Agent: A person acting on behalf of another person called the principal.
Agreement of Sale: Known by various names, such as “contract of purchase,” “purchase agreement,” “sales agreement,” or “binder,” according to location or jurisdiction. A contract in which a seller agrees to sell and a buyer agrees to buy under certain specific terms and conditions spelled out in writing and signed by both parties.
Amenity: A feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, Woods, water) or man-made (like a swimming pool or garden).
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: An expert judgment or estimate of the quality or value of real estate, completed by a licensed appraiser, as of a given date.
Appraiser: A qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.
ARM: This acronym stands for Adjustable Rate Mortgage. In contrast with a mortgage loan with a fixed rate of interest, the ARM rate will adjust from time to time in accordance with an agreed upon formula. Upon each adjustment, the new payment amount will be calculated by applying the new interest rate to the principal balance amortized over the remaining life of the loan.
Assessed Value: The valuation placed upon property by a public tax assessor as the basis for taxes.
Assessor: A government official who is responsible for determining the value of a property for the purpose of taxation.
Assumable Mortgage: Provisions in a mortgage loan that allows for the purchaser of your home to assume the balance of your mortgage and to take over your payments. Most mortgages are not assumable unless the prospective purchasers make application with and are approved by the holder of the existing loan.
Balloon Mortgage: A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.
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.
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.
Budget: A detailed record of all income earned and spent during a specific period of time.
Building Code: A building code is a regulation that determines the design, construction, and materials used in building based on agreed upon safety standards within a specific area.
Buy-Down: An amount which is paid to the lender, at the time of settlement, to reduce the borrower’s monthly payments. The funds are typically deposited with the lender and drawn from in monthly installments over a specified period of years and applied against that would otherwise be the full principal and interest payments on a loan. By applying the cash paid at settlement to the borrower’s monthly payments, the borrower may qualify for a higher loan amount.
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.
Certificate of Title: A document signed by a title examiner or attorney, stating that the seller has a good marketable and insurable title.
Closing/Closing Statement (Settlement): The computation of financial adjustments between the buyer and seller as of the day of closing a sale to determine the net amount of money which the buyer must pay to the seller to complete the purchase of the real estate and seller’s net proceeds. Also “settlement sheets” or HUD-1.
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.
Collateral: Property pledged to the lender to secure the repayment of the loan.
Commission: Payment of money or valuable consideration to a real estate broker for services performed.
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.
Conventional Loan: A private sector loan, one that is not guaranteed or insured by the U.S. government.
Convey: To deed or transfer title of property from one person to another.
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.
Credit History: History of an individual’s debt payment; lenders use this information to gauge a potential borrower’s ability to repay a loan.
Credit Report: A record that lists all past and present debts and the timeliness of their repayment; it documents an individual’s credit history.
Credit Bureau Score: A number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.
Debt-to-income ratio: A comparison of gross income to housing and non-housing expenses.
Deed: A legal instrument by which an interest in real estate is transferred from one owner to the next. The Deed is prepared by the settlement attorney. It will contain the names of the existing owners as “Grantors” and the new owners as “Grantees” and will describe the property conveyed.
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.
Deed of Trust: Like a mortgage, a security instrument whereby real property is given as security for a debt. However, in a deed of trust there are three parties to the instrument: the borrower, the trustee, and the lender or beneficiary.
Default: Failure to comply with the terms of the loan documents. A borrower’s default may allow the lender to demand full repayment of the loan immediately or result in foreclosure of the Deed of Trust.
Delinquency: Failure of a borrower to make timely mortgage payments under a loan agreement.
Discount Fee/Point: A fee paid to the lender, at or before settlement, to secure a preferred rate of interest on a loan. This fee is generally referred to in terms of a percentage of the loan amount or “points.” Generally, the more discount points paid, the lower the interest rate.
Down Payment: The portion of a home’s purchase price that is paid in cash and is not part of the mortgage loan.
Due on Sale Clause: A standard provision in a note which provides that the note will become due immediately (or may be “accelerated” by the lender) upon the transfer by borrower of any interest in the real estate pledged as collateral for the loan, unless written consent from the lender is obtained.
Earnest Money: The money given to the seller by the potential buyer (usually held in escrow) upon the signing of the agreement of sale to show that buyer is serious about buying the house. Also “deposit.”
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
Equity: The interest or value which the owner has in real estate over and above the debts against it. (Sales Price – Mortgage Balance = Equity.)
Escrow: Funds, property or other things of value left in trust to a third party. The escrow may be released upon the fulfillment of certain conditions or by agreement of the parties.
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.
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.
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.
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.
Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
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.
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 Inspection Report: A written report of the physical condition of the premises, prepared by a professional inspector. Typically this inspection is ordered by the purchaser to be conducted within a specified time period following contract ratification.
Home Warranty: Offers protection for mechanical systems and attached appliances against unexpected repairs.
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 injury or property damage.
House Location Drawing: A drawing which shows the structures and improvements on a lot in relation to the platted boundary lines, building restriction lines and easements. The drawing may also include a certification that the property is not within a special flood hazard zone.
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,” it itemizes all closing costs; must be given to the borrower at or before closing.
HVAC: Heating, Ventilation and Air Conditioning; a home’s heating and cooling system.
Index: A measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage.
Inflation: The number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation results in a decrease in the dollar’s value.
Interest: A fee charged for the use of money.
Interest Rate: The amount of interest charged on a monthly loan payment; usually expressed as a percentage.
Insurance: Protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.
Judgment: A legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor’s claim by providing a collateral source.
Lease Purchase: 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.
Lien: A legal claim against property that must be satisfied when the property is sold
Listing Contract: Between a homeowner (as principal) and a licensed real estate broker (as agent) by which the broker is employed to market the real estate within a given time for which service the owner agrees to pay a commission. Also “listing agreement.”
Loan: money borrowed that is usually repaid with interest.
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-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.
Loss Mitigation: A process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan
Margin: An amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage. Market Price: The actual amount for which a piece of property is sold. Also “sales price,” “purchase price.” Market Value: The highest price which a buyer, ready, willing and able but not compelled to buy, would pay, and the lowest price a seller, ready, willing and able but not compelled to sell, would accept. Basis for “listing price” or “asking price.”
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 The premium paid for insurance to protect the lender in the event of a foreclosure where the money collected from the sale of the real estate is insufficient to cover the outstanding balance and costs due to the lender. Mortgage insurance is usually required from conventional loans that exceed 80% of the appraised value of the property and for all Federal Housing Administration (FHA) loans.
Note: A legal instrument constituting a promise to repay money borrowed from a lender. The Note is typically prepared by the lender and delivered to the settlement agent with the closing package. The Note will include the original principal amount of the loan, the initial rate of interest, the maturity date, and it will describe any contemplated changes to the interest rate or due date. The note will also describe the conditions of repayment and the penalties for failure to comply with its terms.
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 A fee charged by a lender or mortgage broker to initiate the loan process. This fee is typically referred to in terms of a percentage of the loan amount or “points.”
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.
PITI: Principal, Interest, Taxes, and Insurance – 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.
PMI: Private Mortgage Insurance; 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.
Points: Common term used in the industry when referring to loan origination fees and discount fees. Each “point” represents one percent (1%) of the loan amount.
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-foreclosure Sale: Allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.
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.
Prorate: To allocate between the seller and buyer their proportionate share of an obligation paid or due. For example, a prorate of real property taxes, utilities, or HOA/condominium fee.
Radon: A radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.
Real Estate Agent: An individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.
REALTOR: A real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and its local and state associations.
Refinancing: Paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
Rehabilitation mortgage: A mortgage that covers the costs of rehabilitating (repairing or Improving) a property; some rehabilitation mortgages – like the FHA’s 203(k) – allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.
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.
Settlement Statement (HUD-1): The final accounting of all lender’s fees, settlement costs and adjustments paid by or exchanged between the Buyer and Seller. The HUD-1 is prepared on a standardized form by your settlement attorney or agent; it is reviewed and signed by all parties at the settlement table.
Subordinate: To place in a rank of lesser importance or to make one claim secondary to another.
Survey: A map or plat made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and its relationship to surrounding tracts of land. A review of the survey is often required by the lender to assure a building is actually sited on the land according to its legal description.
Sweat Equity: Using labor to build or improve a property and therefore value
Tenancy: The legal term used to describe the form of co-ownership in which real estate title is held by more than one person. The tenancy of co-owners must be specified in the Deed. Joint Tenancy (with right of survivorship) is a form of co-ownership where, upon the death of any joint tenant, title to the property will automatically transfer to the surviving joint tenant(s) (NOTE: each joint tenant must take title to an equal share of the property). Tenancy by the Entirety is a form of co-ownership held by a married couple. Upon the death of either spouse, title to the property will automatically transfer to the surviving spouse. Tenancy in Common is a form of ownership where, upon the death of any tenant in common, the share owned by the deceased does not automatically transfer to the surviving tenant(s) in common, but rather is distributed as part of the estate of the deceased (i.e., as designated in the decadent’s will or as prescribed by state law if the deceased died without a will.)
Time is of the Essence: Many contracts call for a specific time by which the agreed on acts must be completely performed. This means that the contract must be performed within the time limit specified. A party who fails to perform on time is liable for breach of contract.
Title insurance: Insurance which protects the purchaser and the lender against loss or damage resulting from defects of title or the enforcement of liens against real estate existing at the time of issuance. Potential defects covered will include matters that may not be discovered from a search of public records, such as past frauds or forgeries. Title insurance requires one-time premium paid at settlement which protects you for a long as you own the property.
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.
Transfer/Recordation Tax-State: Tax, local tax (where applicable), and tax stamps (in some areas) required by law when title passes from one owner to another.
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.
VA: Department of Veterans Affairs; A federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.