
communities may apply for
discretionary funding. Its purpose is
to encourage more broadly conceived
community development projects and
expand housing opportunities for low-
and moderate-income persons.
In some 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.
A second borrower who signs a mortgage
loan with a mortgagor. The
co-mortgagorís income, assets and
debts are combined with the
mortgagorís for underwriting and
ratio analysis purposes. The
co-mortgagorís name must appear on
the FHA certificate of commitment and
the mortgage or deed of trust. For
full guarantee under the VAís
program, the co-mortgagor must be
either a spouse or another eligible
Properties used for comparative
purposes in the appraisal process that
have similar characteristics to the
A non-interest paying
bank deposit maintained by the
borrower that induces the bank to make
credit available to the borrower on
more favorable terms than would
otherwise be available.
A bond furnished by a
contractor to guarantee completion of
A report given
a lender by a designated compliance
inspector indicating whether
construction or repairs conform to
conditions established by prior
A method of
depreciation involving the separation
of the cost of various elements of a
building (such as roofing, plumbing,
and mechanical components) to take
advantage of the shorter useful lives
of such elements, and thereby,
increase the depreciation of
deductions in the early years of a
A method to achieve
maximum financing by splitting a real
estate parcel into separate fee and
leasehold interests, and financing
each component separately. Also called
Interest computed on
both the original principal and
Options on options. The
buyer is required to pay a fee for the
right to buy an additional option at a
later date, at a given strike price.
Loan Origination System (CLO)
electronic system that furnishes
subscribers with the latest data on
available loan programs at a variety
of lending institutions. Some CLOs
offer mortgage information services
and can prequalify buyers, process
loan applications, underwrite loans,
and even make a commitment of funds.
A discount or other inducement given
by a landlord or seller to a
prospective tenant or buyer to induce
them to sign a lease of purchase
The taking of private property for
public use under the right of eminent
domain with just compensation paid the
An agreement to lend
money to a borrower that has yet to be
identified, but is still subject to
the approval of the lender. During
HUD/FHA mortgage insurance processing,
it indicates the satisfactory
completion of technical processing
involving the estimated cost of the
project, the "as-is" value
of the site, a detailed estimate of
operating expenses and taxes,
supportable costs, the financial and
credit capacity of sponsors, financial
requirements, and mortgage amounts.
Prepayment Rate (CPR)
prediction of the number of current
outstanding mortgages in a pool that
A contract for the
sale of a property in which transfer
of title to the buyer is contingent on
fulfillment of certain conditions.
the use of land and resulting
penalties for failure to comply.
Commonly used by land subdividers on
newly plotted areas.
form of property ownership whereby the
purchaser receives title to a unit in
a multiunit structure and
proportionate interest in common
The process of
changing rental units into a
condominium form of ownership.
condominium documents that must be
registered by conveyance of the first
unit sold. The declaration thoroughly
describes the entire condominium
entity, including each unit and all
common areas, and specifies essential
elements of ownership that permanently
govern its operation. Also known as a
entity which issues mortgage-backed
securities backed by mortgages which
were originated by other lenders.
Court approval of the
sale of property by an administrator,
executor, guardian, conservator, or
commissioner in a foreclosure sale.
A mortgage loan
which meets all requirements (size,
type, and age) to be eligible for
purchase or securitization by federal
Something of value offered and
accepted in exchange for a promise,
without which a contract is
The percentage of the original loan
paid in equal annual payments that
provides principal reduction and
interest payments over the life of the
loan. For example, a $1 million loan
with a 10.8 percent constant requires
a $108,000 annual payment.
A periodic payment of a
fixed amount that includes interest
and principal. As the loan amount
reduces, the portion of the payment
applied to the principal increases.
Standard home mortgages are constant
An agreement between a
general contractor and an
owner/developer stating the specific
duties the general contractor will
perform according to blueprints and
specifications at a stipulated price
and terms of payment.
All costs incurred in the
completion of a construction project,
including land, labor, overhead, and
A short-term, interim loan
for financing the cost of
construction. The lender advances
funds to the builder at periodic
intervals as work progresses.
agreement between a lender and a
builder and/or borrower which details
the specific terms and conditions of a
construction loan, including the
schedule of payments.
A partial disbursement
of the construction loan based on the
schedule of payments in the loan
agreement. Also called takedown.
indirectly by newspaper or public
record, or similar device, whether
received or not, which satisfies the
legal requirements for notification.
To bring to completion.
clause in a contract that requires the
completion of a certain act or the
occurrence of a certain event before
the contract is binding.
A reserve account in
which funds are held until certain
specified conditions are satisfied.
provision appended to a loan in which
the lender receives a percentage of
annual gross or net project income
exceeding a certain base amount, in
addition to fixed interest.
In futures, a standardized agreement
obligating two parties to a
transaction involving a set amount and
grade of a commodity, at a price and
time specified by an exchange.
A contract between a
purchaser and seller of real property
to convey title after certain
conditions have been met and payments
have been made.
Actual rent as specified in
a rental or lease agreement, as
opposed to actual market or economic
person or company who agrees to do
work and/or furnish materials for a
contracted price. Subcontractors are
often hired by the contractor to
perform specialized or technical
In real estate,
mortgage financing which is not
insured or guaranteed by a government
agency such as HUD/FHA, VA, or the
Farmers Home Administration.
of the price of a futures contract
toward the price of the underlying
cash commodity. As the contract nears
expiration, the futures price and the
cash price converge.
A type of
adjustable-rate mortgage that may be
converted to a fixed-rate mortgage at
specified intervals during a
predetermined time period. In income
property lending, a mortgage in which
lender-provided funds convert to
equity ownership after a predetermined
period of time.
A Fannie Mae
mortgage purchase that may be
converted to the same yield offered in
the most recent Free Market Auction.
act of transferring title to real
property from one party to another.
document, such as a deed, lease, or
mortgage, used to effect a transfer.
A period of time, provided
by law or by contract, during which a
party to a contract can legally back
out of a contract.
In real estate, a form of multiple
ownership in which a corporation or
business trust entity holds title to a
property, (usually an apartment
complex) and grants occupancy rights
to shareholder tenants through
proprietary leases. Also called a
business entity owned by a group of
owners, called stockholders. A
corporation is considered an
artificial person under law.
The final step in the appraisal
process where the appraiser considers
three estimates of value derived from
cost, income, and market data
approaches. The correlation process
weighs the influence of each method in
relation to the specific property type
and final estimate of value.
A specialized type of mortgage banker
whose function is limited to the
origination of mortgage loans which
are sold to other mortgage bankers or
who agrees to assume a debt obligation
if the principal borrower defaults on
mortgage payments. A co-signer assumes
only personal liability and has no
ownership interest in the property;
his or her income and obligations are
used in the underwriting process to
reinforce the credit of the principal
A valuation approach in
which the value of a property is
determined by computing the
replacement value of improvements,
depreciation, and the value of the
An itemization of
all construction costs and other
building and material costs for
verification. Generally required in
HUD/FHA multifamily insurance
The difference between the yield on an
instrument and the cost of funds to
The amount of money required or
expended over and above budgeted cost,
including such items as labor,
interest, materials, and land.
A construction contract
in which the contract price is equal
to the cost of construction plus a
profit allowance to the builder, as
opposed to a fixed price contract.
An agreement under
which the contractor (in an
owner-contractor agreement) or the
architect (in an owner-architect
agreement) is reimbursed for direct
and indirect costs and, in addition,
is paid a fee for services. The fee is
usually a stated sum or percentage of
legally enforceable promise or
restriction in a mortgage. For
example, the borrower may covenant to
keep the property in good repair and
adequately insured against fire and
other casualties. A breach of covenant
in a mortgage usually creates a
default as defined by the mortgage,
and can be the basis for foreclosure.
percentage of mortgage pipeline that
has investor commitments or is hedged.
Declining term life insurance taken
out by a borrower as an added source
of funds for the repayment of a loan.
A rating given to a person
or company that establishes
creditworthiness based upon present
financial condition, experience, and
past credit history.
A report to a prospective
lender on the credit standing of a
prospective borrower, used to aid in
the determination of creditworthiness.
A clause in many junior
mortgages that say a default in one
mortgage also triggers a default in
the mortgage in which the clause
An appraisal method using
the cost approach. The front or width
of the building is multiplied by the
depth of the building and by the
height, figured from the basement
floor to the outer surfaces of the
walls and roof. The total cubic
measurement is then multiplied by a
cost per factor to obtain the
Items of physical
deterioration and functional
obsolescence that can be repaired or
replaced by a prudent property owner.
Assets that can be turned
into cash within a year, such as
accounts receivable or marketable
The amount of
money a firm would gain or lose if it
were to meet loan guarantees and
mandatory commitments at current
The ratio of current assets
to current liabilities.
The ratio of interest to
the actual face value of the
Bank accounts for the
deposit of funds belonging to others.
a commercial bank which holds for
safekeeping mortgages and related
documents backing a mortgage-backed
security. Custodians may be required
to examine and certify documents.
for a property, as when the mortgagee
turns a foreclosed property over to
VA. A specialized VA term, custody
may, but does not necessarily, include
the legal right to physical possession
of the property.