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| Acceleration Clause | A provision which allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should your default on you loan. |
| Adjustable Rate Mortgage(ARM) | Also know as a variable rate, an ARM is a mortgage with interest rates that may fluctuate up or down periodically, according the the index upon which it is based. Most ARM's will have a limit or cap on the amount the rate can vary. A 1/1 ARM is fixed for the first year and adjusts every subsequent year, a 3/1 ARM adjusts after 3 years and every subsequent year, a 5/1 ARM adjusts after 5 years and every subsequent year. |
| Amortization | Payment of debt in regular, periodic installments of principal and interest. |
| Annual Percentage Rate (APR) | An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan. |
| Appraisal | An opinion of the value of property based on factual analysis, made by a qualified licensed professional called an "appraiser." |
| Appreciation | Increase in value of property, not including increases from improvements. |
As-is Agreement |
An agreement in which a property is sold without warranty in whatever condition it is in at the time the contract is signed. |
| Assessment | Tax or charge levied against a property by the government, typically to pay for local improvement, e.g. sidewalks, curbs, sewers, etc. |
| Assignment Clause | A sales contract with an assignment clause allows the buyer to transfer the interest in the property (e.g. the right to buy it at the given rates and terms) to another party. |
| Assumption | The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. |
| Automated Underwriting | The use of a computer and a statistical model to expedite the decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors. |
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| Balloon (Payment) Mortgage | Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract. |
| Bankruptcy | A legal proceeding which offers protection from creditors to a debtor who is unable to pay debts. |
Bids |
An offer to purchase a property for a specific set of terms. |
| Breach | Failure to perform on a promise made in contract without legal excuse. |
| Broker | An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services. |
| Buydown | When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires. |
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| Caps (Interest) | Safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan. |
| Caps (Payment) | Safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. |
| Certificate of Eligibility | The document a veteran must have to be entitled to a VA 100% LTV loan. Click here for eligibility requirements |
| Certificate of Occupancy | A certificate stating that a building approved for occupancy issued by the city or county building inspection department. It is important that a certificate has been issued,as some home insurance policies will not pay claims for damage to a property that has not been approved for occupancy. |
| Certificate of Reasonable Value (CRV) | An appraisal issued by the Department of Veterans Affairs |
| Closing | The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands, the loan documents are signed, and the title to the property is transferred. |
| Closing Costs | The cost associated with purchasing property. Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount. |
| Cloud on Title | An invalid legal claim to the title of a property that appears during the sale of the property, due to a recording mistake or other error and thus not apparent to the buyer or seller beforehand. |
| Commitment | An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions. |
| Condominium | An individually owned living unit (typically, an apartment) that is part of a building with many such units. As an owner of a condo, you typically have an ownership interest in the common areas of the complex, such as the land, parking facilities, swimming pool, and so on. |
| Construction Loan | A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses. |
| Construction Perm Loan | A hybrid loan that combines the construction and the permanent loan into one closing. Generally resulting in lower closing cost for both the buyer and the builder. |
| Conventional Loan | A mortgage not insured by FHA or guarantee by the VA or Farmers Home Administration (FmHA). |
| Contingency | A provision that makes the occurrence of one event dependent on the completion of another. For example, the purchase of a home may be contingent on the seller repairing the structural damages. |
Co-ownership |
The state of two or more people sharing ownership of a property. Can be an important issue in matters such as personal liability or inheritance. |
| Co-signer | A person who assumes joint liability with another person by signing documents (e.g. loan promissory note). A co-signer is not necessarily a co-owner. |
| Counter offer | A rejection of an original offer, combined with a new offer stating different terms and condition. |
| Credit report | A report from an independent source outlying the credit history of an individual, including current and previous debts, payment amounts, late payments and past due amounts, defaults, and other related information on every credit source the individual has used. |
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| Deed | A written, sealed document which transfers title to real estate from one party to another. |
| Deed of Trust | In many states, this document is used in place of a mortgage to secure the payment of a note. |
| Debt-to-Income Ratio | The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income. |
| Default | Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage. |
| Department of Veterans Affairs (VA) | An independent agency of the federal government which guarantees long-term, low- or no-down payment mortgages to eligible veterans. |
| Detached | Term used to describe a house that is completely separate from the units surrounding it. |
| Disclosure | Statement of fact(s) concerning the condition of the property for sale and the surrounding area. In most states, the buyer is protected by disclosure laws requiring sellers to divulge certain information about the property, e.g. if the property is in a special studies zone. |
| Discount Points | A point is equal to 1 percent of the loan amount (e.g. one point on a $100,000 mortgage would equal $1,000). Usually points are paid to the lender as prepaid interest in return for a lower interest rate. |
| Down Payment | The difference between the purchase price and mortgage amount. Down payments vary from 3 to 20 percent of the sales price on Conventional loans, and no money down up to 5 percent on FHA and VA loans. |
| Due-On-Sale Clause | A type of acceleration clause in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home. |
| Duplex | A dwelling that is divided into two living units. |
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| Easement Rights | The rights of an individual to use another individual’s property for a particular purpose (e.g. access to their own property). The seller should make the buyer aware of any easement rights that affect the property for sale. |
| Earnest Money | Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment. |
| Equal Credit Opportunity Act (ECOA) | Is a federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs. |
| Encumbrance | Any claim against the title to a property, such as a lien or mortgage. |
| Equity | The difference between the fair market value and current indebtedness, also referred to as the owner's interest. |
| Escrow | Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments. |
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| Fair Market Price | A price which approximates what comparable homes have sold at in the same area. |
| Farmers Home Administration (FmHA) | Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere. |
| Federal Home Loan Mortgage Corporation (FHLMC) | Also called Freddie Mac, is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers. |
| Federal Housing Administration (FHA) | A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standard for underwriting mortgages. |
| Federal National Mortgage Association (FNMA) | Also known as Fannie Mae. A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable. |
| Fee Simple | Having full title ownership of an estate. The owner and owner’s heirs have the right to occupy the land indefinitely, to use it in any manner desired and to convey it to anyone at any time. |
| FHA Loan | A loan insured by the Federal Housing Administration open to all qualified home purchasers. There are limits to the size of FHA loans, which vary by location they are generous enough to handle moderate - priced homes almost anywhere in the country. Generally the qualification requirements for FHA are less stringent than most conventional loans. |
| FHA Mortgage Insurance | A type of insurance that reduces the loss to the lender in the event of default by a borrower. A small fee (up to 3 percent of the loan amount) is paid at closing, usually this is included in the loan. In addition a monthly fee of .00416 percent of the loan amount is added to the payment. For example the monthly fee on a $75,000 loan would be $31.20. |
| Fixed-Rate Mortgage | A mortgage on which the interest rate is set for the term of the loan. |
| Fixture | An item that is attached to the property, e.g. a dishwasher or air conditioner, and usually sold with it. |
| Flood Zone | An area prone to flooding as determined by the Federal Emergency Management Association flood maps. |
| Foreclosure | A legal procedure in or out of court to extinguish all rights, title, and interest of the owner(s) of a property, so the property may be sold to pay a defaulting borrower's debt . |
| Free and Clear Title | Title to a property which is free from any mortgage, lien, or other encumbrance. |
| Freely Assumable | Term used to describe a loan which may be assumed by anyone without permission from the lender. In such a situation, however, the original borrower is usually held liable in the event the loan is not repaid. |
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| Government National Mortgage Association (GNMA) | Also known as Ginnie Mae, provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA. |
| Grace Period | The time period between the due date of a mortgage payment and the date when late charges are assessed. For example, payments due on the first of the month may have a 14 day grace period, meaning that fees will be charged if payment is not received by the fifteenth |
| Graduated Payment Mortgage (GPM) | A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it. |
| Gross Monthly Income | The total amount the borrower earns per month, before any expenses are deducted. |
| Guarantee | A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract. |
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| Hazard Insurance | A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like. |
| Home Warranty Insurance | Private insurance for homebuyers that covers appliances and plumbing, heating, and electrical systems in the home. |
| Housing Expenses-to-Income Ratio | The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (Conventional loans). |
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| Impound | That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves. |
| Index | A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury Security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average Costs-of-Funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down. |
| Interest Cap | A limit on the amount that the interest rate for an adjustable rate mortgage can change, regardless of how much the index changes. Most ARMs have a cap on both the amount it can increase or decrease at any periodic adjustment interval and a life-long cap that limits the amount the interest rate can vary over the life of the loan. The two interest caps are sometimes called a "periodic cap" and a "life cap". |
| Investor | The bank, insurance company, savings and loan, or other money source for a lender. |
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| Jumbo Loan | A loan which is larger (more than $Conform limit) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate. |
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| Lien | A claim upon a piece of property for the payment or satisfaction of a debt or obligation. |
| Loan-To-Value Ratio | The ratio of a proposed loan amount to the lesser of a property’s appraised value or purchase price. For example, if a property is purchased for $110,000, appraised for $100,000 and the buyer is applying for a loan in the amount of $80,000, the LTV is 80% (80,000 divided by 100,000). |
| Lock-in | An assurance of a given interest rate at the time of settlement. For example, if the interest rate is at 7.5 % when you apply for a loan, it may have risen (or fallen) by the time the loan is approved. A lock-in ensures that you will get the original interest rate. Some lenders charge a fee for locking in an interest rate. |
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| Margin | A fixed amount that is added to the index of an adjustable rate mortgage to determine the interest rate at a given time. For example, if an ARM has an index of 6% and a margin of 2.75, the interest rate is set at 8.75% (6+2.75). |
| Market Value | The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time. |
| Mortgage Insurance | Money paid to insure the mortgage when the down payment is less than 20 percent. See Private Mortgage Insurance or FHA Mortgage Insurance. |
| Mortgagee | The lender. |
| Mortgagor | The borrower or homeowner. |
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| Negative Amortization | Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan. |
| Net Effective Income | The borrower's gross income minus federal income tax. |
| Non-Assumption Clause | A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. |
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| Origination Fee | The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of face value of the loan. |
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| PITI | Principal, interest, taxes, and insurance. Also called monthly housing expense. |
| Points | See Discount Points |
| Power of Attorney | A legal document authorizing one person to act on behalf of another. |
| Prepaids | Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments. |
| Prepayment | A privilege in a mortgage permitting the borrower to make payments in advance of their due date. |
| Prepayment Penalty | Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia. |
| Prequalification | The process of establishing a borrower’s qualification for a loan of a particular amount based on income and expenses. Prequalification does not guarantee that the loan amount will be approved, but can be used to demonstrate financial capability to an agent or seller. |
| Principal | The amount of debt, not counting interest, left on a loan. |
| Prorate | To divide proportionately, so as to determine actual amounts owed by the buyer and seller at closing. For example, if property taxes for a month are $300 and the seller owned the property for the first 10 days while the borrower owned the property for the remaining 20 days, the property taxes owed would be prorated so that the seller would pay $100 ($300*10/30)and the buyer would pay $200 ($300*20/30). |
| Private Mortgage Insurance (PMI) | In the event that you do not have a 20 percent down payments, lenders will allow a smaller down payment-as low as 5 percent in some cases. With the smaller down payments loans, however, borrowers are usually required to carry private mortgage insurance. |
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| Quit Claim Deed | A document used to relinquish ownership to property, Usually in the case of divorce. |
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| Realtor | A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors. |
| Recision | The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security. |
| Recording Fees | Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records. |
| Recourse | The right of a lender to reclaim both money and collateral from a borrower who has defaulted on a loan. |
| Renegotiable Rate Mortgage (RRM) | A loan in which the interest rate is adjusted periodically. See Adjustable Rate Mortgage. |
| Real Estate Settlement Procedures Act (RESPA) | RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish information after application only. |
| Reverse Annuity Mortgage (RAM) | A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security. |
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| Secondary Market | A collection of agencies that buy mortgages from primary lenders. These mortgage funds are then pooled and sold to investors, much like a mutual fund. By purchasing loans from primary lenders, the secondary market supplies money for additional mortgages. |
| Servicing | All the steps and operations a lender perform to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like. |
| Settlement | See Closing. |
| Settlement Costs | See Closing Costs. |
| Shared Appreciation Mortgage (SAM) | A mortgage in which a borrower receives a below-market interest rate in return for which a lender receives a portion of the future appreciation in the value of the property. Also known as an Equity Stake Mortgage. |
| Survey | The measurement of the boundaries of a parcel of land, prepared by a registered land surveyor, showing it's area, its dimensions, and the location and dimensions of any buildings, or improvements. |
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| Termite Inspection | An inspection to determine if termites, or other wood destroying insects are present in a property. In some cases the property is also inspected for water damage. Also known as a wood infestation report. |
| Title | A document that gives evidence of an individual's ownership of property. |
| Title Company | A company that provides title insurance and other services including researching the title, checking the public records for liens, and preparing title abstracts. |
| Title Insurance | A policy, usually issued by a Title Insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. |
| Title Search | An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company. Sometimes called and abstract. |
| Truth-in-Lending | A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan. |
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| Underwriting | The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors. |
| Unencumbered | The state of having no mortgage, liens, or other claims against a property. A property that is unencumbered is said to be "free and clear". |
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| VA Loan | A long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements. |
| VA Mortgage Funding Fee | A premium of up to 2 percent (depending on the size of the down payment) paid on a VA-backed loan. On a $75,000 30-year fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed. |
| Variable Rate Mortgage (VRM) | See Adjustable Rate Mortgage. |
| Verification of Deposit (VOD) | A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts. |
| Verification of Employment | A document signed by the borrower's employer verifying his/her position and salary. |
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| Wraparound Mortgage | Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top. |
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