We wanted to demystify all of the lingo used in the mortgage industry so that you won't feel like you're in over your head next time you apply for a mortgage or hard money loan. This week, we share part two of our glossary of mortgage terms.
chain of title: the chain of title is simply an analysis - or list - of all of the transfers of title to the property. If the house is a new build, you'll be the only person in the chain of title, and if it has had three owners, there will likely be two transfers of title.
clear title: the term used when a title is free of liens or legal questions about the ownership of the property.
closed/closing: this term has different meanings depending on which state you reside in. In some states, a deal is not closed until the documents have been recorded at a recorder's office, but in other states, the closing of a property occurs during a meeting between all parties where all of the documents are signed and the money changes hands.
cloud on title: a cloud on title is simply a mark on the title that could have a negative impact on the deed, for example, debts that have not been cleared. Usually, clouds on title can only be removed by a change in the deed or through a court action.
co-borrower: an additional borrower on the loan who could own 50% of the property, or less. This borrower is obligated to pay back the loan and will also be noted on the title of the property.
collateral: in a home loan, the collateral of the loan is the house. If you default on the loan (mortgage) the lender will be able to take the property in order to sell it on so that they can pay off the mortgage. In the context of a hard money loan, the collateral may well be the property itself, or another item of high value, like another property or even a car. Some hard money borrowers will even use their business as collateral in order to secure the loan.
community property: in some states, a property acquired by a married couple is considered to be a community property that is owned jointly, regardless of who pays the mortgage. This is particularly true of states in the south west.
comparable sales: comparable sales are simply sales that have occurred in the same area that can be used to produce a ballpark market value of the property. Comparable sales are usually of properties that are in the same zip code, that have a similar number of bedrooms, a similar sized garden and a similar amount of square footage.
condominium: a condominium is actually a type of ownership rather than a type of property, whereby all of the owners own the property, common buildings, public areas and outdoor areas together, with the exception of the interior of each individual property, which are all owned by individuals rather than by all of the owners in the complex.
construction loan: a construction loan is simply used as a short-term loan in order to rehab a property. The lender will pay the builder and you will pay the lender.
contingency: a contingency in this context is a condition that must be met before the contract is binding. A contingency can take the form of the seller throwing in the kitchen appliances or the buyer having to get a home inspection report before the contract can be binding or before the sale can take place.
convertible ARM: as discussed in part one of our guide, an ARM is an adjustable rate mortgage. A convertible ARM can be converted to a fixed price mortgage within a specific amount of time. Typically, convertible ARMs will be taken out when national mortgage rates are fairly low so that buyers can take advantage of those low rates.
co-operative (co-op): this also refers to the ownership of a property rather than a particular property. The residents and owners of a housing unit such as an apartment block or community also own shares in the corporation that owns the property. These shares give them the right to own a specific house or unit within that community but often means that owners will also be responsible for common areas, too.
credit history: a credit history is a record of an individual's relationship with credit. An individual's credit history will be thoroughly checked by a mortgage lender to ensure that the borrower is trustworthy enough to be given a mortgage. A creditor is an individual or agency that is owed money, and a credit report is simply a report of the credit history to be used by lenders.
deed in lieu of foreclosure: a deed in lieu of foreclosure simply transfers title to the lender when the borrower of the loan is unable to make repayments or is in default and wants to transfer the title of the property to the lender. This is used to avoid foreclosure. If the lender accepts the deed in lieu, the fact that the loan has not been repaid will still likely show up on credit histories and credit reports, although it may well cease foreclosure activities, meaning that it will not become public record.
default: when an individual defaults on a loan, it means that they have not paid it back, or a portion of it back, within a specified amount of time. This could also occur when an individual consistently misses their mortgage repayments. Usually, if a payment has not been made within 30 days of the due date of the payment, the loan will be in default.
depreciation: when a property declines in value, it is known as depreciation. This typically happens due to market conditions but it could also occur because the condition of the property has rapidly declined. Depreciation can also be used as an expense which can reduce income which is taxed.
down payment: the payment made on a property in order to secure it. This payment is not financed with a mortgage and may also be called a deposit.
For more mortgage terms, come back next week for part 3 of our glossary.