Glossary of Terms

A

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).

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.

Assessor

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

B

Bankruptcy

A federal law whereby a person's assets are turned over to a trustee and used to payoff outstanding debts; this usually occurs when someone owes more than they have the ability to repay.

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.

C

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.

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.

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 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.

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.

D

Delinquency

Failure of a borrower to make timely mortgage payments under a loan agreement.

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

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.

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.

F

Foreclosure

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

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.

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

HUD-l 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.

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.

Interest rate

The amount of interest charged on a monthly loan payment; usually expressed as a percentage.

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

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.

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.

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.

M

Mortgage banker

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

Mortgage

A lien on the property that secures the promise to repay a loan.

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.

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.

N

O

Origination fee

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

Origination

The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

P

Principal

The amount borrowed from a lender; doesn't include interest or additional fees.

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-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.

Premium

An amount paid on a regular schedule by a policyholder that maintains insurance coverage.

Q

R

Real estate agent

An individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.

REALTOR®

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

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

Survey

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

Subordinate

To place in a rank of lesser importance or to make one claim secondary to another.

T

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.

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.

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