Day 2

Vocabulary flashcards covering second liens, mortgage products, ARM mechanics, income calculations, appraisal basics, title concepts, settlement types, loss-mitigation, and key clauses.

Second Lien

Any junior mortgage recorded behind a first‐lien mortgage; can be a HEL, HELOC, or Purchase-Money Second.

Home Equity Loan (HEL)

A closed-end, lump-sum second mortgage that is fully amortizing with fixed payments.

Home Equity Line of Credit (HELOC)

An open-end, revolving second mortgage that allows the borrower to draw, repay and re-borrow funds, similar to a credit card.

Purchase-Money Second / Piggyback Loan

A second lien originated at the time of purchase (e.g., 80/20 or 80/10/10) to avoid PMI on the first mortgage.

80/20 Loan

Financing structure with an 80% first mortgage and a 20% second mortgage, eliminating the need for PMI.

80/10/10 Loan

Structure with 80% first mortgage, 10% second mortgage, and 10% down payment to bypass PMI.

2/1 Buy-Down

A 30-year fixed mortgage offering a rate 2% below the note rate in year 1 and 1% below in year 2, then reverting to the note rate; also called a Graduated Payment Mortgage (GPM).

Teaser Rate

Introductory interest rate (usually lower) offered during the initial period of a buy-down or ARM.

Reverse Mortgage (HECM)

FHA-insured loan for homeowners 62+ that converts equity into cash; repaid when the borrower sells the home or dies.

Bridge Loan

Short-term, non‐conforming financing that taps equity in a current home to purchase a new one, usually with no payments for 6-12 months.

Share Appreciation Mortgage (SAM)

Loan in which the lender offers a lower rate or modification in exchange for a percentage of future property appreciation.

Bi-Weekly Mortgage

Fixed-rate loan with payments every two weeks, resulting in 26 payments (one extra monthly payment) per year.

Package Mortgage

Non-conforming loan that finances both real property and personal property (e.g., appliances, furniture) under one contract.

Adjustable-Rate Mortgage (ARM)

Loan with an interest rate that adjusts periodically based on an index plus a margin; often shown as 3/1, 5/1, 7/1, etc.

Hybrid ARM

ARM with an initial fixed period (e.g., 5 years in a 5/1) before rate adjustments begin.

Rate Cap (ARM)

Contractual limit on how much the ARM rate can change: initial, periodic, and lifetime caps (e.g., 2/2/5).

Initial Rate Cap

Maximum amount the interest rate can increase at the first adjustment after the fixed period.

Periodic Rate Cap

Limit on rate changes at each subsequent adjustment period.

Lifetime Rate Cap

Absolute maximum interest rate allowed over the life of the ARM.

Index (ARM)

Benchmark rate (COFI, LIBOR, or T-Bill/CMT) that moves up or down and serves as the variable component of an ARM.

COFI

11th District Cost of Funds Index used for some ARMs.

LIBOR

London Interbank Offered Rate; a widely used ARM index (being phased out).

T-Bill / CMT

Treasury Bill or Constant Maturity Treasury index used for ARMs.

Margin (ARM)

Fixed percentage added to the index to determine the Fully Indexed Rate; represents lender profit.

Fully Indexed Rate (FIR)

Index + Margin; the actual rate the borrower pays after adjustments.

Option ARM

ARM that lets the borrower choose each month among minimum, interest-only, or fully amortizing payments; can cause negative amortization.

Negative Amortization

Situation where payments are less than the accrued interest, causing the loan balance to increase.

Interest-Only Loan (Straight Note)

Loan requiring only interest payments for a set term; principal is unpaid during the IO period.

Debt-to-Income Ratio (DTI)

Comparison of monthly debt obligations to gross monthly income; expressed as front-end/back-end percentages.

Vacancy Factor

Underwriting rule allowing only 75% of rental income (25% vacancy allowance) to qualify a borrower.

URAR (Form 1004)

Uniform Residential Appraisal Report used for standard property appraisals.

1004MC

Market Conditions Addendum that summarizes neighborhood trends and accompanies the URAR.

Sales Comparison Approach

Primary appraisal method using at least three recent comparable sales with specific adjustment limits (10% line, 15% net, 25% gross).

Income Approach (Appraisal)

Valuation method based on the income-producing potential of a property, mainly for commercial real estate.

Cost Approach

Appraisal method estimating land value plus replacement cost of improvements, used for new construction.

Yield Spread Premium (YSP)

Fee a broker earns by originating a loan above par rate and selling it to a lender.

Service Release Premium (SRP)

Compensation a lender receives for selling servicing rights when the loan is sold on the secondary market.

Promissory Note

Borrower’s written promise to repay a loan; the primary evidence of debt.

Deed of Trust

Security instrument in title-theory states placing property title with a trustee until the loan is repaid.

Title Theory State

State where the lender (via trustee) holds legal title until the debt is satisfied; borrower retains equitable title.

Lien Theory State

State where borrower holds legal title and the lender places a lien; foreclosure requires court action.

Defeasance Clause

Provision in a Deed of Trust that reconveys legal title to the borrower once the loan is paid off.

Reconveyance

Document that releases a mortgage lien in lien-theory states after payoff.

Conveyance

Transfer of property ownership from one party to another.

Wet Settlement

Closing in which loan funds are disbursed the same day documents are signed (ink still wet).

Dry Settlement

Closing where documents are signed but funds are released only after outstanding conditions are met.

Table Funding

Broker closes a loan with short-term funds (warehouse line) and immediately assigns it to a lender at settlement.

Hypothecation

Pledging property as collateral while retaining possession (e.g., mortgage lending).

Loan Modification

Permanent change to one or more loan terms to help a borrower with long-term hardship avoid foreclosure.

Forbearance

Temporary reduction or suspension of payments granted to borrowers facing short-term hardship.

Pre-Foreclosure Review Period

Servicer may not file foreclosure until the loan is 120 days delinquent, except under specific conditions.

Late Payment Clause

Provision assessing a fee after a grace period (often 15 days) when a payment is late.

Prepayment Penalty

Fee charged for paying off a loan early; may be hard (sale or refi) or soft (refi only).

Hard Prepayment Penalty

Penalty applied if the borrower sells or refinances within the specified period.

Soft Prepayment Penalty

Penalty applied only if the borrower refinances, not if the property is sold.

Due-on-Sale Clause (Alienation)

Requires full repayment when the property is sold or transferred.

Acceleration Clause

Allows the lender to demand immediate repayment if the borrower defaults.

Per Diem Interest

Daily interest charged from funding date to month-end; calculated on a 360-day year.

Prepaid Interest

Interest collected at closing to cover the period between funding and the first mortgage payment; mortgages are paid in arrears.