A
Adjustable Rate Mortgage: A loan that adjusts on a regular schedule based on a national economic index and the lender’s margin. Also called “variable rate mortgage.”
Amortization: The process of paying off a loan with regular payments over a fixed time period.
Amortization Schedule: A timetable/ schedule for payments of the mortgage term showing the amount of each payment that is applied to interest, and principle.
Application Fee: A one-time fee charged by a lender for processing a borrower’s application for a mortgage loan. The application fee may cover the administrative cost to extend the loan.
Appraisal: A professional opinion of the market value of a property. Most lenders will use an appraisal to determine the home’s value which may affect the loan to value for refinances. An appraisal will also be completed to determine whether a purchase price is supported by the market value.
Appreciation: An increase in the value of a house due to change in market conditions, home improvement or other factors.
Assessed value: The taxable value placed on a home by a public tax assessor. The assessed value is determined yearly for the purpose of determining property taxes.
Asset: Anything an individual owns that has commercial or exchange value. Home loans may require a reserve called liquid assets such as: Checking, Savings, 401K, retirement accounts, IRA, investments, etc… An asset has a convertible to cash value.
Assumable Mortgage: A loan that can be taken over, or assumed, by a buyer when the home is sold. A potential applicant may ask the current lender whether the loan may be assumed.
Automated underwriting: A computer-based method enables mortgage lenders to process loan applications more quickly. Lenders will use several factors to determine the willingness to repay using credit scores, and other loan application data to make a recommendation on whether or not to extend a mortgage loan. Many factors will determine an approval such as income, credit, property to loan value, liquid assets, payment history, work history.
B
Balloon Payment Mortgage: A loan with fixed monthly payments based on a 30-year schedule of payments, but the entire balance of the loan comes due at the end of a set period, usually five, seven or ten years. This is an alternative to an ARM loan. These loans generally have a lower than par rate. This option is for people who are going to sell, pay off or refinance before the balloon is due.
Bank: A depository institution chartered under federal and state regulations that offers services such as checking accounts, savings accounts, consumer loans, safe-deposit boxes, investment services and automatic payment of bills.
Bankruptcy: A legal proceeding declaring that an individual is unable to pay debts, which may release the person from repaying debts owned. Chapter 7 clears all debts, and a chapter 13 is a repayment plan of selected debts.
Borrower: The person who obtains a mortgage loan. The borrower is generally referred to as the “mortgagor” on mortgage paperwork.
Budget: A financial plan for spending and saving money. A budget is also referred to a “spending plan.”
Building Permit: A written permit that must be purchased from the local government by anyone doing new construction, remodeling or rehabilitation work on a property. Every major remodeling project should take a building permit in order to record the improvements. This may increase the accuracy of an appraisal’s market analysis.
Buy-Downs: Points a borrower pays a lender in advance to obtain a lower interest rate. One point is equal to 1% of the loan amount.
Buyer’s Agent: A real estate professional that enters into a contract of agency relationship with a buyer, and typically gets paid by splitting the sales commission with the selling, or listing agent. A buyer’s agent may work towards their client’s interest. Review your Realtor’s agreement to clarify your real estate agent’s interests.
C
Cap: The maximum amount an interest rate can increase or decrease in a designated period of time (interest rate cap) or over the life of the loan (lifetime cap) on an adjustable rate loan.
Capacity: An applicant’s ability to earn enough income to make the new mortgage loan payments and still pay all other living expenses. Capacity is one of the “4 Cs of credit.”
Capital: The funds that potential homeowners have available for the upfront costs of homeownership, such as the down payment, taxes, insurance, and closing costs. Capital is one of the “4Cs of credit.”
Cash-Out Refinance: When an owner refinances a loan and takes equity out as cash. Most cash out loans are used for debt consolidation to lower overall monthly expenses.
Cash Reserves: Assets required for many lenders’ loan programs, borrowers have sufficient cash remaining after closing to make several mortgage payments. Many programs require 2-3 or more months in reserves to pay the principle, interest, taxes, insurance, and all monthly obligations.
Chapter 7 Bankruptcy: A form of bankruptcy that involves total liquidation of assets. May be referred to as “straight bankruptcy.”
Chapter 13 Bankruptcy: A form of bankruptcy that involves a wage earner repayment plan.
Charge Off: An accounting term to indicate that the creditor does not expect to collect the balance owed on an account. However, most creditors will continue to pursue collection of the debt. The creditors will sell these accounts to other collection companies which may validate the debt as new. Many borrowers may settle these debts to the collection company in full or may negotiate a lower percentage to settle the debt.
Chattel: A loan secured against personal property, which is common in the financing of manufactured homes.
Clear Title: A title that is free of liens and legal questions on the ownership of the property.
Closing: The final steps in the transfer of property ownership, which usually occurs at a formal meeting between the buyer, seller, settlement agent, and possibly real estate agents, where the buyer signs the mortgage and mortgage note, the seller receives payment for the property, the buyer and/or seller pay closing costs, and the title is transferred from the seller to the buyer. Also called “settlement.”
Collateral: Expenses accepted as security for a loan, or one of the “four Cs of credit” that measures the value and condition of the house to make sure it is worth at least as much as is being borrowed.
Collection Amount: A delinquent account that has been transferred from a routine debt to a collection department of the creditor’s firm or to a professional debt collection firm.
Commission: The fee a real estate agent is paid for helping to sell a house that is usually based on the purchase price of the home.
Commitment Letter: A formal offer by a lender stating the terms under which it agrees to loan money to a homebuyer. This is different than a prequalification letter. The borrower has sent in financial, credit, or additional documents that have been reviewed and approved by the lender.
Community Reinvestment Act (CRA): A federal law that encourages lenders to meet the credit needs of their local communities.
Comparative Market Analysis (CMA): A written analysis of comparable houses currently being offered for sale and comparable houses sold in the past six months. These reviews are based on similar factors such as, square footage, similar sales within 1-3 miles of subject property, year built, and current market conditions. This is not a replacement for an independent appraisal.
Condominium: A home that is attached to other homes and shares common areas that everyone in the building or development owns together and maintains through a homeowner’s association fee.
Consolidation Loan: A loan used that combines payments of separate bills into one loan payment.
Contingency: A condition put in an offer to buy a home.
Contract for Deed: A type of seller financing where the buyer makes the down payment and installment payments to the seller, but there is no transfer of title for the borrower to own the house until the loan is fully pad or the property is refinanced.
Contractor: An individual who is hired to build or rehabilitate a property.
Conventional Mortgage: A loan made by for-profit lenders and not insured by the federal government.
Cooperative: A type of group ownership where all members own the property’s living units and common areas by owning shares in the property.
Co-signer: A person who agrees to share credit responsibilities and repays the debt if the borrower defaults.
Counteroffer: A response from the seller changing some of the terms of an original offer.
Covenant: A specific agreement or regulation, which is legally enforceable and is transferred with the deed to the new owner, governing the use of a property. May be referred to as the “covenants, conditions and restrictions (CC & R), deed restrictions or restrictive covenants.”
Credit: The granting of money in exchange for a promise of future repayment, or one of the “four Cs of credit” that measures an applicant’s likeliness to repay a home loan based on how previous debts have been handled.
Credit Counseling: Advice given by professional counselors to inform people about how to use credit responsibly and how to get out of serious debt. Many credit counselors may be non-profit or for profit. Please refer to a local listing to determine which is right for you.
Creditor: Any person or business to whom the consumer owes money and who has the right to undertake legal action to attain money owed. Not all creditors report to local reporting authorities.
Credit Report: A “snap shot” in time or record that measures how a consumer has paid credit in the past. It maybe used as a guide to determine a potential homebuyer’s creditworthiness. Lenders may use a tri-merge credit report which includes the three largest credit reporting agencies.
Credit Reporting Agency: A company which gathers, files and sells information to creditors and others with a legitimate business purpose. Also referred to a “credit bureau.” Many lenders use the three major credit reporting agencies.
Credit Score: A numerical value based on the analysis of a credit report that is used by creditors to predict how likely an individual is to repay a new loan.
Credit Union: A financial institution that is a cooperative and offers savings and checking accounts and other financial services for its members.
D
Debt: Money owed. Also called “liability.”
Debt Management Plan: A bill payment plan for a borrower in a credit emergency that is agreed to by the borrower and creditors. This plan may substantially affect credit ratings from the credit bureaus.
Debt-to-Income Ratio: The maximum percentage of a borrower’s gross monthly income that can be spent on the house payment and all other creditor debts. May be referred to as a “back-end ratio.”
Deductible: The amount of cash payment required by an insurance policy that is made by the homeowner to cover a portion of a damage or loss. Typically a higher deductible may lower the cost of the policy. Also called “out of pocket expenses.”
Deed-In-Lieu: An agreement where a delinquent borrower gives the lender the deed and keys and moves out of the property in exchange for forgiveness of the loan.
Deed of Trust: An alternative to a mortgage in some states, whereby a third party holds the deed of the property as security until the buyer repays the loan. Also called “trust deed.”
Default: Failure to meet financial obligations, which may result in the lender foreclosing on the loan.
Depreciation: A decrease in the value or property due to changes in market conditions, wear and tear on the property, or other factors.
Disclosures: Federal or state requirements to provide information about a property for sale, especially as it represents actual or potential defects or problems. Used in loan application process to inform borrowers of all terms and conditions related to obtaining a mortgage.
Document Recording: The process of recording certain documents and making them part of the public record that follows closing.
Down Payment: The amount of cash a borrower pays toward purchasing a home.
Dual Agent: A real estate professional who represents both the buyer and the seller in a single home purchase transaction.
Due-on-Sale Clause: A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.
Duplex: A house divided into two living units.
E
Earnest Money: Funds that may be included with an offer to purchase to show good faith in following through with the transaction.
Easement: A right of way giving people other than the owner’s access to or over a property.
Encroachment: A building, driveway, fence or other structure that extends over the legal property line or beyond the buildable space of the lot.
Equal Credit Opportunity Act (ECOA): A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, national origin, age, sex, marital status or receipt of income from public assistance programs.
Equity: Ownership interest in an asset after liabilities are deducted, or the part of the house the borrower owns. This may increase or reduce based on market conditions of the property.
Equity Loan: A loan based on the borrower’s equity in the home. This loan may be either an adjustable rate revolving equity line. Which payments are determined on the outstanding balance. This may also be a 2nd mortgage that is fixed term and repayment schedule.
Escrow: The time period between when the purchase contract is signed and the loan closing.
Escrow Account: A special account set up by the lender to collect and hold monthly payment toward annual property taxes and homeowner’s insurance. Also called an “impound account.”
F
Fair Credit Reporting Act (FCRA): A federal law that enables consumers to learn what information credit reporting agencies has on file about them and to dispute inaccurate date in the file.
Fair Debt Collection Practices Act: A federal law that protects consumers from abuse or threats from collection agencies trying to get overdue payments.
Fair Housing Act: A federal law that prohibits discrimination in housing and real estate transactions.
Fair Market Value: The price a willing buyer will pay and a willing seller will accept for real property.
FHA Loan: A type of mortgage that is insured by the Federal Housing Administration, a department of the federal government.
Finance Charges: The total dollar amount charged to use credit, which includes interest and other costs.
Fist Mortgage: A home loan that has top priority over the claims of subsequent lenders for the same property in the event of default of the loan.
Fixed Expense: An expense that does not change from period to period, such as loan payments.
Fixed-Rate Mortgage: A loan where the interest rate remains the same over the life of the loan.
Flood Insurance: A policy required by a lender if a buyer’s house is located in a flood zone.
Forbearance: The legal process used to force the payment of debt secured by collateral whereby the property is sold to satisfy the debt.
For-Sale-By-Owner (FSBO): A home that is offered for sale without the use of a real estate agent.
Fourplex: A house divided into four living units. May be referred to as multi-family residence or apartment dwelling.
G
Gift Letter: A document that is required by a lender if a borrower receives a down payment from any individual as a gift.
Good Faith Estimate: A document that discloses anticipated settlement costs.
Graduated Payment Mortgage: A loan that starts out with lowers monthly payments, and then over a period of years, the payments go up slowly and then stay fixed for the rest of the loan.
Gross Income: Money earned before taxes are withdrawn. Net income is after taxes and deductions are subtracted.
H
Hazard Insurance: Insurance policy designed to protect the homeowner against physical damage to a property from fire, wind, vandalism and other hazards. Generally doesn’t cover flood. Most flood policies are separate from the hazard policy.
Home Equity Line of Credit: A type of home equity loan that allows the homeowner to access the loan money with checks or a credit card as needed. Equity lines are generally revolving for several years then have a repayment period.
Home Equity Loan: A loan based on the difference of the amount of equity paid on a home and the home’s current market value.
Home Improvement: Changes to a house that increases its value, such as modernizing a kitchen or adding a second bathroom to a three-bedroom home.
Homeowner’s Association: A group of homeowners within a defined community, neighborhood or complex who make decisions, pay to maintain and repair land and common areas and/or enforce community rules and covenants.
Homeowner’s Insurance: An insurance policy that combines liability coverage and hazard insurance. Home owner’s coverage is generally required by lenders while financing is on the property. Flood insurance is generally a separate policy to be paid if you are in a flood zone.
Home Warranty: A guarantee for certain features of a new home, such as the materials, workmanship and/or its main components.
Home Warranty Policy: An optional policy that protects a homeowner against the cost of high repair bills for one year if the heating, plumbing, air conditioning or appliance break down.
Housing Inspection: A professional opinion of the structural soundness of a property. May be performed by a licensed inspector and may cover several topics such as, electrical, structural, physical defects in the subject property.
Housing Ratio: The maximum percentage of a borrower’s gross monthly income that can be used to make the monthly mortgage payments. Also called “front-end ratio.”
HUD-1 Settlement Statement: A final statement listing all of the costs of the sale of a property and who pays for them.
I
Index: A published market index rate tied to an economic indicator that is used to calculate the interest rate of an adjustable rate mortgage at origination and at each adjustment period.
Individual Development Account: A type of matched savings account, offered in some communities, for people whose income is below a certain level.
Installment Loan: A credit account in which the amount of the payment and the number of payments are fixed.
Interest: The cost of borrowing money.
Interest Factor: The cost for borrowing $1,000 of a mortgage loan based on interest rate and term.
Interest Rate: The percentage of a loan amount charged for a loan.
Interest Rate Lock-In: A written guarantee that a buyer will receive a specified interest rate from a lender, provided that the loan closes within a set period of time.
J
Joint Tenancy: A form of ownership, where two or more people have an equal and undivided interest in the property.
Judgment: The official court decision of an action or suit that may be listed on a credit report as a public record.
K
L
Land Lease: When a person owns a house and rents the land beneath it.
Lease-Purchase Mortgage: A type of financing option that allows a potential homebuyer to lease a home with an option to buy, where each month’s rent payments include an extra amount that is deposited into a savings account to accumulate money for down payment and closing costs.
Lender: The entity or person who offers the mortgage loan. Also called a “mortgagee.”
Liability Protection: Insurance that covers people (other than the insured) and their personal property in cases of injury or damage while on the homeowner’s property.
Lien: A legal hold or claim of one person on the property of another as security for a debt or charge that may be listed on a credit report as a public record.
Listing Agent: A real estate professional that has a contract with the seller of a house to advertise the property for sale and represent the seller when offers are made. Also called “selling agent.”
Loan Term: The amount of time a borrower has to pay off a loan.
Loan-to-Value Ratio (LTV): The ratio of the loan balance to the appraised value of the house.
M
Manufactured Home: A home built entirely in a factory under
A federal building code administered by the Department of Housing and Urban Development that went into effect June 15, 1976. Also called “mobile home.”
Margin: The set percentage the lender adds to the index rate to determine the interest rate of an adjustable rate mortgage.
Mobile Home: A factory-built home built prior to June15, 1976.
Modular Home: Factory-built housing with onsite assembly and some onsite construction that is built to meet state and local codes and does not have a chassis.
Mortgage: A security agreement between the lender and the buyer in which the property is collateral for the loan. The mortgage gives the lender the right to collect payment on a loan and to foreclose if the loan obligations are not met.
Mortgage Bank: A type of financial institution that offers only mortgage financing.
Mortgage Broker: A company or individual that matched borrowers with lenders for a fee.
Mortgage Insurance (MI): A policy required by the lender if a borrower puts less than 20% cash down when buying a home with a conventional loan to protect the lender from collateral risk in case of default. Also called “private mortgage insurance (PMI).”
Mortgage Life Insurance: An optional form of life insurance that pays off a mortgage if the borrower dies.
Mortgage Note: A legal document obligating a borrower to repay a loan at a state interest rate during a specified period that is secured by a mortgage and recorded in the public records along with the deed.
Mortgage Payment: The total monthly loan payment known as principle, interest, taxes and insurance (PITI).
Multiple Listing Services (MLS): A service within a given community or area that allows real estate professionals to submit listings and agree to attempt to sell all properties in the service.
N
Negative Amortization: Payment terms under which the borrower’s monthly payments do not cover the interest due, and the loan balance subsequently increases. Loan programs that are offered under several names such as “Pay Option Arm,” “pick a payment”, “pick a pay”, “minimum payment option”, “deferred interest payment”.
Nontraditional Credit History: A record of credit performance shown with receipts and check stubs from payments to landlords, utility companies, child-care providers and other applicants who do not have a credit history from loans and other forms of credit.
O
Origination Fee: A fee that is charged by some lenders for submitting, processing and evaluating a proposed mortgage loan.
P
Partial Claim: When the mortgage insurance company lends delinquent borrower money to bring a loan current by making a second mortgage on the property.
Payment Plan: An agreement with a lender in which a borrower promises to make up any missed payments by sending one full payment and one partial payment each month until delinquent mortgage payments are caught up.
Planned Unit Development (PUD): A type of property that is part of a subdivision and has common areas that are shared with all residents and maintained through a homeowner’s association fee. Usually, the owner owns the home and the land on which it stands.
Point: A fee that is one percent of the loan amount.
Preapproval: A guarantee that a lender will loan a potential buyer a fixed amount as long as s/he buys a home within a certain time frame and the house appraises for the amount of money for which s/he qualifies.
Predatory Lending: A type of lending that falls between appropriate risk-based pricing and blatant fraud and combines certain products, terms, prices and practices.
Pre-Foreclosure Sale: When the lender agrees to allow a delinquent borrower to sell the house to avoid foreclosure.
Prepayment: Paying more each month than the amount of the mortgage loan payment to pay the loan off sooner and save money on interest charges.
Prepayment Penalty: Paying more each month than the amount of the mortgage loan payment to pay the loan off sooner and save money on interest charges. Many lenders will offer a lower rate in exchange for paying payments through a specific term but not exceeding a predetermined amount. Some prepayment penalty terms last 12-60 months based on lender’s terms.
Prequalification: The process used by lenders to calculate a potential buyer’s mortgage affordability, usually based on unverified information.
Prime Lending: Lending to borrowers with highly rated credit histories. Prime loans are often called “A” credits.
Principle: The outstanding balance of a loan, not including interest and other charges.
Promissory Note: A document in which the borrower promises to repay a loan. Also called “note.”
Property Tax: A tax charged by the local government and used to fund a variety of municipal services such as schools, police or street maintenance.
Proration: Certain items that are continuing expenses such as property taxes and homeowners association dues that must be distributed between the buyers and the sellers at the close of escrow.
Public Record: Information obtained by a credit reporting agency from court records, such as liens, bankruptcy filing and judgments.
Purchase and Sale Agreements: A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Purchase Offer: A purchase proposal to the seller of a house, telling the amount a certain buyer would pay for the house and other conditions that would have to be met before the proposed house sale.
Q
Quitclaim Deed: A deed that operates to release any interest in a property that a person may have.
R
Real Estate Broker: A real estate agent that is authorized to open and run his or her own agency.
Real Estate Settlement Procedures Act (RESPA): A lending regulation that establishes laws and procedures for closing mortgage loans. RESPA prohibits cost increasing practices, such as kickbacks and referral fees and requires advance disclosure of settlement costs.
Realtor®: A real estate agent or agency that belongs to the local or state board of Realtors® and has an affiliation with the National Association of Realtors®.
Redlining: An illegal practice of discrimination against a particular ethnic group by mortgage lenders who decide that certain areas of a community are too high risk and refuse to lend to buyers who want to purchase property in those areas, regardless of their qualifications or creditworthiness.
Refinancing: The process of paying off one loan with the proceeds from a new loan secured by the same property.
Remodeling: To rebuild and improve a house, often changing the house’s layout or adding rooms.
Replacement Coverage: An optional insurance feature available on both a house and its contents that pays to restore to its original condition if it is damaged or replace contents if they are lost.
Repossession: Property, such as a car that is taken back by the creditor when the borrower does not make payments due on the property.
Reverse Mortgage: A special type of home loan that lets an elderly homeowner convert the equity in the home into cash.
Revolving Account: A credit agreement that allows a borrower to pay all or part of the outstanding balance on a loan or credit card. As credit is paid off, it becomes available again to use for another purchase or cash advance.
S
Secondary Market: Investors who purchase residential mortgages originated by primary lenders, which in turn provide lenders with money for future lending.
Second Mortgage: A home loan that has rights subordinate to the rights of the first mortgage.
Servicing: The collection of payments and management of operational procedures related to a mortgage.
Settlement Statement: A document required by the Real Estate Settlement Procedures Act that is an itemized statement of services and charges relating to the closing or settlement of the property transfer. Also called “HUD-1 Settlement Statement” or “Uniform Settlement Statement.”
Single-Family Home: A type of property, usually detached, where one family owns the home and the land on which it stands.
Sole and Separate: A form of ownership where one individual owns the property.
Specifications: A detailed description of the size, shape, materials and other details of a building or remodeling project.
Subprime Lending: A type of lending that relies on risk-based pricing to serve borrowers who cannot obtain credit in the prime market, where higher degrees of risk for borrowers carry higher costs for loans. Subprime loans are often called “A- through D” credits.
Survey: A professional measurement of a property and the land around it.
T
Tenancy in Common: A form of ownership where two or more people own a property and can have different shares of ownership.
Title: A legal document establishing the right of ownership in a property.
Title Insurance: Insurance to protect the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of a property.
Triplex: A house that has three living units.
Truth-In-Lending Act (TILA): A federal law that requires creditors to give complete and accurate information about the cost of credit to consumers and the terms of repayment.
Truth-In-Lending Statement: A document that discloses the terms and cost of a mortgage loan, including APR. Generally referred to as the “TIL.”
U
Underwriting: The process of analyzing a borrower’s finances in order to approve or deny a loan.
V
VA Loan: A loan that is guaranteed by the Veterans Administration, a department of the federal government.
Variable Expense: An expense that changes from period to period, such as utilities, food, clothing and entertainment.
Verification: The process of making sure that all of the borrower’s loan application information is accurate.
W
Walk-Through: A final inspection of the property by the buyer to determine that the property is as described in the purchase agreement, which is usually conducted right before closing.
Workout Agreement: The negotiated agreement that is made with the lender or servicer to address a debt by the homeowner in order to avoid foreclosure.
X
Y
Z
Zoning: A county or city law stating the types of use to which properties can be put in specific areas.
