Note investing has its own vocabulary, borrowed from real estate, lending, title insurance and the courts. This dictionary collects the terms you will meet most often when you buy, sell or broker notes, from abstracts and acceleration clauses to wraparounds and yield.
Keep it handy as a reference. A few entries also carry practical advice for note buyers, such as why the word “discount” misleads and why a first right of refusal clause matters.
Terms from abstract to attachment
Abstract: A summary.
Abstract of judgment: A summary of a money judgment obtained in court. When this summary or abstract is recorded in the county recorder’s office, the judgment becomes a lien on the debtor’s property, both presently owned or after acquired.
Acceleration clause: Clause in a deed of trust or mortgage which “accelerates” (hastens) the time when the indebtedness becomes due. For example, some deeds of trust contain an acceleration clause stating that the note shall become due immediately upon the sale of the land or upon failure to pay interest or an installment of principal and interest.
Accommodation recording: Recording of instruments with the county recorder by a title company merely as a convenience to a customer and without assumption of responsibility for correctness or validity.
Accrue interest: Allow interest payments to build up for later payment.
Acknowledgment: A formal declaration before a duly authorized officer (such as a notary public) by a person who has executed an instrument that such execution is his own. An acknowledgment is necessary to entitle an instrument (with certain specific exceptions) to be recorded to impart constructive notice of its contents and to entitle the instrument to be used as evidence without further proof. The certificate of acknowledgment is attached to the instrument or incorporated therein.
Addendum: Additional parts of a note, usually on separate pages. Used for clauses that are not part of the printed contract. Also may be added anytime after the note was created to modify the note by specifying new agreements reached between the parties.
Adjustable-rate mortgage (ARM): Mortgage in which the interest rate changes as a specified index’s interest rate changes. Most often the mortgage payment will change upon each adjustment, but in some ARMs the payment remains fixed and interest accrues.
Affidavit: A written declaration made under oath.
Agreement of sale: See Contract for deed.
Agreement to convey: See Contract for deed.
ALTA survey: See Survey.
Amortization: Reduction of a principal balance via payments over time.
Amortization term: The amount of time required to amortize the loan. The amortization term is expressed as a number of months. For example, for a 15-year fixed-rate mortgage, the amortization term is 180 months.
Amortized loan: A loan to be repaid, interest and principal, by a series of regular payments that are equal or nearly equal, without any special balloon payment prior to maturity.
Annual percentage rate (APR): The cost of credit on a yearly basis, expressed as a percentage. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Does not include title insurance, appraisal, and credit report.
Annuity: A contract pledging a series of payments over time.
Appraisal: An opinion of market value as of a specific date. Required by most lenders to obtain a loan and by note investors.
Appurtenant: Belonging to, accessory to. Something incident to a chief or principal thing, as a right of way to land.
Arbitrary map: An office “subdivision” or map made by a title company for its own convenience in locating property in an area in which all the descriptions are by metes and bounds. On this “subdivision,” the “lots” are given “arbitrary” numbers. The deeds and other instruments affecting these “lots” are posted to what is called an “arbitrary” account. The word “arbitrary” is often shortened to “arb.”
“Arb” or “arb numbers”: See Arbitrary map.
Assignee: One who receives an assignment or transfer of rights. An assignment of a contract transfers the right to buy property.
Assignment: Written document by which property—other than real property—is assigned, that is, transferred, from one person to another. Common assignments include contracts, leases, mortgages, deeds of trust and rentals. The “assignor” is the person who makes the assignment and the “assignee” receives the property assigned.
Assignor: The one who assigns to another person.
Assumption (“assume a loan”): The purchaser of a property pledges to take, or assume, the place of the seller’s liability on the existing loan. See Subject to.
Attachment: The seizing by the sheriff or other authorized officer of property belonging to the defendant as security for any judgment the plaintiff may get in a court action.
Terms from balloon payment to credit score
Balloon payment: A lump sum payment on a note. It can be all or part of the remaining principal, accrued interest, or a combination.
Bankruptcy: A special proceeding under federal laws by which the property of a debtor is seized by the court and divided among his creditors.
Basis point: A basis point is one one-hundredth of a percent. For example, a 150 basis point rise in interest rate is the same as a 1.5% rise. A 10 basis point fee is the same as a 0.1% fee.
Beacon score: A method of credit scoring. See Credit score and FICO score.
Beneficiary: See Deed of trust.
Binder: 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.
Blanket mortgage: A mortgage covering at least two pieces of real estate as security for the same mortgage, thus it “blankets” the properties. This sort of loan is more common for commercial property or “special case” loans.
Call: To require a balloon payment.
Capitalization rate (cap rate): Net operating income divided by market value of the property.
Cash flow: Net income.
Certificate of satisfaction: A document signed by the note holder and recorded in the land records evidencing release of a deed of trust, mortgage or other lien on the property.
Certificate of title: A statement provided by an abstract company, title company, or attorney stating that the title of real estate is legally held by the current owner. The certificate does not certify as to matters not of record and affords no protection unless the author was negligent.
Chattel: Personal property.
Clauses: Separate sections of a note.
Clear title: A title that is free of liens or legal questions as to ownership of the property.
Closing: The meeting at which all documents for a transaction are signed, dated and notarized. Also called settlement.
Closing costs: Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney’s fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.
Cloud on title: An evidence of encumbrances.
Collateral: Assets pledged as security for a loan, such as property. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.
Comparables (“comps”): The price at which properties comparable to the subject property have recently sold. “Listing comps” are asking prices of comparable properties that have not sold. When buying a loan, listing comps should not be used to determine value.
Condemnation: The taking of private property by the government for public use—as for a street or a storm drain—upon making just compensation to the owner. (This right or power of government to take property for a necessary public use is called “eminent domain”).
Constructive notice: Notice imparted by the public records, such as a newspaper notice, which legally notifies the parties involved, but may not actually notify them.
Contingency (contingency clause): A section of a note specifying that the note depends upon the satisfaction of the requirements stated in the clause.
Contract for deed: A written contract entered into between the seller (vendor) and buyer (vendee) for sale of real property on an installment or deferred payment plan. The seller retains the deed and actual title (the buyer receives equitable title) and conveys the deed and actual title when the terms of the contract are fulfilled. It is also known as: Agreement to Convey; Land Contract; or Agreement of Sale.
Conventional loan: A loan not guaranteed by a government agency. More commonly, a loan not involving the Veterans Administration, Federal Housing Administration, Farmers Home Administration, a state loan guarantee program, etc.
Corporation: An entity authorized by law and endowed with certain rights, privileges and duties of an individual.
Covenants, conditions and restrictions: Commonly called “CC&Rs,” the term usually refers to a written recorded declaration or deed which sets forth certain covenants, conditions or restrictions established by a subdivider to create uniformity in a tract.
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 score: A numerical indicator of an individual’s credit history. The lower the number, the worse the payment history.
Terms from debt coverage to due-on-sale
Debt coverage ratio: A property’s net operating income divided by its annual principal and interest payments.
Debt service: 1. The principal and interest payments on a loan. 2. The total amount of credit card, auto, mortgage or other debt upon which a loan applicant must pay.
Debt-to-income ratio: The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her gross monthly income.
Decree of distribution: A court decree which determines how the estate of a decedent shall be distributed.
Deed: Written document by which land interest is transferred from one person to another. The person who transfers the interest is called the “grantor.” The one who acquires the interest is called the “grantee.” Deeds may be of many kinds. For example, there are grant deeds, administrators’ deeds, executors’ deeds, etc., depending on the language of the deed, the legal capacity of the grantor and other circumstances.
Deed in lieu of foreclosure: Requiring the mortgagor to sign over the deed to the note collateral to the lender. The deed is kept in escrow and not recorded unless the mortgagor violates the conditions of the note. In this case, it is recorded and the lender takes possession of the property, circumventing the time-consuming and expensive foreclosure process. This procedure should be used with care: the mortgagor may sue under the theory of denial of due process.
Deed of trust (trust deed): Written document by which the title to property is conveyed as security for the repayment of a loan. In this document, the property owner is called the “trustor.” The party to whom the legal title is conveyed (and who may be called on to conduct a sale thereof if the loan is not paid) is the “trustee.” The lender is the “beneficiary.” A deed of trust is accompanied by a note outlining the terms of the loan and signed by the borrower (trustor). A deed of trust is unlike a mortgage in that the legal title to the property is conveyed to the trustee as security, while under a mortgage legal title to the property remains with the mortgagor. When the loan is paid off, the trustee is asked by the beneficiary to issue a “reconveyance,” usually called a “recon.” This reconveyance corresponds to the release that the holder of a mortgage executes when the mortgage is paid off.
Default: Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Deficiency judgment: A court ruling permitting a lender to attach a borrower’s property other than the property securing the lender’s loan. May be issued when foreclosure fails to produce enough to satisfy the loan balance and the borrower has pledged personal liability on the loan.
Delinquency: Failure to make mortgage payments when mortgage payments are due.
Description: A reference to maps, plats, instruments, etc., recorded in the county recorder’s office or the federal land office upon which, by careful interpretation, the property can be located or identified.
Discount (a mortgage): Purchasing for an amount less than the current balance of the note, obtained by calculating the present value of the stream of payments at a specified yield. For example, a note with a principal balance of $10,000 that is discounted 20 percent would sell for $8,000 (20% off $10,000). The term is shunned by knowledgeable investors because it does not take the face interest rate or the payment schedule of the note into account. A $10,000 note with a 12% face interest rate amortized over 10 years discounted 20 percent yields 17.9 percent. The same note with a face interest of 9 percent at the same discount yields 14.5 percent. The same note at 12 percent face interest but paid interest-only with a 10-year balloon at the same discount yields 16 percent. Thus, “discount” can mean many things! See Yield.
Discount schedule (a nonsense term): A rule-of-thumb used to discount notes. The most common is a discount of 5 percent from the principal for each year of the note. Thus, a 3-year note would be offered at a 15 percent discount. To see why it is a nonsense term, See Discount.
Down payment: The difference between the purchase price and that portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer’s own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.
Drive-by appraisal: Also called a “windshield appraisal.” An appraisal done without the appraiser entering the property.
Due-on-sale clause: A clause in a mortgage agreement providing that, if the mortgagor (the borrower) sells, transfers, or, in some instances, encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full.
Terms from easement to guardian
Easement: A right or interest in the land of another which entitles the holder to some use, privilege, or benefit, such as to place pole lines, pipelines or roads thereon.
Effective interest rate: The cost of credit on a yearly basis expressed as a percentage. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Useful in comparing loan programs with different rates and points.
Eminent domain: See Condemnation.
Encroachment: Construction onto the property of another. When a building, a wall, a fence or other fixture encroaches upon (overlaps) the land of an adjoining owner.
Encumbrance: A right or claim upon the real property (land) which does not hinder its conveyance or sale (transfer). Encumbrances are divided into two classes: A. liens (mortgages, deeds of trust, mechanics’ liens, local taxes, assessments, judgments, attachments, etc.); and B. encumbrances other than liens which are limitations on the ownership of the land (such as conditions, restrictions, reservations, easements, etc.).
Endorsement: Addition to a title insurance policy which expands the coverage of the policy, fulfilling specific requirements of the insured.
Equity: The mortgage balance(s) subtracted from the fair market value of the property.
Equity loan: See Hard money loan.
Escheat: A forfeiture of title to the state.
Escrow: Delivery of a deed in which a third party acts as the agent for seller and buyer, or for borrower and lender carrying out the instructions of both, disbursing of papers and funds.
Escrow account: 1) A third party’s bank account to which he is contractually responsible for the interests of both other parties. 2) An impound account maintained by a lender for the payment of property taxes and insurance on a property.
Estoppel: A signed statement from a mortgagor (note payor) verifying the principal balance, the interest paid to date, the next payment due date, the interest rate and the payment schedule. The estoppel should verify that there are no claims, defenses, rights or offsets against the note.
Execution: An order directing a sheriff, constable, marshal, or court-appointed commissioner to enforce a money judgment against a debtor. This officer levies on the debtor’s property and, if necessary, may sell the property to satisfy the judgment.
Executor or executrix: A man or woman appointed in a will to carry out its provisions.
Factor: A purchaser of accounts receivable.
Factoring: Purchasing accounts receivable.
FICO score: A numerical indicator of an individual’s credit history. The lower the number, the worse the payment history. FICO stands for Fair, Isaac and Company, the firm that developed this method of scoring.
First mortgage: A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances).
First right of refusal: A clause in a note requiring the note holder, if he wishes to sell the note, to secure the best written offer he can and then give the note payor the right to buy the note for that offer. Only after the note payor declines to buy the note can the holder sell it to another party. This is a critically important clause. When you are buying a note, be sure this clause is part of it. With it, you stand to profit greatly if the collateral is sold before your note matures (thus giving you a windfall profit when your note pays off early). Without this clause, you risk losing a great opportunity for profit.
Foreclosure: The legal proceeding under which a lender takes possession of the security for a note in default. Under a deed of trust, foreclosure is by public auction after appropriate advertisement. A mortgage may require the lender to obtain Court approval prior to sale.
Forfeiture of title: A common penalty for the violation of restrictions imposed by the seller upon the buyer in a deed. For example, a deed may be made upon the condition that if liquor is sold on the land, the title to the land will be forfeited (that is, lost) by the buyer (or some later owner) and will revert to the seller. (Actual reversion does not take place until a court decree has been obtained in an action brought against the land owner.)
FSBO: For sale by owner.
“Good faith” or “mortgage savings” clause: A clause which provides that “a violation thereof shall not defeat or render invalid the lien of any mortgage or deed of trust made in good faith and for value.”
Grace period: A period of time during which a loan payment may be paid after its due date but not incur a late penalty.
Grantee: See Deed.
Grantor: See Deed.
Gross income: The income of the mortgagor before taxes or expenses are deducted.
Guardian: A person who is court-appointed to manage the affairs of a minor or incompetent person (called a “ward”).
Terms from hard money to loan-to-value
Hard money loan (equity loan): A loan in which the property equity serves as the sole qualifying factor. A hard money lender is generally unconcerned with such matters as the creditworthiness or income of the borrower.
Hazard insurance: A contract between purchaser and an insurer, to compensate the insured for loss of property due to hazards (fire, hail damage, etc.), for a premium.
Homestead: Under homestead laws enacted by a number of states, when a “declaration of homestead” is filed in the recorder’s office the property described in this document becomes what is known as a homestead—the dwelling (house and adjacent land) of the head of a family. From then on, such property receives certain protections under the law from forced sale to satisfy creditors’ claims.
HUD-1 or HUD settlement statement: A form utilized at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development.
Hypothecate: To pledge something as security without delivery of the security to the lender. Often used erroneously to mean borrowing money using a mortgage as the collateral. True hypothecation does not require the transfer of title to the security. When borrowing against a mortgage, be aware that lenders normally assess the financial strength of the borrower, rather than the note or income from the note itself, as the primary basis for their lending decisions.
Improvements: Any part of a property that is not raw land.
Income stream: The payments on a note. See Cash flow.
Indemnity agreement: Agreement signed by an owner or builder/contractor to induce the title company to take an extended risk for a third party’s benefit, usually the lender. Indemnity means “exemption from loss or damage.”
Inferior lien: See Junior lien.
Institutional investor: A company that purchases over $100 million in notes per year for its own account.
Interest: A charge for borrowed money. Also termed rent on borrowed money.
Interest-only: Loan payments consisting entirely of interest, no principal.
Internal rate of return (IRR): That rate of return at which the present value of future cash flows is exactly equal to the initial capital investment. Since income-producing investments (such as real estate) and certain note investments have future income streams of varying amounts and times, plus a lump sum upon distribution of the property, there are time disparities between the varying returns of and on the initial investment. Since money has time value, the IRR can also be interpreted as “the rate each dollar invested earns during a given period.” (Raoul L. Weinstein, CCIM).
Intestate: Without leaving a will, or leaving an invalid will so that the property of the estate passes by the laws of succession rather than by direction of the deceased.
Investment-to-value ratio (ITV): The total amount invested plus the balances of any superior loans divided by the property value. For example, the ITV of a second mortgage purchased for $40,000 when there is a first mortgage with a $10,000 balance and a property value of $100,000 is 50% ($40,000 + $10,000 = $50,000; $50,000 ÷ $100,000 = 0.50). For an ITV calculation, the balance of the mortgage purchased is not considered. In the above example, the mortgage purchased for $40,000 could have had a balance of $50,000 or $80,000 and it would not affect the ITV. See Loan-to-value ratio.
Joinder: Acting jointly with one or more persons.
Joint tenancy property: See Ownership.
Judgment: The decision of a court of law as to the rights of the parties in an action or proceeding. All judgments do not award money nor do they become liens upon real property when recorded.
Judgment lien: A judgment is a lien against all real property owned by the judgment debtor in the county where the judgment is docketed (recorded).
Junior lien: A loan in an inferior position to another loan on the same property, thus it will not be paid until the other loan, called the superior lien, is satisfied. See Superior lien.
Jurat: A certificate evidencing that an affidavit was properly made before an authorized officer. It is also commonly and incorrectly used in trade language to mean an acknowledgement made on a separate form and attached to the instrument bearing the signature or signatures acknowledged.
Jurisdiction: The extent of legal right or authority to hear and determine a cause or causes.
Land contract: See Contract for deed.
Lease: Written document by which an owner of real property (lessor) gives the right of possession to another (lessee) for a specified period of time and for a stipulated rent.
“Legal”: In property title insurance, a term meaning an insurable description.
Liability (title insurance): The greatest amount of money an insurer will pay the persons insured under its policy, guarantee or report in case of loss by reason of failure of title caused by defects against which they were protected thereunder.
Lien: The right to take and hold or sell the property of a debtor as a security or payment for a debt. The security interest created by a mortgage or other debt instrument against a property.
Lis pendens: Suit pending; notice of action.
Loan commitment: A binding contract with a lender to issue a loan. A loan commitment usually specifies the interest rate (or it may “float,” that is, may be locked in by the borrower at a future date) and an expiration date for the commitment.
Loan constant: The annual principal and interest loan payment divided by the loan balance.
Loan origination: Making a loan. Purchasing an existing mortgage is not loan origination.
Loan servicing: See Servicing.
Loan-to-value ratio (LTV): The total balance of all loans divided by the value of the property. For example, if a second mortgage balance is $30,000 and the first mortgage balance is $20,000 and the property value is $100,000, the LTV is 50% ($30,000 + $20,000 = $50,000; $50,000 ÷ $100,000 = 0.50). Unlike ITV, the LTV ignores what is paid for the mortgage purchased. See Investment-to-value ratio.
Terms from mechanics’ lien to notice of nonresponsibility
Mechanics’ lien: A lien upon a specific parcel of land to secure the compensation of those who, according to contract, have done work on or have been directly instrumental in its improvement.
Mesne: Intermediate; intervening.
Metes and bounds (measurements and boundaries): When it becomes necessary to describe a parcel of land in an unsubdivided area or one that is a part of a larger lot, the parcel is described usually by metes and bounds, that is, by specific reference to the location, direction and extent of its boundary lines. The starting point for such a description should be one that has been established by a recorded deed or official map.
Mortgage: A legal form of property lien. A written document by which land is put up as security for the repayment of a loan. Determined by state law. In this document, the landowner is called the “mortgagor.” The lender is the “mortgagee.” A mortgage is accompanied by a note outlining the terms of the loan and signed by the mortgagor (borrower). A mortgage is unlike a deed of trust in that the legal title to the land remains with the mortgagor, while under a deed of trust the legal title is conveyed to the trustee as security. Its impact on note investors is principally in the foreclosure process, which is judicial under a mortgage and consequently more cumbersome and time-consuming than a deed of trust. Note that “mortgages” is often used generically to refer to mortgages, trust deeds and land contracts. See Deed of trust. See Contract for deed.
Mortgage broker: One who facilitates the origination of mortgages. A mortgage broker may also be, but is not necessarily, a note broker.
Mortgagee: The lender. See Mortgage.
Mortgagor: The borrower. See Mortgage.
Negative amortization: Occurs when monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.
Net operating income: Income less expenses, not including debt service.
Nonrecourse loan: In the event of default, the lender has no action available except foreclosure; he may not hold the mortgagor personally liable.
Note: Any written promise to pay. A negotiable note starts “Pay to the order of” and is transferable by endorsement similar to a check. A mortgage or trust deed consists of two parts: the security instrument, which is the actual mortgage or deed of trust document encumbering the property, and the note, which represents the borrower’s indebtedness. The term “note” is also used generically to refer to both the mortgage and note and/or the deed of trust and note, and also used to describe a contract for deed and other debt instruments. A note without a mortgage or other lien instrument is an “unsecured” or “promissory” note.
Note broker: One who purchases notes and sells them to investors. A note broker may also be, but is not necessarily, a mortgage broker.
Notice of action: When a court action begins to affect the title or right of possession of real property, a notice of that action to the public may be recorded in the recorder’s office. Also called “lis pendens.”
Notice of completion: Within ten days after a building is completed, the owner should file a notice to that effect in the recorder’s office. The contractor and those who furnished material or worked on the building then have a certain amount of time within which to file their claims for unpaid bills. If such notice is not filed, claimants have a longer time within which to file. Before purchasing a lien on a new building or purchasing the actual building, the buyer should make sure that the Notice of Completion is filed and the time for claims has passed.
Notice of default: Notice given by the beneficiary under a deed of trust to the trustee showing that the trustor is in default (behind on the payments) and requesting that the trustee sell the property under the terms of trust to satisfy the debt.
Notice of nonresponsibility: A notice (provided for by statute) filed by the owner of real property stating that he will not be responsible for any liability arising out of work being done on said real property by (or for) one holding an interest acquired from him (as where a lessee begins to erect a building or an oil derrick).
Terms from omnibus clause to rule of 78s
Omnibus clause: Clause in a decree of distribution by which “any other property not now known or discovered which may belong to said estate or in which said estate may have any interest” passes to the distributees named without specific description.
Operating expense ratio: Annual operating expenses divided by the property annual income.
Operating expenses: Property expenses other than those for financing and acquisition.
Option: A right given for a consideration to keep an offer to purchase or lease open for specific time.
Order confirming sale: An order of the court confirming terms of the sale of an estate’s assets.
Ownership: The right of one or more persons to possession of property to the exclusion of others. The incidents of property ownership are the rights to its possession, use and enjoyment.
Paper: Generic term for notes.
Partnership: An association of two or more persons who have contracted to join in business and share the profits.
Party wall: A wall erected on a property boundary for the common benefit and use of the two property owners on either side.
Patent: A conveyance of title to government land by the government.
Payoff amount: A total balance; amount of a full payment on existing loan or lien.
Personal property (movable): Any property that is not designated by law as real property (i.e., money, goods, evidences of debt, rights of action, furniture, automobiles, etc.).
P.I.Q.: A title term referring to property in question.
PITI: Principal, interest, taxes and insurance, which comprise your monthly mortgage payment.
Plat: A plan, map or chart of a tract or town site dividing a parcel of land into lots.
P.O.C.: Term used on property settlement (closing) statements to refer to items paid outside of closing.
Point: One percent of the loan amount, usually referring to the computation of a loan fee. For example, “9 percent and 3 points” means the loan interest rate is 9 percent and to obtain that loan the borrower will be charged a fee equivalent to 3 percent of the borrowed funds.
Power of attorney: A document by which one person (called the “principal”) authorizes another person (called the “attorney-in-fact”) to act for him in designated transactions.
“Pre” or “prelim”: A written report issued by a title company preliminary to issuing title insurance, which shows the condition of title of the property in question.
Prepayment penalty: A fee assessed for paying the balance of a loan before it is due to be paid.
Principal: The amount borrowed and remaining unpaid on a note.
Priority: Refers to the order of preference, rank or position of the various liens and encumbrances affecting the title to a particular parcel of land. Usually the date and time of recording determine the relative priority, but in some states (e.g., California) the priority of mechanics’ liens is determined by the time of commencement of labor.
Priority inspection: A title term referring to the type of inspection made in connection with insuring a new construction loan. In making the inspection of the property, the title company must be assured that the work of improvement had not yet begun when the lender’s deed of trust was recorded.
Private investor: An individual that invests for his own account.
Promissory note: A written unsecured note promising to pay a specified amount of money on demand, transferable to a third party.
Purchase money mortgage: A mortgage (or trust deed) created by seller financing of a property sale.
Qualifying ratios: Comparisons of a borrower’s debts and gross monthly income.
Quiet title: To free the title to a piece of land from the claims of other persons by means of a court action called a “quiet title” action. The court decree obtained is a “quiet title” decree.
Real property (immovable): Land from the center of the earth and above the surface indefinitely; that which is affixed to land; that which is incidental or appurtenant to land. Examples: minerals, trees, buildings, appurtenant rights, etc.
“Recon” or reconveyance: See Deed of trust.
Recording: The filing of a document with the county recorder for the purpose of having it copied into the public records. The recording of a document gives notice to the public of its contents.
Recourse: When a mortgage, trust deed or other note is sold “with recourse,” the seller is guaranteeing the payments and making himself personally liable for the performance of the mortgagor.
Redemption period: The time legally allotted to a mortgagor to repurchase the property that the mortgagee foreclosed upon. Varies by state law from one year after foreclosure to nothing (no right of redemption). Mortgage investors usually avoid buying mortgages in states with long rights of redemption.
Refinance: To borrow money and thus to create a new loan against a property to satisfy an existing indebtedness.
Regulation Z or Reg Z: See Truth in Lending Act.
Release clause: Language in a loan document describing the terms under which the borrower may have part of the collateral released from the lien.
RESPA: Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.
Right of redemption: Allowing a mortgagor to repurchase a property that has been foreclosed upon. In some jurisdictions, this may be a one-year period, and note buyers must be aware of the laws in which the collateral is situated and the impact they could have on their investment. See Redemption period.
Right of rescission: The legal right to void or cancel a mortgage in such a way as to treat the mortgage as if it never existed. Right of rescission is not applicable to mortgages made to purchase a home, but may be applicable to other mortgages, such as home equity loans.
Right of way: Right to cross a parcel of land.
Rule of 78s: A loan amortization method that lumps the interest to be paid over the life of the loan into the early years of the loan, creating a loan balance for those years greater than the amount borrowed. Thus, an early payment of the balance due on a loan calculated under the Rule of 78s can easily result in the borrower having to pay back more than he borrowed.
Terms from secondary market to yield
Secondary market: A market for the purpose of purchase and sale of existing mortgages usually at discounted prices to provide greater liquidity to the mortgagee/lender.
Second lien: A mortgage, deed of trust or other lien junior to another in first position. See Junior lien.
Security interest: An interest that a lender takes in the borrower’s property to assure repayment of a debt.
Separate property: See Ownership.
Servicing: Collecting loan payments. Servicing may also include making property tax and hazard insurance payments when due, issuing late payment letters, collection and foreclosure processing.
Settlement: See Structured settlement. See Closing.
Starter: A copy of the last policy or report issued by a title insurer which described the land upon which a new search is to be made.
Street improvement bonds: Interest-bearing bonds issued, usually by a city or county, to secure the payment of assessments levied against land to pay for street improvements. The property owner may pay off the particular assessment against his property, or he may allow the assessment to “go to bond” and pay installments of principal and interest over a period of years, usually at the city or county treasurer’s office. The holder of a bond receives his payments from these offices.
Structured settlement: A common method of compensating victims of serious injuries. They are often used to settle medical malpractice, wrongful death or workers’ compensation lawsuits. Injury victims or relatives who have filed lawsuits against a hospital, employer or other defendant agree to settle their case for an agreed-upon financial payment. Instead of paying the settlement in a lump sum, the defendant or its insurer agrees to a series of tax-free payments designed to cover future medical expenses and basic living needs. The defendant or insurer purchases an insurance annuity or U.S. Treasury bonds to guarantee the agreed-upon payments. The money is typically paid out in increments over 20 to 30 years. The arrangement often benefits injury victims and their families, because they may lack the expertise to invest a lump-sum payment to provide for long-term needs. Additionally, structured settlement payments are tax-free. Profits from investments on lump-sum settlements usually are taxable.
Subject to: A property sale in which the seller remains liable for the repayment of the existing loan.
Subordinate: To make a lien inferior to another lien.
Subordination agreement: An agreement by which one encumbrance (for example, a mortgage) is made subject to another encumbrance (perhaps a lease). To “subordinate” is to “make subject to.”
Substitution of collateral: To replace one property with another as the security for a loan.
Superior lien: A loan in a higher position relative to another loan on the same property. A first mortgage is superior to a second mortgage. It must be paid before the inferior, or junior, lien is paid. See Junior lien.
Surface rights: Rights to enter upon and use the surface of a parcel of land, usually in connection with an oil and gas lease. Sometimes they are “implied” by the language of the lease (no explicit reservation or exception of the surface rights) and other times they are “explicitly” set forth.
Survey: The measurement which delineates the boundaries of a parcel of land determined by a surveyor. An ALTA survey additionally delineates the exact location of all improvements, encroachments, easements and other matters affecting the title to the property in question.
Testate: A decedent who has left a written declaration of his or her last will.
Title: The written evidence that proves the right of ownership of a specific piece of property.
Title commitment: A binding contract with a title company to issue a specific title policy, showing only those exceptions contained in the commitment and any intervening matters after the date of the commitment and prior to the effective date of the policy. The commitment contains all information included in the preliminary title report, plus a list of the title company’s requirements to insure the transaction. It also includes the standard exceptions from coverage that will appear in the policy.
Title insurance: Protection for lenders or homeowners against financial loss resulting from legal defects in the title.
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.
Trust deed: See Deed of trust.
Trustee: See Deed of trust.
Trustor: See Deed of trust.
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. Also known as Regulation Z or “Reg Z.”
Underwriting: The process of verifying data and approving a loan.
Unsecured note: A note not secured by a lien instrument. Actually a misnomer, since in the absence of a specific lien, the note holder can sue for satisfaction of the debt and claim any or all of the debtor’s property.
Usury: Charging an interest rate for a loan higher than the legal maximum. State laws determine usury.
Vendee: See Contract for deed.
Vendor: See Contract for deed.
Venue: Neighborhood; often used to refer to the county or place in which an acknowledgment is made before a notary; also refers to the county in which a lawsuit may be filed or tried.
Vesting: The names, status and manner in which title of ownership is held with a fixed or determinable interest in a particular parcel of real property; also that portion of a title report or policy setting forth the above.
Waive: To release or abandon—as to “waive” a right of appeal from a court decree.
Windshield appraisal: See Drive-by appraisal.
Wrap (wraparound; AITD, all-inclusive trust deed): A combination of a senior and junior lien in which the lender collects one payment from the borrower, makes the payment on the senior lien and retains the balance as the payment on the junior lien.
Yield: The return from an investment. Expressed as a percentage, it is the rate of interest earned on the money invested. To a knowledgeable investor, it is the key factor governing every note transaction.
Some definitions are reprinted with the permission of First American Title Company.
