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Glossary of Real Estate Terms

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					       GLOSSARY OF REAL ESTATE TERMS

Adjustable Rate Mortgage (ARM): A home loan with an interest rate that periodically
adjusts to reflect changes in a specified financial index

Adjustment period: The amount of time between interest rate adjustments in an ARM

Amortization: The process of paying the principal and interest on a loan through
regularly scheduled payments

Appraisal: A professional opinion of the value of a property by a licensed real estate
appraiser

APR (annual percentage rate): A measure of interest that expresses the cost of a
mortgage as a yearly rate on the loan balance. The APR assumes the loan is held for its
full term. For ARM loans, the APR assumes the loan’s index doesn’t change from its
initial value.

Assets: Items of value which include cash, real estate, securities and investments

Back end ratio: A calculation used by lenders to compare a borrower’s total debt to
their gross monthly income

Balloon loan: A mortgage loan where the monthly payments are not large enough to
repay the loan by the end of the term, resulting in a lump sum due on the final payment
date

Basis point: A basis point is one one-hundredth of one percentage point. For example,
the difference between a home loan at 5.25% and one at 5.37% is 12 basis points

Bill of Sale: A legal document transferring ownership of personal property

Bridge loan: A short term loan for borrowers who need more time to find permanent
financing. Also known as “interim financing”
Buydown mortgage: A home loan program where the lender receives a premium as an
enticement to reduce the interest rate during the early years of the mortgage

Caps (interest rate caps): Consumer safeguards which limit the amount the interest
rate on an ARM which may change per year and/or the life of the loan

Cash reserve: Cash remaining after closing

Cashier’s check: The check the bank draws on itself rather than on a depositor’s
account

Certificate of Occupancy (CO): A document stating that a home or other building has
met all building codes and is suitable for habitation

Clear title: A title to property that does not have liens, defects or other legal
encumbrances

Closing: The final procedure in which loan and title documents are signed between the
buyer and the seller and their respective representation. Also called “settlement”

Closing costs: Expenses related to the sale of real estate including loan, title and
appraisal fees. These costs are above and beyond the price of the property and are paid
at closing. Most closing costs are one-time expenses.

Closing statement: A document which details the final financial details of a property
sale between a buyer and a seller and the costs paid by each party. Also called a
“settlement statement” or “HUD 1”

Commitment: A promise by a lender to make a loan with specific terms for a specified
period

Conditional commitment: A promise by a lender to make a loan if the borrower meets
certain conditions

Conforming loan: A home loan that meets qualifications to be purchased by Fannie Mae
or Freddie Mac
Construction loan: A short term loan for construction. Lenders usually disburse funds
from construction loans in draws according to completion of defined stages throughout
the construction process

Construction to Permanent Loan: A construction loan that is converted to a longer term
traditional mortgage after constructions has been completed

Contingency: A condition that must be met before a contract is legally binding

Conventional loan: A loan term loan a lender makes for the purchase of a home

Credit Report: A detailed account of an individual’s credit, employment and residence
history. A lender uses this report to determine a loan applicant’s creditworthiness. The
3 largest credit bureaus are TransUnion, Equifax and Experian

Credit Score: A credit score is a statistical summary of the information contained in a
consumer’s credit report. The most well known type of credit score is the Fair Isaac or
FICO score. The score represents the answer from a mathematical formula that assigns
numerical value to various pieces of information in a credit report

Debt to Income Ratio: The ratio, expressed as a percentage, which results when a
borrower’s monthly payment obligation on long-term debts in divided by his or her gross
monthly income

Deed: The legal document that transfers property ownership from the seller to the
buyer

Deed of trust: A document that gives a lender the right to foreclose on a piece of
property if the borrower defaults on the loan

Default: The failure to fulfill a duty or discharge an obligation- such as making monthly
mortgage payments

Discount points: Fees charged by a lender to provide a lower interest rate. One
discount point equals one percent (1%) of the loan amount

Down payment: The difference between the purchase price and the portion financed by
a mortgage lender
Earnest money: Money a buyer provides with an offer to purchase a property. Also
called a “deposit”

Easement: A right given to a third party to use a portion of the property for certain
purposes, such as power lines or sewage mains

Equal Credit Opportunity Act (ECOA): Federal law that requires lender and other
creditors to make credit equally available without discrimination based on race, color,
religion, national origin, age, sex, marital status or receipt of income from public
assistance

Equity: The value of a property after existing liens are deducted

Escrow: A neutral third party holds documents and money for a real estate transaction
and ensures that all conditions of a sale are met before any disbursement of funds or
articles

Escrow account: An account that a mortgage lender or mortgage servicing company
establishes to hold funds for the payment of expenses such as homeowners insurance
and property taxes. Also called an “impound account”

Fair Housing Act: Federal law making it illegal to refuse to rent or sell to anyone based
on race, color, religion, sex, national origin, familial status or disability

Fannie Mae (FNMAE): The office name of the Federal National Mortgage Association-
it is a congressionally chartered, shareholder-owned company that buys mortgages from
lenders and resells them as securities on the secondary mortgage market

Farmers Home Administration (FMHA): The US Dept of Agriculture agency that
provides credit to farmers and rural residents

Federal Home Loan Mortgage Corporation (FHLMC): Also known as “Freddie Mac”.
This corporation buys mortgages from lending institutions, pools them with other loans
and sells shares to investors

Federal Housing Administration (FHA): This government agency provides low-rate
mortgages to buyers to make a down payment as small as 3%
FHA Mortgage Insurance: Requires a fee (up to 2.25% of the loan amount) paid at
closing to insure the loan with the FHA. I n addition to the one time fee, the FHA also
requires an additional insurance of up to 0.5% of the current loan amount, paid in
monthly installments. The lower the down payment, the more years the fee must be paid

Fixed Rate Mortgage: A home loan with an interest rate that will remain at a specific
rate for the term of the loan

Flood certification: The process of determining whether a property is located within a
known flood zone

For Sale by Owner (FSBO): A selling method whereas the owner of the property acts
as the selling agent and handles the sales process directly with the buyer or buyer’s
agent. This is most commonly done by owners in order to avoid paying a listing
commission

Front end ratio: A lender calculation that compares a borrower’s monthly housing
expense (principal, interest, taxes and insurance) to gross monthly income

Gift: Funds a buyer receives from a relative or other source. Mortgage lenders require
a gift letter from the donor of the “gift money” stating that the money does not have to
be repaid

Good Faith Estimate: An estimate from a mortgage lender or broker showing all the
costs associated with obtaining a home loan

Government National Mortgage Association (GNMA): Also known as “Ginnie Mae”. This
government agency buys home loans from lenders, pools them with other loans and sells
shares to investors. However, unlike Fannie Mae and Freddie Mac, Ginnie Mae only
purchases loans backed by the federal government

Graduated Payment Mortgage: A mortgage that requires a borrower to make larger
monthly payments over the term of the loan. Payments are lower for the first few years
but gradually rise until year 3 or 5, when payments become fixed

Gross income: The total household income before taxes or expenses are subtracted
Hazard insurance: Hazard insurance provides coverage for damage from items such as
fire or wind. Mortgage lenders require coverage for at least the replacement value of
the home. Also known as “Homeowners insurance” or “Fire Insurance”

Home Equity Loan: A loan that allows owners to borrow against the equity in their
homes

Home inspection: An examination of a home’s condition by a licensed inspector

Homeowners Association (HOA): a group that governs a subdivision, condominium or
planned community. The association collects monthly fees from all owners to pay for
common area maintenance, handle legal and safety issues and enforce the covenants,
conditions and restrictions set by the developer

Homestead: A parcel of land used by the owner as a primary residence

Housing Expense Ratio: The ratio, expressed as a percentage, which results when a
borrower’s expenses are divided by his/gross monthly income

Impound: A portion of the monthly mortgage payment that is placed in an account and
used to pay for hazard insurance, property taxes and private mortgage insurance (if
applicable)

Index: A published interest rate against which lenders measure the difference between
the current interest rate on an ARM and that earned by other investments, which is
then used to adjust the interest rate

Interest Rate: The fee, expressed as a percentage, charged for a loan

Interest Only Loan: The borrower pays only the interest that accrues on the loan
balance each month. Because each payment goes toward interest, the outstanding
balance of the loan does not decline with each payment

Joint Tenancy: Ownership by 2 or more people that gives equal shares to a piece of
property. Rights pass to the surviving owner or owners

Jumbo loan: Loans that exceed the conforming limits set annually by Fannie Mae &
Freddie Mac
Liabilities: A borrower’s debts and financial obligations

LIBOR: Acronym for “London Interbank Offered Rate”. An index used to determine
interest rate changes for ARMs. Very popular index for Interest Only mortgages

Lien: A claim laid by one person or company on the property of another as security for
money owed

Life cap: Limits the amount a loan’s interest rate can change during the mortgage term.
For example, if the rate for an ARM begins at 4% and has a life cap of 6%, it cannot go
above 10%

Liquid assets: Cash and all other assets that can be converted to cash relatively quickly.
Liquid assets can include money in savings and checking accounts, money market accounts
and most CDs

Loan application: A document that details a borrower’s income, debt and other
obligations to determine credit worthiness

Loan Origination Fee: A fee charged by the lenders to cover the direct costs of
arranging the loan

Loan to Value Ratio (LTV): The relationship between the amount of the mortgage loan
and the appraised value of the property, expressed as a percentage

Lock in: A lender’s commitment to a borrower to guarantee a specific interest rate for
a limited amount of time

Margin: A percentage added to the index and fixed for the life of the loan. When the
initial interest rate on an ARM has expired, the interest rate moves toward the sum of
its index plus a margin

Market value: The price a piece of property sells for at a particular point in time

Mortgage: A sum of money borrowed to purchase a home using the property as
collateral. A mortgage is the legal document that pledges the property as collateral for
the loan.
Mortgage Banker: A company that provides home loans using its own money. The loans
are usually sold to investors such as insurance companies and Fannie Mae

Mortgage Insurance: Required by lenders on some loans to protect lenders from a
possible default. Most conventional loans with down payments or home equity
percentages that are less than 20% of the home value requires private mortgage
insurance (PMI)

Mortgagee: A bank or other financial institution that lends money to the borrower.

Mortgagor: The person who borrows money to purchase a house

Note: A legal document that requires a borrower to repay a mortgage at a certain
interest rate over a specified period of time

Option: A situation in which a buyer puts down money for the right to purchase a piece
of real estate within a set time period but does not have an obligation to buy

Per Diem interest: Interest charged or accrued daily

PITI: A payment amount calculated by a mortgage lender to include the total payment
of all principal, interest, taxes and insurance due monthly

Pre-approval: A thorough assessment made by a lender of a potential borrower’s ability
to pay for a home and a confirmation of the amount to be borrowed.

Prepaid expenses: Expenses including taxes, insurance and assessments that are paid
before the due date

Prepaid interest: Interest paid before it is due

Prepayment penalty: A penalty that a lender may impose on a borrower who pays a loan
off before its expected end date

Principal: The amount of money originally borrowed in a mortgage, minus any payments
made subsequently
Processing fee: A fee charged by some lenders for gathering information necessary to
process the loan

Property tax: Tax paid on privately owned property. Property taxes are usually paid
semi-annually or monthly if required. The amount is based on local tax rates and
assessed property value

Qualifying Ratio: A ratio calculated by a lender to determine how much a potential
buyer can borrow

Recording fee: A fee charged for conveying the sale of a piece of property into the
public record

Refinancing: The process of replacing an older mortgage with a new mortgage

Reverse Mortgage: A special type of loan available to equity-rich, older home owners.
Repayment is not necessary until the borrower sells the property

Right to Recission: A provision in the federal Truth in Lending Act that allows
borrowers to cancel certain kinds of loans within 3 days of signing

Sales Contract: A contract signed by the borrower and seller detailing the terms of a
property sale

Second Mortgage: A second loan placed upon a piece of property

Subordinate Loan: A second or third mortgage

Survey: A precise measurement of a piece of property by a licensed surveyor.

Tax lien: A lien placed against a property for nonpayment of taxes (property and/or
personal)

Teaser rate: A low, short term interest rate offered on a mortgage to entice the
borrower. Also known as a “tickler rate”

Title: The legal document conferring ownership of a piece of real estate
Title Company: A firm that ensures that the property title is clear and provides title
insurance

Title exam: An examination of the public record to determine that the seller is the
legal owner and there are no encumbrances (claims or liens) affecting the property

Title insurance: A policy issued to lender and buyers to protect against loss due to
disputed property ownership at a later date

Title search: The process of reviewing all recorded transactions in the public record to
determine whether any title defects exist that could interfere with the clear transfer
of ownership of the property

Truth-in-Lending: A federal law that requires lenders to fully disclose, in writing, the
terms and conditions of a mortgage, including the APR and other charges

Underwriting: The process in which lenders evaluate the risks posed by a particular
borrower and set appropriate conditions for the loan

Verification of Deposit (VOD): As part of the loan process a lender may ask a
borrower’s bank to sign a statement verifying the borrower’s account balances and
history

Verification of Employment (VOE): As part of the loan process a lender may ask a
borrower’s employer for confirmation of the borrower’s position and salary

				
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