Glossary
Glossary
- 203(b): FHA program which provides mortgage insurance to protect lenders from default; used to finance the purchase of new or existing one- to four family housing; characterized by low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amount.
- 203(k): This FHA mortgage insurance program enables homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.
- Adjustable-rate mortgage (ARM)
A mortgage that changes interest rate periodically based upon the changes in a specified index.
- Adjustment date
The date on which the interest rate changes for an adjustable-rate mortgage (ARM).
- Adjustment period
The period that elapses between the adjustment dates for an adjustable-rate mortgage (ARM).
- Amenity: a feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, Woods, water) or man-made (like a swimming pool or garden).
- Amortization: repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years)
- Amortization term
The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months.
- Annual Percentage Rate (APR): calculated by using a standard formula, the APR shows 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.
- Application: the first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
- Appraisal: a document that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
- Appraiser: a qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.
- Appreciation
An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.
- 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 lender; the Change in monthly -payment amount, however, is usually subject to a Cap.
- Assessor: a government official who is responsible for determining the value of a property for the purpose of taxation.
- Asset
Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).
- Assignment
The transfer of a mortgage from one person to another.
- 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.
- Assumption
The transfer of the seller's existing mortgage to the buyer.
- Assumption clause
A provision in an assumable mortgage that allows a buyer to assume responsibility for the mortgage from the seller. The loan does not need to be paid in full by the original borrower upon sale or transfer of the property.
- Assumption fee
The fee paid to a lender (usually by the purchaser of real property) resulting from the assumption of an existing mortgage.
- Balance sheet: A financial statement that shows assets, liabilities, and net worth as of a specific date.
- 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.
- Balloon Payment: The final lump sum payment that is made at the maturity date of a balloon mortgage.
- Bankruptcy: a federal law whereby a person's assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.
- Before-tax income: Income before taxes are deducted.
- Beneficiary: The person designated to receive the income from a trust, estate, or a deed of trust.
- Binder: A preliminary agreement, secured by the payment of an earnest money deposit, under which a buyer offers to purchase real estate.
- Biweekly payment mortgage: A mortgage that requires payments to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment that would be required if the loan were a standard 30-year fixed-rate mortgage, and they are usually drafted from the borrower's bank account. The result for the borrower is a substantial savings in interest.
- Blanket mortgage: The mortgage that is secured by a cooperative project, as opposed to the share loans on individual units within the project.
- Bond: An interest-bearing certificate of debt with a maturity date. An obligation of a government or business corporation. A real estate bond is a written obligation usually secured by a mortgage or a deed of trust.
- Borrower: a person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
- Breach: A violation of any legal obligation.
- Bridge loan: A form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as "swing loan."
- Broker: A person who, for a commission or a fee, brings parties together and assists in negotiating contracts between them.
- Building code: based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.
- Budget: a detailed record of all income earned and spent during a specific period of time.
- Buydown mortgage
A temporary buydown is a mortgage on which an initial lump sum payment is made by any party to reduce a borrower's monthly payments during the first few years of a mortgage. A permanent buydown reduces the interest rate over the entire life of a mortgage.
- Call option: A provision in the mortgage that gives the mortgagee the right to call the mortgage due and payable at the end of a specified period for whatever reason.
- 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.
- Capital improvement: Any structure or component erected as a permanent improvement to real property that adds to its value and useful life.
- Cash-out refinance: A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.
- 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 Eligibility: A document issued by the federal government certifying a veteran's eligibility for a Department of Veterans Affairs (VA) mortgage.
- Certificate of Reasonable Value (CRV): A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
- 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 should be clear and free of all liens or other claims.
- Chain of title: The history of all of the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent.
- Change frequency: The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).
- Clear title: A title that is free of liens or legal questions as to ownership of the property.
- Closing: also known as 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 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 to the borrower after submission of a loan application.
- Closing cost item: A fee or amount that a home buyer must pay at closing for a single service, tax, or product. Closing costs are made up of individual closing cost items such as origination fees and attorney's fees. Many closing cost items are included as numbered items on the HUD-1 statement.
- Closing statement: Also referred to as the HUD1. The final statement of costs incurred to close on a loan or to purchase a home.
- Cloud on title: Any conditions revealed by a title search that adversely affect the title to real estate. Usually clouds on title cannot be removed except by a quitclaim deed, release, or court action.
- Collateral: An asset (such as a car or a home) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.
- Collection: The efforts used to bring a delinquent mortgage current and to file the necessary notices to proceed with foreclosure when necessary.
- Co-maker: A person who signs a promissory note along with the borrower. A co-maker's signature guarantees that the loan will be repaid, because the borrower and the co-maker are equally responsible for the repayment. See endorser.
- Commission: an amount, usually a percentage of the property sales price, that is collected by a real estate professional as a fee for negotiating the transaction.
- Commitment letter: A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer. Also known as a "loan commitment."
- Common areas: Those portions of a building, land, and amenities owned (or managed) by a planned unit development (PUD) or condominium project's homeowners' association (or a cooperative project's cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and other recreational facilities, as well as common corridors of buildings, parking areas, means of ingress and egress, etc.
- Community Home Improvement Mortgage Loan: An alternative financing option that allows low- and moderate-income home buyers to obtain 95 percent financing for the purchase and improvement of a home in need of modest repairs. The repair work can account for as much as 30 percent of the appraised value.
- Community property: In some western and southwestern states, a form of ownership under which property acquired during a marriage is presumed to be owned jointly unless acquired as separate property of either spouse.
- Comparables: An abbreviation for "comparable properties"; used for comparative purposes in the appraisal process. Comparables are properties like the property under consideration; they have reasonably the same size, location , and amenities and have recently been sold. Comparables help the appraiser determine the approximate fair market value of the subject property.
- Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas.
- Conventional loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.
- Cooperative (Co-op): residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
- Condominium conversion: Changing the ownership of an existing building (usually a rental project) to the condominium form of ownership.
- Construction loan: A short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses.
- Consumer reporting agency (or bureau): An organization that prepares reports that are used by lenders to determine a potential borrower's credit history. The agency obtains data for these reports from a credit repository as well as from other sources.
- Contingency: A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.
- Contract: An oral or written agreement to do or not to do a certain thing.
- Convertibility clause: A provision in some adjustable-rate mortgages (ARMs) that allows the borrower to change the ARM to a fixed-rate mortgage at specified timeframes after loan origination.
- Convertible ARM: An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under specified conditions.
- Corporate relocation: Arrangements under which an employer moves an employee to another area as part of the employer's normal course of business or under which it transfers a substantial part or all of its operations and employees to another area because it is relocating its headquarters or expanding its office capacity.
- Cost of funds index (COFI): An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It represents the weighted-average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco.
- Covenant: A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.
- Credit: An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.
- Credit bureau score: a number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.
- 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; it documents an individual's credit history.
- Credit repository: An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit.
- Debt: An amount owed to another.
- 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.
- Deed of trust: The document used in some states instead of a mortgage; title is conveyed to a trustee.
- 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.
- Deposit: A sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.
- Depreciation: A decline in the value of property; the opposite of appreciation.
- 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.
- Due-on-sale provision: A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.
- 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; an FHA program that helps homebuyers 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.
- Escrow account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.
- 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 purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.
- FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists 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 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 pay 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 homebuyers.
- 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 lent 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; must be given to the borrower within three days after submission of a loan application.
- HELP: Homebuyer Education Learning Program; an educational 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.
- Home inspection: an examination of the structure and mechanical systems to determine a home's safety; makes the potential homebuyer aware of any repairs that may be needed.
- 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.
- 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.
- Index: a measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage.
- Inflation: 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 secured by the payment of a regularly scheduled premium.
- 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.
- Lease purchase: assists low- to moderate-income homebuyers in purchasing a 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 specific 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.
- 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 the Promise to repay a loan.
- Mortgage banker: a company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or 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.
- Offer: indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.
- 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; is usually calculated in the form of points and paid at closing.
- 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.
- Pre-approve: lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
- Pre-foreclosure sale: allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.
- Pre-qualify: a lender informally determines the maximum amount an individual is eligible to borrow.
- 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.
- Principal: the amount borrowed from a lender; doesn't include interest or additional fees.
- Radon: a radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.
- 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 (like 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
- Settlement: another name for closing
- 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.
- Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
- Sweat equity: using labor to build or improve a property as part of the down payment
- Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don't require a property lien.
- Title insurance: insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers.
- 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 initial period and 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, a loan guarantee protects lenders against loss that may result from a borrower default.
