Glossary
A
Accepted Contract – A sales contract signed by both seller and buyer that defines the terms of the sale.
Additional Principal Payment – A payment by a borrower of more than the scheduled principal amount due, in order to reduce the remaining balance of the loan.
Adjustable Rate Mortgage – An adjustable rate mortgage, commonly referred to as an ARM, is a loan type that allows the lender to adjust the interest rate during the term of the loan. Generally, these changes are determined by a margin and an index so that the interest rate changes, up or down, are based on market conditions at the time of the change. Most often these interest rate changes are limited by a rate change cap and a lifetime cap. If you apply for an adjustable rate mortgage, the lender is required to provide you with an ARM Program Disclosure which spells out the terms of the loan.
Adjusted Basis – The original cost of a property, plus the value of any capital expenditures for improvements to the property, minus any depreciation taken.
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).
Amortization – A loan repayment plan, which enables the borrower to reduce his debt gradually through monthly payments of principal and interest. The amortization is expressed as a number of months. For example, for a 30 year fixed rate mortgage, the amortization term is 360 months.
Amortization Schedule – A timetable for payment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principals and shows the remaining balance after each payment is made.
Annual Mortgagor Statement – A report sent to the mortgagor each year. The report shows how much was paid in taxes and interest during the year, as well as the remaining mortgage loan balance at the end of the year.
Annual Percentage Rate (APR) – To make it easier for consumers to compare mortgage loan interest rates, the federal government developed a standard format called an "Annual Percentage Rate" or APR to provide an effective interest rate for comparison shopping purposes. Some of the costs that you pay at closing are factored into the APR for ease of comparison. Your actual monthly payments are based on the periodic interest rate, not the APR.
Appraisal – An analysis performed by a qualified individual to determine the estimated value of a home.
Appraised Value – An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience and analysis of the property.
Appreciation – An increase in the value of a property due to changes in market conditions and other causes.
Assessed Value – The valuation placed on property by a public tax assessor for purposes 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 loan that does not have to be paid in full if the home is sold. Instead, the new owner can take over payments on the existing loan and pay the seller the difference between the sales price and the balance on the loan.
B
Backup Contract – A contract to buy property that becomes effective if a prior contract fails to be agreed upon.
Balloon Mortgage – A short-term fixed-rate loan which involves smaller payments for a certain period of time and one large balloon payment for the entire balance due at the end of the loan term.
Before Tax Income – Income before deducting taxes.
Betterment – An improvement that increases property value as opposed to repairs or replacements that simply maintain value.
Bi-weekly Payment Mortgage – A mortgage that requires payment to reduce the debt every two weeks instead of monthly. The 26 (sometimes 27) biweekly payments are each equal to one-half of the monthly payment that would be required with a standard 30 year fixed-rate mortgage. The result is a faster loan balance reduction with substantial savings in interest.
Binder – An agreement between a buyer and seller to purchase real estate. A binder, also known as an offer to purchase or a sales contract, secures the right to purchase real estate upon agreed terms for a limited period of time. If the buyer changes his mind or is unable to purchase, the earnest money that was paid is forfeited unless the binder expressly provides that it is to be refunded.
Binder Deposit – A sum of cash paid to a seller by a buyer prior to the closing to show that the buyer is serious about buying the house. The binder deposit is deducted from the purchase price at closing and is not an additional cost. Sometimes referred to as earnest money.
Bridge Loan – Sometimes called a "swing loan", a bridge loan is generally a loan that is secured by a borrower's current residence to obtain the funds needed to purchase a new home if the current residence will not be sold prior to the purchase of a new home.
Business Days – Check with your lending institution to find out what days it considers as business days under the Truth in Lending and Electronic Fund Transfer Acts. Usually excludes weekends and holidays.
Buy-down Account – An account in which money is held so that it can be applied to the monthly mortgage payments, as each payment comes due, during the period that an interest rate buy-down plan is in effect.
Buy-down – A process that allows a borrower to obtain a lower interest rate on a mortgage by paying discount points to a lender. A temporary buy-down will reduce the interest rate paid during the first few years of the loan. A permanent buy-down reduces the interest rate over the entire life of the loan.
C
Cap – Refers to a provision of an adjustable rate mortgage (ARM) that limits how much the interest rate or payment can increase or decrease.
Cash Out Refinance – A refinance loan that provides the borrower with cash that exceeds the amount required to pay off existing mortgages on the home. This additional cash can be used by the borrower for any purpose.
Certificate of Eligibility – A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) loan.
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 loan.
Clear Title – A title that is free of clouds, liens, disputed interests or legal questions as to ownership of the property.
Closing – A meeting of the parties involved in a real estate transaction to finalize the process. In the case of a purchase, a closing usually involves the seller, the buyer, the real estate broker and the lender. In the case of a refinance, the closing involves the borrower and the lender. Sometimes referred to as the settlement or the close of escrow.
Closing Costs – The total of all the items that must be paid at closing related to your new mortgage.
Closing Statement – Also referred to as the HUD-1 or the settlement statement, this is the document that provides line by line detail of the financial details related to a specific real estate transaction such as the fees paid by the seller and the buyer for a purchase transaction or the fees paid by the borrower for refinances.
Cloud on Title – Any conditions such as encumbrances, liens or claims revealed by a title search that adversely affect the title to real estate. Clouds on a title often cannot be removed, except by a quitclaim deed release, or court action. Compare with clear title.
Collateral – Property pledged as security for a debt. The borrower risks losing the collateral if the debt is not repaid according to the terms of the loan contract.
Commitment Letter – A written offer from a lender to provide financing to a borrower. The commitment letter states the terms under which the lender agrees to provide financing to the borrower. Also called a loan commitment.
Comparables – An abbreviated form of comparable properties. Comparables are used for comparative purposes in the appraisal process and are properties that are very similar to the property being appraised. They have been sold recently and have approximately the same size, location and features. Comparables help the appraiser determine the approximate fair market value of the subject property. Often just called “comps”.
Compound Interest – Interest paid on the original principal balance, and on the accumulated and unpaid interest.
Conforming Loan – A loan that does not exceed $417,000. Loans that exceed this amount are referred to as "jumbo mortgages".
Contingency – A condition that must be met before a contract is legally binding. For example, a lender's commitment to provide financing to a borrower may be contingent on receipt of an acceptable appraisal.
Conventional Mortgage – A mortgage that is not insured or guaranteed by a government agency.
Cosigner – Another person who signs your loan and assumes equal responsibility for it.
Credit History – A record of a person’s debt history, including all open and fully repaid obligations. A credit history helps a lender to determine whether a potential borrower has satisfactory history of repaying debts in a timely fashion.
D
Deed – The written instrument that conveys a property from the seller to the buyer. The deed is recorded at the local courthouse so that the transfer of ownership is part of the public record.
Deed of Trust – This document, referred to as a mortgage in some states, pledges a property to a lender or trustee as security for the repayment of a debt.
Default – A breech of the agreement with a lender such as the failure to make loan payments in a timely manner.
Depreciation – A decline in the value of real or personal property.
Discount Points – Fees that are collected by the lender in exchange for a lower interest rate. Each discount point is 1% of the loan amount.
Discount Rate – The interest rate that the Federal Reserve charges member banks for loans, using government securities or eligible paper as collateral. This provides a floor on interest rates, since banks set their loan rates a notch above the discount rate.
Down Payment – The portion of the purchase price of a property that the borrower will be paying in cash rather than included in the mortgage amount.
E
Earnest Money – A sum of cash paid to a seller by a buyer prior to the closing to show that the buyer is serious about buying the house. The earnest money is deducted from the purchase price at closing and is not an additional cost. Sometimes referred to as a binder deposit.
Effective Age – An appraiser’s opinion of the physical condition of a structure. The actual age of a building may be longer or shorter than its effective age.
Effective Gross Income – Normal annual income, which may include overtime and bonuses, that is regular, consistent and guaranteed. A person’s salary is usually the prime source, but other income may qualify if it is significant, documented and stable.
Encumbrance – Anything that affects the title to a property such as a mortgage, judgment, or easement.
Endorsements – Additions to a title insurance policy for special coverage such as surveys, environmental and state particular endorsements that are not included in the standard insurance policy.
Equity – An owner's financial position in a property. Equity is the difference between the property's value and the amount that is owed on mortgages.
Escrow – Funds paid by one party to another to hold until a specific date when the funds are released to a designated individual. Generally, an escrow account refers to the funds a mortgagor pays to the lender along with their principal and interest payments for the payment of real estate taxes and hazard insurance. This is also referred to as impounds. The money is held by the lender to make payments when they are due. An escrow can also refer to funds that are held by a third party to insure the completion of repairs or improvements that must be completed on the property but that cannot be done prior to closing.
Escrow Payment – The portion of a borrower’s monthly mortgage payment that is held by the loan servicing company to pay for property taxes, hazard insurance, mortgage insurance and other items as they become due.
F
Fair Credit Reporting Act – A federal consumer protection regulation that controls the disclosure of credit information and establishes procedures for correcting mistakes in your credit file.
Fair Market Value – The highest price that a willing, but not compelled, buyer would pay, and the lowest price that a willing, but not compelled, seller would accept.
Fannie Mae – FNMA (Federal National Mortgage Association) One of the congressionally chartered, publicly owned companies that is the largest source of home mortgage funds.
Federal Housing Administration (FHA) – An area of the U.S. Department of Housing and Urban Development (HUD) that insures low downpayment mortgages granted by some lenders. The loan must meet the established guidelines of FHA in order to qualify for the insurance.
FHA Mortgage – A mortgage insured by the Federal Housing Administration (FHA). FHA loans are also known as government mortgages.
Finance Charge – The total dollar amount credit will cost.
First Mortgage – A mortgage that is the first loan recorded in the public record and generally the primary loan against a property.
Fixed Rate Mortgage – A mortgage in which the monthly principal and interest payments remain the same throughout the life of the loan.
Float – A term that describes the interest rate for a loan that has not yet been guaranteed by a lender. If the lender has not yet guaranteed or locked the interest rate, it is floating and could change prior to closing.
Flood Certification – An inspection to determine if a property is located in an area prone to flooding also known as a flood plain. The federal government determines whether an area is in a flood plain. Lenders generally rely on the flood certification to determine if flood insurance will be required in order to obtain a mortgage.
Flood Insurance – Insurance that protects a homeowner from the cost of damages to a property due to flooding or high water. It is required by law that properties located in areas prone to flooding have flood insurance. The federal government determines whether an area is prone to flooding and considered to be in a flood plain.
Foreclosure – The legal process in which a borrower's ownership of a property is dissolved due to default.
Freddie Mac – FHLMC (Federal Home Loan Mortgage Corporation) One of the congressionally chartered, publicly owned companies that is the largest source of home mortgage funds.
Fully Amortized ARM – An adjustable-rate mortgage (ARM) with monthly payments that are sufficient to liquidate the remaining principal balance over the amortization term.
G
Gain – An increase in monetary or property value.
Gap Loan – Short-term financing, usually to cover a gap in time between a person’s purchase of a home and that person’s later receipt of funds, usually from the sale of their previous home. Sometimes called a bridge loan or swing loan.
Good Faith Estimate – A written estimate of the closing costs the borrower will have to pay at closing. Under the Real Estate Settlement Procedures Act (RESPA), the lender is required to provide this disclosure to the borrower within three days of receiving a loan application.
Government mortgage – A mortgage that is guaranteed by the Department of Veterans Affairs (VA) or, is insured by the Federal Housing Administration (FHA).
Guarantee Mortgage – A home loan that is guaranteed by a third party.
H
Hazard Insurance – Insurance that protects a homeowner against the cost of damages to property caused by fire, windstorms, and other common hazards. Also referred to as homeowner's insurance.
Home Equity Line of Credit (HELOC) – A loan secured by real property, usually in a subordinate position, that allows the borrower to receive the loan proceeds in the form of multiple advances up to a limit that represents a maximum percentage of the borrower's equity in a property.
Home Equity Loan – A loan secured by a subordinate mortgage on one's principal residence, generally to be used for some non-housing expenditure. A traditional home equity loan provides lump-sum proceeds at the time the loan is closed.
Home Inspection – A complete and detailed inspection that examines and evaluates the mechanical and structural condition of a property. A complete and satisfactory home inspection is often required by the homebuyer.
Homeowner's Insurance – See Hazard Insurance.
Homeowner’s Warranty – A type of insurance policy that covers repairs to certain parts of a home for an agreed upon period of time. It is typically provided by the contractor or seller as a condition of the sale
Homeowners Association – A nonprofit association that manages the common areas of a neighborhood, condominium project or planned unit development (PUD). In a condominium development, the association has no ownership interest in the common elements. In a PUD, it holds title to the common elements of the project.
Homeowners Association Dues – Payments made to an association responsible for the maintenance of the common areas in a condominium or subdivision development.
Housing Ratio – A standard calculation performed by mortgage lenders to determine if a borrower qualifies for a specific loan type and amount. It is calculated by dividing the monthly housing expense (Principal, Interest, Taxes and Insurance) by the borrower’s monthly gross income. Also referred to as a front-end ratio or a top ratio.
HUD – Also known as the U.S. Department of Housing and Urban Development, insures home mortgage loans made by lenders meet minimum standards for such homes.
HUD Median Income – Median family income for a particular county or metropolitan statistical area, as estimated by the Department of Housing and Urban Development (HUD).
HUD-1 Statement – Also referred to as the closing statement or the settlement statement, this is the document that provides line by line detail of the financial details related to a specific real estate transaction such as the fees paid by the seller and the buyer for a purchase transaction or the fees paid by the borrower for refinances.
I
Illiquidity – Having inadequate cash to meet current obligations. Real property is considered an illiquid investment because of the time and effort required to convert it to cash.
Impound Account – A fund set aside for future needs, such as an escrow or reserve account.
Impounds – An impound refers to the funds a mortgagor pays to the lender along with their monthly principal and interest payments for the payment of real estate taxes and hazard insurance. This is also referred to as an escrow account. The money is held by the lender to make payments when they are due.
Income Property – Real estate developed and improved for the purpose of producing steady income.
Index – A published interest rate used to establish the interest rate offered on an Adjustable Rate Mortgage (ARM). Some of the most common indices are treasury bills, treasury securities, London Inter-Bank Offering Rates (LIBOR) and the Cost of Funds Index (COFI).
Initial Interest Rate – The original, starting interest rate of a loan at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). Sometimes called a teaser rate
Installment – A regularly scheduled periodic payment that a borrower agrees to make to a lender.
Installment Loan – Borrowed money that is repaid in equal periodic payments. Cars and furniture are often paid for with installment loans.
Insurance – A form of contract that provides compensation for specific losses in exchange for a periodic payment. An individual contract is known as an insurance policy. The periodic payments are known as insurance premiums.
Insurance Binder – A document stating that insurance is only temporarily in effect. Because the coverage will expire by a certain date, a permanent policy must be obtained prior to the expiration date.
Insured Mortgage – A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (PMI). If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount.
Interest Accrual Rate – The rate at which interest accrues on a mortgage. Usually, it is also the rate used to calculate the monthly payments.
Interest Rate – The cost of borrowing a lender's money. Interest takes into account the risk and cost to the lender for a loan.
Interest Rate Buy-down Plan – An arrangement where the property seller, borrower or other party deposits money to an account so that it can be released each month to reduce the borrower's interest rate or monthly payments during a specified period of a loan.
Interest Rate Ceiling – The maximum interest rate for an adjustable-rate mortgage (ARM), as specified in the mortgage loan note.
Interest Rate Floor – The minimum interest rate for an adjustable-rate mortgage (ARM), as specified in the mortgage loan note.
J
Joint Tenancy – A form of co-ownership that gives each tenant equal undivided interest and equal rights in the property, including the right of survivorship.
Jumbo Mortgage – A loan that exceeds $417,000. Also known as a non-conforming loan.
L
Late Charge – The penalty a borrower must pay when a payment is made after the stated due date.
Lease – A written contract between a property owner and a tenant that expresses the conditions under which the tenant may possess the real estate for a specified period of time and rent.
Lease-purchase Mortgage Loan – A creative financing option that allows homebuyers to lease a home with an option to buy. Each month's rent payment consists of principal, interest, taxes and insurance, plus an extra amount that is deposited into a savings account created for a down payment.
Lender – The bank, mortgage broker, or financial institution providing the loan funds to a borrower.
Lender Fees – Fees that are kept by the lender to cover some of their expenses. Typically fees such as origination fees, discount points, processing fees, underwriting fees and document preparation fees are lender fees.
Liabilities – A person's financial obligations including both long-term and short-term debt, as well as any other amounts that are owed to others.
Liability Insurance – An insurance policy that offers protection against claims that a property owner's negligence resulted in bodily injury or property damage to another party.
LIBOR – See London Inter-bank Offered Rate.
Lien – A loan secured by real estate. An encumbrance against a property for money due. The lien can be voluntary such as a mortgage or involuntary such as a judgement.
Lifetime Interest Rate Cap – On an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the term of the loan.
Lifetime Payment Cap – On an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the term of the loan.
Liquid Asset – An asset that is easily converted into cash.
Loan – Borrowed money that is usually repaid with interest.
Loan Commitment – A written offer from a lender to provide financing to a borrower. The commitment letter states the terms under which the lender agrees to provide financing to the borrower. Also called a commitment letter.
Loan Origination – The process by which a mortgage lender creates a mortgage secured by real property.
Loan Term – The number of months that you will make monthly payments. If the loan term is the same as the payment calculation term, you will pay the loan in full during the loan term and no balance will be due. If the payment calculation term is greater than the loan term, a balance or "balloon payment" may be due at the end of the loan term.
Loan to Value Ratio (LTV) – A ratio used by lenders to calculate the loan amount requested as a percentage of the value of a home. To determine the loan to value ratio, divide the loan amount by the home's value. The LTV ratio is used to determine what loan types the borrower qualifies for as well as the cost and fees associated with obtaining the loan.
Lock – Written agreement in which a lender guarantees a specific interest rate if a loan closes within a set period of time. The lock-in may also specify the number of discount points to be paid at closing.
Lock Period – The number of days that the lender will guarantee the interest rate offered for a loan. In order to hold the guaranteed interest rate for a loan, the loan closing must occur during the lock period.
London Inter-Bank Offered Rates (LIBOR) – An index used to establish the interest rate of some adjustable rate mortgages (ARM). LIBOR is the London Inter-Bank Offered Rates. This is the interest rate at which the highest rated banks offer to lend to one another in eurodollars. LIBOR offers various maturities, including 1-month, 3-month, 6-month and 1-year. LIBOR is quoted daily in the Wall Street Journal's Money Rates.
M
Maintenance – Activities required to compensate for wear and tear on a property.
Margin – The number of percentage points a lender adds to the index value to calculate the ARM interest rate at each adjustment period.
Maturity – The date on which the principal balance of a financial instrument becomes due and payable.
Maximum Financing – Usually, a loan amount that is within 5 percent of the highest loan-to-value (LTV) percentage allowed for a specific product.
Merged Credit Report – A credit report that contains information from at least three credit repositories. Any duplicate entries are combined to provide a concise summary of your credit.
Mortgage – The legal document used by a borrower to pledge their property as security in order to obtain a loan. In some areas of the country, the mortgage is called a "deed of trust".
Mortgage Insurance (MI) – Insurance provided by a private company to protect the mortgage lender against losses that might be incurred if a loan defaults. The borrower usually pays the cost of the insurance and is most often required if the loan amount is more than 80% of the home's value. Sometimes referred to as private mortgage insurance (PMI).
Mortgage Insurance Premium (MIP) – Amount paid by a borrower for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (PMI) company.
Mortgage Registration Fee – A fee or tax charged by some state and local governments when a mortgage is obtained.
Mortgage Tax – A tax charged by some state or local governments that is paid to the state when a mortgage is obtained.
Mortgagee – The person or company who provides the loan funds to the borrower.
Mortgagor – The person who receives funds from a lender in exchange for a security interest in the property. Commonly known as the borrower.
Multifamily Mortgage – A residential mortgage on a dwelling that is designed to house more than four families, such as an apartment complex.
N
Negative Amortization – A gradual increase in mortgage debt that occurs when the periodic monthly payment is not sufficient to cover the monthly principal and interest due. The amount of the deficit is added to the remaining principal balance to create negative amortization.
Net Cash Flow – The income that remains for an investment property after the monthly operating income is reduced by the monthly housing expense, which includes principal, interest, taxes, and insurance.
Net Closing Costs – The total closing costs quoted by a lender, less any credit or rebate that is offered.
Net Worth – The total value of all of a person's or company's assets, minus all liabilities.
Non-Conforming Loan – A mortgage that exceeds $417,000. Also known as a jumbo loan.
Non-liquid Assets – Any assets that cannot easily be converted into cash
Notary Fee – A fee for a licensed notary public to certify your signature on the loan documents.
Note – The written agreement signed by the borrower at closing that contains the promise to repay the loan. The note also contains the terms of the loan, such as interest rate, payment, and term.
Note Rate – The interest rate stated on a mortgage note. Also called nominal rate or face interest rate.
Notice of Default – Formal written notice to a borrower that a default on a loan has occurred and that legal action may be taken.
O
Occupancy Rate – Percentage of currently rented units in a building, neighborhood, complex, or city.
Offer – A buyer's expression of willingness to purchase a property at the seller's specified price.
Offer to Purchase – An agreement between a buyer and seller to purchase real estate. An offer to purchase, also known as a binder or a sales contract, secures the right to purchase real estate upon agreed terms for a limited period of time. If the buyer changes his mind or is unable to purchase, the earnest money that was paid is forfeited unless the binder expressly provides that it is to be refunded.
Origination Fee – A fee charged by a lender as a way to cover processing expenses. Most commonly, the origination fee is expressed as a percent of the loan amount.
Owner Financing – A real property purchase transaction in which the seller provides the financing.
P
P&I – The monthly principal and interest payment required when repaying a mortgage in accordance with its terms.
Payment Change Date – The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM). The payment change date usually occurs in the month immediately after the adjustment date.
Periodic Payment Cap – On an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase during a single adjustment period.
Periodic Rate Cap – On an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase during a single adjustment period.
Personal Property – Any and all property that is not real property.
PITI – (P)rincipal, (I)nterest, (T)axes, and (I)nsurance is a reference to the total monthly payment required to repay a mortgage in accordance with its term as well as monthly escrow payments for taxes and insurance.
Planned Unit Development (PUD) – A housing project that includes common property that is owned and maintained by a homeowners' association for the benefit and use of the individual unit owners.
Points – Fees that are collected by the lender in exchange for a lower interest rate. Commonly called discount points, each point is equal to 1% of the loan amount. To determine if it is wise to pay discount points to obtain a lower rate, you must compare the up-front cost of the points to the monthly savings that result from obtaining the lower rate.
Power of Attorney – A written legal instrument that authorizes another person to act on one's behalf. A power of attorney can grant either complete or limited authority.
Pre-qualification – Procedure to determine how much money a potential homebuyer will be eligible to borrow prior to actually applying for a loan.
Prepaids – Expenses of property ownership or expenses incurred while obtaining a mortgage that must be paid in advance. Prepaids typically include real estate taxes and hazard insurance.
Prepayment – Any amount that is paid to reduce the principal balance, not interest, of a loan before the due date.
Prepayment Penalty – A monetary penalty charged by a lender if all or part of a loan is paid off before it is due.
Principal – The actual balance, excluding interest, of a mortgage loan. Also refers to the amount of the monthly mortgage payment that will be applied to the actual balance.
Principal & Interest – See P&I.
Principal Balance – The outstanding balance of principal on a loan. Principal does not include interest or fees.
Private Mortgage Insurance (PMI) – Insurance provided by a private company to protect the mortgage lender against losses that might be incurred if a loan defaults. The cost of the insurance is usually paid by the borrower and is most often required if the loan amount is more than 80% of the home's value. Sometimes referred to as mortgage insurance (MI).
Processing Fee – A fee charged by a lender to cover the costs of processing a loan request.
Promissory Note – A written promise to pay a specified sum to specified person over a specified period of time.
Property Taxes – Taxes based on the assessed value of the home, paid by the homeowner for community services such as schools, public works, and other costs of local government.
Purchase Agreement – A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Q
Qualifying Ratios – Calculations performed by lenders to determine your ability to repay a loan. The first qualifying ratio is calculated by dividing the monthly PITI by the gross monthly income. The second ratio is calculated by dividing the monthly PITI and all other monthly debts by the gross monthly income.
R
Rate – The annual rate of interest for a loan. Also called the interest rate.
Rate Change Cap – The maximum amount that an interest rate can change, either at an adjustment period or over the entire life of the loan. Commonly associated with an adjustable rate mortgage (ARM).
Rate Improvement Mortgage – A fixed-rate mortgage (FRM) that includes a clause allowing the borrower the option to reduce the interest rate one time (without refinancing) during the first few years of the loan term.
Rate Lock – An agreement by a lender to guarantee the interest rate offered for a mortgage provided that the loan closes within the specified period of time.
Real Estate Settlement Procedures Act (RESPA) – RESPA is about closing costs and settlement procedures. RESPA requires that consumers receive disclosures at various times in the transaction and outlaws kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD. To learn more visit www.hud.gov.
Real Property – Land and anything permanently affixed to the land, including structures, trees, minerals, and the interest, benefits and rights thereof.
Reconveyance Fee – A fee charged by title companies or attorneys in some states. It covers the cost of removing your current lender's lien from your property title when you refinance.
Recorder – The public official who keeps records of transactions that affect real property in a specific geographic area (usually a county). Often known as a County Recorder or County Clerk.
Recording – The entering in a book of public record the details of a properly executed legal instrument that affects title to real property, thereby making it a part of the public record.
Recording Fees – A fee charged by the local government to record mortgage documents into the public record so that any interested party is aware that a lender has an interest in the property.
Refinance – The process of paying off any existing mortgages on a home with a new mortgage loan.
Rescission – The cancellation of a contract by the operation of a law or by mutual consent. In some circumstances, borrowers have the right to cancel a transaction within three business days after closing.
RESPA – See Real Estate Settlement Procedures Act.
Revolving Credit – A credit agreement (typically a credit card) that allows a customer to borrow against a pre-approved credit line when purchasing goods and services. The borrower is only billed for the amount that is actually borrowed plus any interest due.
Right of First Refusal – A contract provision that requires a property owner to give another party the first opportunity to purchase or lease the property before it is offered to others.
Right of Survivorship – In joint tenancy, the right of surviving joint tenants to acquire the interest of a deceased joint tenant.
S
Sales Contract – An agreement between a buyer and seller to purchase real estate. A sales contract, also known as an offer to purchase or a binder, secures the right to purchase real estate upon agreed terms for a limited period of time. If the buyer changes his mind or is unable to purchase, the earnest money that was paid is forfeited unless the binder expressly provides that it is to be refunded.
Second home – A home used by the owners only occasionally or seasonally, primarily for recreational purposes.
Second Mortgage – A loan that has a lien position subordinate to the first mortgage.
Secondary Mortgage Market – The buying and selling of existing mortgages, primarily residential first mortgages.
Secured Loan – A loan that is backed by collateral.
Security – The collateral offered to a lender in exchange for a loan. When a lender provides a mortgage, you provide your home as the security. This means that if payments are in default, the lender has the right to take title to the property.
Seller Take-Back – An arrangement in which the owner of a property provides financing.
Servicer – A company that collects principal and interest payments from borrowers and manages borrowers' escrow accounts. The servicer may or may not be the original lender.
Settlement – A meeting of parties involved in a real estate transaction to finalize the process. In the case of a purchase, the settlement usually involves the seller, the buyer, the real estate broker and the lender. In the case of a refinance, the settlement involves the borrower and the lender. Sometimes referred to as the closing or the close of escrow.
Settlement or Closing Fee – A fee charged by a title company, closing agent or attorney to act as a representative and agent for the lender to perform the closing of a real estate transaction.
Settlement Statement – Also referred to as the HUD-1 or the closing statement, this is the document that provides line by line detail of the financial details related to a specific real estate transaction such as the fees paid by the seller and the buyer for a purchase transaction or the fees paid by the borrower for refinances.
Subordinate Financing – Any mortgage or other lien that has a lower priority than that of the first mortgage.
Survey – The survey is typically a written map of the property showing locations of buildings and boundaries. In some states a survey is required by a title company to issue a title insurance policy.
Sweat Equity – Contribution to the construction of a property in the form of labor or services, instead of cash.
Swing Loan – Sometimes called a bridge loan, a swing loan is generally a loan that is secured by a borrower's current residence to obtain the funds needed to purchase a new home if the current residence will not be sold prior to the purchase of a new home.
T
Tangible Property – Real estate and other property of value which can be seen and touched.
Tax Base – The total value of property, income, or other taxable assets subject to taxation.
Tax Certificate – A tax charged by some state or local governments at the time of transfer of real estate title from one owner to another.
Tax Service Fee – A fee charged to a borrower by a lender so that another company will assume responsibility for verifying the amount of real estate taxes due and that taxes have been paid over the life of the loan.
Term – The loan term is the number of months that you will make monthly payments. If the loan term is the same as the payment calculation term, you will pay the loan in full during the loan term and no balance will be due. If the payment calculation term is greater than the loan term, a balance or "balloon payment" may be due at the end of the loan term.
Third Party Fees – Third party fees are usually fees that the lender will collect and pass on to the person who actually performed the service.
Title – A legal written instrument evidencing a person's lawful possession of a property.
Title Company – A company that specializes in examining titles to real estate and issuing title insurance.
Title Insurance – An insurance policy that protects the lender (and sometimes the property owner as well) against loss due to disputes over the ownership of a property and defects in the title that were not found in the search of the public record.
Title Opinion – A statement issued by an attorney as to the quality of title after examining an abstract of title. Also, referred to as an Attorney Opinion.
Title Search – An examination of the public title records to determine the legal ownership of a property, and to ensure that there are no liens, encumbrances or other claims outstanding.
Total Debt Ratio – A standard calculation performed by mortgage lenders to determine if a borrower qualifies for a specific loan type. It is calculated by dividing the monthly housing expense (Principal, Interest, Taxes and Insurance plus all other monthly debt obligation) by the borrower's monthly gross income. Also referred to as a back end ratio or a bottom ratio.
Transfer Tax – A tax charged by some state or local governments at the time of transfer of real estate title from one owner to another. May also be referred to as an Intangible Tax.
Trustee – A fiduciary who holds property in trust for another to secure performance of an obligation or act
Truth in Lending Act (TILA) – Also known as Regulation Z, this federal regulation requires a lender to provide borrowers with a disclosure estimating the costs of the loan including your total finance charge and the Annual Percentage Rate (APR) within three business days of the application for a loan. This act is designed to provide consumers with a standard method of comparing the financing costs from lender to lender.
U
Upfront Fees – Funds required by a lender in advance of processing a loan request.
Underwriting – Detailed process of evaluating a borrower's loan application to determine the risk involved for the lender. Underwriting usually involves an in-depth analysis of the borrower's credit history, as well as an examination of the value and quality of the subject property.
Underwriting Fee – A fee charged to cover the cost of the lender's analysis of the risk associated with a loan.
Unsecured Loan – A loan that is not backed by collateral.
Upfront Mortgage Insurance Premium – FHA charges the borrower an Upfront Mortgage Insurance Premium (Upfront MIP) for most transactions. This fee is a percentage of the principal loan amount and is due at closing. The full amount can be financed as part of the loan amount or paid in cash.
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VA Loan – A mortgage for veterans and service persons. The loan is guaranteed by the Department of Veterans Affairs (VA) and requires low or no down payment.
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Waiver – The voluntary abandonment or surrender of some claim, right, or privilege.
Wire Transfer Fee – A fee charged by some lenders to cover the cost of wiring the mortgage funds to the appropriate parties, such as the title company or attorney, so that they are available for closing.
Z
Zone – A geographic area reserved and defined by local ordinance for specific limited use. Zones are almost always subject to certain restrictions or conditions.
Zoning – The local government's specifications for the use of property in certain areas.
Zoning map – A map of the local geographic area that defines current zoning designations and land use.
Zoning Ordinances – The acts of an authorized local government establishing building codes, and setting regulations for property usage.
