Amortization – The reduction of a debt by regular, usually monthly, installments of principal and interest. An amortization schedule is a table showing the payment, the amounts applied to interest and principal and the unpaid balance.

Annual Percentage Rage (APR) – The cost of credit expressed as a yearly rate, taking into account interest, points, and other finance charges. Disclosure of the APR is required by the federal Truth-in-Lending Act and allows borrowers to compare the costs of different mortgage loans.

Appraisal – An estimate of a property’s value as of a given date, determined by a qualified professional appraiser. The value may be based on replacement cost, the sales of comparable properties, or the property’s ability to produce income.

Assumption – An agreement between a buyer and a seller which may require lender approval, where the buyer takes over the payments for a mortgage and accepts the liability. Assuming a loan can be advantageous for a buyer because there are no closing costs and the loan’s interest rate may be lower than current market rates. Depending on the terms of the mortgage deed of trust, the lender may raise the interest rate or require the buyer to qualify for the mortgage.

Back to Top

B

Bankruptcy – A proceeding in a federal court in which a debtor (who owes more than his/her assets or cash flow) is relieved from the payment of debts. This can affect the borrower’s personal liability or the mortgage debt but not the lien of a mortgage.

Borrower (Mortgagor) – One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Back to Top

Certificate of Occupancy (CO) – Written authorization given by a local municipality that allows a newly completed or substantially completed structure to be inhabited.

Certificate of Title – Document rendering an opinion on the status of a property’s title based on public records.

Closing – The meeting between the buyer, seller and lender or their agents where the property and funds legally changes hands. Also called settlement. Commitment and agreement, often in writing between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

Closing costs – Fees paid at closing which usually include an origination fee, discount points, appraisal fee, title search, and insurance, survey, taxes, deed recording, credit report charge and other costs assessed at settlement. The costs of closing usually are about three to six percent of the mortgage amount.

Co-Borrower – One who is individually and jointly obligated to repay a mortgage loan and may or may not share ownership of the property with one or more of the borrowers. See also: co-signer.

Co-Signer – A person who agrees to assume a debt obligation if the principal borrower defaults on the payments. A co-signer is not on the security instrument and is only responsible for the debt. See also: co-borrower.

Collateral – Something of value pledged as security for a loan. In mortgage lending, the property itself serves as collateral for a mortgage loan.

Commitment Fee – A fee charged when an agreement is reached between a lender and a borrower for a loan on specific terms and conditions. Rate and points may be locked-in or may be "floating."

Condominium – A form of ownership where the dwelling units are individually owned and the homeowners share ownership of common areas such as grounds, the parking facilities, and the tennis courts.

Conforming Loan – A loan that conforms to Federal Home Loan Mortgage Corporation (FHLMC) or Federal National Mortgage Association (FNMA) guidelines. See also: non- conforming loan.

Construction Loan – A short-term loan financing improvements to real estate, such as the building of a new home. The lender advances funds to borrower as needed while construction progresses. Upon completion of the construction, the borrower must obtain permanent financing or pay the construction loan in full.

Contract sale or deed – A contract between the purchaser and sellers of real estate to convey title after certain conditions have been met. It is a form of installment sale.

Consumer Handbook on Adjustable Rate Mortgages – A disclosure required by the federal government to be given to any borrower applying for an adjustable rate mortgage (ARM).

Back to Top

Debt-To-Income Ratio – The ratio of the borrower’s total monthly obligations, including housing expenses and recurring debts, to monthly income. It is used to determine the borrower’s capacity to repay the mortgage and all other debts.

Delinquency – Failure to make payments on time. This can lead to foreclosure.

Department of Housing and Urban Development – The U.S. government agency that administers FHA, GNMA and other housing programs.

Discount – The amount by which the sales price of a note (or financial instrument) is below or less than its face value. The purpose of a discount is to adjust the yield upward either in lieu of interest or in addition to interest. Discount points are payable to the lender by the borrower or seller to increase the lender’s effective yield. One point is equal to 1% of the loan.

Down Payment – The difference between the purchase price and mortgage amount. The down payment becomes your property equity. Typically it should be cash savings, but it can also be a gift that is not to be repaid or a borrowed amount secured by assets.

Due on Sale – A clause in a mortgage or deed of trust allowing a lender to require immediate payment of the balance of the loan if the property is sold.

Back to Top

Earnest money – Cash given to a seller by a buyer as good faith assurance that the buyer intends to go through with the purchase of a property.

Easement – The right one party has in regard to the property of another, such as the right of a public utility company to lay lines.

Equal Credit Opportunity Act – A federal law prohibiting lenders and other creditors from discriminating based on race, color, sex, religion, national origin, age, martial status, receipt of public assistance or because an applicant has exercised his or her rights under the Consumer Credit Protection Act.

Equity – The value of a property beyond any liens against it. Also referred to as owner’s interest.

Escrow Funds – Money held by the lender for payment of the taxes and insurance on your home.

Back to Top

Fair Market Value – The price established in a free market between a buyer and seller in an arms-length transaction where neither one is compelled to buy or sell. In an appraisal, this is the final value derived after examining the Sales Comparison, Cost, and if applicable, Income approaches; sometimes referred to as "Market Value."

Farmer’s Home Administration – The government agency that guarantees mortgages secured by residential properties located in rural areas, concentrating on borrowers with income less than HUD’s local median income for the area in which they reside. FmHa is known as Rural Economic and Community Development.

Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) – A quasi-governmental, federally sponsored organization that acts as a secondary market investor to buy and sell mortgage loans. FHLMC sets many of the guidelines for conventional mortgage loans.

Federal Housing Administration (FHA) – An agency within the Department of Housing and Urban Development that sets standards for underwriting and insures residential mortgage loans made by private lenders. One of FHA’ s objectives is to ensure affordable mortgages to those with low or moderate income. FHA loans may be high loan-to-value, and they are limited by loan amount. FHA mortgage insurance requires a fee of up to 3.8 percent of the loan amount to be paid either at closing or added to each monthly payment, as well as an annual fee of 0.5 percent of the loan amount added to each monthly payment.

Fee simple – The maximum form of ownership, with the right to occupy a property and sell it to a buyer at any time. Upon the death of the owner, the property goes to the owner’s designated heirs. Also known as fee simple absolute.

Fixed Rate Mortgage – The mortgage interest rate will remain the same on these mortgages through out the term of the mortgage for the original borrower.

Foreclosure – The legal process by which a borrower in default under a mortgage or deed of trust, loses his/her interest in the mortgage property. This process usually involves a forced sale of property at public auction with proceeds of the sale being applied to the mortgage debt.

Back to Top

Gift funds – Funds donated to the borrower from certain eligible sources to assist the borrower in meeting closing costs. Generally, eligible sources are a relative, church, municipality, or non-profit organization.

Back to Top

Hazard Insurance – A form of insurance that protects the insured property against physical damage such as fires, tornadoes, earthquakes, etc. Mortgage lenders often require a borrower to maintain an amount of the mortgage loan.

Homeowner’s Association (HOA) – A non-profit association, whose directors and officers are elected by the unit owners of a condominium or a planned unit development project. The primary responsibilities are to manage the common areas, expenses and services of the project.

Housing and Urban Development (HUD) – The U.S. government agency that administers FHA, GNMA and other housing programs.

Housing debt-to-income ratio – The sum of all monthly housing mortgage expenses such as principal, interest, taxes and insurance (PITI), homeowner’s dues, private mortgage insurance and any special assessments as a percentage of gross qualifying income.

Back to Top

Installment Debt – Borrowed money that is repaid in successive payments, usually at regular intervals.

Interest Rate – The simple interest rate, stated as a percentage, charged by a lender on the principal amount of borrowed money. See also: Annual Percentage Rate

Investor – A money source for a lender.

Back to Top

Jumbo Loan – A loan that is for a larger dollar amount than the limits set by the Federal Home Loan Mortgage Corporation (FHLMC) guidelines.

Back to Top

Lien – A claim against a property for the payment of a debt. A mortgage is a lien. Other types of liens a property might have include a tax lien for overdue taxes, or a court judgement lien, or a mechanics lien for unpaid debt to a contractor.

Loan-to-value ratio – The relationship, expressed as a percentage, between the amount of the proposed loan and a property’s appraised value or purchase price. For example, a $75,000 loan on a property appraised at $100,000 is a 75% loan-to-value.

Lock-in – The guarantee of a specific interest rate and/or points for a specific period of time. Some lenders will charge a fee for locking in an interest rate.

Back to Top

Market Value – The price a property can realistically sell for, based upon comparable selling prices of other properties in the same area.

Mortgage Insurance Premium (MIP) – Amount of one-half percent which borrower pay each month on FHA insured mortgage loans. It is insurance from FHA to the lender against incurring a loss due to the borrower’s default. On September 1, 1983 the MIP was changed to a one-time charge to borrowers.

Mortgage – A legal instrument in which a lien on real property is granted as security for the repayment of a loan. In some states, a deed of trust is used rather than a mortgage.

Mortgage Broker – An intermediary between a borrower and a lender. A broker’s expertise is to help borrowers find financing that they might not otherwise find themselves.

Mortgage Insurance (MI) – Insurance that protects a mortgage lender against loss in the event of default by the borrower. This insurance allows lenders to make loans with lower down payments (LTVs above 80%, in most cases). The cost is usually borne by the borrower.

Mortgagee – The lender.

Mortgagor – The borrower.

Back to Top

Net worth – The amount by which an individual’s assets (or assets of a business) exceed total liabilities.

Non-conforming loan – A loan that does not conform to Federal Home Loan Mortgage Corporation (FHLMC) guidelines because the loan amount is too high or FHLMC underwriting or other criteria are not met. Jumbo loans are non-conforming. Also called sub-prime or BCD. See also: conforming loan

Note – A signed document that acknowledges a debt and shows the borrower is obligated to pay it.

Back to Top

Origination Fee – The amount charged by a lender to originate and close a mortgage loan. Origination fees are usually expressed in points.

Back to Top

Payment to income (P/I) ratio – The ratio of the borrower’s total housing payment (principal, interest, taxes insurance, HOA fees, special assessments, and subordinate financing) that is used to measure the borrower’s capacity to manage the housing expense. Also known as "housing debt-to-income ratio."

PITI – Abbreviation for principal, interest, taxes, and insurance.

Planned Unit Development (PUD) – A real estate project in which each unit owner has title to a residential lot and building and a non-exclusive easement on the common areas of the project.

Points (Discount Points) – Charges levied by the lender based on the loan amount. Each point is one percent of the loan amount for example, two points of a $100,000 mortgage is $2,000. Discount points are used to buy down the interest rate. Points can also include a loan origination fee, which is usually one point.

Power of Attorney – A legal document authorizing one person to act on behalf of another.

Prepaid items – Items that generally must be paid for at the time of closing, are generally recurring charges and may include the following:

• first year premiums for hazard, flood, and mortgage insurance, as applicable to the transaction
• prorated interest
• any special assessments which must be prepaid (i.e. water/sewer connection, etc.)
• escrow accounts for any of the above

Pre-payment – The borrower’s ability to make full or partial payments on a loan’s principal before they are due.

Pre-payment Penalty – Money charged for an early repayment of debt. Prepayment penalties are allowed in some form in 36 states and the District of Columbia.

Pre-qualification – Tentative establishment of a borrower’s qualification for a mortgage loan of a specific amount or ability to make monthly payments at a certain level, based solely on debt-to-income ratios. Pre-qualification is an estimate only and is subject to debt and income verification, credit history, property appraisal and other factors.

Prime Rate – The interest rate designated by a lender as its prime rate and which serves as a basis for the interest rate charged to certain customers.

Principal – The amount of the mortgage loan, not counting interest.

Private Mortgage Insurance (PMI) – Insurance coverage that many lenders, investors, and government agencies require the borrower to obtain to protect the lender against loss in the event of mortgage default on higher LTV mortgages.

Back to Top

Qualification – As determined by a lender, the ability of the borrower to repay a mortgage loan based on the borrower’s credit history, employment history, assets, debts, income and other factors.

Qualifying ratios – The percentage of payment to income (P/I) and debt-to-income (D/I) that is used to measure the borrower’s capacity to repay the mortgage debt.

Back to Top

Refinance – Retirement of an existing debt from the proceeds of a new loan, using the same collateral as security.

Reserves – Sometimes referred to as "cash reserves" or "post closing reserves"; this is the amount of liquid assets the borrower has remaining after completion of the mortgage loan transaction and payment of any other debts(s) that had to be satisfied in order for the borrower to qualify for the loan.

RESPA – Abbreviation for the federal Real Estate Settlement Procedures Act, which requires lenders to disclose information on the nature and costs of the real estate settlement process, limits certain fees and charges, and regulates the amount home buyers are required to place in escrow.

Back to Top

Second/vacation home – A second home/vacation home that is occupied by the borrower for some portion of the year for his/her exclusive use and enjoyment but which is suitable for year-round occupancy. It cannot be subject to a mandatory rental pool and the borrower does not intend to use the property for income purposes.

Self-employed borrower – A borrower whose income is derived from a business in which he/she has an ownership interest of 25% or more.

Servicing – The responsibility of collecting monthly mortgage payments and properly crediting them to the principal, interest, taxes and insurance, as well as keeping the borrower informed of any changes in the status of the loan.

Settlement – The closing of a mortgage loan. See also: closing.

Survey – A physical measurement of the property done by registered professional showing the boundaries, dimensions and location of any buildings as well as easements, rights of way, roads, etc.

Back to Top

Title – A formal document establishing ownership of property.

Title Search – An examination of municipal records to determine the legal ownership of the property. Usually is performed by a title company.

Back to Top

Underwriter – The decision whether to make a loan to a potential home buyer based on credit, employment, assets and other factors and the matching of this risk to an appropriate rate and term or loan amount.

Uniform Settlement Statement – A standard document prescribed by the Real Estate Settlement Procedures Act disclosing all costs pain in connection with the settlement for a real estate transaction. Also called a HUD-1.

Back to Top

Verification of Deposit (VOD) – A document signed by the borrower’s financial institution verifying the status and balance of his or her financial accounts.

Verification of Employment (VOE) - A document signed by borrower’s employer verifying his or her position and salary.

Veteran’s Administration (VA) – The federal agency responsible for the VA loan guarantee program as well as other services for eligible veterans. In general, qualified veterans can apply for home loans with no down payment and a mortgage insurance premium of one percent of the loan amount.

Back to Top

Walk-through – An inspection of a property by the prospective buyer prior to closing on a mortgage.

Warranty deed – A document protecting a homebuyer against any and all claims to the property.

Back to Top

Zoning – The ability of local government to specify the use of property in order to control development within designated areas of land. For example, some areas of a neighborhood may be designated only for residential use and others for commercial use such as stores, gas stations, etc.