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Glossary of Terms

When you start shopping for a new home, you may encounter some words and terms that are unfamiliar to you.  Use the following glossary for definitions and, as always, if you have any questions, just ask!

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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

Accrued Interest:  Interest that has been earned but not paid.  Example: If 6% interest is earned on a $100 deposit, then $6 of interest has accrued to the depositor.

Adjustable Rate Mortgage (ARM):  A loan with an interest rate that is adjusted according to movements in the financial market.

AD Valorem Tax:  A tax based on the value of the thing being taxed.  Example: If the ad valorem tax rate is 1%, the tax would be $1 per $100 of the assessed value.

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 water front or mountain views) or man-made (like a swimming pool or garden).

Amortization: A payment plan by which a loan balance is reduced through monthly payments of principal and interest.

Annual Percentage Rate (APR):  The annual cost of credit over the life of a loan, including interest service charges, points, loan fees, mortgage insurance and other items.

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:  An evaluation to determine the value of property in the current marketplace.

Appraiser: a qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.

Appreciation:  The increase in the value of a property.

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

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: A transaction allowing the buyer to assume responsibility for an existing loan instead of getting a new loan.

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B

Balloon Mortgage:  A loan that has a series of monthly payments with the remaining balance due in a large lump sum payment at the end of a specific period of time.

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.

Binder:  A receipt for a deposit paid to secure the right to purchase a home at terms agreed upon by the buyer and seller.

Blanket Mortgage:  A single mortgage that covers more than one parcel of real estate.

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.

Bridge Loan:  Mortgage financing between the termination of one loan and the beginning of another loan.

Budget: a detailed record of all income earned and spent during a specific period of time.

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.

Buy Down:  1. The action to pay additional discount points to a lender in exchange for a reduced rate of interest on a mortgage.  2. A loan that has been bought down by the seller of a property for the benefit of the buyer.

Buyer’s Agent:  A buyer’s agent works solely on behalf of the buyer and owes duties to the buyer, which include the utmost good faith, loyalty and fidelity.  The agent will negotiate on behalf of and act as an advocate for the buyer.  The buyer is legally responsible for the actions of the agent when that agent is acting within the scope of the agency.  The agent must disclose to potential sellers all adverse material facts concerning the buyer’s financial ability to perform the terms of the transaction and whether the buyer intends to occupy the property.  A separate written buyer listing agreement is required which sets forth the duties and obligations of the parties.

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C

Cap: A limit to the amount an interest rate or a monthly payment can increase for an adjustable-rate loan either during an adjustment period or during the life of the 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.

Certificate of Occupancy (CO):  A document from an official agency stating that the property meets the requirements of local codes, ordinances, and regulations.

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.

Certified Buyer:  Some lenders provide a document to a buyer identifying the buyer as a “certified” or “cash buyer.”  This is a form of preapproval, with the intent to provide assurance to the seller that, subject to appraisal and title work being acceptable, the buyer has a loan ready to close.

Closing:  A meeting to sign documents that transfer property from a seller to a buyer (also referred to as a settlement).

Closing Costs:  Charges paid at settlement for obtaining a mortgage loan and transferring a real estate title.

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.

Conditions, Covenants and Restrictions (CCR): The standards that define how a property may be used and the protections the developer makes for the benefit of all owners in a subdivision.

Condo: 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 mortgage loan not insured by a government agency (such as FHA or VA).

Convertibility:  The ability to change a loan from an adjustable-rate to a fixed-rate schedule.

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.

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 Rating:  A report ordered by a lender from a credit agency to determine if the borrower is a good credit risk.

Credit Report: a record that lists all past and present debts and the timeliness of their repayment; it documents an individual’s credit history.

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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.

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.

Default: A breach of a mortgage contract or Real Estate Contract.

Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.

Density: The number of homes built on a particular acre of land.  Allowable densities are determined by local jurisdictions.

Discount Points:  Amounts paid to the lender (usually by the seller) at the time of origination of a loan, to account for the difference between the market interest rate and the lower face rate of the note (often required when VA loans are used).

Down Payment:  The difference between the sales price and the mortgage amount of the property.  A down payment is usually paid at closing.

Due-on-Sale:  A clause in a mortgage contract requiring the borrower to pay the entire outstanding balance upon sale or transfer of the property.

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E

Earnest Money: A sum paid to the seller to show that a potential purchaser is serious about buying.  The money is applied to the down payment at closing.

Easement:  The right-of-way granted to a person or company authorizing access to the owner’s land; for example, a utility company may be granted an easement to install pipes or wires.  An owner may voluntarily grant an easement, or can be ordered to grant one by a local jurisdiction.

Energy Efficiency Mortgage (EEM): 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:  The difference between the value of the home and the loan balance.

Escrow:  The handling of funds or documents by a third party on behalf of the buyer and/or seller.

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F

Fair Housing Act: a law that prohibits discrimination in all facets of the homebuying 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.

Federal Housing Administration (FHA): A federal agency that insures mortgages with lower down payment requirements than conventional loans.

Fixed-Rate Mortgage: A mortgage with an interest rate that remains constant over the life of the loan.

Fixed-Schedule Mortgage: A mortgage with a payment schedule that is established at closing for the life of the loan.  The payment and interest rate are not necessarily level.

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 termination of all rights of a mortgagor or the grantee in the property covered by the mortgage.  Statutory foreclosure is affected without recourse to the courts, but must conform to the laws (statutes).  Strict foreclosure forever bars equity of redemption.

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.

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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 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.

Graduated-payment Mortgage (GPM): A fixed rate, fixed-schedule loan that starts at lower payments than a level payment loan; the payments rise annually over the first 5 to 10 years and then remain constant for the remainder of the loan.  GPMs involve negative amortization.

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H

Hazard Insurance: Protection against damage caused by fire, windstorm or other common hazards.  Many lenders require borrowers to carry it in an amount at least equal to the mortgage.

Homebuyer Education Learning Program (HELP): an educational program from the FHA that counsels people about the homebuying 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.

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.

Housing Counseling Agency: provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and homebuying.

Housing Finance Agency: A state agency that offers below-market-rate home financing for low-and-moderate-income households.

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.

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I

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.

Infrastructure: The public facilities and services needed to support residential development, including highways, bridges, schools and sewer systems.

Interest: The cost paid to a lender for borrowed money.

Interest Rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage.

Improvement Location Certificate (ILC): Not as detailed as a survey, but shows the property and relative location of all items attached to the property.

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

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J

Joint Tenancy: A form of ownership in which the tenants own a property equally.  If one dies, the other would automatically inherit the entire property.

Judgement: 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.

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K

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L

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.

Level Payment Mortgage: A mortgage with identical monthly payments over the life of the loan.

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.

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M

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: One who originates loans and resells them to secondary mortgage lenders like: Fannie Mae or Freddie Mac.

Mortgage Broker: One who represents numerous lenders and helps consumers find affordable mortgages; the broker charges a fee only if the consumer finds a loan.

Mortgage Commitment: A formal written communication by a lender, agreeing to make a mortgage loan on a specific property, specifying the loan amount, length of time and conditions.

Mortgage Company: Borrows money from a bank, lends it to consumers to buy homes, then sells the loans to investors.

Mortgagee: The lender who makes a mortgage loan.

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.

Mortgage Origination Fee: A charge for the work involved in preparing and servicing a mortgage application, usually one percent of the loan amount.

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N

Negative Amortization: An increase in the outstanding amount when a monthly payment does not cover the monthly interest due.

Note: A formal document showing the existence of a debt and stating the terms of repayment.

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O

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.

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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 major components of monthly housing payments).

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.

Point: A one-time charge assessed; by the lender at closing to increase the interest yield on a mortgage loan.  Generally, it is one percent of the mortgage amount.

Pre-Approval: This takes pre-qualification a step further.  In this case, the buyer will supply documentation to a loan originator and/or processor.  After all documentation requirements have been met, the loan goes to underwriting for approval.  When approved by underwriting, the buyer has loan approval, subject to the final home appraisal and title work completion.

Pre-Payment: Payment of a debt prior to maturity.

Pre-Qualification: This term is used when a buyer has given information, usually verbally, to a loan originator.  From this information, the originator will arrive at a loan amount or purchase price that a home buyer can afford.

Pre-Forclosure Sale: allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.

Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage.

Principal: The amount borrowed, excluding interest and other charges.

Property Survey: Determines the boundaries of your property.  The cost depends on the complexity of your survey.

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Q

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R

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

Recording Fee: A charge for recording the transfer of property, paid to a city, county or other appropriate branch of government.

Real Estate Agent: an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.

Real Estate Settlement Procedures Act (RESPA): A Federal law requiring lenders to provide home buyers with information about known or estimated settlement costs.

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.

R-Value: The resistance of insulation materials (including windows) to heat passing through it.  The higher the number, the greater the insulating value.

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S

Sales Contract: A contract between a buyer and seller that should explain, in detail, exactly what the purchase includes, what guarantees there are, when the buyers can move in, what closing costs are, and what recourse the parties have if the contract is not fulfilled or if the buyer cannot get a mortgage commitment at the agreed-upon terms.

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.

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T

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.

Transaction Broker: A transaction-broker assists both the buyer or seller or both throughout a real estate transaction with communication, advice, negotiation, contracting and closing without being an agent or advocate for either of the parties.  The parties to a transaction are not legally responsible for the actions of a transaction-broker and a transaction-broker does not owe those parties the duties of a buyer or seller agent.  However, a transaction-broker does owe the parties a number of statutory obligations and responsibilities, including using reasonable skill and care in the performance of any oral or written agreement.  A transaction-broker must also make the same disclosures as agents about adverse material facts concerning a property or a buyer’s financial ability to perform the terms of a transaction and whether the buyer intends to occupy the property.  No written agreement is required.

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.

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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.

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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.

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W

Walk-through: A final inspection of a home before settlement to search for problems that need to be corrected before ownership changes hands.

Warranty: A promise, either written or implied, that the material and workmanship of a product is defect-free or will meet a specified level of performance over a specified period of time.  Written warranties on new homes are either backed by insurance companies or by the builders themselves.

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X

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Z

Zoning: Regulations established by local governments regarding the location, height and use for any given piece of property within a specific area.

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