The Real Estate Marketplace Glossary: How to Talk the Talk
Federal Trade Commission ftc.govThe Real Estate Marketplace Glossary:How to Talk the TalkBuying a home can be exciting. It also can be somewhat daunting, even if you’ve done it before. You will deal with mortgage options, credit reports, loan applications, contracts, points, appraisals, change orders, inspections, warranties, walk-throughs, settlement sheets, escrow accounts, recording fees, insurance, taxes...the list goes on. No doubt you will hear and see words and terms you’ve never heard before. Just what do they all mean?The Federal Trade Commission, the agency that promotes competition and protects consumers, has prepared this glossary to help you better understand the terms commonly used in the real estate and mortgage marketplace. Annual Percentage Rate (APR): The cost of Appraisal: A professional analysis useda loan or other financing as an annual rate. to estimate the value of the property. ThisThe APR includes the interest rate, points, includes examples of sales of similar prop-broker fees and certain other credit charges erties.a borrower is required to pay.Appraiser: A professional who conducts anAnnuity: An amount paid yearly or at other analysis of the property, including examplesregular intervals, often at a guaranteed of sales of similar properties in order to de-minimum amount. Also, a type of insurance velop an estimate of the value of the prop-policy in which the policy holder makes erty. The analysis is called an “appraisal.”payments for a fixed period or until a statedage, and then receives annuity payments Appreciation: An increase in the marketfrom the insurance company. value of a home due to changing marketconditions and/or home improvements.Application Fee: The fee that a mortgagelender or broker charges to apply for a Arbitration: A process where disputes aremortgage to cover processing costs. settled by referring them to a fair and neutral third party (arbitrator). The disputingA
Glossaryparties agree in advance to agree withthe decision of the arbitrator. There isa hearing where both parties have anopportunity to be heard, after which thearbitrator makes a decision.Asbestos: A toxic material that wasonce used in housing insulation andfireproofing. Because some forms of asbestos have been linked to certain lungdiseases, it is no longer used in newhomes. However, some older homes maystill have asbestos in these materials.Assessed Value: Typically the valueplaced on property for the purpose oftaxation.Assessor: A public official who establishes the value of a property for taxation purposes.Asset: Anything of monetary value thatis owned by a person or company. Assets include real property, personalproperty, stocks, mutual funds, etc.Assignment of Mortgage: A documentevidencing the transfer of ownership of amortgage from one person to another.Assumable Mortgage: A mortgage loanthat can be taken over (assumed) by thebuyer when a home is sold. An assumption of a mortgage is a transaction inwhich the buyer of real property takesover the seller’s existing mortgage; theseller remains liable unless released bythe lender from the obligation. If themortgage contains a due-on-sale clause,the loan may not be assumed withoutthe lender’s consent.Assumption: A homebuyer’s agreementto take on the primary responsibilityfor paying an existing mortgage from ahome seller.Assumption Fee: A fee a lender chargesa buyer who will assume the seller’s existing mortgage.Automated Underwriting: An automated process performed by a technology application that streamlines theprocessing of loan applications andprovides a recommendation to the lenderto approve the loan or refer it for manualunderwriting.BBalance Sheet: A financial statementthat shows assets, liabilities, and networth as of a specific date.Balloon Mortgage: A mortgage withmonthly payments often based on a30-year amortization schedule, withthe unpaid balance due in a lump sumpayment at the end of a specific periodof time (usually 5 or 7 years). The mortgage may contain an option to “reset”the interest rate to the current marketrate and to extend the due date if certainconditions are met.Balloon Payment: A final lump sumpayment that is due, often at the maturity date of a balloon mortgage.Bankruptcy: Legally declared unable topay your debts. Bankruptcy can severelyimpact your credit and your ability toborrow money.Before-tax Income: Income before taxesare deducted. Also known as “gross income.”Biweekly Payment Mortgage: A mortgage with payments due every two weeks(instead of monthly).Bona fide: In good faith, without fraud.Bridge Loan: A short-term loan securedby the borrower’s current home (whichis usually for sale) that allows the proceeds to be used for building or closingon a new house before the current homeis sold. Also known as a “swing loan.”
Glossary Broker: An individual or firm that actsas an agent between providers and usersof products or services, such as a mortgage broker or real estate broker. Seealso “Mortgage Broker.”Building Code: Local regulations thatset forth the standards and requirements for the construction, maintenanceand occupancy of buildings. The codesare designed to provide for the safety,health and welfare of the public.Buydown: An arrangement wherebythe property developer or another thirdparty provides an interest subsidy toreduce the borrower’s monthly paymentstypically in the early years of the loan.Buydown Account: An account inwhich funds are held so that they can beapplied as part of the monthly mortgagepayment as each payment comes dueduring the period that an interest ratebuydown plan is in effect.Cap: For an adjustable-rate mortgage(ARM), a limitation on the amount theinterest rate or mortgage payments mayincrease or decrease. See also “LifetimePayment Cap,” “Lifetime Rate Cap,” “Periodic Payment Cap,” and “Periodic RateCap.”Capacity: Your ability to make yourmortgage payments on time. This depends on your income and incomestability (job history and security), yourassets and savings, and the amount ofyour income each month that is left overafter you’ve paid for your housing costs,debts and other obligations.Cash-out Refinance: A refinance transaction in which the borrower receivesadditional funds over and above theamount needed to repay the existingmortgage, closing costs, points, and anysubordinate liens.Certificate of Deposit: A document issued by a bank or other financial institution that is evidence of a deposit, with theissuer’s promise to return the deposit plusearnings at a specified interest rate withina specified time period.Certificate of Eligibility: A document issued by the U.S. Department of VeteransAffairs (VA) certifying a veteran’s eligibilityfor a VA-guaranteed mortgage loan.Chain of Title: The history of all of thedocuments that have transferred title toa parcel of real property, starting with theearliest existing document and endingwith the most recent.Change Orders: A change in the originalconstruction plans ordered by the property owner or general contractor.Clear Title: Ownership that is free ofliens, defects, or other legal encumbrances.Closing: The process of completing afinancial transaction. For mortgageloans, the process of signing mortgagedocuments, disbursing funds, and, ifapplicable, transferring ownership ofthe property. In some jurisdictions, closing is referred to as “escrow,” a processby which a buyer and seller deliver legaldocuments to a third party who completesthe transaction in accordance with theirinstructions. See also “Settlement.”Closing Agent: The person or entity thatcoordinates the various closing activities,including the preparation and recordationof closing documents and the disbursement of funds. (May be referred to as anescrow agent or settlement agent in somejurisdictions.) Typically, the closing is conducted by title companies, escrow companies or attorneys.Closing Costs: The upfront fees chargedin connection with a mortgage loan transaction. Money paid by a buyer (and/orseller or other third party, if applicable)C
Glossaryto effect the closing of a mortgage loan,generally including, but not limited toa loan origination fee, title examinationand insurance, survey, attorney’s fee,and prepaid items, such as escrow deposits for taxes and insurance.Closing Date: The date on which thesale of a property is to be finalized and aloan transaction completed. Often, a realestate sales professional coordinates thesetting of this date with the buyer, theseller, the closing agent, and the lender.Closing Statement: See “HUD-1 Settlement Statement.”Co-borrower: Any borrower other thanthe first borrower whose name appearson the application and mortgage note,even when that person owns the property jointly with the first borrower andshares liability for the note.Collateral: An asset that is pledged assecurity for a loan. The borrower riskslosing the asset if the loan is not repaidaccording to the terms of the loan agreement. In the case of a mortgage, thecollateral would be the house and realproperty.Commission: The fee charged for services performed, usually based on apercentage of the price of the items sold(such as the fee a real estate agent earnson the sale of a house).Commitment Letter: A binding offer from your lender that includes theamount of the mortgage, the interestrate, and repayment terms.Common Areas: Those portions of abuilding, land, or improvements andamenities owned by a planned unitdevelopment (PUD) or condominiumproject’s homeowners’ association (ora cooperative project’s cooperative corporation) that are used by all of theunit owners, who share in the commonexpenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and otherrecreational facilities, as well as commoncorridors of buildings, parking areas,means of ingress and egress, etc.Comparables: An abbreviation for “comparable properties,” which are used as acomparison in determining the currentvalue of a property that is being appraised.Concession: Something given up oragreed to in negotiating the sale of ahouse. For example, the sellers mayagree to help pay for closing costs.Condominium: A unit in a multiunitbuilding. The owner of a condominiumunit owns the unit itself and has theright, along with other owners, to usethe common areas but does not own thecommon elements such as the exteriorwalls, floors and ceilings or the structural systems outside of the unit; theseare owned by the condominium association. There are usually condominium association fees for building maintenance,property upkeep, taxes and insuranceon the common areas and reserves forimprovements.Construction Loan: A loan for financing the cost of construction or improvements to a property; the lender disburses payments to the builder at periodicintervals during construction.Contingency: A condition that must bemet before a contract is legally binding.For example, home purchasers ofteninclude a home inspection contingency;the sales contract is not binding unlessand until the purchaser has the homeinspected.Conventional Mortgage: A mortgageloan that is not insured or guaranteedby the federal government or one of itsagencies, such as the Federal HousingAdministration (FHA), the U.S. Department of Veterans Affairs (VA), or the
Glossary Rural Housing Service (RHS). Contrastwith “Government Mortgage.”Conversion Option: A provision of someadjustable-rate mortgage (ARM) loansthat allows the borrower to change theARM to a fixed-rate mortgage at specified times after loan origination.Convertible ARM: An adjustable-ratemortgage (ARM) that allows the borrowerto convert the loan to a fixed-rate mortgage under specified conditions.Cooperative (Co-op) Project: A projectin which a corporation holds title to aresidential property and sells shares toindividual buyers, who then receive aproprietary lease as their title.Cost of Funds Index (COFI): An index that is used to determine interestrate changes for certain adjustable-ratemortgage (ARM) loans. It is based on theweighted monthly average cost of deposits, advances, and other borrowingsof members of the Federal Home LoanBank of San Francisco.Counter-offer: An offer made in response to a previous offer. For example,after the buyer presents their first offer,the seller may make a counter-offer witha slightly higher sale price.Credit: The ability of a person to borrow money, or buy goods by payingover time. Credit is extended based on alender’s opinion of the person’s financialsituation and reliability, among otherfactors.Credit Bureau: A company that gathers information on consumers who usecredit. These companies sell that information to lenders and other businessesin the form of a credit report.Credit History: Information in the filesof a credit bureau, primarily comprisedof a list of individual consumer debtsand a record of whether or not thesedebts were paid back on time or “asagreed.” Your credit history is called acredit report when provided by a creditbureau to a lender or other business.Credit Life Insurance: A type of insurance that pays off a specific amount ofdebt or a specified credit account if theborrower dies while the policy is in force.Credit Report: Information provided bya credit bureau that allows a lender orother business to examine your use ofcredit. It provides information on moneythat you’ve borrowed from credit institutions and your payment history.Credit Score: A numerical value thatranks a borrower’s credit risk at a givenpoint in time based on a statistical evaluation of information in the individual’scredit history that has been proven to bepredictive of loan performance.Creditor: A person who extends creditto whom you owe money.Creditworthy: Your ability to qualify forcredit and repay debts.DDebt: Money owed from one person orinstitution to another person or institution.Debt-to-Income Ratio: The percentage of gross monthly income that goestoward paying for your monthly housing expense, alimony, child support, carpayments and other installment debts,and payments on revolving or open-ended accounts, such as credit cards.Deed: The legal document transferringownership or title to a propertyDeed-in-Lieu of Foreclosure: Thetransfer of title from a borrower to thelender to satisfy the mortgage debt andavoid foreclosure. Also called a “voluntary conveyance.”
GlossaryDeed of Trust: A legal document inwhich the borrower transfers the title toa third party (trustee) to hold as securityfor the lender. When the loan is paid infull, the trustee transfers title back tothe borrower. If the borrower defaults onthe loan the trustee will sell the propertyand pay the lender the mortgage debt.Default: Failure to fulfill a legal obligation. A default includes failure to pay ona financial obligation, but also may be afailure to perform some action or service that is non-monetary. For example,when leasing a car, the lessee is usuallyrequired to properly maintain the car.Delinquency: Failure to make a payment when it is due. The condition of aloan when a scheduled payment has notbeen received by the due date, but generally used to refer to a loan for whichpayment is 30 or more days past due.Depreciation: A decline in the value ofa house due to changing market conditions or lack of upkeep on a home.Discount Point: A fee paid by the borrower at closing to reduce the interestrate. A point equals one percent of theloan amount.Down Payment: A portion of the priceof a home, usually between 3-20%, notborrowed and paid up-front in cash.Some loans are offerend with zero down-payment.Due-on-Sale Clause: A provision in amortgage that allows the lender to demand repayment in full of the outstanding balance if the property securing themortgage is sold.EEarnest Money Deposit: The deposit toshow that you’re committed to buyingthe home. The deposit usually will notbe refunded to you after the seller accepts your offer, unless one of the salescontract contingencies is not fulfilled.Easement: A right to the use of, or access to, land owned by another.Employer-Assisted Housing: A programin which companies assist their employees in purchasing homes by providingassistance with the down payment, closing costs, or monthly payments.Encroachment: The intrusion ontoanother’s property without right or permission.Encumbrance: Any claim on a property,such as a lien, mortgage or easement.Equal Credit Opportunity Act (ECOA):A federal law that requires lenders tomake credit equally available withoutregard to the applicant’s race, color, religion, national origin, age, sex, or maritalstatus; the fact that all or part of the applicant’s income is derived from a publicassistance program; or the fact that theapplicant has in good faith exercised anyright under the Consumer Credit Protection Act. It also requires various noticesto consumers.Equity: The value in your home abovethe total amount of the liens againstyour home. If you owe $100,000 on yourhouse but it is worth $130,000, youhave $30,000 of equity.Escrow: An item of value, money, ordocuments deposited with a third partyto be delivered upon the fulfillment ofa condition. For example, the depositby a borrower with the lender of fundsto pay taxes and insurance premiumswhen they become due, or the deposit offunds or documents with an attorney orescrow agent to be disbursed upon theclosing of a sale of real estate.Escrow Account: An account that amortgage servicer establishes on behalfof a borrower to pay taxes, insurance
Glossary premiums, or other charges when theyare due. Sometimes referred to as an“impound” or “reserve” account.Escrow Analysis: The accounting thata mortgage servicer performs to determine the appropriate balances for theescrow account, compute the borrower’smonthly escrow payments, and determine whether any shortages, surplusesor deficiencies exist in the account.Eviction: The legal act of removingsomeone from real property.Exclusive Right-to-Sell Listing: Thetraditional kind of listing agreement under which the property owner appointsa real estate broker (known as the listing broker) as exclusive agent to sell theproperty on the owner’s stated terms,and agrees to pay the listing broker acommission when the property is sold,regardless of whether the buyer is foundby the broker, the owner or anotherbroker. This is the kind of listing agreement that is commonly used by a listing broker to provide the traditional fullrange of real estate brokerage services.If a second real estate broker (known asa selling broker) finds the buyer for theproperty, then some commission will bepaid to the selling broker.Exclusive Agency Listing: A listingagreement under which a real estatebroker (known as the listing broker) actsas an exclusive agent to sell the property for the property owner, but may bepaid a reduced or no commission whenthe property is sold if, for example, theproperty owner rather than the listingbroker finds the buyer. This kind of listing agreement can be used to providethe owner a limited range of real estatebrokerage services rather than the traditional full range. As with other kindsof listing agreements, if a second realestate broker (known as a selling broker)finds the buyer for the property, thensome commission will be paid to theselling broker.Executor: A person named in a will andapproved by a probate court to administer the deposition of an estate in accordance with the instructions of the will.FFair Credit Reporting Act (FCRA): Aconsumer protection law that imposesobligations on (1) credit bureaus (andsimilar agencies) that maintain consumer credit histories, (2) lenders and otherbusinesses that buy reports from creditbureaus, and (3) parties who furnishconsumer information to credit bureaus.Among other provisions, the FCRA limitsthe sale of credit reports by credit bureaus by requiring the purchaser to havea legitimate business need for the data,allows consumers to learn the information on them in credit bureau files (including one annual free credit report),and specifies procedure for challengingerrors in that data.Fair Market Value: The price at whichproperty would be transferred betweena willing buyer and willing seller, eachof whom has a reasonable knowledge ofall pertinent facts and is not under anycompulsion to buy or sell.Fannie Mae: A New York stock exchange company. It is a public companythat operates under a federal charterand is the nation’s largest source offinancing for home mortgages. FannieMae does not lend money directly toconsumers, but instead works to ensure that mortgage funds are availableand affordable, by purchasing mortgageloans from institutions that lend directlyto consumers.Fannie Mae-Seller/Servicer: A lenderthat Fannie Mae has approved to sellloans to it and to service loans on Fannie Mae’s behalf.Fannie Mae/Freddie Mac Loan Limit:The current 2006 Fannie Mae/Freddie
GlossaryMac loan limit for a single-family homeis $417,000 and is higher in Alaska,Guam, Hawaii, and the U.S. VirginIslands. The Fannie Mae loan limit is$533,850 for a two-unit home; $645,300for a three-unit home; and $801,950 fora four-unit home. Also referred to as the“conventional loan limit.”Federal Housing Administration(FHA): An agency within the U.S. Department of Housing and Urban Development (HUD) that insures mortgagesand loans made by private lenders.FHA-Insured Loan: A loan that is insured by the Federal Housing Administration (FHA) of the U.S. Department ofHousing and Urban Development (HUD).First Mortgage: A mortgage that is theprimary lien against a property.First-Time Home Buyer: A person withno ownership interest in a principalresidence during the three-year periodpreceding the purchase of the securityproperty.Fixed-Period Adjustable-Rate Mortgage: An adjustable-rate mortgage (ARM)that offers a fixed rate for an initialperiod, typically three to ten years, andthen adjusts every six months, annually,or at another specified period, for theremainder of the term. Also known as a“hybrid loan.”Fixed-Rate Mortgage: A mortgage withan interest rate that does not changeduring the entire term of the loan.Flood Certification Fee: A fee chargedby independent mapping firms to identify properties located in areas designatedas flood zones.Flood Insurance: Insurance that compensates for physical property damageresulting from flooding. It is required forproperties located in federally designatedflood hazard zones.Foreclosure: A legal action that endsall ownership rights in a home when thehomebuyer fails to make the mortgagepayments or is otherwise in default under the terms of the mortgage.Forfeiture: The loss of money, property,rights, or privileges due to a breach of alegal obligation.Fully Amortized Mortgage: A mortgagein which the monthly payments are designed to retire the obligation at the endof the mortgage term.GGeneral Contractor: A person whooversees a home improvement or construction project and handles variousaspects such as scheduling workers andordering supplies.Gift Letter: A letter that a family member writes verifying that s/he has givenyou a certain amount of money as a giftand that you don’t have to repay it. Youcan use this money towards a portionof your down payment with some mortgages.Good-Faith Estimate: A form requiredby the Real Estate Settlement Procedures Act (RESPA) that discloses an estimate of the amount or range of charges,for specific settlement services the borrower is likely to incur in connectionwith the mortgage transaction.Government Mortgage: A mortgageloan that is insured or guaranteed by afederal government entity such as theFederal Housing Administration (FHA),the U.S. Department of VeteransAffairs (VA), or the Rural HousingService (RHS).Government National MortgageAssociation (Ginnie Mae): A government-owned corporation within the U.S.Department of Housing and Urban De
Glossary velopment (HUD) that guarantees securities backed by mortgages that areinsured or guaranteed by other government agencies. Popularly known as“Ginnie Mae.”Gross Monthly Income: The incomeyou earn in a month before taxes andother deductions. It also may includerental income, self-employed income,income from alimony, child support,public assistance payments, and retirement benefits.Ground Rent: Payment for the use ofland when title to a property is held asa leasehold estate (that is, the borrower does not actually own the property,but has a long-term lease on it).Growing-Equity Mortgage (GEM):A fixed-rate mortgage in which themonthly payments increase accordingto an agreed-upon schedule, with theextra funds applied to reduce the loanbalance and loan term.HHazard Insurance: Insurance coverage that compensates for physicaldamage to a property from fire, wind,vandalism, or other covered hazardsor natural disasters.Home Equity Conversion Mortgage(HECM): A special type of mortgagedeveloped and insured by the FederalHousing Administration (FHA) thatenables older home owners to convertthe equity they have in their homesinto cash, using a variety of paymentoptions to address their specific financial needs. Sometimes called a “reverse mortgage.”Home Equity Line of Credit(HELOC): A type of revolving loan,that enables a home owner to obtainmultiple advances of the loan proceeds at his or her own discretion, upto an amount that represents a specifiedpercentage of the borrower’s equity inthe property.Home Inspection: A professional inspection of a home to determine thecondition of the property. The inspection should include an evaluation of theplumbing, heating and cooling systems,roof, wiring, foundation and pest infestation.Homeowner’s Insurance: A policy thatprotects you and the lender from fire orflood, which damages the structure ofthe house; a liability, such as an injuryto a visitor to your home; or damage toyour personal property, such as yourfurniture, clothes or appliancesHomeowner’s Warranty (HOW): Insurance offered by a seller that coverscertain home repairs and fixtures for aspecified period of time.Homeowners’ Association: An organization of homeowners residing within aparticular area whose principal purposeis to ensure the provision and maintenance of community facilities andservices for the common benefit of theresidents.Housing Expense Ratio: The percentage of your gross monthly income thatgoes toward paying for your housingexpenses.HUD-1 Settlement Statement: A finallisting of the closing costs of the mortgage transaction. It provides the salesprice and down payment, as well as thetotal settlement costs required from thebuyer and seller.Hybrid Loan: An adjustable-rate mortgage (ARM) that offers a fixed rate foran initial period, typically three toten years, and then adjusts every sixmonths, annually, or at another specified period, for the remainder of theterm.
10 GlossaryIIncome Property: Real estate developedor purchased to produce income, suchas a rental unit.Index: A number used to computethe interest rate for an adjustable-ratemortgage (ARM). The index is generallya published number or percentage, suchas the average interest rate or yield onU.S. Treasury bills. A margin is added tothe index to determine the interest ratethat will be charged on the ARM. Thisinterest rate is subject to any caps onthe maximum or minimum interest ratethat may be charged on the mortgage,stated in the note.Individual Retirement Account (IRA):A tax-deferred plan that can help youbuild a retirement nest egg.Inflation: An increase in prices.Initial Interest Rate: The original interest rate for an adjustable-rate mortgage(ARM). Sometimes known as the “startrate.”Inquiry: A request for a copy of yourcredit report by a lender or other business, often when you fill out a creditapplication and/or request more credit.Too many inquiries on a credit reportcan hurt your credit score; however,most credit scores are not affected bymultiple inquiries from auto or mortgagelenders within a short period of time.Installment: The regular periodic payment that a borrower agrees to make toa lender.Installment Debt: A loan that is repaidin accordance with a schedule of payments for a specified term (such as anautomobile loan).you. Interest is usually expressed as apercentage of the amount borrowed.Interest Accrual Rate: The percentagerate at which interest accumulates orincreases on a mortgage loan.Interest Rate Cap: For an adjustable-rate mortgage (ARM), a limitation on theamount the interest rate can change peradjustment or over the lifetime of theloan, as stated in the note.Interest Rate Ceiling: For an adjustable-rate mortgage (ARM), the maximuminterest rate, as specified in the mortgage note.Interest Rate Floor: For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgagenote.Investment Property: A property purchased to generate rental income, taxbenefits, or profitable resale rather thanto serve as the borrower’s primary residence. Contrast with “second home.”JJudgment Lien: A lien on the propertyof a debtor resulting from the decree of acourt.Jumbo Loan: A loan that exceeds themortgage amount eligible for purchaseby Fannie Mae or Freddie Mac. Alsocalled “non-conforming loan.”Junior Mortgage: A loan that is subordinate to the primary loan or first-lienmortgage loan, such as a second or thirdmortgage.KInterest: The cost you pay to borrow Keogh Funds: A tax-deferred retire-money. It is the payment you make to ment-savings plan for small businessa lender for the money it has loaned to owners or self-employed individuals who
Glossary 11Lhave earned income from their trade orbusiness. Contributions to the Keoghplan are tax-deductible.Late Charge: A penalty imposed by thelender when a borrower fails to make ascheduled payment on time.Lease-Purchase Option: An optionsometimes used by sellers to rent aproperty to a consumer, who has the option to buy the home within a specifiedperiod of time. Typically, part of eachrental payment is put aside for the purpose of accumulating funds to pay thedown payment and closing costs.Liabilities: A person’s debts and otherfinancial obligations.Liability Insurance: Insurance coveragethat protects property owners againstclaims of negligence, personal injury orproperty damage to another party.LIBOR-Index: An index used to determine interest rate changes for certainadjustable-rate mortgage (ARM) plans,based on the average interest rate atwhich international banks lend to orborrow funds from the London Interbank Market.Lien: A claim or charge on property forpayment of a debt. With a mortgage,the lender has the right to take the titleto your property if you don’t make themortgage payments.Lifetime Cap: For an adjustable-ratemortgage (ARM), a limit on the amountthat the interest rate or monthly payment can increase or decrease over thelife of the loan.Liquid Asset: A cash asset or an assetthat is easily converted into cash.Loan Origination: The process by whicha loan is made, which may include taking a loan application, processing andunderwriting the application, and closing the loan.Loan Origination Fees: Fees paid toyour mortgage lender or broker for processing the mortgage application. Thisfee is usually in the form of points. Onepoint equals one percent of the mortgageamount.Loan-To-Value (LTV) Ratio: The relationship between the loan amountand the value of the property (the lowerof appraised value or sales price), expressed as a percentage of the property’svalue. For example, a $100,000 homewith an $80,000 mortgage has an LTV of80 percent.Lock-In Rate: A written agreementguaranteeing a specific mortgage interest rate for a certain amount of time.Low-Down-Payment Feature: A featureof some mortgages, usually fixed-ratemortgages, that helps you buy a homewith a low down payment.MManufactured Housing: Homes thatare built entirely in a factory in accordance with a federal building code administered by the U.S. Department ofHousing and Urban Development (HUD).Manufactured homes may be single-or multi-section and are transportedfrom the factory to a site and installed.Homes that are permanently affixed toa foundation often may be classified asreal property under applicable state law,and may be financed with a mortgage.Homes that are not permanently affixedto a foundation generally are classifiedas personal property, and are financedwith a retail installment sales agreement.
1 GlossaryMargin: A percentage added to the indexfor an adjustable-rate mortgage (ARM) toestablish the interest rate on each adjustment date.Market Value: The current value of yourhome based on what a purchaser wouldpay. An appraisal is sometimes used todetermine market value.Maturity Date: The date on which amortgage loan is scheduled to be paid infull, as stated in the note.Merged Credit Report: A credit reportissued by a credit reporting companythat combines information from two orthree major credit bureaus.Modification: Any change to the termsof a mortgage loan, including changes tothe interest rate, loan balance, or loanterm.Money Market Account: A type of investment in which funds are invested inshort-term securities.Mortgage: A loan using your home ascollateral. In some states the term mortgage is also used to describe the document you sign (to grant the lender a lienon your home). It also may be used toindicate the amount of money you borrow, with interest, to purchase yourhouse. The amount of your mortgageoften is the purchase price of the homeminus your down payment.Mortgage Broker: An individual or firmthat brings borrowers and lenders together for the purpose of loan origination. A mortgage broker typically takesloan applications and may processloans. A mortgage broker also may closethe loan.Mortgage Insurance (MI): Insurancethat protects lenders against lossescaused by a borrower’s default on amortgage loan. MI typically is requiredif the borrower’s down payment is lessthan 20 percent of the purchase price.Mortgage Insurance Premium (MIP):The amount paid by a borrower formortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a privatemortgage insurance (PMI) company.Mortgage Lender: The lender providingfunds for a mortgage. Lenders also manage the credit and financial informationreview, the property and the loan application process through closing.Mortgage Life Insurance: A type ofinsurance that will pay off a mortgage ifthe borrower dies while the loan is outstanding; a form of credit life insurance.Mortgage Rate: The interest rate youpay to borrow the money to buy yourhouse.Mortgagee: The institution or individualto whom a mortgage is given.Mortgagor: The owner of real estate whopledges property as security for the repayment of a debt; the borrower.Multifamily Mortgage: A mortgage loanon a building with five or more dwellingunits.Multifamily Properties: Typically,buildings with five or more dwellingunits.Multiple Listing Service (MLS): Aclearinghouse through which memberreal estate brokerage firms regularly andsystematically exchange informationon listings of real estate properties andshare commissions with members wholocate purchasers. The MLS for an areais usually operated by the local, privatereal estate association as a joint ventureamong its members designed to fosterreal estate brokerage services.Mutual Funds: A fund that pools themoney of its investors to buy a variety ofsecurities.
Glossary 1NNegative Amortization: An increase inthe balance of a loan caused by addingunpaid interest to the loan balance; thisoccurs when the payment does not coverthe interest due.Net Monthly Income: Your take-homepay after taxes. It is the amount ofmoney that you actually receive in yourpaycheck.Net Worth: The value of a company orindividual’s assets, including cash, lesstotal liabilities.Non-Liquid Asset: An asset that cannoteasily be converted into cash.Note: A written promise to pay a specified amount under the agreed uponconditions.Note Rate: The interest rate stated on amortgage note, or other loan agreement.OOffer: A formal bid from the home buyerto the home seller to purchase a home.Open House: When the seller’s realestate agent opens the seller’s house tothe public. You don’t need a real estateagent to attend an open house.Original Principal Balance: The totalamount of principal owed on a mortgagebefore any payments are made.Origination Fee: A fee paid to a lenderor broker to cover the administrativecosts of processing a loan application.The origination fee typically is stated inthe form of points. One point is one percent of the mortgage amount.Owner Financing: A transaction inwhich the property seller provides all orpart of the financing for the buyer’s purchase of the property.Owner-Occupied Property: A propertythat serves as the borrower’s primaryresidence.PPartial Payment: A payment that is lessthan the scheduled monthly payment ona mortgage loan.Payment Change Date: The date onwhich a new monthly payment amounttakes effect, for example, on an adjustable-rate mortgage (ARM) loan.Payment Cap: For an adjustable-ratemortgage (ARM) or other variable rateloan, a limit on the amount that payments can increase or decrease duringany one adjustment period.Personal Property: Any property that isnot real property.PITI: An acronym for the four primarycomponents of a monthly mortgagepayment: principle, interest, taxes, andinsurance (PITI).PITI Reserves: A cash amount that aborrower has available after making adown payment and paying closing costsfor the purchase of a home. The principal, interest, taxes, and insurance (PITI)reserves must equal the amount that theborrower would have to pay for PITI for apredefined number of months.Planned Unit Development (PUD): Areal estate project in which individualshold title to a residential lot and homewhile the common facilities are ownedand maintained by a homeowners’ association for the benefit and use of theindividual PUD unit owners.Point: One percent of the amount of themortgage loan. For example, if a loan
1 Glossaryis made for $50,000, one point equals$500.Power of Attorney: A legal documentthat authorizes another person to acton one’s behalf. A power of attorney cangrant complete authority or can be limited to certain acts and/or certain periods of time.Pre-Approval: A process by which alender provides a prospective borrowerwith an indication of how much moneyhe or she will be eligible to borrow whenapplying for a mortgage loan. This process typically includes a review of theapplicant’s credit history and may involve the review and verification of income and assets to close.Pre-Approval Letter: A letter from amortgage lender indicating that youqualify for a mortgage of a specificamount. It also shows a home seller thatyou’re a serious buyer.Pre-Qualification: A preliminary assessment by a lender of the amount it willlend to a potential home buyer. The process of determining how much money aprospective home buyer may be eligibleto borrow before he or she applies for aloan.Pre-Qualification Letter: A letter froma mortgage lender that states that you’repre-qualified to buy a home, but doesnot commit the lender to a particularmortgage amount.Predatory Lending: Abusive lendingpractices that include making mortgage loans to people who do not havethe income to repay them or repeatedlyrefinancing loans, charging high pointsand fees each time and “packing” creditinsurance onto a loan.Prepayment: Any amount paid to reduce the principal balance of a loanbefore the scheduled due date.Prepayment Penalty: A fee that a borrower may be required to pay to thelender, in the early years of a mortgageloan, for repaying the loan in full or prepaying a substantial amount to reducethe unpaid principle balance.Principal: The amount of money borrowed or the amount of the loan thathas not yet been repaid to the lender.This does not include the interest youwill pay to borrow that money. Theprincipal balance (sometimes called theoutstanding or unpaid principal balance)is the amount owed on the loan minusthe amount you’ve repaid.Private Mortgage Insurance: Insurance for conventional mortgage loansthat protects the lender from loss in theevent of default by the borrower. SeeMortgage InsurancePromissory Note: A written promise torepay a specified amount over a specified period of time.Property Appreciation: See “Appreciation.”Purchase and Sale Agreement: A document that details the price and conditions for a transaction. In connectionwith the sale of a residential property,the agreement typically would include:information about the property to besold, sale price, down payment, earnestmoney deposit, financing, closing date,occupancy date, length of time the offeris valid, and any special contingencies.Purchase Money Mortgage: A mortgageloan that enables a borrower to acquirea property.QQualifying Guidelines: Criteria used todetermine eligibility for a loan.
Glossary 1RQualifying Ratios: Calculations that areused in determining the loan amountthat a borrower qualifies for, typicallya comparison of the borrower’s totalmonthly income to monthly debt payments and other recurring monthlyobligations.Quality Control: A system of safeguardsto ensure that loans are originated, underwritten and serviced according to thelender’s standards and, if applicable, thestandards of the investor, governmentalagency, or mortgage insurer.Radon: A toxic gas found in the soilbeneath a house that can contribute tocancer and other illnesses.Rate Cap: The limit on the amount aninterest rate on an adjustable-rate mortgage (ARM) can increase or decreaseduring an adjustment period.Rate Lock: An agreement in which aninterest rate is “locked in” or guaranteedfor a specified period of time prior toclosing. See also “Lock-in Rate.”Ratified Sales Contract: A contractthat shows both you and the seller ofthe house have agreed to your offer. Thisoffer may include sales contingencies,such as obtaining a mortgage of a certain type and rate, getting an acceptableinspection, making repairs, closing by acertain date, etc.Real Estate Professional: An individualwho provides services in buying andselling homes. The real estate professional is paid a percentage of the homesale price by the seller. Unless you’vespecifically contracted with a buyer’sagent, the real estate professional represents the interest of the seller. Realestate professionals may be able to referyou to local lenders or mortgage brokers,but are generally not involved in thelending process.Real Estate Settlement ProceduresAct (RESPA): A federal law that requireslenders to provide home mortgage borrowers with information about transaction-related costs prior to settlement, aswell as information during the life of theloan regarding servicing and escrow accounts. RESPA also prohibits kickbacksand unearned fees in the mortgage loanbusiness.Real Property: Land and anythingpermanently affixed thereto — includingbuildings, fences, trees, and minerals.Recorder: The public official who keepsrecords of transactions that affect realproperty in the area. Sometimes knownas a “Registrar of Deeds” or “CountyClerk.”Recording: The filing of a lien or otherlegal documents in the appropriate public record.Refinance: Getting a new mortgage withall or some portion of the proceeds usedto pay off the prior mortgage.Rehabilitation Mortgage: A mortgageloan made to cover the costs of repairing, improving, and sometimes acquiringan existing property.Remaining Term: The original numberof payments due on the loan minus thenumber of payments that have beenmade.Repayment Plan: An arrangement bywhich a borrower agrees to make additional payments to pay down past dueamounts while still making regularlyscheduled payments.Replacement Cost: The cost to replacedamaged personal property without adeduction for depreciation.
1 GlossaryRescission: The cancellation or annulment of a transaction or contract byoperation of law or by mutual consent.Borrowers have a right to cancel certainmortgage refinance and home equitytransactions within three business daysafter closing, or for up to three years incertain instances.Revolving Debt: Credit that is extendedby a creditor under a plan in which(1) the creditor contemplates repeatedtransactions; (2) the creditor may impose a finance charge from time to timeon an outstanding unpaid balance; and(3) the amount of credit that may be extended to the consumer during the termof the plan is generally made available tothe extent that any outstanding balanceis repaid.Right of First Refusal: A provision inan agreement that requires the ownerof a property to give another party thefirst opportunity to purchase or leasethe property before he or she offers it forsale or lease to others.Rural Housing Service (RHS): Anagency within the U.S. Department ofAgriculture (USDA), which operates arange of programs to help rural communities and individuals by providing loanand grants for housing and communityfacilities. The agency also works withprivate lenders to guarantee loans forthe purchase or construction of single-family housing.SSecurities: A financial form that showsthe holder owns a share or shares of acompany (stock) or has loaned money toa company or government organization(bond).Sale-Leaseback: A transaction in whichthe buyer leases the property back tothe seller for a specified period of time.Second Mortgage: A mortgage that hasa lien position subordinate to the firstmortgage.Secondary Mortgage Market: The market in which mortgage loan and mortgage-backed securities are bought andsold.Secured Loan: A loan that is backed byproperty such as a house, car, jewelry,etc.Security: The property that will be givenor pledged as collateral for a loan.Securities: Financial forms that showsthe holder owns a share or shares of acompany (stocks) or has loaned moneyto a company or government organization (bonds).Seller Take-Back: An agreement inwhich the seller of a property providesfinancing to the buyer for the home purchase. See also “Owner Financing.”Servicer: A firm that performs servicingfunctions, including collecting mortgagepayments, paying the borrower’s taxesand insurance and generally managingborrower escrow accounts.Servicing: The tasks a lender performsto protect the mortgage investment,including the collection of mortgagepayments, escrow administration, anddelinquency management.Settlement: The process of completing a loan transaction at which time themortgage documents are signed andthen recorded, funds are disbursed, andthe property is transferred to the buyer(if applicable). Also called closing or escrow in different jurisdictions. See also“Closing”Settlement Statement: A documentthat lists all closing costs on a consumermortgage transaction.
Glossary 1Single-Family Properties: One- tofour-unit properties including detachedhomes, townhouses, condominiums, andcooperatives, and manufactured homesattached to a permanent foundation andclassified as real property under applicable state law.Soft Second Loan: A second mortgagewhose payment is forgiven or is deferreduntil resale of the property.Servicemembers Civil Relief Act: Afederal law that restricts the enforcement of civilian debts against certainmilitary personnel who may not be ableto pay because of active military service.It also provides other protections to certain military personel.Subordinate Financing: Any mortgageor other lien with lower priority than thefirst mortgage.Survey: A precise measurement of aproperty by a licensed surveyor, showing legal boundaries of a property andthe dimensions and location of improvements.Sweat Equity: A borrower’s contributionto the down payment for the purchase ofa property in the form of labor or services rather than cash.TTaxes and Insurance: Funds collectedas part of the borrower’s monthly payment and held in escrow for the payment of the borrower’s, or funds paid bythe borrower for, state and local property taxes and insurance premiums.Termite Inspection: An inspection todetermine whether a property has termite infestation or termite damage. Inmany parts of the country, a home mustbe inspected for termites before it can besold.Third-Party Origination: A process bywhich a lender uses another party tocompletely or partially originate, process, underwrite, close, fund, or package a mortgage loan. See also “MortgageBroker.”Title: The right to, and the ownershipof, property. A title or deed is sometimesused as proof of ownership of land.Title Insurance: Insurance that protects lenders and homeowners againstlegal problems with the title.Title Search: A check of the public records to ensure that the seller is the legal owner of the property and to identifyany liens or claims against the property.Trade Equity: Real estate or assetsgiven to the seller as part of the downpayment for the property.Transfer Tax: State or local tax payablewhen title to property passes from oneowner to another.Treasury Index: An index that is usedto determine interest rate changes forcertain adjustable-rate mortgage (ARM)plans. It is based on the results of auctions by the U.S. Treasury of Treasurybills and securities.Truth-In-Lending Act (TILA): A federal law that requires disclosure of atruth-in-lending statement for consumercredit. The statement includes a summary of the total cost of credit, such asthe annual percentage rate (APR) andother specifics of the credit.Two- to Four- Family Property: Aresidential property that provides living space (dwelling units) for two tofour families, although ownership of thestructure is evidenced by a single deed;a loan secured by such a property isconsidered to be a single-family mortgage.
1 GlossaryUUnderwriting: The process used to determine loan approval. It involves evaluating the property and the borrower’scredit and ability to pay the mortgage.Uniform Residential Loan Application: A standard mortgage applicationyou will have to complete. The formrequests your income, assets, liabilities,and a description of the property youplan to buy, among other things.Unsecured Loan: A loan that is notbacked by collateral.VVeterans Affairs (U.S. Departmentof Veterans Affairs): A federal government agency that provides benefits toveterans and their dependents, including health care, educational assistance,financial assistance, and guaranteedhome loans.VA Guaranteed Loan: A mortgage loanthat is guaranteed by the U.S. Department of Veterans Affairs (VA).WWalk-Through: A common clause in asales contract that allows the buyer toexamine the property being purchasedat a specified time immediately beforethe closing, for example, within the 24hours before closing.Warranties: Written guarantees of thequality of a product and the promise torepair or replace defective parts free ofcharge.Federal Trade Commissionftc.gov