Glossary of Mortgage & Note Purchase Terms
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Agreement for Purchase and Sale of Note and Mortgage
This is a contract between the buyer and seller of the mortgage spelling out the
purchase price, terms, etc. of the proposed transaction.
Amortization
The method by which the outstanding balance of a loan is reduced by making equal
payments on a regular schedule (usually monthly). The payments are structured so
that the borrower pays a portion of both interest and principal with each equal payment.
Appraisal
The determination of property value based on recent sales information of similar
properties. Depending upon the type of property and note purchase transaction, may
require either a 'drive-by' or full appraisal.
Assignment
The process by which ownership in some portion of future payments is transferred
from one party to another. The Assignment Form is signed by the seller at
closing, then recorded.
Balloon Mortgage
A fixed-rate mortgage for a set number of years (usually 15 years or more)
which then must be paid off in full in a single "balloon" payment at a future
earlier date (usually 3 to 10 years from the original date of the mortgage).
Broker: Note Broker, Cash Discounter, Note Buyer, Mortgage Broker, Paper Broker
An individual or company in the business of assisting in arranging funding
or negotiating contracts for a client but who does not necessarily advance
the funds himself. Brokers usually charge a fee or receive a commission for
their services.
Bulk Purchases
The purchase of a portfolio or "pool" of mortgages by an investor, generally
as one transaction.
Business Notes/Business Contracts
Notes arising from the sale of a business from one party to another.
Typically, secured by assets other than real estate.
Buyer: Note Broker, Cash Discounter, Note Buyer, Mortgage Investor,
Note Investor, Note Purchaser
An individual or company in the business of purchasing or arranging for the
purchase of notes.
Cash Discounters
An individual or company in the business of purchasing or arranging for the
purchase of notes.
Chattel
Security other than real estate; i.e., inventory, equipment, etc.
Closing Costs
Costs of title search, title insurance, appraisal, recording fees, etc.
required for the transaction. May be paid by either the buyer or seller,
depending upon their prior agreement.
Closing Statement/Settlement Statement
Also known as a HUD1. This document is prepared by the title company
or closing attorney and details all funds received and disbursed at
the time of purchase and closing on the property.
Contracts
The written understanding between the parties. May be a mortgage, land
contract, contract for deed, deed of trust, etc.
Contracts for Deed
Similar to a mortgage in that it secures the obligation with the underlying
eal estate, it differs in that the property has not yet been transferred
(deeded over). Transfer of the deed is contingent upon all terms of the
Contract having first been fulfilled.
Credit Application/Form 1003 (Residential Uniform Mortgage Application)
This is the standard, most generally-accepted form used in the purchase
of residential properties.
Credit Rating/Credit Score
Persons paying on a mortgage are rated by investors according to the
borrower's credit- worthiness or risk profile. Credit ratings are expressed
as letter grades such as A, B, C, etc.. These ratings are based on various
factors such as a borrower's payment history, foreclosures, as well as the
numerical credit scores issued by the credit bureaus.
Credit Report
A report on the credit standing of a prospective or existing mortgagor/payor.
Used by the investor to help determine creditworthiness.
Deed
A legal, recorded document which shows the transfer of ownership of real estate
from the one party to another.
Deed of Trust
Similar to a mortgage, this is a recorded document that in conjunction with
the mortgage note creates a security interest in real property.
Default
The failure to make payments as agree, possibly resulting in foreclosure.
Down Payment
Money paid by a buyer from his own funds, as opposed to that portion of
the purchase price which is financed.
Documentation (Mortgage Documents)
Required documents for all mortgage purchase transactions: copies of note,
security instrument, etc.
Escrow
The holding of funds and/or documents in trust by a third party, typically
an attorney or title company, on behalf of another party or parties.
Equity
The difference between the current market value of a property and the
principal balance of all outstanding mortgage loans.
Fixed-Rate Mortgage
A mortgage where the interest rate does not change over the life of
the loan.
Flips/Flipping/ReHabs
The practice of buying a property generally in need of repair (REHAB property)
with the intent of re-selling it at a substantially higher price in the future.
Many times, these properties are initially acquired through foreclosure or
similiar circumstances and at a below-market price. In many cases, the investor
has not yet taken title to the property before re-selling it.
Foreclosure
A legal procedure in which real estate is sold by the lender to pay a defaulting
borrower's debt.
Good Faith Estimate
An estimate of charges which a borrower is likely to incur in connection with a
loan closing for the purchase of real estate.
Hazard Insurance
A form of insurance in which the insurance company protects the insured from
certain losses, such as fire, vandalism, storms and certain other natural causes.
Interest Only Mortgages/Notes
Payments are required on an interest-only (no principal payments) basis for
a set payment schedule, with a final, or "balloon" payment at maturity.
Investment to Value Ratio
A ratio used by investors for calculating the amount of their investment to the
value of the property, to determine their risk factor.
Junior Mortgages
Any mortgage having another mortgage ahead of it, in terms of priority. A
second mortgage is junior to a first mortgage; a third mortgage is junior
to both a first and second.
Land Contracts
Similar to a mortgage in that it secures the obligation with the underlying
real estate, it differs in that the property has not yet been transferred
(deeded over). Transfer of the deed is contingent upon all terms of the
Contract having first been fulfilled. A land contract usually applies to the
purchase of the land only, while a Contract for Deed typically covers
structures as well.
Loss Payee/Loss Payee Clause
An additionally-named insured party to an insurance policy. At the time
of closing on a mortgage/note purchase transaction, the buyer/investor
is named as a co-insured party.
Loan to Value (LTV)
The ratio of the principal balance of mortgages attached to real property
to the appraised or "Market Value" of the real property. Example: A home worth
$100,000 secured by an $80,000 mortgage would have an 80% LTV.
Mortgage Investors
Parties buying mortgages and notes for their own account.
Mortgage Portfolios (see Bulk Purchases)
Mortgagee
the party receiving the mortgage payments.
Mortgagor
the party responsible for making the mortgage payments. Also known as the "Payor"
Mortgagees Title Policy
A title insursance policy protecting the holders of the mortgage against
possible defects in title.
Mortgage/Mortgages
A recorded document that in conjunction with the mortgage note creates
a security interest in real property. In some States, referred to as a Deed of Trust.
Note Brokers (see Buyer)
Note Buyers (see Buyer)
Note Investors
Parties buying mortgages and notes for their own account.
Note Pools/Note Portfolios (see Bulk Purchases)
Note/Notes
The underlying promissory note/obligation to pay. At times, referred to as "paper"
Owner-financed (see Privately-held)
Owner-held (see Privately-held)
Owners Title Policy
A title insursance policy protecting the purchaser of the property against
possible defects in title.
Paper
A general term for the mortgage, note, and related documents.
Partial Purchase/Partial Sale
The sale or purchase of only part of the remaining payments due on the mortgage
note. The Seller receives cash at closing, plus they also receive the residual
value, when due, of their portion of future payments not sold initially.
See also - Cash Options
Payment Streams
The actual "flow" of mortgage payments: how much, and when to be received.
Payors
The party or parties obligated to pay on the note and mortgage. Also referred
to as Mortgagor(s).
Pool Purchases (see Bulk Purchases)
Privately-held/Private Mortgages
A note and mortgage taken by the seller or financier of a property, in lieu of
cash provided by an institutional lender.
Property Value
Determined by appraisal. For properties sold within the past year, generally the
lesser of sales price or current appraisal is used. If after one year,
current appraised value is used.
Real Estate Contracts
Any document relating to the ownership, transfer or securitization of real
property.
Real Estate Notes
Any note or obligation secured by real property.
Recorded Documents
A document filed and officially recorded in the County recording offices,
putting all parties on notice as to ownership, etc.
ReHabs/Flips/Flipping
The practice of buying a property generally in need of repair (REHAB property)
with the intent of re-selling it at a substantially higher price in the future.
Many times, these properties are initially acquired through foreclosure or similiar
circumstances and at a below-market price. In many cases, the investor has not yet
taken title to the property before re-selling it.
Residual Value of Mortgage/Note
When a mortgage/note is sold under a Partial Sale arrangement, the seller of the note
is entitled to receive the mortgage back when the terms of the assignment have
been met. The amount of this 'residual balance' may be affected by early prepaypent,
default, and other factors.
Seasoning
This refers to the number of payments made to-date on a mortgage note. A note where
25 months payments have been made, is said to be "seasoned 25 months."
Second Mortgages
A mortgage junior to a first mortgage lien; i.e., put in place and recorded after
the recording of a first mortgage. The first mortgage has priority over the second
mortgage in terms of repayment in the event of default.
Seller-financed (see Privately-held)
Seller-held (see Privately-held)
Simultaneous Closings/Simultaneous Funding
A closing transaction where the property is sold and the seller converts his
owner-held mortgage and note into cash all at the same time.
Title Insurance
A policy issued by a title insurance company protecting the parties against
defect in title.
Trust Deeds
A recorded document that in conjunction with the note creates a security interest
in real property. In some States, referred to as a Mortgage.
Wraparound Mortgages/Wraps
A junior mortgage created to "wrap around" a superior mortgage, generally to
avoid having to pay off the first mortgage at the time of sale of the property.
Typically, this is done with a second mortgage wrapping around a smaller first
mortgage. If the wraparound mortgage is sold, at which time the first mortgage
is paid off, the wraparound mortgage then becomes a first mortgage.