Glossary

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A

Acceleration Clause. A clause in a mortgage stating the entire debt becomes due at once if the mortgagee defaults.

Acceptance. The act of accepting an offer to enter a contract. Acceptance becomes binding and legal when both parties agree to the initial terms or after both parties have accepted all counter offers.

Accrued Interest. The interest expense that accumulates on your loan. For example, if you have a mortgage at an annual rate of six percent, interest accrues at 0.5 percent per month. For a loan balance of $50,000, the accrued interest after one month equals 0.5 percent of the loan amount, or $250. From a payment of $500, the lender applies $250 to the accrued interest and $250 to the principal.

Acquisition Cost. Under a FHA (Federal Housing Administration) loan, the purchase price or appraised value of the property plus the estimated closing costs.

Additional Principal Payment. A payment larger than the scheduled principal amount that reduces the remaining balance on the loan.

Adjustable-Rate Mortgage (ARM). A mortgage allowing the lender to adjust the interest rate periodically under the loan agreement. Also called a variable-rate mortgage.

Adjusted Basis or Adjusted Book Basis. The purchase price of a property plus the cost of any capitol improvements and minus any accrued depreciation at the date of the sale.

Adjustment Date. For an ARM (adjustable-rate mortgage), the date the interest rate changes.

Adjustment Period or Interval. For an ARM (adjustable-rate mortgage), the period between the adjustment dates. For example, a one-year ARM would have an adjustment period of one year.

Affordability Analysis. A detailed analysis of your ability to afford the purchase of a home. The analysis considers your income, liabilities, and available money, along with the type of mortgage you plan to use, the area where you want to buy a home, and the closing costs that you might expect to pay.

Amenity. A nonessential feature of real property that enhances its attractiveness and increases the occupant’s satisfaction. Natural amenities include scenic views or a desirable location near water. Man-made amenities include swimming pools, tennis courts, and landscaping.

Amortization. The gradual reduction of loan principal that occurs as you make payments.

Amortization Schedule or Table. A timetable showing the amount of principal and interest in each mortgage payment plus the remaining balance. As you pay back the loan, an increasing amount of each payment reduces principal and a smaller amount goes to accrued interest.

Amortization Term. The time in months needed to repay a mortgage. For example, a 30-year mortgage amortizes in 360 months.

Amortize. To repay a mortgage with regular payments covering both principal and interest.

Anniversary Date. For an ARM (adjustable-rate mortgage), the date, usually once a year, when the lender resets the interest rate.

Annual Mortgagor Statement. A report sent to the borrower at the end of each year showing the amount of taxes and interest paid plus the remaining mortgage balance.

Annual Percentage Rate (APR). Your effective borrowing cost including base interest rate and closing costs stated as a yearly percentage of the loan amount. Comparing the APR of different loans gives a better gauge of the overall cost of a loan than simply comparing rates. A mortgage held for less than the full 15 or 30 year term has a higher EPR (effective percentage rate) than the quoted APR because the loan costs are spread over fewer years.

Annuity. The payment, usually annually, of an allowance or income, often on a guaranteed dollar basis.

Application. The form used to apply for a mortgage where borrowers provide information on their income, assets, and debts, plus information on the type of mortgage loan they want and the proposed purchased property.

Application Fee. A fee charged to accept a mortgage loan application and typically used to cover the cost of a property appraisal and credit report.

Appraisal Fee. A fee charged to complete an estimate of property value and paid to the lender or directly to the appraiser.

Appraised Value. An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.

Appraiser. A person qualified to estimate the value of real and personal property.

Appreciation. An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.

Appreciation Rate. The yearly percentage rate at which an asset increases in value. For example, a home bought three years ago for $150,000 that appreciated to just under $200,000 has an average appreciation rate of 10 percent. The value of the home climbed to $165,000 after the first year, to $181,500 after the second, and now to just under $200,000.

Assessed Value. Value placed on property by a public tax assessor for taxation purposes.

Assessment. Determination of a property’s value for taxation. It may also refer to a levy or tax against property for a special purpose, such as a sewer assessment.

Assessor. A public official who establishes the value of a property for tax purposes. Asset. Anything of monetary value owned by a person. Assets include real property, personal property, bank accounts, stocks, bonds, mutual funds, and so forth.

Assignment. The transfer of a mortgage from one person to another.

Assumable Mortgage. A mortgage where the buyer can assume all outstanding payments upon sale of the home. The buyer generally must meet certain qualification standards to assume a loan.

Assumption. The transfer of the existing mortgage to the buyer.

Assumption Clause. A provision in an assumable mortgage that allows the buyer to assume responsibility for the mortgage from the seller. The original borrower does not need to repay the loan upon sale or transfer of the property.

Assumption Fee. The fee resulting from the assumption of an existing mortgage usually paid by the purchaser to the lender.

Attorney-In-Fact. One who holds a power of attorney to execute documents for the grantor of the power.

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B

Back-End Ratio. Lenders use a debt ratio, also called debt-to-income or back-end ratio, to approve loan applicants. Debt ratio equals total monthly payments (mortgage, car loans, credit cards, and so forth) divided by gross monthly income. If you have an income of $5,000 and total debts of $2,000, your debt ratio comes to 40 percent ($2,000 divided by $5,000).

Balance Sheet. A financial statement showing assets, liabilities, and net worth on a specific date. Lenders generally require a balance sheet to approve a loan for a self-employed person.

Balloon Mortgage. Behaves like a fixed-rate mortgage for a set number of years, usually five or seven, and then must be paid off in a single balloon payment. Balloon loans are popular with those expecting to sell or refinance their property within a definite time.

Balloon Payment. The final lump sum paid at the end of the balloon mortgage.

Bankrupt. A person, firm, or corporation relieved from the payment of some or all debts through a federal court proceeding. This usually involves the surrender of all assets to a court-appointed trustee or the reorganization of the debtor’s assets and liabilities. Usually, at least two years must pass before lenders will consider making a new loan.

Bankruptcy. A tactic that people use to relieve themselves of debts and/or liabilities they cannot repay. The most common form of personal bankruptcy is a Chapter 7, where a person frees himself from most of his debts.

Base or Index Rate. The benchmark rate used to set the interest rate for borrowers. Credit card interest rates often follow a change in the prime rate.

Basis. The original cost of a property plus closing costs, selling costs, and the cost of any improvements made and used to compute the amount of taxable gain or loss when selling the property.

Best Faith Estimate. An estimate of the total costs for getting a real estate loan.

Betterment. An improvement that increases property value as distinguished from repairs or replacements that simply maintain value.

Bill of Sale. A written document that transfers a title to personal property.

Binder. An agreement secured with an earnest money deposit where a buyer offers to purchase real estate.

Biweekly Payment Mortgage. A mortgage that requires payment every two weeks, yielding thirteen full installments per year rather than twelve. This significantly cuts the time needed to repay the principal.

Blanket Insurance Policy. A single policy that covers more than one property or more than one person.

Blanket Mortgage. A mortgage secured by the pledging of multiple properties as collateral.

Bona Fide. In good faith, without fraud.

Bond. An interest-bearing certificate of debt with maturity date. A real estate bond is a written obligation usually secured by a mortgage.

Book Value. Acquisition costs less any accrued depreciation.

Breach. A violation of any legal obligation.

Break-Even Point. At the break-even point, the savings you get from refinancing equal the costs. To find your break-even point, work out how long you must live in your home after you refinance to recover the closing costs.

Bridge Loan. A loan to a homeowner before sale of the present home providing money to make a down payment and pay closing costs on a new home. Also called gap financing.

Broker. A person who brings parties together and helps in negotiating contracts in exchange for a fee or a commission.

Budget. A detailed plan of expected income and expenses for a certain period.

Budget Category. A category of income or expense data such as salary or mortgage payment.

Building Code. Local regulations based on safety and health standards controlling design, construction, and materials used in construction.

Buydown Account. An account holding monies paid out as each payment comes due during the period of an interest rate buydown plan.

Buydown Mortgage. In a temporary buydown mortgage, a party makes an initial lump sum payment to cut the borrower’s monthly payments during the first few years of a mortgage. A permanent buydown cuts the interest rate over the entire life of the mortgage.

Buyer’s Attorney’s Fees. Fees paid by a homebuyer for legal services and /or advice in conjunction with buying real estate.

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C

Call Option. A provision in a mortgage giving the lender the right to call the loan due in full at the end of a named period.

Callable Debt. A debt security the issuer has the right to redeem at a named price on or after a given date before maturity.

Capital. Money used to create income as an investment in either a business or an income property.

Capital Expenditure. The cost of an improvement to real property that increases its value and useful life.

Capital Gains Tax. Tax paid on the gain realized on the sale of an asset.

Capital Improvement. A permanent improvement to real property that increases its value and useful life.

Caps. For an ARM (adjustable-rate mortgage), consumer safeguards that limit how much the interest rate or mortgage payments may rise or fall.

Carryback Loan. A loan in which a seller agrees to finance the buyer to complete a property sale.

Cash-Out Refinance. A refinance transaction where the borrower gets cash because the amount of the new loan exceeds the balance of the old loan, closing costs, and any unpaid subordinate mortgage liens.

Certificate of Deposit (CD). A document written by a bank or other financial institution to verify a deposit, with the issuer’s promise to return the deposit plus earnings at a given interest rate within a given time.

Certificate of Deposit Index. An index used to work out interest rate changes for certain ARM (adjustable-rate mortgage) plans. It represents the weekly average of secondary market interest rates on six-month negotiable certificates of deposit.

Certificate of Eligibility. A veteran’s evidence of entitlement for a VA (Veterans Administration) guaranteed loan.

Certificate of Reasonable Value (CRV). The VA (Veterans Administration) issues a CRV after the appraisal of property slated for a VA loan.

Certificate of Title. A statement from an abstract company, title company, or attorney saying that the owner legally holds title to a property.

Chain of Title. The history of all the documents transferring title to a parcel of real estate.

Change Frequency. For an ARM (adjustable-rate mortgage), the period in months in which payment and/or interest charges change.

Clear Title. A title free of liens or legal questions as to the ownership of the property.

Closing. A meeting to complete a sale of property where the buyer signs the mortgage documents and pays closing costs. Also called settlement.

Closing Agent. The person who conducts the closing meeting. Depending on state regulations, the agent may be an attorney or a title company representative.

Closing Costs. The borrower pays closing costs when buying or refinancing a property. These costs may include a loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee, credit report charges, legal services, plus an amount placed in escrow. Closing costs vary by area of the country and brokers usually provide estimates of closing costs to prospective buyers. For home mortgage loans, closing costs generally range between three and six percent of the home purchase price.

Cloud. An outstanding claim or encumbrance, that, if valid, would affect the owner’s property title.

Co-Borrower. A person who signs a promissory note along with the borrower.

Coinsurance Clause. A provision in a hazard insurance policy stating the amount of coverage needed for the insured to collect the full amount of a loss.

Collateral. An asset such as a car or home that guarantees the repayment of a loan. An owner not repaying the mortgage according to the terms of the contract risks losing the property.

Collection. The effort to bring a delinquent mortgage current and to file the necessary notices to go ahead with foreclosure if necessary.

Commission. The fee, generally a percentage of the price of the property or loan, charged by a broker for negotiating a real estate or loan transaction.

Commitment letter. A formal offer by a lender stating terms under which it agrees to lend money. Also known as a loan commitment.

Commitment Period. The period of validity of the lender’s commitment.

Common Areas. Areas for the common use of residents in a condominium held jointly by the owners. Common areas may include recreational facilities, common corridors of buildings, parking areas, and lawns.

Common Assessments. Levies against condominium unit owners to provide capital to cover homeowners’ association expenses and to repair, replace, maintain, improve, or operate the common areas of the project.

Community Property. A form of ownership recognized in some states where husband and wife jointly own property obtained during a marriage.

Comparables. An abbreviation for comparable properties; also called comps. The appraiser uses comparables or recently sold properties having similar size, location, and amenities to work out the approximate fair market value of a property.

Comparative Market Analysis (CMA). An estimate of a property’s value using indicators such as price per square foot taken from comparable properties. Real estate agents usually provide free CMAs to set a property’s sales price.

Compound Interest. Interest paid on the original principal balance and on the accrued and unpaid interest.

Concessions. Items provided by a landlord or seller to induce a prospective tenant or buyer to sign a lease or buy a property.

Condemnation. Determining a building not fit for use and therefore to be destroyed. Also the exercise of the right of eminent domain to take private property for public purpose.

Conditions. Tasks you must finish so that you will get your loan.

Condominium. A real estate project in which each unit owner has title to a unit in a building, an undivided interest in the common areas of the project, and sometimes the exclusive use of certain limited common areas.

Condominium Conversion. Changing the ownership of a building or development to the condominium form of ownership.

Conforming Loan. A mortgage loan meeting the limit and underwriting guidelines set by government sponsored entities for loans sold in the secondary market. Conforming loan limits are up to $322,700 in the continental United States and higher in Alaska and Hawaii.

Construction Loan. A short term loan to cover the cost of construction. The lender advances money to the builder as the work progresses.

Consumer Reporting Agency or Bureau. An organization that collects information about consumers’ credit histories.

Contingency. A condition a party must meet to make a contract legally binding. For example, homebuyers’ offers commonly include a contingency specifying that a satisfactory home inspection report must be provided before the contract becomes binding.

Contract. An oral or written agreement to do or not to do a certain thing.

Conversion. The right of a borrower to convert an adjustable or balloon loan into a fixed loan.

Conventional Mortgage. A mortgage loan with only the collateral as guarantee for repayment. Lenders usually grant a conventional mortgage with a 20 percent down payment. Alternatives include FHA (Federal Housing Administration) insurance, VA (Veterans Administration) guarantees, or private insurance.

Convertibility Clause. A provision in some ARMs (adjustable-rate mortgages) allowing the borrower to change the ARM to a fixed-rate mortgage at given timeframes after loan origination.

Convertible ARM. An ARM (adjustable-rate mortgage) that the borrower can convert to a fixed-rate mortgage under stated conditions.

Cooperative or Co-Op. A type of multiple ownership where the residents of a multiunit housing complex have rights to occupy specific apartments or units and own shares in the cooperative corporation owning the property.

Cooperative Corporation. A business trust that holds title to a cooperative project and grants shareholders occupancy rights to particular units through proprietary leases or similar arrangements.

Cooperative Mortgages. Mortgages related to a cooperative project. This usually refers to the multifamily mortgage covering the entire project, but occasionally describes the share loans on individual units.

Cooperative Project. A residential or mixed-use building where a corporation holds title to the property. The corporation sells shares of stock representing the value of a single apartment to individuals who, in turn, get a proprietary lease as evidence of title.

Corporate Relocation. When an employer moves an employee to another area. Also when a company relocates its headquarters or expands its office capacity and moves all or part of its operations and employees to another area.

Cost-Benefit Analysis. An analysis subtracting the benefits from the costs of homeownership to get a net cost. Benefits include tax deductions for mortgage interest, points, and property taxes plus an increase in equity from repayment of the principal and for appreciation in the value of your home. Costs include mortgage interest, closing costs, property taxes, homeowner’s insurance, home maintenance costs, and any PMI (private mortgage insurance).

Covenant. A clause in a mortgage that obligates or restricts the borrower and that, if violated, can lead to foreclosure.

Credit. An agreement in which a borrower gets something of value in exchange for a promise to repay the lender.

Credit Bureau. An organization that gathers, records, updates, and stores financial information about the payment history of individuals.

Credit History. A record of an individual’s open and repaid debts. When you apply for a loan, the lender will check your credit history to decide if your repay debts on time.

Credit Life Insurance. A type of insurance available to borrowers that pays off the mortgage if the borrower dies during the term of the policy.

Credit Rating. Lenders rate borrowers according to their risk profile or credit-worthiness. Factors such as a borrower’s payment history, foreclosures, bankruptcies, and charge-offs contribute to these ratings. Different lenders may assign different grades to the same borrower.

Credit-Related Expenses. The sum of foreclosed property expenses plus charge-offs.

Credit Report. A report prepared by a credit bureau on the credit standing of a prospective borrower that helps a prospective lender assess creditworthiness. A credit report includes information regarding late payments, defaults, or bankruptcies.

Credit Report Fee. A fee charged by a lender to get an applicant’s credit report in conjunction with a mortgage loan application.

Creditor. A person to whom one owes money.

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D

Debt. An amount owed to another.

Debt Ratio. Lenders use a debt ratio, also called debt-to-income or back-end ratio, to approve loan applicants. Debt ratio equals total monthly payments (mortgage, car loans, credit cards, and so forth) divided by gross monthly income. If you have an income of $5,000 and total debts of $2,000, your debt ratio comes to 40 percent ($2,000 divided by $5,000).

Deed. The legal document that transfers title to a property from one person to another.

Deed-In-Lieu. To satisfy debt and avoid foreclosure, a borrower may transfer the deed to the lender with the lender’s approval. Also called a voluntary conveyance.

Default. Failure to make mortgage payments on a timely basis or to meet other loan requirements.

Delinquency. Failure to make mortgage payments when due.

Department of Veterans Affairs. A government agency designed to encourage mortgage lenders to offer long-term, low-down payment financing to eligible veterans by partially guaranteeing the lender against loss from default.

Depreciation. A decline in property value, the opposite of appreciation.

Deposit. A lump sum given in advance as security. Called the earnest money deposit in mortgage terms.

Discount. Difference between the face amount of a note or mortgage and the sales price in the secondary market.

Discount Points. A term used in government subsidized loans, such as FHA (Federal Housing Administration) and VA (Veterans Administration) loans referring to any points paid in addition to the one percent loan origination fee.

Document Preparation Fees. Fees charged by a lender or closing agent to prepare the documents associated with providing a mortgage loan.

Down Payment. The cash you deposit toward the purchase of a home, business property, or vehicle. The larger the down payment, the less you need to borrow. For home loans, lenders generally require a down payment of 20 percent to avoid PMI (private mortgage insurance).

Due-On-Sale Provision. A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property.

Due-On-Transfer Provision. Terminology generally used for second mortgages.

E

Earnest Money Deposit. Money the buyer pays the seller to solidify an offer to buy a property. The purchase price of the house includes the earnest money deposit.

Easement. A right of way giving people other than the owner access to a property.

Effective Age. An appraiser’s estimate of the physical condition of a building. The actual age may be different from the effective age.

Effective Gross Income. Normal annual income including regular or guaranteed overtime. Salary generally serves as the main source, but other significant and stable income may qualify.

Effective Interest Rate. The true interest rate cost of borrowing including fees, points and other closing charges stated as an annual rate.

Effective Percentage Rate (EPR). Measures the cost of a mortgage including interest, mortgage insurance, loan origination fee, and other costs over the time you expect to keep the loan stated as a yearly rate. Compare to the APR (annual percentage rate) that calculates the cost of a loan over the entire term of the loan, typically 15 or 30 years.

Emergency Reserves. Money left after you have made your down payment and paid all closing costs. Some lenders require enough money in reserve to pay two monthly mortgage payments.

Eminent Domain. The right of the government to take private property for public use upon payment of its fair market value.

Encroachment. An improvement that intrudes illegally on another’s property.

Encumbrance. An unpaid lien or claim against real property.

Endorser. A person who signs ownership interest over to another party. See co-borrower.

Equal Credit Opportunity Act (ECOA). A federal law requiring lenders and other creditors to make credit equally available without discrimination due to age, sex, race, color, religion, national origin, marital status, or receipt of income from public assistance programs.

Equity. A homeowner’s financial interest in a property. Equity equals the fair market value of a home minus any mortgage debt or other obligations. For example for a home with a fair market value of $250,000 and a mortgage balance of $140,000, the owner has equity equaling $110,000.

Escalator Clause. A clause in a loan providing for increases in payments or interest based on a pre-determined schedule or on a specific economic index, such as the consumer price index.

Escrow. A deposit of money, valuables, or documents with an impartial third party.

Escrow Account. The account in which a mortgage servicer holds the borrower’s escrow payments before paying property expenses. Also called impound account.

Escrow Analysis. An analysis performed by the servicer each year to make sure that the borrower pays sufficient money into the escrow account to cover expenses.

Escrow Collections. Money collected by the servicer to pay the borrower’s property taxes, mortgage insurance, and hazard insurance.

Escrow Disbursements. The use of escrow money to pay property expenses as they become due.

Escrow Payment. The part of a borrower’s monthly payment held by the servicer to pay for taxes, hazard insurance, mortgage insurance, and other items as they become due.

Estate. The total value of the entire real and personal property owned by a person at the time of death.

Eviction. The legal process to remove an occupant from real property.

Examination of Title. Review of a property’s chain of title from the public records.

Exclusive Listing. A written contract that gives a licensed real estate agent the exclusive right to sell a property and collect a commission for a given time, but reserving the owner’s right to sell the property alone without paying a commission.

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F

Fair Credit Reporting Act. A consumer protection law that sets up procedures for correcting mistakes on one’s credit record and regulates the disclosure of credit reports by credit reporting agencies.

Fair Market Value. The price at which a property will sell from a willing buyer to a willing seller, each of whom has a reasonable knowledge of all the pertinent facts and neither being under any obligation to buy or sell.

Fannie Mae (FNMA). The Federal National Mortgage Association, a congressionally chartered, shareholder-owned company that supports the secondary mortgage market on residential property. It buys and sells conventional, VA-guaranteed, and FHA-insured mortgages.

Fannie Mae’s Community Homebuyer’s Program. A program offering flexible underwriting guidelines to subsidize a low- to moderate-income family’s purchase of a home. The program usually decreases the amount of cash needed to buy a home.

Federal Housing Administration (FHA). An agency of the U.S. Department of Housing and Urban Development (HUD) that insures loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money, plan, or construct housing.

Fee Simple. Ownership of real property believed to be unrestricted subject to eminent domain, police powers, or other restriction for public benefit.

Fee Simple Estate. An unconditional, unlimited estate of inheritance of perpetual duration that represents the greatest estate and most extensive interest in land that can be enjoyed.

Fees. Up-front costs associated with a loan including mortgage points and expenses to underwrite and originate a mortgage loan.

FHA Co-Insured Mortgage. A mortgage under FHA Section 244 for which the FHA (Federal Housing Administration) and the originating lender share the risk of loss if the mortgagor defaults.

FHA Loan or Mortgage. A mortgage insured by the FHA (Federal Housing Administration). Also known as a government mortgage.

Finance Charge. The total dollar amount your loan will cost you. It includes all interest payments for the life of the loan, any interest paid at closing, your origination fee, and any other charges paid to the lender and/or broker. Appraisal, credit report, and title search fees are not included in the finance charge.

Firm Commitment. A lender’s agreement to provide a loan to a specific borrower on a specific property.

First Mortgage. The primary lien against a property with priority over any other mortgages.

Fixed Installment. The monthly payment due on a mortgage loan, including principal, interest, and escrow.

Fixed Rate Mortgage (FRM). A mortgage where the payments and the interest rate do not change for the live of the loan.

Fixture. Personal property that becomes real property when attached in a permanent manner to real estate.

Float. Between the loan application and closing, the borrower may choose to float or to not lock the interest rate hoping that it will drop by the time of closing. A note of caution: the interest rate could go higher.

Flood Insurance. Insurance that reimburses the policyholder for physical property damage resulting from flooding. A requirement for properties in federally designated flood areas.

Forbearance. The postponement for a limited time of part or all of the payments on a loan for a delinquent borrower.

Foreclosure. A legal action where the lender sells real estate to pay a defaulting borrower’s debt.

Forfeiture. The loss or surrender of money, property, rights, or privileges due to a breach of legal obligation.

401(k)/403(b). An employer-sponsored investment plan that allows employees to set aside tax-deferred income for retirement or emergency purposes. A private corporation provides a 401(k) and a non-profit organization a 403(b).

401(k)/403(b) Loan. A loan taken against the amount accumulated in a 401(k)/403(b) plan as allowed by the plan administrator. You may use a 401(k)/403(b) loan as a down payment for most other loans, but you must repay the loan to avoid serious penalty charges.

Freddie Mac. A congressionally chartered, shareholder-owned company that supports the secondary mortgage market on residential and multifamily property with mortgage purchase and securitization programs.

Fully Amortized ARM. An ARM (adjustable-rate mortgage) with a monthly payment sufficient to repay the remaining balance over the amortization term.

Future Interest Rates. The periodic resetting of the interest rate on a loan to meet the terms and conditions of the loan agreement. Most home equity lines of credit and revolving credit have an interest rate periodically reset to a market interest rate. The biggest banks in the U.S. use the prime rate to price loans to their best customers.

G

Gift Funds. Money donated by relatives, churches, municipalities, or nonprofit organizations to help a borrower meet closing costs.

Good Faith Estimate (GFE). A written estimate provided by a mortgage lender of the charges a borrower will likely incur in a loan closing. The lender must mail or deliver the estimate within three business days after receipt of the loan application.

Government Loan or Mortgage. A mortgage insured by the FHA (Federal Housing Administration) or guaranteed by the VA (Department of Veteran Affairs) or the RHS (Rural Housing Service).

Government National Mortgage Association (GNMA). A government-owned corporation within HUD (the U.S. Department of Housing and Urban Development) that guarantees securities backed by mortgages insured or guaranteed by other government agencies. Also known as Ginnie Mae.

Grace Period. A time allowed, usually 15 days, for making late payments without a penalty.

Grantee. The person getting an interest in real property.

Grantor. The person transferring an interest in real property.

Gross Income. Total income before deduction of any taxes or expenses. Often used to decide if a borrower qualifies for a loan.

Guaranteed Loan. Any loan guaranteed by a government agency such as the FHA or VA or other interested party.

H

Hand-Money Mortgage. Cash loan to a borrower.

Hazard Insurance. Insurance coverage that compensates for physical damage to property by fire, wind, vandalism, or other hazards.

Home Equity Conversion Mortgage (HECM). A mortgage where the lender makes monthly payments to the homeowner allowing older homeowners to convert home equity into cash. Borrowers qualify on home value rather than income and need not repay the loan as long as they occupy the property. Also called a reverse mortgage.

Home Equity Line of Credit. A secondary mortgage loan that allows a borrower to get cash drawn against home equity.

Home Inspection. A thorough professional assessment evaluating the structural and mechanical condition of a property. Buyers often make a satisfactory home inspection a contingency for purchase.

Homeowners’ Association (HOA). A nonprofit association that manages the common areas in a condominium or PUD (planned unit development). The association has no ownership in the common areas in a condominium while it holds title to them in a PUD.

Homeowners’ Association Dues. A monthly or quarterly fee paid to a homeowners’ association.

Homeowner’s Insurance. An insurance policy covering personal liability and hazard insurance for a home and its contents. Lenders require a homeowner to buy insurance to protect the collateral securing the mortgage loan. Coverage of catastrophic events such as floods, tornadoes, or hurricanes generally requires a separate policy.

Homeowners’ Protection Act. The Homeowners’ Protection Act of 1999 requires home lenders to cancel a requirement for PMI (private mortgage insurance) if the borrower has equity of at least 22 percent in the home. For further information, go to www.hud.gov.

Homeowner’s Warranty (HOW). Insurance sometimes provided by the builder or property seller as a condition of sale. HOW covers repairs to specified parts of a home for a designated time.

Housing Expense Ratio. The ratio of the monthly housing payment to total gross monthly income. If you have a gross income of $4,500 and a mortgage payment of $1,500, you have a 33 percent ($1,500/$4,500) housing expense ratio. Lenders use the housing expense ratio to approve applicants. Also called payment-to-income ratio or front-end ratio.

HUD. U.S. Department of Housing and Urban Development. HUD regulates Fannie Mae and Ginny Mae.

HUD Median Income. Median family income for a particular county or metropolitan statistical area (MSA) as estimated by HUD (U.S. Department of Housing and Urban Development).

HUD-1 Statement. A document providing an itemized listing of costs due at closing. These include commissions, loan fees, points, and initial escrow amounts. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing. Also known as the closing statement or settlement sheet.

Hybrid Financing. The joining of two forms of finance, such as combining a convertible loan with a participation loan, under which the lender has the right at loan maturity to convert the debt to a 50 percent ownership in the property.

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I

Impound Account. An account where a mortgage servicer holds the borrower’s escrow payments in reserve to cover property expenses such as taxes. Also called escrow account.

Income Property. Any property developed or improved to provide income.

Index Rate. A widely used interest rate that lenders employ to set the interest rate on loans and credit cards. Lenders often use the average rate on 10-year U.S. Treasury securities to set rates for 30-year fixed-rate mortgages and the U.S. commercial prime rate to set credit card rates.

Inflation. An increase in the amount of money or credit available in relation to the quantity of goods or services. Inflation causes an increase in the price of goods and services. Over time, it reduces the buying power of the dollar, making it worth less.

Initial Interest Rate. The starting interest rate on an ARM (adjustable-rate mortgage), often below market ARM rates. A low initial interest rate helps homebuyers that may not otherwise qualify for an ARM. Sometimes known as start rate or teaser.

Inspection Fees. Fees paid by a homebuyer for professional inspections of the potentially purchased property. Common inspections include structural/mechanical inspection, termite inspection, and radon testing. Others may be necessary, depending on the property.

Installment. The regular periodic payment that a borrower agrees to make to a lender.

Installment Loan. A loan repaid in equal payments, known as installments.

Insurable Title. A property title that a title insurance company agrees to insure against defects and disputes.

Insurance. A contract that provides compensation for specific losses in exchange for a periodic payment. The contract is called an insurance policy and the payment an insurance premium.

Insurance Binder. A document stating that insurance is temporarily in effect. The insured must get a permanent policy by the expiration date of the binder.

Insured Mortgage. A mortgage protected by the FHA (Federal Housing Administration) or by PMI (private mortgage insurance). If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount.

Interest. A fee charged for borrowing money. Also, a right, share, or title in property.

Interest Accrual Rate. The percentage rate at which interest accrues on a mortgage and generally used to compute the monthly payments.

Interest Only. Mortgage payments consisting of interest only. No amortization occurs and the homeowner accrues equity only through increased home value.

Interest Rate. The cost to borrow money expressed as a percentage per year.

Interest Rate Buydown Plan. An arrangement where the property seller or any other party deposits money used to lower the mortgagor’s payments during the early years of a mortgage. During this period, the mortgagor has an effective interest rate below the actual interest rate.

Interest Rate Cap. For an ARM (adjustable-rate mortgage), the maximum amount the interest rate may increase or decrease, as specified in the mortgage note.

Interest Rate Ceiling. For an ARM (adjustable-rate mortgage), the maximum interest rate, as specified in the mortgage note.

Interest Rate Floor. For an ARM (adjustable-rate mortgage), the minimum interest rate, as specified in the mortgage note.

Interest Rate Swap. A transaction between two parties, in which each agrees to exchange payments tied to different interest rates or indices for a given period.

Interim Interest. Interest covering the time from the day you get your money to the beginning of the next month. For example, if you get your loan on September 15, you would pay 15 days of interest to cover the period between September 15 and September 30. Your first mortgage payment would be due on October 1. Also called odd days interest.

Intermediate-Term Mortgage. A mortgage loan with a stated maturity at the time of purchase equaling 20 years or less.

Investment Property. Property not occupied by the owner.

IRA (Individual Retirement Account). An account allowing individuals to make tax-deferred contributions to a personal retirement fund. Individuals can place IRA funds in bank accounts or in other forms of investment such as stocks, bonds, or mutual funds.

J

Joint Tenancy. A form of co-ownership giving each tenant equal undivided ownership in the property and including the right of survivorship.

Judicial Foreclosure. A court procedure used by lenders to secure clear title to a property under a defaulted real estate loan.

Judgment. A decision made by a court of law. In judgments requiring the repayment of a debt, the court may place a lien against the debtor’s real property as collateral for the creditor.

Judgment Lien. A lien on debtor’s property resulting from a court decree.

Jumbo Loan. A mortgage loan exceeding limits set by Fannie Mae (Federal National Mortgage Association) and Freddie Mac. The current limit equals $322,700 in the continental United States and more in Alaska and Hawaii.

Junior Lien. Any lien subordinate or subsequent to the claims of a prior lien, for example a second mortgage.

L

Late Charge. A penalty a borrower must include with a payment made a stated number of days (usually 15) after the due date.

Lease. A written agreement between an owner and a tenant stipulating the rent payment and conditions under which the tenant may posses the property for a given time.

Leasehold Estate. A way of holding title where the mortgagor has a recorded long-term lease on the property.

Lease-Purchase Mortgage Loan. An alternative financing option allowing low- and moderate-income home buyers to lease a home from a nonprofit organization with an option to buy. Each month’s rent consists of principal, interest, taxes, and insurance payments on the first mortgage plus an extra amount deposited to a savings account where money for a down payment accumulates. Also called rent with option to buy.

Lease Option. A rental agreement indicating a tenant’s option to buy a property. Monthly payments consist of rent and an overage set aside in a down payment fund.

Legal Description. A property description, acceptable by real estate law, that suffices to locate and identify the property without oral testimony.

Lender. The bank, mortgage company, or mortgage broker offering the loan. Many lending institutions originate the loan and then resell the obligation to third parties.

Lender’s Attorney’s Fees. Fees paid by a lender for legal services and/or advice in conjunction with providing a mortgage loan and often passed on to the borrower.

Leverage. Using someone else’s money for the purchase of property.

Liabilities. A person’s financial obligations. Liabilities include long- and short-term debt and any other amounts owed.

Liability Insurance. Insurance protection against claims alleging that a property owner’s negligence or inappropriate action leads to bodily injury to another person or damage to another’s property.

Lien. A legal claim against a property that the owner must pay off at the time of sale. A mortgage is a lien.

Lifetime Payment Cap. For an ARM (adjustable-rate mortgage), the limit to how much the monthly payment can increase or decrease over the term of the loan.

Lifetime Rate Cap. For an ARM (adjustable-rate mortgage), the limit on how much the interest rate can increase or decrease over the term of the loan.

Line of Credit. An agreement by a bank or financial institution to extend a borrower credit up to a specific amount for a certain period.

Liquid Asset. Cash or an asset easily converted to cash.

Listing Agent. The real estate agent used by the seller to find a buyer.

Loan. A sum of borrowed money or principal generally repaid with interest.

Loan Amount. The amount of money you borrow from a financial institution to buy your home. Subtracting the down payment from the purchase price gives you the loan amount.

Loan Application. A document filled out by the applicant containing personal financial data, information about the proposed purchase property, and the selected mortgage option.

Loan Application Fee. A fee a lender, mortgage broker, or mortgage banker charges an applicant for submitting a loan application.

Loan Closing. A meeting to complete a sale of property where the buyer signs the mortgage documents and pays closing costs. Also called loan settlement.

Loan Commitment. A written agreement to lend an exact amount of money at specific terms.

Loan Officer. An intermediary between lending institutions and borrowers. Loan officers solicit loans, represent creditors to borrowers, and represent borrows to creditors.

Loan Origination. The process of obtaining a new mortgage.

Loan Program. A description of the loan including whether the interest rate changes and how long the loan will last.

Loan Servicing. A service performed by a lender to protect a mortgage investment, including collecting monthly payments and handling delinquencies.

Loan-to-Value Ratio (LTV). The ratio between the principal balance of the mortgage and the appraisal value of the property. For example, a $200,000 home with a mortgage balance of $160,000 has a LTV of 80 percent.

Lock. The act of a borrower committing to a mortgage rate. This may occur at the time of application or as late as closing.

Lock in Period. The period of days a lender will guarantee a rate.

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