Glossary of Terms
Below are some common terms, organized alphabetically, and defined for your convenience.
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
Adjustable Rate Mortgage (ARM): A mortgage in which the interest rate is adjusted periodically based on a pre-selected index.
Adjustment Interval: On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three, or five years, depending on the index.
Amortization: Loan payment made by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
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 on the mortgage because it takes into account origination fees and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.
Appraisal: An estimate of the value of the property, made by a qualified professional called an "appraiser."
B
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: The lender 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.
C
Closing Costs: These usually include 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 are usually about 3 to 6 percent of the loan amount.
Conventional Loan: A mortgage not insured by FHA or guaranteed by the VA.
Credit 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 income.
D
Deed of Trust: In many states, this document is used in place of a mortgage to secure the payment of a note.
Default: Failure to meet legal obligations in a contract; specifically, failure to make the monthly payments on a mortgage.
Delinquency: Failure to make payments on time. This can lead to foreclosure.
Department of Veterans Affairs (VA): An independent agency of the federal government which guarantees long-term, low- or no-down payment loans to eligible veterans.
Discount Points: Prepaid interest assessed by the lender at closing. Each point is equal to 1 percent of the loan amount.
Down Payment: Money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 0 to 20 percent of the sales price on conventional loans. FHA requires a down payment of 3.5%.
E
Earnest Money: Money given by a buyer to a seller as part of the purchase price to bind a contract or assure payment.
Equal Credit Opportunity Act (ECOA): 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.
Equity: The difference between the fair market value and amount due on current mortgage. (Also referred to as the owner's interest.)
Escrow: A neutral third party who carries out the instructions of both the buyer and seller to handle all 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.
F
Federal Home Loan Mortgage Corporation (FHLMC): Also called Freddie Mac. A quasi-governmental agency 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 affordable.
FHA Loan: A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are usually generous enough to handle moderately-priced homes almost anywhere in the country.
FHA Mortgage Insurance: Requires a small fee paid at closing and/or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA.
Fixed-Rated Mortgage: A loan on which the interest rate is set for the entire term of the loan.
Foreclosure: A legal procedure in which the property securing debt is sold by the lender to pay a defaulting borrower's debt.
G
Good-faith Estimate: The good-faith estimate is a report from the lender that states the costs you will likely incur when obtaining a mortgage. It is based on the lender's typical loan origination costs for the area where your home is located. The estimate usually adjusts slightly between application and closing as facts are gathered.
Gross Monthly Income: The total amount the borrower earns per month before any expenses or taxes 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 contract.
H
Homeowner's Insurance: An insurance policy which protects the homeowner from financial losses related to the ownership of real property. In addition to covering losses due to vandalism, fire, hail, etc., most policies also provide theft and liability coverage.
Housing Expense-to-Income Ratio: The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by their income.
HUD-1 Settlement Statement: A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include loan fees, origination fees, initial escrow amounts, and other fees. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing. The form for the statement is published by the Department of Housing and Urban Development (HUD). The HUD-1 statement is also known as the "closing statement" or "settlement sheet."
I
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.
Interest Rate: The percentage at which interest accrues on the mortgage. It is also the rate used to calculate the monthly payments.
L
Lien: A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Loan Closing: The final transfer of the ownership of a property from the seller to the buyer which occurs after both have met all the terms of their contract and the deed has been recorded.
Loan Discount Points: A fee paid by the borrower at closing to reduce the interest rate on a mortgage. A discount point equals 1 percent of the loan amount.
Loan Origination Fee: The loan origination fee covers the administrative costs of processing the loan. It is often referred to as "points." One point is 1 percent of the mortgage amount.
Loan-To-Value Ratio: The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
Lock-in ("Lock"): A written agreement in which the lender guarantees a specified interest rate if a mortgage goes to closing within a set period of time.
M
Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Insurance: Money paid to insure the mortgage when the down payment is less than 20 percent.
Mortgage Loan Application: Lenders use the information you provide on the loan application to evaluate whether or not they can give you a loan, and if so, the amount of money they can lend you.
Mortgagee: The lender.
Mortgagor: The borrower or homeowner.
O
Offer: When you make an offer on a property, it means you are making a formal bid to buy the home. You will work with your real estate agent to put together a written offer. An earnest money deposit typically accompanies the offer. Your real estate agent can provide guidance on the elements to be included in the offer.
P
PITI: Principal, interest, taxes, and insurance. These are the costs that make up your monthly housing expense.
Prepaids: Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Prepaids 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 the debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states, including California.
Principal: The amount of debt not counting interest remaining on the loan.
R
Real Estate Sales Professional: Also known as a real estate agent. A person licensed to negotiate and transact the sale of real estate on behalf of the buyer or seller of real property.
Realtor®: A real estate broker or associate holding an active membership in a local real estate board affiliated with the National Association of Realtors®.
Recision: The cancellation of a contract. With respect to refinancing a mortgage, recision is the right of the homeowner to cancel the transaction within three days after the loan signing.
Recording Fees: Money paid for recording a home sale with the local authorities, thereby making it part of the public record.
Refinance: Paying off an existing loan with the proceeds from a new loan, using the same property as security. Usually done to lower the interest rate or take cash from the equity of the property.
Real Estate Settlement Procedures Act (RESPA): RESPA is a federal law that allows borrowers to review known or estimated settlement costs once after application and once prior to or at settlement.
S
Sales Contract: A written contract signed by the buyer and the seller and setting forth the terms and conditions under which a property will be sold.
Servicing: All the operations a lender performs after a loan closes to keep the loan in good standing, such as collection of payments and payment of taxes and insurance from the escrow account.
T
Title: A document that gives evidence of an individual's ownership of property.
Title Insurance: A policy (usually issued by the title insurance company) which insures a homebuyer against errors in the title search. The cost of the policy is usually based on the value of the property.
Title Search: An examination of municipal records to determine the legal ownership of property (usually performed by a title company.)
Truth-in-Lending: A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for a loan.
U
Underwriting: The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
V
VA Loan: A long-term, low- or no-down payment loan guaranteed by the U.S. 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-guaranteed loan, either paid at closing or financed into the loan amount.
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 (VOE): A document signed by the borrower's employer verifying his/her position and salary.