Glossary

Discover the Language of Home Mortgages:

Glossary Use:  The following home mortgage and financing glossary may be useful in interpreting words or terms generally used in real estate transactions.  Words or terms are defined in non-technical terms and may have a different meaning when used in other contexts.

 ARM: Ajustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the change in monthly payment amount, however, is usually subject to a cap.

Abstract of Title: Documents recording the ownership of property throughout time.

Additional Principal Payment: money paid to the lender in addition to the established payment amount used directly against the loan principal to shorten the length of the loan.

Adjustable-Rate Mortgage (ARM): a mortgage loan that does not have a fixed interest rate.  During the life of the loan the interest rate will change based on the index rate.  Also referred to as adjustable mortgage loans (AMLs) or variable-rate mortgages (VRMs).

Affidavit: a signed, sworn statement made by the buyer or seller regarding the truth of information provided.

American Society of Home Inspectors: the American Society of Home Inspectors is a professional association of independent home inspectors.  Phone:  (800) 743-2744 

Amortization: a payment plan that enables you to reduce your debt gradually through monthly payments.  The payments may be principal and interest, or interest-only.  The monthly amount is based on the schedule for the entire term or length of the loan.

Annual Mortgagor Statement: yearly statement to borrowers detailing the remaining principal and amounts paid for taxes and interest.

Annual Percentage Rate (APR): a measure of the cost of credit, expressed as a yearly rate.  It includes interest as well as other charges.  Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans.  APR is a higher rate than the simple interest of the mortgage.

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.

Application Fee: a fee charged by lenders to process a loan application.

Appraisal: a document from a professional that gives an estimate of a property's fair market value based on the sales of comparable homes in the area and the features of a property; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.

Appraisal Fee: fee charged by an appraiser to estimate the market value of a property.

Appraised Value: an estimation of the current market value of a property.

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

Appreciation: an increase in property value.

Arbitration: a legal method of resolving a dispute without going to court.

Back End Ratio (debt 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.

Balance Sheet: a financial statement that shows the assets, liabilities and net worth of an individual or company.

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.

Biweekly Payment Mortgage: a mortgage paid twice a month instead of once a month, reducing the amount of interest to be paid on the loan.

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: a short-term loan paid back relatively fast.  Normally used until a long-term loan can be processed.

Broker: a licensed individual or firm that charges a fee to serve as the mediator between the buyer and seller.  Mortgage brokers are individuals in the business of arranging funding or negotiating contracts for a client, but who does not loan the money.  A real estate broker is someone who assists potential buyers find a home best suited for their needs.

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

Buy Down: the seller pays an amount to the lender so the lender provides a lower rate and lower payments many times for an ARM.  The seller may increase the sales price to cover the cost of the buy down.

Cap: a limit, such as one placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage.  Payment caps do not limit the amount of interest the lender is earning, so they may cause negative amortization.

Capital or Cash Reserves: an individual's savings, investments, or assets.

Cash Reserves: a cash amount sometimes required of the buyer to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.

Casualty Protection: property insurance that covers any damage to the home and personal property either inside or outside the home.

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.

Clear Title: a property title that has no defects.  Properties with clear titles are marketable for sale.

Closing: the final step in property purchase where the title is transferred from the seller to the buyer.  Closing occurs at a meeting between the buyer, seller, settlement agent, and other agents.  At the closing the seller receives payment for the property.  Also known as settlement.

Closing Costs: fees for final property transfer not included in the price of the property.  Typical closing costs include charges for the mortgage loan such as origination fees, discount points, appraisal fee, survey, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes.  A common estimate of a Buyer's closing costs is 2 to 4 percent of the purchase price of the home.  A common estimate for Seller's closing costs is 3 to 9 percent.

Co-Borrower: an additional person that is responsible for loan repayment and is listed on the title.

Co-Signed Account: an account signed by someone in addition to the primary borrower, making both people responsible for the amount borrowed.

Co-Signer: a person that signs a credit application with another person, agreeing to be equally responsible for the repayment of the loan.

Collateral: security in the form of money or property pledged for the payment of a loan.  For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made.

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. Traditionally the home seller pays the commission.  The amount of commission is determined by the real estate professional and the seller and can be as much as 6% of the sales price.

Comparative Market Analysis (COMPS): a property evaluation that determines property value by comparing similar properties sold within the last year.

Compensating Factors: factors that show the ability to repay a loan based on less traditional criteria, such as employment, rent, and utility payment history.

Conforming loan: is a loan that does not exceed Fannie Mae's and Freddie Mac's loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans.

Consideration: an item of value given in exchange for a promise or act.

Construction Loan: a short-term loan, used to finance the cost of building a new home during construction. The lender pays the builder based on milestones accomplished during the building process.  For example, once a sub-contractor pours the foundation and it is approved by inspectors the lender will pay for their service.

Contingency: a clause in a purchase contract outlining conditions that must be fulfilled before closing.  Both, buyer or seller may include contingencies in a contract, but both parties must accept the contingencies.

Conventional Loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.

Convertible ARM: a provision in some ARMs allowing it to change to a fixed-rate loan at some point during the term.  Usually conversions occur at the end of the first adjustment period.  At the time of the conversion, the new fixed rate is generally set at one of the rates then prevailing for fixed rate mortgages.  There may be additional cost for this clause.

Credit: an agreement that a person will borrow money and repay it to the lender over time.

Credit Bureau: an agency that provides financial information and payment history to lenders about potential borrowers.  Also known as a National Credit Repository.

Credit History: a record of an individual that lists all debts and the payment history for each.  The report that is generated from the history is called a credit report.  Lenders use this information to gauge a potential borrower's ability to repay a loan.

Credit Risk: a term used to describe the possibility of default on a loan by a borrower.

Credit Score: a score calculated by using a person's credit report to determine the likelihood of a loan being repaid on time.  Scores range from about 360 - 840: a lower score meaning a person is a higher risk, while a higher score means that there is less risk.

Creditor: the lending institution providing a loan or credit.

Creditworthiness: the way a lender measures the ability of a person to qualify and repay a loan.

Debtor: The person or entity that borrows money.  The term debtor may be used interchangeably with the term borrower.

Debt-to-Income Ratio: a comparison or ratio of housing and non-housing debt to gross income.  With 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.

Debt Security: a security that represents a loan from an investor to an issuer.  The issuer in turn agrees to pay interest in addition to the principal amount borrowed.

Deductible: the amount of cash payment that is made by the insured (the homeowner) to cover a portion of a damage or loss.  Sometimes also called "out-of-pocket expenses."  For example, out of a total damage claim of $1,000, the homeowner might pay a $250 deductible toward the loss, while the insurance company pays $750 toward the loss.  Typically, the higher the deductible, the lower the cost of the policy.

Deed: a document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description and the owner's signature.  Also known as the title.

Default: the inability to make timely monthly mortgage payments or otherwise comply with mortgage terms. A loan is considered in default when payment has not been paid after 60 to 90 days.  Once in default the lender can exercise legal rights defined in the contract to begin foreclosure proceedings.

Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.  Generally after fifteen days a late fee may be assessed.

Deposit (Earnest Money): money put down by a potential buyer to show that they are serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.  During the contingency period the money may be returned to the buyer if the contingencies are not met to the buyer's satisfaction.

Deposit (Progress Payments): amounts paid by a buyer to the seller as home construction progresses.

Depreciation: a decrease in the value or price of a property due to changes in market conditions, wear and tear on the property, or other factors.

Disclosures: the release of relevant information about a property that may influence the final sale, especially if it represents defects or problems.  "Full disclosure" usually refers to the responsibility of the seller to voluntarily provide all known information about the property. Some disclosures may be required by law, such as the federal requirement to warn of potential lead-based paint hazards in pre-1978 housing. A seller found to have knowingly lied about a defect may face legal penalties.

Discount Point: normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.  In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to give you a lower rate and lower payments for part of the mortgage term (usually for one year or less).  After the discount period, the ARM rate will probably go up depending on the index rate.

Down Payment: the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual mortgage loan amount.  Mortgage insurance is required when a down payment of less than 20 percent is made.

Document Recording: after closing on a loan, certain documents are filed and made public record.   Discharges for the prior mortgage holder are filed first. Then the deed is filed with the new owner's and mortgage company's names.

Due on Sale Clause: a provision of a loan allowing the lender to demand full repayment of the loan if the property is sold.

Duration: the number of years it will take to receive the present value of all future payments on a security to include both principal and interest.

Earnest Money (Deposit): money put down by a potential buyer to show that they are serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.  During the contingency period the money may be returned to the buyer if the contingencies are not met to the buyer's satisfaction.

Easements: the legal rights that give someone other than the owner access to use property for a specific purpose. Easements may affect property values and are sometimes a part of the deed.

EEM: Energy Efficient Mortgage; 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.  With an EEM, a larger than normal debt-to-income ratio permits the buyer to qualify for a larger home loan than would otherwise be possible.

Encroachments: a structure that extends over the legal property line on to another individual's property.  The property surveyor will note any encroachment on the lot survey done before property transfer.  The person who owns the structure will be asked to remove it to prevent future problems.

Encumbrance: anything that affects title to a property, such as loans, leases, easements, or restrictions.

Equal Credit Opportunity Act (ECOA): a federal law requiring lenders to make credit available equally without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.

Escrow: funds held in an account to be used by the lender to pay for home insurance and property taxes.  The funds may also be held by a third party until contractual conditions are met and then paid out.

Escrow Account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.

Estate: the ownership interest of a person in real property.  The sum total of all property, real and personal, owned by a person.

FICO Score: FICO is an abbreviation for Fair Isaac Corporation and refers to a person's credit score based on credit history.  Lenders and credit card companies use the number to decide if the person is likely to pay his or her bills. A credit score is evaluated using information from the three major credit bureaus and is usually between 300 and 850.

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

Familial (Family) Status: HUD uses this term to describe a single person, a pregnant woman or a household with children under 18 living with parents or legal custodians who might experience housing discrimination.

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.  Also known as a Government Sponsored Enterprise (GSE).

FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

First Mortgage: the mortgage with first priority if the loan is not paid.

Fixed Expenses: payments that do not vary from month to month.

Fixed-Rate Mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.

Flood Insurance: insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.

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. Also known as a Government Sponsored Enterprise (GSE).

Front End Ratio: a percentage comparing a borrower's total monthly cost to buy a house (mortgage principal and interest, insurance, and real estate taxes) to monthly income before deductions.

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 Mortgages: mortgages that begin with lower monthly payments that get slowly larger over a period of years, eventually reaching a fixed level and remaining there for the life of the loan. Graduated payment loans may be good if you expect your annual income to increase.

Grantee: an individual to whom an interest in real property is conveyed.

Grantor: an individual conveying an interest in real property.

Gross Income: money earned before taxes and other deductions.  Sometimes it may include income from self-employment, rental property, alimony, child support, public assistance payments, and retirement benefits.

Hazard Insurance: protection against a specific loss, such as fire, wind etc., over a period of time that is secured by the payment of a regularly scheduled premium.

HELP: Homebuyer Education Learning Program; an educational program from the FHA that counsels people about the home buying 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 Warranty, Limited: provides limited insured builder warranty including 1^st year, structural, mechanical, and plumbing systems.

Homeowner's Insurance: an insurance policy, also called hazard insurance, that combines protection against damage to a dwelling and its contents including fire, storms or other damages with protection against claims of negligence or inappropriate action that result in someone's injury or property damage.  Most lenders require homeowners insurance and may escrow the cost.  Flood insurance is generally not included in standard policies and must be purchased separately.

Homeownership Education Classes: classes that stress the need to develop a strong credit history and offer information about how to get a mortgage approved, qualify for a loan, choose an affordable home, go through financing and closing processes, and avoid mortgage problems that cause people to lose their homes.

Homestead Credit: property tax credit program, offered by some state governments, that provides reductions in property taxes to eligible households.

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

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," or "closing statement" it itemizes all closing costs; must be given to the borrower at or before closing.  Items that appear on the statement include real estate commissions, loan fees, points, and escrow amounts.

Index: the measure of interest rate changes that the lender uses to decide how much the interest rate of an ARM will change over time.  No one can be sure when an index rate will go up or down. If a lender bases interest rate adjustments on the average value of an index over time, your interest rate would not be as volatile. You should ask your lender how the index for any ARM you are considering has changed in recent years, and where it is reported.

Interest: a fee charged for the use of borrowed money.

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

Insurance: protection against a specific loss, such as fire, wind etc., over a period of time that is secured by the payment of a regularly scheduled premium.

Jumbo Loan: or non-conforming loan, is a loan that exceeds Fannie Mae's and Freddie Mac's loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans.

Late Payment Charges: the penalty the homeowner must pay when a mortgage payment is made after the due date grace period.

Lease: a written agreement between a property owner and a tenant (resident) that stipulates the payment and conditions under which the tenant may occupy a home or apartment and states a specified period of time.

Lease Purchase (Lease Option): 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.

Lender: A term referring to an person or company that makes loans for real estate purchases.  Sometimes referred to as a loan officer or lender.

Liabilities: a person's financial obligations such as long-term / short-term debt, and other financial obligations to be paid.

Lien: a legal claim against property that must be satisfied when the property is sold.  A claim of money against a property, wherein the value of the property is used as security in repayment of a debt; examples include a mechanic's lien, which might be for the unpaid cost of building supplies, or a tax lien for unpaid property taxes. A lien is a defect on the title and needs to be settled before transfer of ownership.  A lien release is a written report of the settlement of a lien and is recorded in the public record as evidence of payment.

Lien Waiver: A document that releases a consumer (homeowner) from any further obligation for payment of a debt once it has been paid in full.  Lien waivers typically are used by homeowners who hire a contractor to provide work and materials to prevent any subcontractors or suppliers of materials from filing a lien against the homeowner for nonpayment.

Life Cap: a limit on the range interest rates can increase or decrease over the life of an adjustable-rate mortgage (ARM).

Line of Credit: an agreement by a financial institution such as a bank to extend credit up to a certain amount for a certain time to a specified borrower.

Liquid Asset: a cash asset or an asset that is easily converted into cash.

: money borrowed that is usually repaid with interest.

Loan Acceleration: an acceleration clause in a loan document is a statement in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

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 Officer: a representative of a lending or mortgage company who is responsible for soliciting homebuyers, qualifying and processing of loans. They may also be called lender, loan representative, account executive or loan rep.

Loan Origination Fee: a charge by the lender to cover the administrative costs of making the mortgage. This charge is paid at the closing and varies with the lender and type of loan. A loan origination fee of 1 to 2 percent of the mortgage amount is common.

Loan Servicer: the company that collects monthly mortgage payments and disperses property taxes and insurance payments.  Loan servicers also monitor nonperforming loans, contact delinquent borrowers, and notify insurers and investors of potential problems.  Loan servicers may be the lender or a specialized company that just handles loan servicing under contract with the lender or the investor who owns the loan.