Terms to Know

If you are like thousands of other potential homebuyers looking to purchase their first home, you may be frustrated by the terminology used by lenders, real estate professionals and attorneys. Below is a list of terms you should know to help you through the purchase offer, mortgage procedure and the closing.

Accerleration Clause: allows the lender to speed up the rate at which your loan comes due.  Also allows the lender to demand immediate payment of the entire outstanding balance on your loan should you default on your loan.

Adjustable Rate Mortgage (ARM):  this mortgage product has an interest rate that adjusts periodically based on a preselected index such as the one year Treasury Bill.  An adjustable rate mortgage may also be called a Canadian rollover mortgage, renegotiable rate mortgage or variable rate mortgage.

Adjustment Interval:  this is the time between changes in the interest rate on your adjustable rate mortgage.  It could be one, three, five, seven or ten years, depending on the index.

Amenity:  this is a feature of your home or property that can be beneficial to the  buyer but not necessarily to the use of the property.  The amenity could be man made like a swimming pool or natural, such as the ocean or lake.

Amortization:  is a breakdown of the principal and interest payment of a loan showing monthly installments from the first payment through the final payment over a fixed period of time.  This time can be 5 years to 40 years depending on the mortgage product.

Annual Percentage Rate (APR): the APR shows the annual cost of a loan using a calculation that takes into account specific closing costs like points, interest, mortgage costs, and other fees associated with the mortgage transaction.  The APR is meant to help potential buyers compare different types of mortgages based on the annual cost for each loan.

Application:  the first step in obtaining financing for your home after you have made and had accepted the purchase offer on a particular piece of real estate.  This document provides vital information on the borrower(s) to the lender.

Appraisal:  an estimate of the fair market value of a particular piece of property.

Appraiser:  a qualified person who uses his/her experience and knowledge to prepare an appraisal report.

Assessor:  the person or department at a city or town hall responsible for determining the value of that town or city’s property for taxation.

Assumption:  an agreement between a buyer and a seller where the buyer takes over the seller’s current mortgage payments on an existing loan.

Balloon Mortgage:  a mortgage that may offer low rates for an initial period of time, 5, 7 or 10 years, after which time the balance is due in full.

Bankruptcy:  occurs when a person or company owes more money in outstanding debt than they have the ability to repay; their assets are turned over to a trustee to help offset the debt.

Borrower:  the person approved to receive a loan and obligated to pay the loan in full according to the terms of the mortgage or loan.

Broker:  a person in the business of arranging funding for a client but does not loan the money directly.  Brokers may charge a fee or receive a commission for their services.

Building Code:  safety standards set by states, cities and towns for their community to ensure that all buildings follow specific guidelines in regards to rehabilitation of property, updating of property, all areas of construction and design and in the use of materials for property.

Budget:  a detailed record of all incoming income and outgoing income during a specific period of time.

Buy-down:  a mortgage option that allows a buyer to buy down the interest rate during the first few years of a loan.  It is usually subsidized by the lender, seller or builder.

Cap:  a limit placed on an adjustable rate mortgage to keep the interest rate from moving too quickly.  For example a cap of 2% per year would allow an interest rate to increase or decrease no more than 2% per year.  Caps vary according to mortgage products and can change every 6 months.

Cash Reserves:  a specific amount of money required to be held in escrow in addition to down payment and closing costs.  Varies with each mortgage product.

Closing:  a meeting between the buyer and the seller with their attorneys, title companies, lenders and real estate agents where the funds and property to close legally transfer.

Closing Costs:  all costs broken down on a HUD Settlement Statement in regards to the purchase of a particular property.  Should include all costs associated with the purchase or refinance:  points, attorney fees, taxes, homeowner’s insurance, interest, and other fees.

Commission:  a fee paid to a real estate professional for negotiating the transaction between buyer and seller.  Usually a set percentage amount.  For example, 5% of the selling price of a particular property.

Commitment:  a written document from the lender to the borrower outlining the conditions the mortgage loan commitment is based upon.  All conditions must be met in order to close.

Condominium:  a form of homeownership in which an individual buyer owns a particular unit of housing solely but together with the other owners has an interest in the entire multi-unit complex.

Construction Loan:  a short term loan to finance the cost of constructing a house from the ground up.  Funds are advanced to the buyer/builder as work progresses.

Conventional Loan:  a private sector loan that is not guaranteed by FHA, VA or the US Department of Agriculture.

Cooperative (co-op):  buyers purchase stock in a cooperative corporation that owns a structure where each stockholder occupies a specific unit and is responsible for paying a portion of the loan.

Credit Report:  a history of an individual’s past and present debt payment which determines a potential buyer’s ability to repay a loan.

Credit Score:  a number that represents whether or not a borrower will default on a loan and is based upon the borrower’s credit history.

Debt-to-income ratio:  a borrower’s monthly payment obligations on all long term debt divided by his/her gross monthly income expressed as a percentage.

Deed:  a document recorded at city or town hall that transfers ownership of a property.

Deed-in-lieu:  an action where the deed is given back to the lienholder in lieu of any foreclosure against the homeowner.  This usually does not reflect favorably on a credit report.  The homeowner must leave the property.

Default:  failure to meet legal obligations in a contract such as timely payment of a mortgage or loan.

Delinquency:  failure to make mortgage payments on time which could lead to foreclosure.

Department of Veterans Affairs (VA):  an agency of the federal government that guarantees long term loans to eligible veterans.

Discount point:  usually paid at closing to help reduce the interest rate on a loan.

Down payment:  a portion of the sales price of a property that is paid towards the purchase and not included in the loan amount.

Due-on-sale Clause:  a provision in a mortgage that allows the lender to demand immediate payment of the entire balance of a mortgage.

Earnest money:  also known as earnest money deposit used to accompany an offer to purchase a piece of property.  It becomes part of the down payment.

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

Equity:  the difference between the balance of a mortgage and the fair market value of a property; also known as the owner’s interest.

Escrow:  putting aside a specific amount of money over a specific time to have funds available to pay specific accounts such as homeowner’s insurance and real estate taxes.

Fair Housing Act:  a law that prohibits discrimination in every area of the homebuying process on the basis of race, color, national origin, religion, sex, familial status or disability.

Fair Market Value:  the agreed upon value of a property based on what a buyer is willing to pay for a piece of property and what the seller is willing to sell the property at.

Fannie Mae (FNMA):  the Federal National Mortgage Association; a federally charted company owned by private stockholders that purchases residential mortgages and converts the mortgages into securities for sale to investors.

Federal Housing Administration (FHA):  created in 1934 to help Americans become homeowners; FHA provides mortgage insurance to lenders to cover losses that may occur should a borrower default on the mortgage; this product allows buyers to become homeowners who may not qualify for a conventional mortgage.

Fixed Rate Mortgage:  a mortgage which has a specific interest rate for the term of the loan.

Flood insurance: is required if a property is found to be in a flood plain.  Each lender has a flood certification done prior to closing to make the determination.

Forclosure:  a legal process that takes mortgaged property and sells it to pay off the outstanding balance of a mortgage.

Freddie Mac (FHLMC):  Federal Home Loan Mortgage Corporation; a federally chartered company that purchases and sells mortgages.

Government National Mortgage Association (GNMA):  known as “Ginnie Mae” which provides sources of funds for residential mortgages that are insured or guaranteed by FHA and/or VA.

Gross Monthly Income: a borrower’s total gross monthly income before any taxes or other deductions are made.

Guaranty:  a promise made by one party to pay a debt or perform a specific obligation as outlined in a contract.

Hazard Insurance:  also known as “homeowner’s insurance” it provides protection from specific losses such as fire, theft and liability.

Housing Ratio:  this ratio is expressed as a percentage and is determined by dividing the borrwer’s monthly housing expense ( principal, interest, taxes and insurance) by the borrower’s gross monthly income.

Impound:  also known as “escrow”; this is the one-twelfth homeower’s insurance, real estate tax or private mortgage insurance held by the lender to pay for these expenses when they are due.

Index:  this is a published interest rate used by lenders to measure the difference between the current interest rate on an adjustable rate mortgage and that earned by investment (such as U.S. Treasury security yields, the Libor, and monthly average cost-of-funds incurred by savings and loans institutions) which is used to adjust the interest rate up or down.

Investor: where lenders go for a source of money.

Jumbo Loan:  a loan larger than the conventional loan limit set by Fannie Mae and Freddie Mac which usually carries a higher interest rate.

Lien:  a claim placed on a property by the holder of a loan or note until such time the debt has been satisfied to the holder of the loan or note.

Loan to Value Ratio:  also called LTV it is the difference between the appraised value  or sales price of a property and the mortgage loan amount.

London Interbank Offered Rate (Libor):  this is the world’s most widely used benchmark in determining short term interest rates.

Margin:  a pre-determined amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

Market Value:  the highest agreed upon price the market will bear on a property sale between buyer and seller.

Mortgage Insurance:  also known as pmi or private mortgage insurance it is money paid to insure the mortgage when less than 20% down payment is made.

Mortgagee:  the lender or holder of a mortgage.

Mortgagor:  the borrower or homeowner indebted to the mortgagee.

Negative Amortization:  an amount of a mortgage payment not included in the current monthly payment that will accumulate and be added onto the total principal balance which could result in an amount of money owing that is higher than the original principal balance.  This is usually the result of a product that does not require the entire interest due be paid making the monthly payment lower and more affordable to the buyer.

Net Income:  the borrower’s gross monthly income minus all taxes and additional withholdings.

Non-assumption  Clause:  a comment in the mortgage that clearly states the mortgage cannot be assumed without the approval of the lender.

Origination Fee:  a percentage of the loan amount used as a fee charged by a lender for preparation of loan documents and other loan associated services.

PITI:  the monthly mortgage payment consisting of principal, interest, taxes, and insurance.

Point:  prepaid interest charged by a lender in return for a lower interest rate.  One point equals one percent of the loan amount.

Power of Attorney:  a legal document that provides the authorization of one party to act on the behalf of another party.

Prepaid Items:  these are expenses that are detailed on a Good Faith Estimate that are part of the entire cost of doing a real estate transaction.  The items can include real estate taxes, insurance, interest, private mortgage insurance and special assessments.

Prepayment Penalty:  a fee charged by lenders when a mortgage loan is paid off early.

Principal:  the balance remaining on a loan which does not include interest.

Private Mortgage Insurance (PMI):  an insurance requirement by lenders when the down payment on a property purchase is less than 20%.  PMI insures the lender against possible default by the borrower.

Realtor:  a real estate agent having an active membership in a local real estate board associated with the National Board of Realtors.

Recision:  an law that gives buyers an opportunity to cancel the contract.This law provides homeowners refinancing a property 3 days to change their minds and withdraw from the pending mortgage contract.

Recording Fees:  usually paid to the attorney who has to cover expenses to record title, mortgage notes, and other purchase associated documents with local authorities making the information a part of public records.

Real Estate Settlement Procedures Act: this law, also known as “RESPA”, allows consumers to review information on knowns estimated settlement costs associated with the loan transaction before a closing and at the closing.

Reverse Annuity Mortgage (RAM):  a type of mortgage where the lender makes periodic payments to the borrower using the borrower’s equity in their home as security.

Servicing:  after closing, this is the regular action a lender performs to keep a loan in good standing.  Some of the actions include paying the property taxes and homeowner’s insurance.

Settlement Costs:  please see Closing Costs.

Term Mortgage:  please see Balloon Mortgage.

Title Insurance:  a policy issued by a title insurance company through an attorney or title company performing the closing which insures homeowners and lenders against a faulty title search.,

Title Search:  performed by a title company which will examine public records to determine legal ownership of property.

Total Debt Ratio:  please see Debt-to-Income Ratio.

Truth-In-Lending: this is a federal law that requires lenders to disclose the Annual Percentage Rate to buyers when they apply for a loan.

Underwriting:  a decision by a lender to make a loan to a potential borrower based on credit, employment, assets and other factors.

VA Loan:  a long term mortgage guaranteed by the Department of Veteran’s Affairs.

VA Mortgage Funding Fee:  a premium paid on a VA loan to the VA by veterans using the program to purchase a property.

Variable Rate Mortgage:  please see Adjustable Rate Mortgage.

Wraparound:  this is a loan where the buyer combines their existing mortgage with a new mortgage resulting in one large mortgage on multiple properties.