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Glossary
Amortization: repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years).
Annual Percentage Rate (APR): calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
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.
Appraisal: a document that gives an estimate of a property's fair market value; 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.
Appraiser: a qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.
Adjustable Rate Mortgage (ARM): 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.
Assessor: a government official who is responsible for determining the value of a property for the purpose of taxation.
Assumable Mortgage: a mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer, the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of an assumable mortgage.
Balloon Mortgage: a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10 years0; after that time-period elapses, the balance is due or is refinanced by the borrower.
Buydown: a mortgage program that allows the home buyer to qualify and start making mortgage payments based on an initial rate below the current 30-year fixed rate. The mortgage payments are pre-determined with the initial payment being calculated at a rate which is typically below the final rate. The interest rate will increase on a yearly basis for a pre-determined number of years, depending on the type of buydown. Once the adjustment periods end, the rate remains the same for the duration of the 30-year term.
Cap: a limit, such as that placed on an adjustable-rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
Cash Reserves: a cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.
Covenants, Conditions and Restrictions (CC&Rs): the governing documents that dictate how the homeowners association operates and what rules the homeowners – and their tenants and guests – must obey. This can include the kinds of architectural changes you can make on your home, rules for using recreation facilities or how many pets you can own. CC&Rs are legally enforceable by the homeowners association, unless a specific provision conflicts with federal, state or local laws. CC&Rs help maintain the value of both individual properties and the community as a whole by establishing standards that owners must comply with.
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.
Closing: also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.
Closing Costs: customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.
Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas.
Cooperative (Co-op): residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
Debt-to-Income Ratio: a comparison of gross income to housing and non-housing expenses; with the 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.
Deed: the document that transfers ownership of a property.
Deed-in-Lieu: to avoid foreclosure ("in lieu" of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process doesn't allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.
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.
Down Payment: the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.
Earnest Money: money put down by a potential buyer to show that he or she is 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.
Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.
Escrow: An account in which a neutral third party holds the documents and money in a real-estate transfer until all conditions of a sale are met. Also, an account in which money for property taxes and insurance is held until paid; money is added to the account every time a mortgage payment is made.
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.
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.
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.
4-Way Inspection: an inspection that evaluates framing, electrical, plumbing and heating.
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.
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.
Homeowners Association: an organization that governs regulations and expenditures within a community. A Homeowners Association is usually responsible for the development of an annual budget, the collection of assessments that homeowners pay to maintain and repair common areas, and the creation of rules and guidelines for living in the community. Most Homeowners Associations have an annually elected Board of Directors though each homeowner within the community is a member of the Association with voting privileges.
Homeowner's Insurance: an insurance policy that combines protection against damage to a dwelling and its contents with protection against claims of negligence or inappropriate action that result in someone's injury or property damage.
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," it itemizes all closing costs; must be given to the borrower at or before closing.
Index: a measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage.
Lien: a legal claim against property that must be satisfied when the property is sold
Loan-to-Value (LTV) Ratio: a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Lock-In: since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.
Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
Mello-Roos: special tax districts, created by the California State Legislature in 1982. These districts collect funds to pay for the basic facilities that a new home community needs, including streets, schools, water, drainage, parks, sidewalks and sewer systems. A Mello-Roos District is formed by the local government. They issue bonds to fund the community's facilities. To repay the bonds, homeowners will pay assessments, which will be added to their annual property tax bill. Each community has its own rate, and assessments can increase or decrease. In some cases, these assessments may be tax deductible.
Mortgage: a lien on the property that secures the Promise to repay a loan.
Mortgage Banker: a company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.
Mortgage Broker: a firm that originates and processes loans for a number of lenders.
Mortgage Insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price.
Mortgage Insurance Premium (MIP): a monthly payment – usually part of the mortgage payment – paid by a borrower for mortgage insurance.
Mortgage Modification: a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.
Offer: indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.
Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.
Origination Fee: the charge for originating a loan; is usually calculated in the form of points and paid at closing.
Partial Claim: a loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.
Principal, Interest, Taxes, and Insurance (PITI): the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
Private Mortgage Insurance (PMI): privately owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
Pre-Approve: lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
Pre-Qualify: a lender informally determines the maximum amount an individual is eligible to borrow.
Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage.
Prepayment: payment of the mortgage loan before the scheduled due date; may be subject to a prepayment penalty.
Principal: the amount borrowed from a lender; doesn't include interest or additional fees.
Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
Real Estate Purchase Contract (REPC): also known as "an offer to purchase" or "purchase agreement," is a legally binding contract that sets forth the terms and conditions of the purchase and sale of the agreed upon real estate property. The terms and conditions must be agreed to and signed by both the seller and the buyer.
RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships.
Settlement: another name for closing.
Special Forbearance: a loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.
Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don't require a property lien.
Title Insurance: insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers.
Title Search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.
Truth-in-Lending: a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.
Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value.
Verification Of Employment (VOE): A document signed by the borrower's employer verifying his/her position, salary and dates of employment.
Verification Of Deposit (VOD): A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
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