Homebuyer Glossary
A
Acceptance
An offeree's consent to enter into a contract and be bound by the terms of the offer. In a real estate transaction an offer is made from the buyer to the seller. If the seller accepts the offer within the prescribed time limit, it becomes a binding contract. In this case acceptance is documented by the seller signing and delivering the signed document.
Acknowledgment
Formal declaration before a public official (typically a Notary Public) that one has signed a document. Required before recording real estate legal documents, such as a deed of trust.
Additional Principal Payment
A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining balance on the loan. Also called a curtailment.
Adjustable-Rate Mortgage (ARM)
A term for any mortgage in which the interest rate and, generally, the payments change over the life of the loan. The interest rate is adjusted to match the rise or fall of a preselected interest rate index (the LIBOR index or the Treasury index, for example). A borrower's regular payments will increase or decrease accordingly. Different types of adjustable-rate mortgages (ARMs) have different frequencies for these adjustments. Also known as a variable-rate loan.
Adjustment Date
The actual date that the interest rate is changed for an adjustable-rate mortgage (ARM).
Agreement Of Sale
A written signed agreement between the seller and the purchaser in which the purchaser agrees to buy certain real estate and the seller agrees to sell upon terms of the agreement. Also known as contract of purchase, purchase agreement, offer and acceptance, earnest money contract or sales agreement.
Amenity
A feature of real property that enhances its attractiveness and increases the occupant's or user's satisfaction, although the feature is not essential to the property's use. Natural amenities include a pleasant or desirable location near water, scenic views of the surrounding area, etc. Human-made amenities include swimming pools, tennis courts, community buildings, and other recreational facilities.
Amortization
The systematic and continuous repayment of an obligation through periodic installments until the debt has been paid off in full.
Amortization Period
That period of time over which a calculated mortgage payment will fully repay a set loan amount at a specific interest rate.
Annual Percentage Rate
The effective rate of interest for a loan per year. This rate is typically higher than the note rate because it takes into account closing costs. This is one way to compare loan programs offered by different lenders. Caution: the APR is sometimes computed differently by different lenders and can be misleading.
Application
A form used to apply for a mortgage loan and to record pertinent information concerning a prospective mortgagor and the proposed security.
Appraisal
A report made by a qualified appraiser setting forth an opinion or estimate of value. The term also refers to the process by which this estimate is obtained.
Appraised Value
The fair market value an appraiser assigns to a particular property, based on his knowledge, experience, analysis of the property in question and the market conditions in the area.
Appraiser
An expert qualified by education, training and experience who sets forth an opinion or estimate of value of a property, based on available facts and an inspection of that property.
Appreciation
An increase in the value of a property. Appreciation may be the result of an increased demand for a property, any improvements or additions made, improvements to the neighborhood, etc.
Asking Price
The price of a property set by the seller that the seller would like to receive. Also known as the list price.
Assessed Value
The valuation placed on a property by a public tax assessor for purposes of taxation. This valuation is not necessarily representative of market value.
Assets
Anything with a dollar value that you own. Assets include items such as cars and bank accounts. Lenders consider your assets when determining how much you can borrow.
B
Back-End Ratio, Or Debt-To-Income (DTI) Ratio
A ratio that compares the total of all monthly debt payments (mortgage, real estate taxes, and insurance, car loans, and other consumer loans) to gross monthly income.
Broker
See Real Estate Broker or Mortgage Broker.
Buyer's Agent
Hired by a buyer to locate a property for purchase. The agent represents the buyer and negotiates with the seller/seller's agent for the best possible deal for the buyer.
C
Caps
Limits on the amount that the interest rate on an ARM can change per year and/or during the life of the loan. Payment caps limit the amount that monthly payments for an ARM may change.
Cash Reserves
The borrower's or borrowers' savings, investments, and assets; lender may require a certain amount in reserves in order to approve a loan.
Closing Agent
An individual who directs closing-related activities.
Closing Costs
Costs, in addition to the price of the property itself, incurred by the buyer and seller in a real estate or mortgage transaction that are due at closing. These costs normally include but are not limited to, origination fees, discount points (see Points) attorney fees, costs for title insurance, surveys, recording documents, and prepayments of real estate taxes and insurance premiums held by the lender. Sometimes the seller will help the borrower pay some of these costs.
Closing Disclosure (CD)
Itemizes all closing costs, including commissions, loan fees, points, and escrow amounts. Must be given to the borrower three days prior to the scheduled closing and the final loan terms.
Closing Or Loan Closing
The completion of the transaction, where the buyer(s) or borrower(s) sign the mortgage documents, the closing costs are paid and title is transferred to the new property owner. Also known as the settlement date.
Co-Borrower
A party who signs the mortgage note along with the borrower and who shares the title to, and the obligation to pay for, the property with the borrower. Also called co-mortgagor.
Collateral
Money or property used as security on a loan and may be taken from the borrower in the case of a default; on a mortgage loan, the home is most often the collateral.
Common Areas
Those portions of a building, land, and amenities owned (or managed) by a planned unit development (PUD) or condominium project's homeowners' association (or a cooperative project's cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and other recreational facilities, as well as common corridors of buildings, parking areas, means of ingress and egress, etc.
Comparables
An abbreviation for "comparable properties"; used for comparative purposes in the appraisal process. Comparables are properties like the property under consideration; they have reasonably the same size, location, and amenities and have recently been sold. Comparables help the appraiser determine the approximate fair market value of the subject property.
Condominium Or Condo
A form of ownership of real property. The purchaser receives title to a particular unit and a proportional interest in certain common areas.
Construction Loan
A short-term loan to pay for the construction of buildings or homes. These loans typically provide periodic disbursements to the builder as each stage of the building is completed. When construction is completed a take-out or permanent loan is used to pay off the construction loan.
Construction Loan Draw
The periodic/partial disbursement of the construction loan, based on the schedule of payments in the loan agreement.
Contingency
A clause in a purchase contract stating conditions that must be met in order for the contract to be binding. For example: The sale of a home can be contingent upon the buyer obtaining financing.
Conventional Loan
A mortgage loan not insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) or Farmers Home Administration (FmHA). No governmental agency approval is required of the lender, borrower or property. It is called "conventional" because it conforms to accepted standards, modified within legal bounds by mutual consent of the borrower and the lender. Also called conventional residential mortgage.
Cooperative
A form of ownership of real estate in which a corporation or business trust entity holds title to a property and grants the occupancy rights to particular apartments or units to shareholders by means of proprietary leases or similar arrangements.
Counter Offer
A rejection of part or all of an offer by either the buyer or seller which includes different terms in an attempt to reach an acceptable agreement from both sides.
Credit Enhancement
An approach used by a lender to reduce the risk of a borrower defaulting on a loan such as requiring mortgage insurance.
Credit History
A record that lists an individual's debts and the payment history of those debts. Lenders often use this information to determine a borrower's ability to repay a loan.
Credit Report
A report detailing a borrower's credit and payment history including: revolving and installment accounts; public records such as tax liens and judgments.
Credit Risk
A term used by lenders to describe the likelihood of a borrower defaulting on a loan.
Credit Score
A credit score is a snapshot of a person's credit risk at a particular point in time. It is used by lenders to help determine if a borrower qualifies for a loan. There are three main credit reporting companies that issue these credit scores.
Credit
The ability of an individual or a company to borrow money or procure goods on time, as a result of a positive opinion by a particular lender concerning the borrower's solvency and reliability. The right granted by a creditor to a debtor to delay satisfaction of a debt, or to incur a debt and defer payment.
Creditworthiness
The ability of a borrower to repay a loan as perceived by the lender.
D
Debtor
The borrower.
Debt-To-Income (DTI) Ratio
A ratio that compares the total of all monthly debt payments (mortgage, real estate taxes and insurance, car loans, and other consumer loans) to gross monthly income.
Deed
The formal written document that transfers the rights of ownership and possession from the seller to the buyer. Also called Certificate of Title or Title.
Default
Failure to meet legal obligations in a contract, such as the failure to make the monthly mortgage payment.
Depreciation
A lowering of value based on physical deterioration or functional or economic obsolescence.
Disbursements
Payments made during the course of an escrow or at closing.
Discount Point
Fees paid to a lender to reduce the interest rate.
Down Payment
The difference between the sales price of real estate and the amount of mortgage loan.
E
Earnest Money
A deposit made by a buyer of real estate towards the down payment to evidence good faith. This money is typically held by the real estate brokers or the escrow company.
Equity
The market value of real property, less the amount of any liens.
Escrow Account
An account held by the lending institution to which the borrower pays monthly installments for property taxes, insurance and special assessments, and from which the lender disburses these sums as they become due.
Eviction
The lawful expulsion of an occupant from real property. The legal process of eviction is different in each state.
F
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record.
Fair Housing Act
A law prohibiting the discrimination on the basis of sex/gender, national origin, religion, race or color, familial status, or disability in any part of the home buying process.
Federal Home Loan Mortgage Corporation (Freddie Mac)
A federally chartered corporation that purchases and sells conventional and residential mortgages and converts them into securities for sale to investors; in doing so, Freddie Mac helps supply funds that lenders use to make additional loans to potential homebuyers. Also known as a Government Sponsored Enterprise (GSE). Freddie Mac maintains a nationwide secondary market primarily for conventional loans originated by banks, thrift institutions and other HUD-approved lenders. Freddie Mac finances most of its operations through the sale of Mortgage Participation Certificates.
Federal Housing Administration - FHA
An agency within the U.S. Department of Housing and Urban Development (HUD). FHA offers mortgage insurance programs to protect the lender in the event of default. Because lenders are insured against loss, they can make affordable financing available to borrowers who would not otherwise qualify.
Federal National Mortgage Association (Fannie Mae)
A federally-charted organization that purchases residential mortgages and converts them into securities for sale to investors; in doing so, Fannie Mae helps supply funds that lenders use to make additional loans to potential homebuyers. Also known as a Government Sponsored Enterprise (GSE). Provides a secondary market for FHA, VA and conventional loans. Fannie Mae issues mortgage-backed securities and guarantees timely payment of their principal and interest to investors.
FICO (FICO Score)
See Credit Score.
First Mortgage
A mortgage that has priority as a lien over all other mortgages. In the case of a foreclosure the first mortgage will be satisfied before other mortgages.
Fixed-Rate Mortgage
The type of loan in which the interest rate will not change for the entire term of the loan.
Fixture
Personal property attached to the land in such a way as to be considered part of the real property.
Flood Insurance
Insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will usually require flood insurance before approving a loan.
For Sale By Owner (FSBO)
A home that the owner is selling without the help of a real estate professional.
Foreclosure
A legal process in which the right, title and interest of a mortgagor or trustor in real property are terminated by selling the property and applying the proceeds to satisfy liens of creditors.
Front End Ratio
Monthly mortgage payments (PITI, principal, interest, taxes and insurance) divided by your gross monthly income. This comes out to a percentage, and a lender uses this percentage to get an idea of how much of your income will be going towards paying your loan. Most programs require a maximum ratio of 28-33%. A low ratio is better.
G
Gift Letter
A letter or affidavit that indicates part of a borrower's down payment is supplied by relatives or friends in the form of a gift and that the gift does not have to be repaid.
Government National Mortgage Association (Ginnie Mae)
A government corporation within the Department of Housing and Urban Development (HUD) that provides assistance for the purchase of certain Federal Housing Administration (FHA) and Veterans Administration (VA) mortgages and guarantees securities backed by pools of mortgage loans.
H
Hazard Insurance
An insurance policy that protects the homeowner against both damage to a home and its contents from disasters such as fire, storms, etc; as well as against claims of negligence or inappropriate action that result in someone's injury. Most lenders will require homeowners insurance.
Home Equity Line Of Credit (HELOC)
A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender's promise to advance you up to $150,000, in an amount and at a time of your choosing.
Home Equity Loan
A loan with a second-priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.
Home Inspection
An examination of the structure and mechanical systems to determine a home's quality, soundness and safety; makes the potential homebuyer aware of any repairs that may be needed. The homebuyer generally pays inspection fees.
Homeowners Association (HOA)
An association of homeowners in a particular subdivision, planned unit development (PUD), or condominium organized to manage the common area of the development and to enforce the association rules and regulations.
Homeowners Insurance
An insurance policy that protects the homeowner against both damage to a home and its contents from disasters such as fire, storms, etc; as well as against claims of negligence or inappropriate action that result in someone's injury. Most lenders will require homeowners insurance.
I
Income
Money received, especially on a regular basis, for work or through investments.
Index
A measure of prevailing market interest rates used with the margin to determine a new interest rate at the time of adjustment on an adjustable-rate mortgage (ARM). An index must be readily verifiable by the borrower and beyond the control of the lender.
Initial Interest Rate
The beginning interest rate at the start of an adjustable-rate mortgage (ARM). It may be lower than the fully indexed rate or "going market rate" and it will remain constant until it is adjusted up or down on the adjustment date.
Interest
A charge for borrowing money. It is usually expressed on an annual rate, or as a percentage, of the money still owed. For example, the interest rate might be 6%. If a person borrowed $10,000 and agrees to pay it in full at the end of one year, the interest will be $600.
Interest Rate
The percentage of an amount of money which is paid for its use for a specified time; usually expressed as an annual percentage.
Interest-Only Mortgage
A mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged.
Investor
The eventual owner of a loan. This can be the original lender of the loan, or an institution that purchases the loan from the lender to hold in their portfolio.
L
Lease
A written agreement between the property owner and a tenant that stipulates the conditions under which the tenant may possess the real estate for a specified period of time and rent.
Lender
A person or company that makes loans for real estate purchases.
Liabilities
A borrower's financial obligations.
LIBOR Index
An average of interest rates at which international banks are willing to lend funds to or borrow funds from the London Interbank market. The rates are an international benchmark in determining interest rates for adjustable-rate mortgages (ARMs).
Loan Estimate
The form that lists the estimated settlement charges the borrower must pay at closing and the terms of the loan including the annual percentage rate (APR). The lender is obligated to provide the borrower this form within three business days of receiving the loan application.
Loan Officer
A person working on behalf of a lending or mortgage company responsible for soliciting borrowers, qualifying and processing loans. Also known as originator, lender, loan representative or loan rep.
Loan Servicer
The company that collects a borrower's monthly mortgage payments and disperses money for property taxes and insurance payments. They may be the lender or a company that is under contract with the investor to service the loan.
Loan-To-Value Ratio
The ratio, expressed as a percentage, of the amount of a loan (numerator) to the value or selling price of real property (denominator).
Lock-In
A written agreement in which the lender guarantees a specified interest rate if a mortgage goes to closing within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.
M
Monthly Housing Expense Ratio
The amount of the monthly income as a percentage of the amount the borrower will owe each month in principal, interest, real estate tax and insurance on a mortgage.
Mortgage
A written instrument that creates a lien upon real estate as security for the payment of a specified debt.
Mortgage Banker
An entity or individual that specializes in originating and servicing loans. They generally sell their loans to investors, but may continue to service them.
Mortgage Broker
Arranges financing for a borrower by placing loans with lenders. Mortgage brokers are paid a fee by the borrower or the lender when a loan closes.
Mortgage Insurance
Insurance written by an independent mortgage guaranty insurance company that protects the mortgage lender against loss incurred by a mortgage default, thus enabling the lender to lend a higher percentage of the sales price. Private companies, such as MGIC, offer this insurance. The federal government writes this form of insurance through the Federal Housing Administration (FHA). Mortgage insurance benefits consumers by helping them achieve homeownership sooner with low-down-payment loans.
Mortgage Life Insurance
A type of term life insurance often bought by mortgagors. The amount of coverage decreases as the principal balance declines. In the event that the borrower dies while the policy is in force, the debt is automatically satisfied by insurance proceeds.
N
Negative Amortization
An increase in principal balance occurs when the monthly payments do not cover all the interest cost. The interest cost which is not covered by the payment is added to the unpaid principal balance.
Nonfixed-Rate Mortgage
A mortgage loan in which the interest rate can vary throughout the term of that loan.
Note
A written promise by one party to pay a specified sum of money to a second party under conditions agreed upon mutually. Also called a promissory note.
Note Rate
The interest rate on the mortgage loan.
O
Offer Or Offer To Purchase
A document completed by a homebuyer specifying the terms and conditions under which real estate will be purchased.
Origination Fee
The fee that the lender charges the borrower to cover the cost of issuing a loan commitment. It pays for processing the loan which includes collecting information about the borrower's creditworthiness and the property. It usually does not include fees for appraisals, credit reports, inspections and loan document preparation. This is different from discount points, which are used to buydown the interest rate.
Owner-Occupied Property
The borrower lives in the property as a primary residence.
P
Payment Cap
A limit on the monthly payment amount can increase at each predetermined adjustment period, regardless of the interest rate being charged. The cap is usually given as a percentage. When payment caps are present, there is the potential for negative amortization to occur.
PITI
The total mortgage payment includes principal, interest, taxes and insurance. The payment of taxes and insurance with the monthly mortgage payment is not always required.
Private Mortgage Insurance (PMI)
Insurance written by an independent mortgage guaranty insurance company that protects the mortgage lender against loss incurred by a mortgage default, thus enabling the lender to lend a higher percentage of the sales price. Private companies, such as MGIC, offer this insurance. The federal government writes this form of insurance through the Federal Housing Administration (FHA). Mortgage insurance benefits consumers by helping them achieve homeownership sooner with low-down-payment loans.
Points
Fees paid to lenders. 1 point = 1 percent of the loan amount. On a $100,000 loan 1 point is $1000. Points may be further classified into origination points or discount points.
Pre-Approval
A fixed loan amount that a lender commits to lend to a borrower based on a completed loan application, credit reports, debt, savings and has been reviewed by an underwriter. This does not guaranty a loan until the property has passed inspections and meets underwriting guidelines.
Predatory Lending
Abusive lending practices that include intentionally placing borrowers in loans with notably worse terms or higher costs than loans offered to similarly qualified consumers from the same area. This may include convincing a borrower to refinance a loan that he or she likely would not have done, had the borrower been fully aware of all the implications and consequences of the new loan.
Pre-Qualification
The process of determining how much money a prospective home buyer will be eligible to borrow before he or she applies for a loan.
Prime Rate
The interest rate banks charge to preferred customers.
Principal Balance
The outstanding balance of a mortgage, exclusive of interest and any other charges. The capital sum of a loan.
Q
Qualifying Debt Ratio
The amount of the total monthly payments for all debt (for example, installment, revolving, and proposed PITI) as a percentage of the monthly income.
S
Servicer
An organization that collects principal and interest payments from borrowers and manages borrowers' escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
Servicing
All the management and operational procedures that the mortgage company handles for the life of the mortgage, up through foreclosure if necessary, including: collecting the mortgage payments, ensuring that the taxes and insurance charges are paid promptly, and sending an annual report on the mortgage and the escrow accounts. (See also Escrow Account.)
T
Title Insurance
An insurance policy that protects the insured against loss arising from defects in title. Title insurance policies are typically obtained for the buyer and the lender.
Total Expense Ratio
A ratio that compares the total of all monthly debt payments (mortgage, real estate taxes and insurance, car loans, and other consumer loans) to gross monthly income.
Two- To Four-Family Property
A property that consists of a structure that provides living space (dwelling units) for two to four families, although ownership of the structure is evidenced by a single deed.
U
Underwriting
In mortgage lending, the process of approving or denying a loan based on an evaluation of the property, the applicant's creditworthiness and ability to repay the loan.
V
VA Mortgage
A mortgage guaranteed by the Department of Veterans Affairs (VA).
Verification Of Deposit
A document signed by the borrower's bank or other financial institution verifying the account balance and history.
Verification Of Employment
A document signed by the borrower's employer verifying his/her starting date, job title, salary and probability of continued employment.
W
Walk Through Inspection
A buyer's final inspection of a property to confirm that any contingencies specified in the purchase agreement have been completed, fixture and non-fixture property is in place and confirm the electrical, mechanical, and plumbing systems are in working order.