Glossary of Terms

A

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).

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.

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.

Assessor

A government official who is responsible for determining the value of a property for the purpose of taxation.

B

Balloon Mortgage

A mortgage that typically offers low rates for an initial period of time {usually 5, 7, or l0) years; after that time period elapses, the balance is due or is refinanced by the borrower.

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.

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.

Closing

Also known as settlement, this is the time at which the property is formally sold and transferred from the seller (builder) 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.

Commission

An amount, usually a percentage of the property sales price, which is collected by a real estate professional as a fee for negotiating the transaction.

Conventional loan

A private sector loan, one 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.

D

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.

Default

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

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.

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.

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, homeowner's insurance, mortgage insurance, etc.

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

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 and sells them to investors; this provides lenders with funds for new homebuyers.

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.

Foreclosure

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

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 V A-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.

H

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-l Statement

Also known as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing.

I

Index

A measurement used by lenders to determine changes to the interest rate charged on an adjustable rate mortgage.

Interest

A fee charged for the use of money.

Insurance

Protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.

J

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.

K

L

Lien

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

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.

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.

M

Margin

An amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.

Mortgage banker

A company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.

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.

N

O

Offer

Indication by a potential buyer of a willingness to purchase a home at a specific price; put forth in writing.

Origination fee

The charge for originating a loan; is usually calculated in the form of points and paid at closing.

P

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.

Pre-qualify

A lender informally determines the maximum amount an individual is eligible to borrow.

Prepayment

Payment of the mortgage loan before the scheduled due date; may be subject to a prepayment penalty.

Q

R

Radon

A radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.

REALTOR®

A real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS® and its local and state associations.

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.

S

Settlement

Another name for closing.

Survey

A property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc..

T

Title I

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 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.

Two-step mortgage

A type of adjustable rate mortgage that has one interest rate for a predetermined initial period and then adjusts to another rate that lasts for the term of the loan.

U

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.

V

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.

W

X

Y

Z