Foreclosure & Short Sale Definitions

APR (Annual Percentage Rate): The cost of a loan; expressed as a yearly interest rate; it includes the interest, points, mortgage insurance, and other fees associated with the loan.

Appraisal: A document that gives an estimate of a property's fair market value; generally required by a lender before loan approval.

ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the terms of the loan; the change in monthly payment amount, however, is usually subject to a Cap.

Assumable Mortgage: A mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer, the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of an assumable mortgage.

Balloon Mortgage: A mortgage that typically offers low rates for an initial period of time (usually 5,7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.

Bankruptcy: A federal law whereby a person's assets become part of the bankruptcy estate and are used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.

Cap: A limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.

Closing: Also known as a settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing cost, and receives title from the seller.

Debt-to-Income Ratio: A comparison of gross income to housing and non-housing expenses; with the FHA, the monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

Deed: The document that transfers ownership of a property.

Deed-in-Lieu: To avoid foreclosure ("in lieu" of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process doesn't allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.

Default: The inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.

Deficiency Judgment: A judgment given when the security pledged for a loan does not satisfy the debt upon its default.

Delinquency: Failure of a borrower to make timely mortgage payments under a loan agreement.

FHA (Federal Housing Administration): Established in 1934 to advance homeownership opportunities for all Americans; assist homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for the conventional mortgages.

Foreclosure: A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.

Grand Deed: A technical legal term in a deed of conveyance bestowing an interest in real property on another. The words "convey" and "transfer" have the same effect.

HELP (Homebuyer Education Learning Program): An education program from the FHA that counsels people about the home buying process; HELP covers topics like budgeting, finding a home, getting a loan, and home maintenance; in most cases, completion of the program may entitle the homebuyer to a reduced initial FHA mortgage insurance premium - from 2.25% to 1.75% of the home purchase price.

Housing Counseling Agency: Provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and home buying.

HUD (the U.S. Department of Housing and Urban Development): Established in 1965, HUD works to create a decent home and suitable living environment for all Americans.

HUD-1 Statement: Also know as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing.

Judgment: A legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source.

Lien: A legal claim against property that must be satisfied when the property is sold.

Lis Pendens: A notice recorded for the purpose of warning all persons that the title or right of possession of certain real property is in litigation.

Loss Mitigation: A process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.

Mortgage Insurance: A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price.

Mortgage Modification: A loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.

Notice of Default (NOD): A notice filed to show that the borrower under a mortgage or deed of trust is in default (behind on payments).

Notice of Rescission: A recorded notice to rescind a notice of default of a mortgage or deed of trust.

Partial Claim: A loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.

PITI (Principal, Interest, Taxes, and Insurance): The four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.

PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.

Power of Attorney: A legal document that authorizes another person to act on your behalf. A power of attorney can grant complete authority or can be limited to certain acts or certain periods of time or both.

Pre-Foreclosure Sale: Allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.

Real Estate Owned (REO): Real estate owned by a bank or savings institution as the result of default by borrowers and subsequent foreclosure by the institution.

RESPA (Real Estate Settlement Procedures Act): A law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships.

Short Sale (of Home): A sale of a house in which the proceeds are less than what the owner owes on the mortgage. By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what he owes.

Special Forbearance: A loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.

Subordinate: To place in a rank of lesser importance or to make one claim secondary to another.

Title Insurance: Insurance of indemnification for loss occasioned by defects in the title to real property or to an interest therein which is insured.

Trustee: The fiduciary holding title to property for the benefit of another.