Glossary

Federal Trade Commission ftc.gov








The Real Estate Marketplace Glossary:

How to Talk the Talk



Buying


a home can be


exciting. It also can


be somewhat daunting, even


if you’ve done it before. You will deal


with mortgage options, credit reports, loan


applications, contracts, points, appraisals, change


orders, inspections, warranties, walk-throughs, settlement


sheets, escrow accounts, recording fees, insurance, taxes...the list


goes on. No doubt you will hear and see words and terms you’ve


never heard before. Just what do they all mean?




The Federal Trade Commission, the agency that promotes competition


and protects consumers, has prepared this glossary to help you


better understand the terms commonly used in the real estate


and mortgage marketplace.






A

Annual Percentage Rate (APR): The cost of Appraisal: A professional analysis used

a loan or other financing as an annual rate. to estimate the value of the property. This

The APR includes the interest rate, points, includes examples of sales of similar prop-

broker fees and certain other credit charges erties.

a borrower is required to pay.

Appraiser: A professional who conducts an

Annuity: An amount paid yearly or at other analysis of the property, including examples

regular intervals, often at a guaranteed of sales of similar properties in order to de-

minimum amount. Also, a type of insurance velop an estimate of the value of the prop-

policy in which the policy holder makes erty. The analysis is called an “appraisal.”

payments for a fixed period or until a stated

age, and then receives annuity payments Appreciation: An increase in the market

from the insurance company. value of a home due to changing market

conditions and/or home improvements.

Application Fee: The fee that a mortgage

lender or broker charges to apply for a Arbitration: A process where disputes are

mortgage to cover processing costs. settled by referring them to a fair and neu-

tral third party (arbitrator). The disputing

 Glossary


parties agree in advance to agree with Automated Underwriting: An auto-

the decision of the arbitrator. There is mated process performed by a technol-

a hearing where both parties have an ogy application that streamlines the

opportunity to be heard, after which the processing of loan applications and

arbitrator makes a decision. provides a recommendation to the lender

to approve the loan or refer it for manual

Asbestos: A toxic material that was underwriting.

once used in housing insulation and

fireproofing. Because some forms of as-

bestos have been linked to certain lung

diseases, it is no longer used in new

B

homes. However, some older homes may Balance Sheet: A financial statement

still have asbestos in these materials. that shows assets, liabilities, and net

worth as of a specific date.

Assessed Value: Typically the value

placed on property for the purpose of Balloon Mortgage: A mortgage with

taxation. monthly payments often based on a

30-year amortization schedule, with

Assessor: A public official who estab- the unpaid balance due in a lump sum

lishes the value of a property for taxa- payment at the end of a specific period

tion purposes. of time (usually 5 or 7 years). The mort-

gage may contain an option to “reset”

Asset: Anything of monetary value that the interest rate to the current market

is owned by a person or company. As- rate and to extend the due date if certain

sets include real property, personal conditions are met.

property, stocks, mutual funds, etc.

Balloon Payment: A final lump sum

Assignment of Mortgage: A document payment that is due, often at the matu-

evidencing the transfer of ownership of a rity date of a balloon mortgage.

mortgage from one person to another.

Bankruptcy: Legally declared unable to

Assumable Mortgage: A mortgage loan pay your debts. Bankruptcy can severely

that can be taken over (assumed) by the impact your credit and your ability to

buyer when a home is sold. An assump- borrow money.

tion of a mortgage is a transaction in

which the buyer of real property takes Before-tax Income: Income before taxes

over the seller’s existing mortgage; the are deducted. Also known as “gross in-

seller remains liable unless released by come.”

the lender from the obligation. If the

mortgage contains a due-on-sale clause, Biweekly Payment Mortgage: A mort-

the loan may not be assumed without gage with payments due every two weeks

the lender’s consent. (instead of monthly).

Assumption: A homebuyer’s agreement Bona fide: In good faith, without fraud.

to take on the primary responsibility

for paying an existing mortgage from a Bridge Loan: A short-term loan secured

home seller. by the borrower’s current home (which

is usually for sale) that allows the pro-

Assumption Fee: A fee a lender charges ceeds to be used for building or closing

a buyer who will assume the seller’s ex- on a new house before the current home

isting mortgage. is sold. Also known as a “swing loan.”

Glossary 


Broker: An individual or firm that acts Certificate of Deposit: A document is-

as an agent between providers and users sued by a bank or other financial institu-

of products or services, such as a mort- tion that is evidence of a deposit, with the

gage broker or real estate broker. See issuer’s promise to return the deposit plus

also “Mortgage Broker.” earnings at a specified interest rate within

a specified time period.

Building Code: Local regulations that

set forth the standards and require- Certificate of Eligibility: A document is-

ments for the construction, maintenance sued by the U.S. Department of Veterans

and occupancy of buildings. The codes Affairs (VA) certifying a veteran’s eligibility

are designed to provide for the safety, for a VA-guaranteed mortgage loan.

health and welfare of the public.

Chain of Title: The history of all of the

Buydown: An arrangement whereby documents that have transferred title to

the property developer or another third a parcel of real property, starting with the

party provides an interest subsidy to earliest existing document and ending

reduce the borrower’s monthly payments with the most recent.

typically in the early years of the loan.

Change Orders: A change in the original

Buydown Account: An account in construction plans ordered by the prop-

which funds are held so that they can be erty owner or general contractor.

applied as part of the monthly mortgage

payment as each payment comes due Clear Title: Ownership that is free of

during the period that an interest rate liens, defects, or other legal encumbranc-

buydown plan is in effect. es.



Closing: The process of completing a

C financial transaction. For mortgage

loans, the process of signing mortgage

Cap: For an adjustable-rate mortgage documents, disbursing funds, and, if

(ARM), a limitation on the amount the applicable, transferring ownership of

interest rate or mortgage payments may the property. In some jurisdictions, clos-

increase or decrease. See also “Lifetime ing is referred to as “escrow,” a process

Payment Cap,” “Lifetime Rate Cap,” “Pe- by which a buyer and seller deliver legal

riodic Payment Cap,” and “Periodic Rate documents to a third party who completes

Cap.” the transaction in accordance with their

instructions. See also “Settlement.”

Capacity: Your ability to make your

mortgage payments on time. This de- Closing Agent: The person or entity that

pends on your income and income coordinates the various closing activities,

stability (job history and security), your including the preparation and recordation

assets and savings, and the amount of of closing documents and the disburse-

your income each month that is left over ment of funds. (May be referred to as an

after you’ve paid for your housing costs, escrow agent or settlement agent in some

debts and other obligations. jurisdictions.) Typically, the closing is con-

ducted by title companies, escrow compa-

Cash-out Refinance: A refinance trans- nies or attorneys.

action in which the borrower receives

additional funds over and above the Closing Costs: The upfront fees charged

amount needed to repay the existing in connection with a mortgage loan trans-

mortgage, closing costs, points, and any action. Money paid by a buyer (and/or

subordinate liens. seller or other third party, if applicable)

 Glossary


to effect the closing of a mortgage loan, tenance. Common areas include swim-

generally including, but not limited to ming pools, tennis courts, and other

a loan origination fee, title examination recreational facilities, as well as common

and insurance, survey, attorney’s fee, corridors of buildings, parking areas,

and prepaid items, such as escrow de- means of ingress and egress, etc.

posits for taxes and insurance.

Comparables: An abbreviation for “com-

Closing Date: The date on which the parable properties,” which are used as a

sale of a property is to be finalized and a comparison in determining the current

loan transaction completed. Often, a real value of a property that is being ap-

estate sales professional coordinates the praised.

setting of this date with the buyer, the

seller, the closing agent, and the lender. Concession: Something given up or

agreed to in negotiating the sale of a

Closing Statement: See “HUD-1 Settle- house. For example, the sellers may

ment Statement.” agree to help pay for closing costs.



Co-borrower: Any borrower other than Condominium: A unit in a multiunit

the first borrower whose name appears building. The owner of a condominium

on the application and mortgage note, unit owns the unit itself and has the

even when that person owns the prop- right, along with other owners, to use

erty jointly with the first borrower and the common areas but does not own the

shares liability for the note. common elements such as the exterior

walls, floors and ceilings or the struc-

Collateral: An asset that is pledged as tural systems outside of the unit; these

security for a loan. The borrower risks are owned by the condominium associa-

losing the asset if the loan is not repaid tion. There are usually condominium as-

according to the terms of the loan agree- sociation fees for building maintenance,

ment. In the case of a mortgage, the property upkeep, taxes and insurance

collateral would be the house and real on the common areas and reserves for

property. improvements.



Commission: The fee charged for ser- Construction Loan: A loan for financ-

vices performed, usually based on a ing the cost of construction or improve-

percentage of the price of the items sold ments to a property; the lender disburs-

(such as the fee a real estate agent earns es payments to the builder at periodic

on the sale of a house). intervals during construction.



Commitment Letter: A binding of- Contingency: A condition that must be

fer from your lender that includes the met before a contract is legally binding.

amount of the mortgage, the interest For example, home purchasers often

rate, and repayment terms. include a home inspection contingency;

the sales contract is not binding unless

Common Areas: Those portions of a and until the purchaser has the home

building, land, or improvements and inspected.

amenities owned by a planned unit

development (PUD) or condominium Conventional Mortgage: A mortgage

project’s homeowners’ association (or loan that is not insured or guaranteed

a cooperative project’s cooperative cor- by the federal government or one of its

poration) that are used by all of the agencies, such as the Federal Housing

unit owners, who share in the common Administration (FHA), the U.S. Depart-

expenses of their operation and main- ment of Veterans Affairs (VA), or the

Glossary 


Rural Housing Service (RHS). Contrast agreed.” Your credit history is called a

with “Government Mortgage.” credit report when provided by a credit

bureau to a lender or other business.

Conversion Option: A provision of some

adjustable-rate mortgage (ARM) loans Credit Life Insurance: A type of insur-

that allows the borrower to change the ance that pays off a specific amount of

ARM to a fixed-rate mortgage at speci- debt or a specified credit account if the

fied times after loan origination. borrower dies while the policy is in force.



Convertible ARM: An adjustable-rate Credit Report: Information provided by

mortgage (ARM) that allows the borrower a credit bureau that allows a lender or

to convert the loan to a fixed-rate mort- other business to examine your use of

gage under specified conditions. credit. It provides information on money

that you’ve borrowed from credit institu-

Cooperative (Co-op) Project: A project tions and your payment history.

in which a corporation holds title to a

residential property and sells shares to Credit Score: A numerical value that

individual buyers, who then receive a ranks a borrower’s credit risk at a given

proprietary lease as their title. point in time based on a statistical eval-

uation of information in the individual’s

Cost of Funds Index (COFI): An in- credit history that has been proven to be

dex that is used to determine interest predictive of loan performance.

rate changes for certain adjustable-rate

mortgage (ARM) loans. It is based on the Creditor: A person who extends credit

weighted monthly average cost of de- to whom you owe money.

posits, advances, and other borrowings

of members of the Federal Home Loan Creditworthy: Your ability to qualify for

Bank of San Francisco. credit and repay debts.



Counter-offer: An offer made in re-

sponse to a previous offer. For example,

after the buyer presents their first offer,

D

the seller may make a counter-offer with Debt: Money owed from one person or

a slightly higher sale price. institution to another person or institu-

tion.

Credit: The ability of a person to bor-

row money, or buy goods by paying Debt-to-Income Ratio: The percent-

over time. Credit is extended based on a age of gross monthly income that goes

lender’s opinion of the person’s financial toward paying for your monthly hous-

situation and reliability, among other ing expense, alimony, child support, car

factors. payments and other installment debts,

and payments on revolving or open-end-

Credit Bureau: A company that gath- ed accounts, such as credit cards.

ers information on consumers who use

credit. These companies sell that infor- Deed: The legal document transferring

mation to lenders and other businesses ownership or title to a property

in the form of a credit report.

Deed-in-Lieu of Foreclosure: The

Credit History: Information in the files transfer of title from a borrower to the

of a credit bureau, primarily comprised lender to satisfy the mortgage debt and

of a list of individual consumer debts avoid foreclosure. Also called a “volun-

and a record of whether or not these tary conveyance.”

debts were paid back on time or “as

 Glossary


Deed of Trust: A legal document in cepts your offer, unless one of the sales

which the borrower transfers the title to contract contingencies is not fulfilled.

a third party (trustee) to hold as security

for the lender. When the loan is paid in Easement: A right to the use of, or ac-

full, the trustee transfers title back to cess to, land owned by another.

the borrower. If the borrower defaults on

the loan the trustee will sell the property Employer-Assisted Housing: A program

and pay the lender the mortgage debt. in which companies assist their employ-

ees in purchasing homes by providing

Default: Failure to fulfill a legal obliga- assistance with the down payment, clos-

tion. A default includes failure to pay on ing costs, or monthly payments.

a financial obligation, but also may be a

failure to perform some action or ser- Encroachment: The intrusion onto

vice that is non-monetary. For example, another’s property without right or per-

when leasing a car, the lessee is usually mission.

required to properly maintain the car.

Encumbrance: Any claim on a property,

Delinquency: Failure to make a pay- such as a lien, mortgage or easement.

ment when it is due. The condition of a

loan when a scheduled payment has not Equal Credit Opportunity Act (ECOA):

been received by the due date, but gen- A federal law that requires lenders to

erally used to refer to a loan for which make credit equally available without

payment is 30 or more days past due. regard to the applicant’s race, color, reli-

gion, national origin, age, sex, or marital

Depreciation: A decline in the value of status; the fact that all or part of the ap-

a house due to changing market condi- plicant’s income is derived from a public

tions or lack of upkeep on a home. assistance program; or the fact that the

applicant has in good faith exercised any

Discount Point: A fee paid by the bor- right under the Consumer Credit Protec-

rower at closing to reduce the interest tion Act. It also requires various notices

rate. A point equals one percent of the to consumers.

loan amount.

Equity: The value in your home above

Down Payment: A portion of the price the total amount of the liens against

of a home, usually between 3-20%, not your home. If you owe $100,000 on your

borrowed and paid up-front in cash. house but it is worth $130,000, you

Some loans are offerend with zero down- have $30,000 of equity.

payment.

Escrow: An item of value, money, or

Due-on-Sale Clause: A provision in a documents deposited with a third party

mortgage that allows the lender to de- to be delivered upon the fulfillment of

mand repayment in full of the outstand- a condition. For example, the deposit

ing balance if the property securing the by a borrower with the lender of funds

mortgage is sold. to pay taxes and insurance premiums

when they become due, or the deposit of

funds or documents with an attorney or

E escrow agent to be disbursed upon the

closing of a sale of real estate.

Earnest Money Deposit: The deposit to

show that you’re committed to buying Escrow Account: An account that a

the home. The deposit usually will not mortgage servicer establishes on behalf

be refunded to you after the seller ac- of a borrower to pay taxes, insurance

Glossary 


premiums, or other charges when they Executor: A person named in a will and

are due. Sometimes referred to as an approved by a probate court to adminis-

“impound” or “reserve” account. ter the deposition of an estate in accor-

dance with the instructions of the will.

Escrow Analysis: The accounting that

a mortgage servicer performs to deter-

mine the appropriate balances for the

escrow account, compute the borrower’s

F

monthly escrow payments, and deter- Fair Credit Reporting Act (FCRA): A

mine whether any shortages, surpluses consumer protection law that imposes

or deficiencies exist in the account. obligations on (1) credit bureaus (and

similar agencies) that maintain consum-

Eviction: The legal act of removing er credit histories, (2) lenders and other

someone from real property. businesses that buy reports from credit

bureaus, and (3) parties who furnish

Exclusive Right-to-Sell Listing: The consumer information to credit bureaus.

traditional kind of listing agreement un- Among other provisions, the FCRA limits

der which the property owner appoints the sale of credit reports by credit bu-

a real estate broker (known as the list- reaus by requiring the purchaser to have

ing broker) as exclusive agent to sell the a legitimate business need for the data,

property on the owner’s stated terms, allows consumers to learn the informa-

and agrees to pay the listing broker a tion on them in credit bureau files (in-

commission when the property is sold, cluding one annual free credit report),

regardless of whether the buyer is found and specifies procedure for challenging

by the broker, the owner or another errors in that data.

broker. This is the kind of listing agree-

ment that is commonly used by a list- Fair Market Value: The price at which

ing broker to provide the traditional full property would be transferred between

range of real estate brokerage services. a willing buyer and willing seller, each

If a second real estate broker (known as of whom has a reasonable knowledge of

a selling broker) finds the buyer for the all pertinent facts and is not under any

property, then some commission will be compulsion to buy or sell.

paid to the selling broker.

Fannie Mae: A New York stock ex-

Exclusive Agency Listing: A listing change company. It is a public company

agreement under which a real estate that operates under a federal charter

broker (known as the listing broker) acts and is the nation’s largest source of

as an exclusive agent to sell the prop- financing for home mortgages. Fannie

erty for the property owner, but may be Mae does not lend money directly to

paid a reduced or no commission when consumers, but instead works to en-

the property is sold if, for example, the sure that mortgage funds are available

property owner rather than the listing and affordable, by purchasing mortgage

broker finds the buyer. This kind of list- loans from institutions that lend directly

ing agreement can be used to provide to consumers.

the owner a limited range of real estate

brokerage services rather than the tra- Fannie Mae-Seller/Servicer: A lender

ditional full range. As with other kinds that Fannie Mae has approved to sell

of listing agreements, if a second real loans to it and to service loans on Fan-

estate broker (known as a selling broker) nie Mae’s behalf.

finds the buyer for the property, then

some commission will be paid to the Fannie Mae/Freddie Mac Loan Limit:

selling broker. The current 2006 Fannie Mae/Freddie

 Glossary


Mac loan limit for a single-family home Foreclosure: A legal action that ends

is $417,000 and is higher in Alaska, all ownership rights in a home when the

Guam, Hawaii, and the U.S. Virgin homebuyer fails to make the mortgage

Islands. The Fannie Mae loan limit is payments or is otherwise in default un-

$533,850 for a two-unit home; $645,300 der the terms of the mortgage.

for a three-unit home; and $801,950 for

a four-unit home. Also referred to as the Forfeiture: The loss of money, property,

“conventional loan limit.” rights, or privileges due to a breach of a

legal obligation.

Federal Housing Administration

(FHA): An agency within the U.S. De- Fully Amortized Mortgage: A mortgage

partment of Housing and Urban Devel- in which the monthly payments are de-

opment (HUD) that insures mortgages signed to retire the obligation at the end

and loans made by private lenders. of the mortgage term.



FHA-Insured Loan: A loan that is in-

sured by the Federal Housing Adminis-

tration (FHA) of the U.S. Department of

G

Housing and Urban Development (HUD). General Contractor: A person who

oversees a home improvement or con-

First Mortgage: A mortgage that is the struction project and handles various

primary lien against a property. aspects such as scheduling workers and

ordering supplies.

First-Time Home Buyer: A person with

no ownership interest in a principal Gift Letter: A letter that a family mem-

residence during the three-year period ber writes verifying that s/he has given

preceding the purchase of the security you a certain amount of money as a gift

property. and that you don’t have to repay it. You

can use this money towards a portion

Fixed-Period Adjustable-Rate Mort- of your down payment with some mort-

gage: An adjustable-rate mortgage (ARM) gages.

that offers a fixed rate for an initial

period, typically three to ten years, and Good-Faith Estimate: A form required

then adjusts every six months, annually, by the Real Estate Settlement Proce-

or at another specified period, for the dures Act (RESPA) that discloses an esti-

remainder of the term. Also known as a mate of the amount or range of charges,

“hybrid loan.” for specific settlement services the bor-

rower is likely to incur in connection

Fixed-Rate Mortgage: A mortgage with with the mortgage transaction.

an interest rate that does not change

during the entire term of the loan. Government Mortgage: A mortgage

loan that is insured or guaranteed by a

Flood Certification Fee: A fee charged federal government entity such as the

by independent mapping firms to identi- Federal Housing Administration (FHA),

fy properties located in areas designated the U.S. Department of Veterans

as flood zones. Affairs (VA), or the Rural Housing

Service (RHS).

Flood Insurance: Insurance that com-

pensates for physical property damage Government National Mortgage

resulting from flooding. It is required for Association (Ginnie Mae): A govern-

properties located in federally designated ment-owned corporation within the U.S.

flood hazard zones. Department of Housing and Urban De-

Glossary 


velopment (HUD) that guarantees se- to an amount that represents a specified

curities backed by mortgages that are percentage of the borrower’s equity in

insured or guaranteed by other gov- the property.

ernment agencies. Popularly known as

“Ginnie Mae.” Home Inspection: A professional in-

spection of a home to determine the

Gross Monthly Income: The income condition of the property. The inspec-

you earn in a month before taxes and tion should include an evaluation of the

other deductions. It also may include plumbing, heating and cooling systems,

rental income, self-employed income, roof, wiring, foundation and pest infesta-

income from alimony, child support, tion.

public assistance payments, and re-

tirement benefits. Homeowner’s Insurance: A policy that

protects you and the lender from fire or

Ground Rent: Payment for the use of flood, which damages the structure of

land when title to a property is held as the house; a liability, such as an injury

a leasehold estate (that is, the borrow- to a visitor to your home; or damage to

er does not actually own the property, your personal property, such as your

but has a long-term lease on it). furniture, clothes or appliances



Growing-Equity Mortgage (GEM): Homeowner’s Warranty (HOW): In-

A fixed-rate mortgage in which the surance offered by a seller that covers

monthly payments increase according certain home repairs and fixtures for a

to an agreed-upon schedule, with the specified period of time.

extra funds applied to reduce the loan

balance and loan term. Homeowners’ Association: An organi-

zation of homeowners residing within a

particular area whose principal purpose

H is to ensure the provision and main-

tenance of community facilities and

Hazard Insurance: Insurance cover- services for the common benefit of the

age that compensates for physical residents.

damage to a property from fire, wind,

vandalism, or other covered hazards Housing Expense Ratio: The percent-

or natural disasters. age of your gross monthly income that

goes toward paying for your housing

Home Equity Conversion Mortgage expenses.

(HECM): A special type of mortgage

developed and insured by the Federal HUD-1 Settlement Statement: A final

Housing Administration (FHA) that listing of the closing costs of the mort-

enables older home owners to convert gage transaction. It provides the sales

the equity they have in their homes price and down payment, as well as the

into cash, using a variety of payment total settlement costs required from the

options to address their specific finan- buyer and seller.

cial needs. Sometimes called a “re-

verse mortgage.” Hybrid Loan: An adjustable-rate mort-

gage (ARM) that offers a fixed rate for

Home Equity Line of Credit an initial period, typically three to

(HELOC): A type of revolving loan, ten years, and then adjusts every six

that enables a home owner to obtain months, annually, or at another speci-

multiple advances of the loan pro- fied period, for the remainder of the

ceeds at his or her own discretion, up term.

10 Glossary




I you. Interest is usually expressed as a

percentage of the amount borrowed.



Income Property: Real estate developed Interest Accrual Rate: The percentage

or purchased to produce income, such rate at which interest accumulates or

as a rental unit. increases on a mortgage loan.



Index: A number used to compute Interest Rate Cap: For an adjustable-

the interest rate for an adjustable-rate rate mortgage (ARM), a limitation on the

mortgage (ARM). The index is generally amount the interest rate can change per

a published number or percentage, such adjustment or over the lifetime of the

as the average interest rate or yield on loan, as stated in the note.

U.S. Treasury bills. A margin is added to

the index to determine the interest rate Interest Rate Ceiling: For an adjust-

that will be charged on the ARM. This able-rate mortgage (ARM), the maximum

interest rate is subject to any caps on interest rate, as specified in the mort-

the maximum or minimum interest rate gage note.

that may be charged on the mortgage,

stated in the note. Interest Rate Floor: For an adjustable-

rate mortgage (ARM), the minimum in-

Individual Retirement Account (IRA): terest rate, as specified in the mortgage

A tax-deferred plan that can help you note.

build a retirement nest egg.

Investment Property: A property pur-

Inflation: An increase in prices. chased to generate rental income, tax

benefits, or profitable resale rather than

Initial Interest Rate: The original inter- to serve as the borrower’s primary resi-

est rate for an adjustable-rate mortgage dence. Contrast with “second home.”

(ARM). Sometimes known as the “start

rate.”



Inquiry: A request for a copy of your J

credit report by a lender or other busi-

ness, often when you fill out a credit Judgment Lien: A lien on the property

application and/or request more credit. of a debtor resulting from the decree of a

Too many inquiries on a credit report court.

can hurt your credit score; however,

most credit scores are not affected by Jumbo Loan: A loan that exceeds the

multiple inquiries from auto or mortgage mortgage amount eligible for purchase

lenders within a short period of time. by Fannie Mae or Freddie Mac. Also

called “non-conforming loan.”

Installment: The regular periodic pay-

ment that a borrower agrees to make to Junior Mortgage: A loan that is subor-

a lender. dinate to the primary loan or first-lien

mortgage loan, such as a second or third

Installment Debt: A loan that is repaid mortgage.

in accordance with a schedule of pay-

ments for a specified term (such as an

automobile loan). K

Interest: The cost you pay to borrow Keogh Funds: A tax-deferred retire-

money. It is the payment you make to ment-savings plan for small business

a lender for the money it has loaned to owners or self-employed individuals who

Glossary 11


have earned income from their trade or Loan Origination: The process by which

business. Contributions to the Keogh a loan is made, which may include tak-

plan are tax-deductible. ing a loan application, processing and

underwriting the application, and clos-

ing the loan.

L Loan Origination Fees: Fees paid to

Late Charge: A penalty imposed by the your mortgage lender or broker for pro-

lender when a borrower fails to make a cessing the mortgage application. This

scheduled payment on time. fee is usually in the form of points. One

point equals one percent of the mortgage

Lease-Purchase Option: An option amount.

sometimes used by sellers to rent a

property to a consumer, who has the op- Loan-To-Value (LTV) Ratio: The re-

tion to buy the home within a specified lationship between the loan amount

period of time. Typically, part of each and the value of the property (the lower

rental payment is put aside for the pur- of appraised value or sales price), ex-

pose of accumulating funds to pay the pressed as a percentage of the property’s

down payment and closing costs. value. For example, a $100,000 home

with an $80,000 mortgage has an LTV of

Liabilities: A person’s debts and other 80 percent.

financial obligations.

Lock-In Rate: A written agreement

Liability Insurance: Insurance coverage guaranteeing a specific mortgage inter-

that protects property owners against est rate for a certain amount of time.

claims of negligence, personal injury or

property damage to another party. Low-Down-Payment Feature: A feature

of some mortgages, usually fixed-rate

LIBOR-Index: An index used to deter- mortgages, that helps you buy a home

mine interest rate changes for certain with a low down payment.

adjustable-rate mortgage (ARM) plans,

based on the average interest rate at

which international banks lend to or

borrow funds from the London Inter-

M

bank Market. Manufactured Housing: Homes that

are built entirely in a factory in accor-

Lien: A claim or charge on property for dance with a federal building code ad-

payment of a debt. With a mortgage, ministered by the U.S. Department of

the lender has the right to take the title Housing and Urban Development (HUD).

to your property if you don’t make the Manufactured homes may be single-

mortgage payments. or multi-section and are transported

from the factory to a site and installed.

Lifetime Cap: For an adjustable-rate Homes that are permanently affixed to

mortgage (ARM), a limit on the amount a foundation often may be classified as

that the interest rate or monthly pay- real property under applicable state law,

ment can increase or decrease over the and may be financed with a mortgage.

life of the loan. Homes that are not permanently affixed

to a foundation generally are classified

Liquid Asset: A cash asset or an asset as personal property, and are financed

that is easily converted into cash. with a retail installment sales agree-

ment.

1 Glossary


Margin: A percentage added to the index Mortgage Insurance Premium (MIP):

for an adjustable-rate mortgage (ARM) to The amount paid by a borrower for

establish the interest rate on each ad- mortgage insurance, either to a govern-

justment date. ment agency such as the Federal Hous-

ing Administration (FHA) or to a private

Market Value: The current value of your mortgage insurance (PMI) company.

home based on what a purchaser would

pay. An appraisal is sometimes used to Mortgage Lender: The lender providing

determine market value. funds for a mortgage. Lenders also man-

age the credit and financial information

Maturity Date: The date on which a review, the property and the loan appli-

mortgage loan is scheduled to be paid in cation process through closing.

full, as stated in the note.

Mortgage Life Insurance: A type of

Merged Credit Report: A credit report insurance that will pay off a mortgage if

issued by a credit reporting company the borrower dies while the loan is out-

that combines information from two or standing; a form of credit life insurance.

three major credit bureaus.

Mortgage Rate: The interest rate you

Modification: Any change to the terms pay to borrow the money to buy your

of a mortgage loan, including changes to house.

the interest rate, loan balance, or loan

term. Mortgagee: The institution or individual

to whom a mortgage is given.

Money Market Account: A type of in-

vestment in which funds are invested in Mortgagor: The owner of real estate who

short-term securities. pledges property as security for the re-

payment of a debt; the borrower.

Mortgage: A loan using your home as

collateral. In some states the term mort- Multifamily Mortgage: A mortgage loan

gage is also used to describe the docu- on a building with five or more dwelling

ment you sign (to grant the lender a lien units.

on your home). It also may be used to

indicate the amount of money you bor- Multifamily Properties: Typically,

row, with interest, to purchase your buildings with five or more dwelling

house. The amount of your mortgage units.

often is the purchase price of the home

minus your down payment. Multiple Listing Service (MLS): A

clearinghouse through which member

Mortgage Broker: An individual or firm real estate brokerage firms regularly and

that brings borrowers and lenders to- systematically exchange information

gether for the purpose of loan origina- on listings of real estate properties and

tion. A mortgage broker typically takes share commissions with members who

loan applications and may process locate purchasers. The MLS for an area

loans. A mortgage broker also may close is usually operated by the local, private

the loan. real estate association as a joint venture

among its members designed to foster

Mortgage Insurance (MI): Insurance real estate brokerage services.

that protects lenders against losses

caused by a borrower’s default on a Mutual Funds: A fund that pools the

mortgage loan. MI typically is required money of its investors to buy a variety of

if the borrower’s down payment is less securities.

than 20 percent of the purchase price.

Glossary 1




N part of the financing for the buyer’s pur-

chase of the property.



Negative Amortization: An increase in Owner-Occupied Property: A property

the balance of a loan caused by adding that serves as the borrower’s primary

unpaid interest to the loan balance; this residence.

occurs when the payment does not cover

the interest due.



Net Monthly Income: Your take-home P

pay after taxes. It is the amount of

money that you actually receive in your Partial Payment: A payment that is less

paycheck. than the scheduled monthly payment on

a mortgage loan.

Net Worth: The value of a company or

individual’s assets, including cash, less Payment Change Date: The date on

total liabilities. which a new monthly payment amount

takes effect, for example, on an adjust-

Non-Liquid Asset: An asset that cannot able-rate mortgage (ARM) loan.

easily be converted into cash.

Payment Cap: For an adjustable-rate

Note: A written promise to pay a speci- mortgage (ARM) or other variable rate

fied amount under the agreed upon loan, a limit on the amount that pay-

conditions. ments can increase or decrease during

any one adjustment period.

Note Rate: The interest rate stated on a

mortgage note, or other loan agreement. Personal Property: Any property that is

not real property.





O PITI: An acronym for the four primary

components of a monthly mortgage

payment: principle, interest, taxes, and

Offer: A formal bid from the home buyer insurance (PITI).

to the home seller to purchase a home.

PITI Reserves: A cash amount that a

Open House: When the seller’s real borrower has available after making a

estate agent opens the seller’s house to down payment and paying closing costs

the public. You don’t need a real estate for the purchase of a home. The princi-

agent to attend an open house. pal, interest, taxes, and insurance (PITI)

reserves must equal the amount that the

Original Principal Balance: The total borrower would have to pay for PITI for a

amount of principal owed on a mortgage predefined number of months.

before any payments are made.

Planned Unit Development (PUD): A

Origination Fee: A fee paid to a lender real estate project in which individuals

or broker to cover the administrative hold title to a residential lot and home

costs of processing a loan application. while the common facilities are owned

The origination fee typically is stated in and maintained by a homeowners’ as-

the form of points. One point is one per- sociation for the benefit and use of the

cent of the mortgage amount. individual PUD unit owners.



Owner Financing: A transaction in Point: One percent of the amount of the

which the property seller provides all or mortgage loan. For example, if a loan

1 Glossary


is made for $50,000, one point equals Prepayment Penalty: A fee that a bor-

$500. rower may be required to pay to the

lender, in the early years of a mortgage

Power of Attorney: A legal document loan, for repaying the loan in full or pre-

that authorizes another person to act paying a substantial amount to reduce

on one’s behalf. A power of attorney can the unpaid principle balance.

grant complete authority or can be lim-

ited to certain acts and/or certain peri- Principal: The amount of money bor-

ods of time. rowed or the amount of the loan that

has not yet been repaid to the lender.

Pre-Approval: A process by which a This does not include the interest you

lender provides a prospective borrower will pay to borrow that money. The

with an indication of how much money principal balance (sometimes called the

he or she will be eligible to borrow when outstanding or unpaid principal balance)

applying for a mortgage loan. This pro- is the amount owed on the loan minus

cess typically includes a review of the the amount you’ve repaid.

applicant’s credit history and may in-

volve the review and verification of in- Private Mortgage Insurance: Insur-

come and assets to close. ance for conventional mortgage loans

that protects the lender from loss in the

Pre-Approval Letter: A letter from a event of default by the borrower. See

mortgage lender indicating that you Mortgage Insurance

qualify for a mortgage of a specific

amount. It also shows a home seller that Promissory Note: A written promise to

you’re a serious buyer. repay a specified amount over a speci-

fied period of time.

Pre-Qualification: A preliminary assess-

ment by a lender of the amount it will Property Appreciation: See “Apprecia-

lend to a potential home buyer. The pro- tion.”

cess of determining how much money a

prospective home buyer may be eligible Purchase and Sale Agreement: A docu-

to borrow before he or she applies for a ment that details the price and condi-

loan. tions for a transaction. In connection

with the sale of a residential property,

Pre-Qualification Letter: A letter from the agreement typically would include:

a mortgage lender that states that you’re information about the property to be

pre-qualified to buy a home, but does sold, sale price, down payment, earnest

not commit the lender to a particular money deposit, financing, closing date,

mortgage amount. occupancy date, length of time the offer

is valid, and any special contingencies.

Predatory Lending: Abusive lending

practices that include making mort- Purchase Money Mortgage: A mortgage

gage loans to people who do not have loan that enables a borrower to acquire

the income to repay them or repeatedly a property.

refinancing loans, charging high points

and fees each time and “packing” credit

insurance onto a loan.

Q

Prepayment: Any amount paid to re- Qualifying Guidelines: Criteria used to

duce the principal balance of a loan determine eligibility for a loan.

before the scheduled due date.

Glossary 1


Qualifying Ratios: Calculations that are but are generally not involved in the

used in determining the loan amount lending process.

that a borrower qualifies for, typically

a comparison of the borrower’s total Real Estate Settlement Procedures

monthly income to monthly debt pay- Act (RESPA): A federal law that requires

ments and other recurring monthly lenders to provide home mortgage bor-

obligations. rowers with information about transac-

tion-related costs prior to settlement, as

Quality Control: A system of safeguards well as information during the life of the

to ensure that loans are originated, un- loan regarding servicing and escrow ac-

derwritten and serviced according to the counts. RESPA also prohibits kickbacks

lender’s standards and, if applicable, the and unearned fees in the mortgage loan

standards of the investor, governmental business.

agency, or mortgage insurer.

Real Property: Land and anything

permanently affixed thereto — including

R buildings, fences, trees, and minerals.



Radon: A toxic gas found in the soil Recorder: The public official who keeps

beneath a house that can contribute to records of transactions that affect real

cancer and other illnesses. property in the area. Sometimes known

as a “Registrar of Deeds” or “County

Rate Cap: The limit on the amount an Clerk.”

interest rate on an adjustable-rate mort-

gage (ARM) can increase or decrease Recording: The filing of a lien or other

during an adjustment period. legal documents in the appropriate pub-

lic record.

Rate Lock: An agreement in which an

interest rate is “locked in” or guaranteed Refinance: Getting a new mortgage with

for a specified period of time prior to all or some portion of the proceeds used

closing. See also “Lock-in Rate.” to pay off the prior mortgage.



Ratified Sales Contract: A contract Rehabilitation Mortgage: A mortgage

that shows both you and the seller of loan made to cover the costs of repair-

the house have agreed to your offer. This ing, improving, and sometimes acquiring

offer may include sales contingencies, an existing property.

such as obtaining a mortgage of a cer-

tain type and rate, getting an acceptable Remaining Term: The original number

inspection, making repairs, closing by a of payments due on the loan minus the

certain date, etc. number of payments that have been

made.

Real Estate Professional: An individual

who provides services in buying and Repayment Plan: An arrangement by

selling homes. The real estate profes- which a borrower agrees to make ad-

sional is paid a percentage of the home ditional payments to pay down past due

sale price by the seller. Unless you’ve amounts while still making regularly

specifically contracted with a buyer’s scheduled payments.

agent, the real estate professional rep-

resents the interest of the seller. Real Replacement Cost: The cost to replace

estate professionals may be able to refer damaged personal property without a

you to local lenders or mortgage brokers, deduction for depreciation.

1 Glossary


Rescission: The cancellation or annul- Second Mortgage: A mortgage that has

ment of a transaction or contract by a lien position subordinate to the first

operation of law or by mutual consent. mortgage.

Borrowers have a right to cancel certain

mortgage refinance and home equity Secondary Mortgage Market: The mar-

transactions within three business days ket in which mortgage loan and mort-

after closing, or for up to three years in gage-backed securities are bought and

certain instances. sold.



Revolving Debt: Credit that is extended Secured Loan: A loan that is backed by

by a creditor under a plan in which property such as a house, car, jewelry,

(1) the creditor contemplates repeated etc.

transactions; (2) the creditor may im-

pose a finance charge from time to time Security: The property that will be given

on an outstanding unpaid balance; and or pledged as collateral for a loan.

(3) the amount of credit that may be ex-

tended to the consumer during the term Securities: Financial forms that shows

of the plan is generally made available to the holder owns a share or shares of a

the extent that any outstanding balance company (stocks) or has loaned money

is repaid. to a company or government organiza-

tion (bonds).

Right of First Refusal: A provision in

an agreement that requires the owner Seller Take-Back: An agreement in

of a property to give another party the which the seller of a property provides

first opportunity to purchase or lease financing to the buyer for the home pur-

the property before he or she offers it for chase. See also “Owner Financing.”

sale or lease to others.

Servicer: A firm that performs servicing

Rural Housing Service (RHS): An functions, including collecting mortgage

agency within the U.S. Department of payments, paying the borrower’s taxes

Agriculture (USDA), which operates a and insurance and generally managing

range of programs to help rural commu- borrower escrow accounts.

nities and individuals by providing loan

and grants for housing and community Servicing: The tasks a lender performs

facilities. The agency also works with to protect the mortgage investment,

private lenders to guarantee loans for including the collection of mortgage

the purchase or construction of single- payments, escrow administration, and

family housing. delinquency management.



Settlement: The process of complet-

S ing a loan transaction at which time the

mortgage documents are signed and

Securities: A financial form that shows then recorded, funds are disbursed, and

the holder owns a share or shares of a the property is transferred to the buyer

company (stock) or has loaned money to (if applicable). Also called closing or es-

a company or government organization crow in different jurisdictions. See also

(bond). “Closing”



Sale-Leaseback: A transaction in which Settlement Statement: A document

the buyer leases the property back to that lists all closing costs on a consumer

the seller for a specified period of time. mortgage transaction.

Glossary 1


Single-Family Properties: One- to Third-Party Origination: A process by

four-unit properties including detached which a lender uses another party to

homes, townhouses, condominiums, and completely or partially originate, pro-

cooperatives, and manufactured homes cess, underwrite, close, fund, or pack-

attached to a permanent foundation and age a mortgage loan. See also “Mortgage

classified as real property under appli- Broker.”

cable state law.

Title: The right to, and the ownership

Soft Second Loan: A second mortgage of, property. A title or deed is sometimes

whose payment is forgiven or is deferred used as proof of ownership of land.

until resale of the property.

Title Insurance: Insurance that pro-

Servicemembers Civil Relief Act: A tects lenders and homeowners against

federal law that restricts the enforce- legal problems with the title.

ment of civilian debts against certain

military personnel who may not be able Title Search: A check of the public re-

to pay because of active military service. cords to ensure that the seller is the le-

It also provides other protections to cer- gal owner of the property and to identify

tain military personel. any liens or claims against the property.



Subordinate Financing: Any mortgage Trade Equity: Real estate or assets

or other lien with lower priority than the given to the seller as part of the down

first mortgage. payment for the property.



Survey: A precise measurement of a Transfer Tax: State or local tax payable

property by a licensed surveyor, show- when title to property passes from one

ing legal boundaries of a property and owner to another.

the dimensions and location of improve-

ments. Treasury Index: An index that is used

to determine interest rate changes for

Sweat Equity: A borrower’s contribution certain adjustable-rate mortgage (ARM)

to the down payment for the purchase of plans. It is based on the results of auc-

a property in the form of labor or ser- tions by the U.S. Treasury of Treasury

vices rather than cash. bills and securities.



Truth-In-Lending Act (TILA): A fed-

T eral law that requires disclosure of a

truth-in-lending statement for consumer

Taxes and Insurance: Funds collected credit. The statement includes a sum-

as part of the borrower’s monthly pay- mary of the total cost of credit, such as

ment and held in escrow for the pay- the annual percentage rate (APR) and

ment of the borrower’s, or funds paid by other specifics of the credit.

the borrower for, state and local prop-

erty taxes and insurance premiums. Two- to Four- Family Property: A

residential property that provides liv-

Termite Inspection: An inspection to ing space (dwelling units) for two to

determine whether a property has ter- four families, although ownership of the

mite infestation or termite damage. In structure is evidenced by a single deed;

many parts of the country, a home must a loan secured by such a property is

be inspected for termites before it can be considered to be a single-family mort-

sold. gage.

1 Glossary




U

Underwriting: The process used to de-

termine loan approval. It involves evalu-

ating the property and the borrower’s

credit and ability to pay the mortgage.



Uniform Residential Loan Applica-

tion: A standard mortgage application

you will have to complete. The form

requests your income, assets, liabilities,

and a description of the property you

plan to buy, among other things.



Unsecured Loan: A loan that is not

backed by collateral.







V

Veterans Affairs (U.S. Department

of Veterans Affairs): A federal govern-

ment agency that provides benefits to

veterans and their dependents, includ-

ing health care, educational assistance,

financial assistance, and guaranteed

home loans.



VA Guaranteed Loan: A mortgage loan

that is guaranteed by the U.S. Depart-

ment of Veterans Affairs (VA).







W

Walk-Through: A common clause in a

sales contract that allows the buyer to

examine the property being purchased

at a specified time immediately before

the closing, for example, within the 24

hours before closing.



Warranties: Written guarantees of the

quality of a product and the promise to

repair or replace defective parts free of

charge.









Federal Trade Commission

ftc.gov