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A
Amenity: a feature of a home or property that is desirable, like location, acreage, a swimming pool or garden.
Amortization: repayment of a mortgage loan through monthly installments of principal and interest that will allow
you to own your home at the end of a specific time period (for example, 15 or 30 years).
Annual Percentage Rate (APR): calculated by using a standard formula, the APR shows the cost of a loan. It
includes the interest, points, mortgage insurance, and other fees associated with the loan.
Application: the first step in the official loan approval process; used to record important information about the
potential borrower and required for the underwriting process.
Appraisal: a document that estimates a property's fair market value. An appraisal is generally required by a
Lender before loan approval to ensure that the mortgage amount is not more than the value of the property.
Appreciation: a rise in the appraised value of a property, based on increasing market value.
ARM: Adjustable Rate Mortgages (ARM) are subject to changes in interest rates. When rates change, payments
increase or decrease as determined by the Lender. The change in monthly payments is usually limited by a cap.
Assessor: a government official who determines the value of a property for the purpose of taxation.
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.
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B
Balloon Mortgage: a mortgage that offers low rates for an initial period of time, usually five, seven, or 10 years;
after that time period elapses, the balance is due or refinanced by the borrower.
Bankruptcy: a federal law whereby a person's assets are turned over to a trustee and used to payoff
outstanding debts.
Borrower: a person who has been approved to receive a loan and is then obligated to repay it according to the
loan terms.
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C
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.
Cash reserves: a cash amount sometimes required to be held in reserve in addition to the down payment and
closing costs; the amount is determined by the Lender.
Certificate of title: a document provided by a qualified source (such as a title company) that shows the property
legally belongs to the current owner. Before the title is transferred at closing, it must be clear and free of all liens
and claims.
Closing: also known as settlement, this is the time at which the property is formally sold and transferred from the
seller to the buyer. At this time that the borrower takes on the loan obligation, pays all closing costs, and receives
title from the seller.
Closing costs: customary costs above and beyond the sale price of the property that must be paid to cover the
transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed for
the borrower after submission of a loan application.
Commission: a percentage of the property sales price that is collected by a real estate professional as a fee for
negotiating the transaction.
Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit
complex. The owners share financial responsibility for common areas.
Conventional loan: a private sector loan that is not guaranteed or insured by the U.S. government.
Credit history: history of an individual's debt payment. Lenders use this information to gauge a potential
borrower's ability to repay a loan.
Credit report: a record that lists all past and present debts and the timeliness of their repayment.
Credit agency score: a number representing the possibility that a borrower may default. It is based upon credit
history and is used to determine ability to qualify for a mortgage loan.
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D
Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses; per the Federal
Housing Administration (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.
Default: the inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage
terms.
Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.
Discount point: normally paid at closing and generally calculated to be equivalent to 1% of the total loan
amount. Discount points are paid to reduce the interest rate on a loan.
Down payment: the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.
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E
Earnest money: money put down by a potential buyer to show that he or she is serious about purchasing the
home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is
forfeited if the buyer pulls out of the deal.
EEM (Energy Efficient Mortgage): A Federal Housing Administration (FHA) program that helps home buyers save
money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing
home as part of the home purchase
Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the
mortgage loan(s) from the fair market value of the property.
Escrowaccount: a separate account into which the Lender puts a portion of each monthly mortgage payment.
An escrow account provides the funds needed for property taxes, homeowners insurance, mortgage insurance,
etc. Having an escrow account is optional but recommended.
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F
Fair Housing Act: a law that prohibits discrimination in all facets of the home buying process on the basis of
race, color, national origin, religion, sex, familial status, or disability.
Fair market value: the hypothetical price that a willing buyer and seller will agree upon when they are acting
freely, carefully, and with complete knowledge of the situation.
Fannie Mae Federal National Mortgage Association (FNMA): a federally chartered enterprise owned by private
stockholders that buys residential mortgages and converts them into securities for sale to investors. By
purchasing mortgages, Fannie Mae supplies funds that Lenders may loan to potential home buyers.
FHA (Federal Housing Administration): Established in 1934 to advance homeownership opportunities for all
Americans, the FHA assists home buyers 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 conventional mortgages.
Fixed-rate mortgage: a mortgage with payments that remain the same throughout the life of the loan because
the interest rate and other terms are fixed and do not change.
Flood insurance: insurance that protects homeowners against losses from a flood. If a home is located in a
flood plain, the Lender will require flood insurance before approving a loan.
Foreclosure: a legal process in which mortgaged property is sold to payoff the loan of the defaulting borrower.
Freddie Mac Federal Home Loan Mortgage Corporation (FHLM): a federally chartered corporation that
purchases residential mortgages, securitizes them, and sells them to investors. This provides Lenders with funds
for new home buyers.
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G
Ginnie Mae Government National Mortgage Association (GNMA): A government-owned corporation overseen by
the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed
loans to back securities for private investment; as with Fannie Mae and Freddie Mac, the investment income
provides funding that may then be loaned to eligible borrowers by Lenders.
Good faith estimate: an estimate of all closing fees including pre-paid and escrow items as well as Lender
charges, which must be given to the borrower within three days after submission of a loan application.
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H
Home inspection: an examination of the structure and mechanical systems to determine a home's safety;
makes the potential home buyer aware of necessary and desirable repairs.
Home warranty: offers protection for mechanical systems and attached appliances against unexpected repairs
not covered by homeowner's insurance. Coverage extends over a specific time period and does not cover the
home's structure.
Homeowner's insurance: an insurance policy that combines protection against damage to a dwelling and its
contents with protection against claims of negligence or inappropriate action that result in someone's injury or
property damage.
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. It does this by addressing housing needs,
improving and developing American communities, and enforCing fair housing laws.
HUD1 Statement: also known as the "settlement sheet," it itemizes all closing costs; must be given to the
borrower at or before closing.
HVAC: Heating, Ventilation and Air Conditioning; a home's heating and cooling system.
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I
Index: a measurement used by Lenders to determine changes to the interest rate charged on an Adjustable Rate
Mortgage.
Inflation: An economic condition in which the number of dollars in circulation exceeds the amount of goods and
services available for purchase. Inflation results in a decrease in the dollar's value.
Interest: a fee charged for the use of money.
Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage.
Insurance: protection against a specific loss over a period of time that is obtained by the payment of a regularly
scheduled premium.
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L
Lease purchase: assists low- to moderate-income home buyers in purchasing ~ home by allowing them to lease
a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional
amount that is credited to an account for use as a down payment.
Lien: a legal claim against property that must be satisfied when the property is sold.
Loan: money borrowed that is usually repaid with interest.
Loan fraud: purposely giving incorrect information on a loan application in order to better qualify for a loan; may
result in civil liability or criminal penalties.
Loan-to-value (LTV) ratio: a percentage calculated by dividing the amount borrowed by the price or appraised
value of the home to be purchased. The higher the LTV, the less cash a borrower is required to pay as down
payment.
Lock-in: since interest rates can change frequently, many Lenders offer an interest rate lock-in that guarantees a
specific interest rate if the loan is closed within a specified time.
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.
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M
Margin: an amount the lender adds to an index to determine the interest rate on an Adjustable Rate Mortgage.
Mortgage: a lien on the property that secures a promise to repay a loan.
Mortgage banker: a company that originates loans and resells them to secondary mortgage Lenders like Fannie
Mae and Freddie Mac.
Mortgage broker: a firm that originates and processes loans for a number of Lenders.
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 insurance premium (MIP): a monthly payment - usually part of the mortgage payment - paid by a
borrower for mortgage insurance.
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.
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O
Offer: a written document completed by a potential buyer who wants to purchase a home at a specific price.
Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit
check, verification of employment, and a property appraisal.
Origination fee: the charge for originating a loan, calculated in the form of points and paid at closing.
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P
PITI (Principal, Interest, Taxes, and Insurance): the four elements of a monthly mortgage payment. 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.
Points: a point is one percent of the value of the property.
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.
Pre-approve: a lender's commitment to lend money to a potential borrower. The commitment remains as long
as the borrower still meets the qualification requirements at the time of purchase.
Pre-qualify: a Lender's informal determination of the maximum amount an individual is eligible to borrow. This is
not the same as a pre-approval.
Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage.
Prepayment: payment of the mortgage loan before the scheduled due date; may be subject to a prepayment
penalty.
Prime mortgage: the interest rate charged by banks to their most creditworthy customers (usually the most
prominent and stable business customers). The rate is almost always the same among major banks.
Adjustments to the prime lending rate are made by banks at the same time, although the prime rate does not
adjust on any regular basis. The reported rates are based upon the prime rates on the first day of each
respective month.
Principal: the amount borrowed from a Lender; doesn't include interest or additional fees
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R
Real estate agent: an individual who is licensed to negotiate and arrange real estate sales; works for a real
estate broker.
Realtor: a real estate agent or broker who is a member of the National Association of Realtors, and its local and
state associations.
Refinancing: paying off one loan by obtaining another. Refinancing is generally done to secure better loan
terms (such as a lower interest rate).
Rehabilitation mortgage: a mortgage that covers the costs of rehabilitating (repairing or improving) a property;
some rehabilitation mortgages - like the FHA's 203(k) - allow a borrower to roll the costs of rehabilitation and
home purchase into one mortgage loan.
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.
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S
Settlement: another name for closing.
Sub-prime lending: Lending to borrowers who have less than ideal credit. Such borrowers will pay a higher
interest rate due to their increased risk of not repaying loans, based on credit history, low income, or other criteria
used by lenders. During economic booms, sub-prime borrowers can often borrow more easily than they can at
other times, as many Lenders prefer higher yields in search of higher profit margins. When the boom is over,
these loans tend to default at much higher rates than prime loans, and Lenders again become wary of lending to
sub-prime borrowers.
Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way,
improvement locations, etc.
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T-U-V
Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or
repairs) to their home; Title 1 loans less than $7,500 don't require a property lien.
Title insurance: insurance that protects the Lender against any claims that arise from disputes about ownership
of the property; also available for home buyers.
Title search: a check of public records to be sure that the seller is the recognized owner of the real estate and
that there are no unsettled liens or other claims against the property.
Truth-in-Lending: a federal law obligating a Lender to give full written disclosure of all fees, terms, and
conditions associated with the loan's initial period, which then adjusts to another rate that lasts for the term of the
loan.
Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the
loan. It includes a review of the potential borrower's credit history and a judgment of the property value.
VA (Department of Veterans Affairs): a federal agency which guarantees loans made to veterans. Similar to
mortgage insurance, this loan guarantee protects Lenders against loss that may result from a borrower default.
