Glossary and Checklists
Acceptance
A legal term referring to the acceptance of an offer. A buyer offers to buy and
the seller accepts the offer.
Accounts Payable
A running record of business transactions showing the amount of money owed.
They are considered liabilities by lenders.
Accretion
An addition to land from natural causes (for example, from the gradual action
of the ocean or river waters).
Ad Valorem
Latin for, "according to value." It is a method of imposing a tax
on the ownership of real estate property.
Adjustable-Rate Mortgage (ARM)
A home loan that permits the lender to adjust its interest rate periodically
during the life of the loan on the basis of changes in a specified financial
index. ARMs typically start with a particularly low interest rate that gradually
rises over time. If the overall level of interest rates drops, as measured
by a variety of different indexes, the interest rate of your ARM follows
suit. Similarly, if interest rates rise, so does your mortgage's interest
rate and monthly payment. The amount that the interest can fluctuate is limited
by caps.
Adjusted Gross Income
Total income including your salary and bonuses, and any rental or seasonal
income.
Administrator
A person appointed by the probate court to administer the estate of a deceased
person.
Agreement of Sale
A written document in which a purchaser agrees to buy property under certain
given conditions and the seller agrees to sell under certain given conditions.
Also known as a 'Sales Contract.'
Amortization
The process of gradually paying down the principal of the loan. As each payment
toward principal is made, the mortgage amount is reduced or amortized by
that amount. This is in contrast to an interest-only payment where the principal
balance is never reduced.
Annual Percentage Rate (APR)
The rate of interest to be paid on a loan over its projected life; sometimes
referred to as the "true" rate of interest. The APR is the annual
cost of a loan, including interest, loan fees, and other costs.
Annuity
A sum of money received at fixed intervals, such as series of equal or nearly
equal payments to be made over a period of time, or it may be a lump sum
payment to be made at some time in the future. The installment payments due
to a landlord under the terms of a lease are an example of an annuity. The
installment payments due to a lender on a note are another such example.
Appraisal
A professional evaluation of the value of a home or other piece of property
made by a professional who is familiar with local real estate prices and
markets. Appreciation The amount by which the value of a piece of property
increases over time.
APR
See Annual Percentage Rate.
ARM
See Adjustable Rate Mortgage.
Assessed Value
A value placed upon property by a tax assessor.
Assessment
Determining the value of property for the purpose of imposing a tax, or the
amount of the tax imposed.
Asset
Anything of monetary value that is owned by a person. Assets include real estate
property, personal property, and enforceable claims against others including
bank accounts, stocks, mutual funds, and so on.
Assumption
When a buyer takes over the loan payments and obligations of the seller. If
the buyer defaults, however, both the buyer and seller are responsible for
the debt.
Back-End Ratio
See Total Debt Ratio.
Balance Sheet
A financial statement that shows assets, liabilities, and net worth as of a
specific date.
Balloon Mortgage
A balloon mortgage offers lower interest rates for shorter-term financing,
usually five, seven or ten years. At the end of this term, the borrower requires
refinancing or must pay off the outstanding balance in a lump-sum (balloon)
payment.
Bankruptcy
A court action under the Federal Bankruptcy Code by which a debtor's debts
may be excused, usually by transferring assets to a trustee, or rescheduled.
Beneficiary
(1) A person entitled to the proceeds of a trust; (2) A person who receives
profit from an estate, the title of which is entrusted to a trustee; (3)
The lender on the security of a note and deed of trust.
Bill of Sale
A written document that serves as evidence of the transfer of title to personal
property.
Binder
An agreement to consider the purchase of real estate. The agreement is backed
by a cash deposit as evidence of good faith on the part of the purchaser.
Broker
A person who, for a commission, brings parties together and assists in negotiating
contracts between them.
Building Line
A line set by law or deed restriction a certain distance from the street line,
in front of which an owner cannot build on his lot. Also called a setback
line.
Buydown Mortgage
A temporary buydown is a mortgage on which an initial lump sum payment is made
by a party to reduce a borrower's monthly payment during the first few years
of a mortgage. A permanent buydown reduces the interest rate over the entire
life of a mortgage.
Cap
A limit on how much a mortgage interest rate may increase or decrease for an
adjustablerate mortgage.
Capital Gain
Income from the sale of an asset rather than from the general business activity.
Capital gains are generally taxed at a lower rate then ordinary income.
Capital Improvement
Any structure or component erected as a permanent improvement to real estate
property that adds to its value and useful life.
Cash Flow
Income generated by a rental property. It is determined by subtracting vacancy
allowances and collection costs, operating expenses and debt-servicing costs
from the property's scheduled gross income.
Certificate of Eligibility
A document issued by the federal government certifying a veteran's eligibility
for a Department of Veterans Affairs mortgage.
Certificate of Reasonable Value
(CRV)
A document issued by the Department of Veterans Affairs that establishes the
maximum value and loan amount for a Veterans Affairs mortgage.
Certificate of Title
A written document stating that the title to a piece of property is legally
vested owned by the title holder (the person named on the certificate) in
the present owner.
Clear Title
A title that is free of liens or legal questions regarding ownership of the
property.
Closing
In real estate, Closing is the delivery of a deed, the payment of the purchase
price, the signing of promissory notes, and the paying of closing costs,
which completes a real estate transaction.
Closing Costs
The miscellaneous expenses involved in closing a real estate transaction that
are over and above the purchase price. Some of the closing costs include
title insurance, appraisal fee, and credit report.
Commitment Letter
A formal offer by a lender, which states the terms under which it agrees to
lend money to a home buyer. Also known as a 'loan commitment.' This letter
will indicate the contingencies that must be cleared prior to funding the
loan.
Common Areas
Portions of a building, land and amenities owned (or managed) by a planned
unit development (PUD) or condominium project's homeowners' association.
Common areas are used by a group of the unit owners, who share in the common
expenses of their operation and maintenance. They include swimming pools,
tennis courts and other recreational facilities, as well as common corridors
of buildings or parking areas.
Comparables
An abbreviation for "comparable properties," in the appraisal process.
Comparables are properties similar to the one under consideration for appraisal.
Compound Interest
Interest paid on the original principal and on interest accrued from time it
became due.
Conforming Mortgage Loan
The current confirming loan limit is $333,700 and below.
Construction Loan
A short-term interim loan for financing the cost of construction. The lender
builder makes payments to the builder lender at periodic intervals as the
work progresses.
Consumer Reporting Agency
An organization that creates reports used by lenders to help determine a potential
borrower's credit history. The agency gets this information from many sources.
Contingency
A clause in a contract stating that the buyer or seller must meet a given condition
before the purchase can be completed.
Conventional Mortgage
A home loan that follows a fixed rate. It's neither guaranteed nor insured
by the Federal Housing Administration (FHA) or Department of Veterans' Affairs
(VA).
Credit History
The financial worthiness of a borrower. Credit history is the history of whether
the borrower has met financial obligations on time in the past.
Credit Report
A full listing of debts and credit that tracks on a loan applicant's willingness
and ability to make payments in a timely manner in the past. This report
is provided to the bank by an outside agency.
CRV
See Certificate of Reasonable Value.
Debt-to-Income Ratio
The ratio of a borrower's monthly debt payments to his or her monthly gross
income. Lenders use this ratio to determine how much of a loan a borrower
is qualified for. Debt-to-income is the total amount of debt, including credit
cards and other loans, divided by total gross monthly income.
Deed
The legal document conveying title to a property.
Deed of Trust
An document that transfers the bare legal title of a property to a trustee
to be held pending fulfillment of an obligation, usually the repayment of
a loan to a beneficiary.
Default
Failure to pay mortgage payments over a specified period of time.
Delinquency
Being late with loan payments.
Depreciation
Loss of value in real property brought about by age, physical deterioration,
by changing neighborhood, economic conditions, functional or economic obsolescence.
Discount Points
A percentage of the mortgage paid to the lender to lower the interest rate
on a loan. One point equals one percent.
Down Payment
The portion of the purchase price that a buyer pays up front, in cash, at the
time the loan originates.
Due-on-Sale Provision
A provision in a mortgage that allows the lender to demand repayment in full
if a borrower sells the property that serves as security for the mortgage.
Earnest Money
A sum of money given as evidence of one's good faith, used to bind or secure
a real estate sale. Also known as a 'Binder.'
Easement
The right, privilege or interest that one party has in the land of another,
created by grant or agreement for a specific purpose. An example would be
a right of way.
Effective Gross Income
Normal annual income including overtime that is regular or guaranteed. The
income may be from more than one source. Salary is generally the principal
source.
Endorsement
The signature on the back of a check, bill, note or similar document. It is
required on negotiable documents.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally
available without discrimination based on race, color, religion, national
origin, age, sex, marital status or receipt of income from public assistance
programs.
Equity
The difference between the market value of a house and the amount still owed
on the mortgage. It's value of a property minus outstanding mortgage debt
and other liens. Increased equity positions you as a safer risk to lenders
and enhances your financial position by lowering or eliminating some expenses,
such as insurance and rates.
Escrow
Money and documents deposited in a trust account to be held by one party for
another. Often used by brokers to hold deposit money prior to closing. Also
used by lenders to hold money for taxes and insurance on a home.
Exclusive Agency Listing
A written document giving one agent the right for a specified time to sell
a property, but reserving the right of the owner to sell the property himself
or herself without payment of a commission to the agent.
Exclusive Right to Sell Listing
A written agreement between an owner and an agent giving the agent the right
to collect a commission if the property is sold by anyone during the term
of his or her agreement.
Fair Credit Reporting Act
A consumer protection law that regulates the disclosures of consumer credit
reports by consumer/credit reporting agencies and establishes procedures
for correcting mistakes on one's credit report.
Fair Market Value
The highest price that a willing buyer would pay and the lowest the willing
seller willing would accept. Neither party is compelled to buy or sell in
this situation.
Fannie Mae
A congressionally chartered, shareholder-owned company that is the nation's
largest supplier of home mortgage funds. Also known as Federal National Mortgage
Association (FNMA).
FHA Loan
Also known as a "government loan"," an FHA loan is guaranteed
by the Federal Housing Administration. FHA issues specific guidelines for mortgages.
FHLMC
See Freddie Mac.
Fiduciary
A person in a position of trust and confidence, for instance a principal and
broker. A broker as a fiduciary owes certain loyalty that cannot be breached.
Finder's Fee
A fee paid to a mortgage broker for finding a mortgage loan for a prospective
borrower.
First Mortgage
The original loan taken out to purchase a home.
Fixed-Rate Mortgage
A loan with an interest rate that never changes.
FNMA
See Fannie Mae.
Flood Insurance
Insurance that would provide reimbursement for physical property damage resulting
from flooding. It is required for properties that are located in federally
designated flood areas.
Foreclosure
The legal process by which a borrower in default under a mortgage is deprived
of his or her right to ownership in the mortgaged property. This usually
involves a forced sale of the property at public auction with the proceeds
of the sale being applied to the mortgage debt.
Freddie Mac
A major secondary mortgage market investor. It is a government sponsored, privately
owned corporation that is a major purchaser of mortgages from lenders. Also
known as 'Federal Home Loan Mortgage Corporation' (FHLMC).
Front-End Ratio
Also called a Top Ratio. This is a calculation of your total monthly housing
expenses divided by your income. Lenders use a front-end ratio as a guideline
to see if you qualify for a loan.
Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient
to amortize the remaining balance, at the interest accrual rate, over the
amortization term.
Good Faith Estimate
A disclosure that must be given by the lender to all mortgage loan applicants
within three business days of an application. It is an estimate of all settlement
charges likely to be incurred at closing.
Home Equity Loan
A loan secured by a second deed of trust on a house, typically used as a home
improvement loan.
Housing-to-income Income Ratio
A ratio used by lending institutions to determine whether a person is qualified
for a mortgage. Housing-to-income is the ratio of the monthly housing payment
in total (PITI -- Principal, Interest, Taxes and Insurance) divided by the
gross monthly income. This ratio is sometimes referred to as the 'top ratio'
or 'front-end ratio.'
HUD
Acronym for the U.S. Department of Housing and Urban Development.
HUD-1
A document that gives a breakdown of costs that the seller and buyer may pay
at closing.
Income Property
Property that produces income from residential or commercial rentals and profits
attributable to real estate other than rent. Residential or commercial property
that produces income and profits in ways other than rents.
Index
An economic indicator that lenders use to calculate interest rate adjustments
for adjustablerate mortgages (ARMs). The index used is outside the lender's
control.
Interest
The amount charged per year on a home loan. The rate varies according to the
type of loan.
Interest Rate Cap
A limit on the amount that interest can rise or fall during a specified period
of time on an adjustable-rate mortgage.
Involuntary Lien
A lien or charge imposed against property without consent of owner. Examples:
taxes, assessments, federal income tax liens, judgments, etc.
Jumbo Mortgage
Also known as a 'non-conforming' mortgage. Non-conforming loans usually incur
a rate and origination fee premium. The current conforming loan limit is
$333,700 and below for a single-family residence, $384,900 and below for
a 2-unit property, $465,200 and below for a 3-unit property, and $578,150
and below for a 4-unit property. Loan amounts greater than this are considered
non-conforming or jumbo mortgages.
Lender
The bank or mortgage company offering the loan.
Lien
A legal hold or claim of a creditor on the property of another.
Lifetime Cap
A limit on how high the interest rate on an adjustable-rate mortgage can rise
over the lifetime of the loan.
Loan-to-Value Ratio (LTV)
The amount of the loan divided by the purchase price of the house. It is the
percentage that shows how much equity a borrower will have in a home. The
LTV determines which products are available to the borrower.
Lock- in
Allows the borrower to be assured a given rate of interest for a mortgage.
This usually involves paying a fee to the lender. Mortgage rates not "locked
in" are subject to changing market conditions.
Low-Documentation
Some loan products require only that applicants state the source of their income
without providing supporting documentation such as tax returns.
LTV
See Loan-to-Value Ratio.
Margin
A set number of percentage points a lender adds to the index rate to determine
the interest rate for an ARM.
Mortgage Insurance
Also known as 'Private Mortgage Insurance' (PMI). Insurance that protects mortgage
lenders against loss in the event of default by the borrower.
Mortgage
A lien or claim against real property given by the buyer to the lender as security
for money borrowed.
Mortgage Broker
A person who, for a fee, brings together a borrower and lender and handles
the necessary applications for the borrower to obtain a loan against real
estate property by giving a mortgage or deed of trust as security. Also called
loan broker.
Mortgagee
A person or organization that lends money for a home.
Mortgagor
A person who borrows money for a home.
Net Worth
Value remaining after subtracting the liabilities from the assets of a company
or an individual.
Non-Conforming Loan
Also known as a 'Jumbo Mortgage.' Non-conforming loans usually incur a rate
and origination fee. The current conforming loan limit is $333,700 and below
for a single family residence, $384,900 and below for a 2-unit property,
$465,200 and below for a 3-unit property, and $578,150 and below for a 4-unit
property. Loan amounts greater than this are considered non-conforming or
jumbo mortgages.
Note
A signed written instrument acknowledging a debt and promising payment.
Obligations-to-Income Ratio
See Total Debt Ratio.
Origination Date
The date on which the loan is initiated or funded.
Origination Fee
A fee imposed by a lender to cover the administrative costs of setting up a
mortgage. This will include the preparation of documents and certain processing
expenses in connection with making a real estate loan. This is usually charged
as a percentage of the amount loaned, such as one point or one percent.
PITI
Principal, interest, taxes and insurance-the components of a monthly mortgage
payment.
PMI
See Private Mortgage Insurance.
Payoff
The complete repayment of loan principal, interest and any other sums due;
payoffs occur either over the full term of the loan through monthly amortization
or through prepayments.
Points
An upfront fee that is collected in addition to the interest on a loan. One
point is equal to one percent of the mortgage. The use of points allows the
lender to raise its yield above the apparent interest rate and reduce the
rate by lowering the origination costs. Points may also be referred to as
an 'origination fee' or 'discount points' depending on the purpose.
Prepayment Penalty
A fee imposed on a borrower who pays off a mortgage before it is due.
Pre-Approval
A process that mortgage lenders use to determine how much money they would
lend you based on a thorough review of your financial situation. Lenders
issue a pre-approval letter, which strengthens your position when bidding
on a home, as it shows sellers that you will be able to raise the funds needed
to purchase the home.
Pre-Qualification
An informal process in which a lender will offers an opinion on how much money
you may be able to borrow. This opinion is based entirely on the financial
information you provide and is neither binding nor necessarily accurate because
lenders have not yet verified your financial information.
Preliminary Title Report
A report made by a title company stating whether there are any other claims
to ownership of a property. It is a necessary step before a mortgage loan
can be approved.
Pre-paids
Those expenses of property that are paid in advance of their due date and will
usually be prorated upon sale, such as taxes, insurance, rent, etc.
Prime Rate
The best interest rate available to a lender's most qualified customers.
Principal
The original balance of money lent on an outstanding loan and fees, excluding
interest. Also the remaining balance of a loan, excluding interest.
Private Mortgage Insurance (PMI)
Insurance coverage obtained from mortgage insurance companies to protect lenders
against the risk of making higher loan-to-value loans. Typically required
on all first mortgages with an LTV that exceeds 80%. percent. The borrower
usually pays the PMI premiums.
Promissory Note
The document signed by a borrower promising repayment of a loan. It shows the
amount of monthly payments, interest rate, first payment date, last payment
date, and the late charge and prepayment provisions.
Purchase Contract
A written promise to pay a specific amount for a property at a specified time.
The purchase contract is a written statement of the offer, which both the
borrower and the seller will sign if the offer is accepted.
Rate Cap
A limit on how much the interest rate can change, either at each adjustment
period or over the life of the loan.
Rate Lock
The amount of time that a lender will guarantee a loan's interest rate. Once
you've locked in the interest rate on a loan, the lender will guarantee that
rate for a certain period of time, usually for 30, 45 or 60 days.
Refinancing
A way of obtaining a better interest rate, lower monthly payments or to borrow
cash on the equity in a property that has built up on a loan. A second loan
is taken out to pay off the first, higher-rate loan.
Second Mortgage
An additional mortgage on a property, the second mortgage. It often carries
a shorter term and a higher interest rate than the original mortgage.
Secondary Mortgage Market
A market in which existing mortgages are resold.
Seller Take-Back
An agreement in which the owner of a property provides financing, often in
combination with an assumed mortgage.
Seller Financing
When the current owner of a house holds the mortgage loan for the buyer.
Servicing (or Loan Servicing)
Supervising and administering a loan after it has been made. This involves
such things as collecting the payments, keeping accounting records, computing
interest and principal, etc.
Term
The period of time which covers the life of the loan. For example, a 30-year
fixed loan has a term of 30 years.
TILA
See Truth-in-Lending Act.
Title
Evidence of a person's right to possession ownership of a property.
Title Company
A company that searches for titles and insures title claims.
Title Insurance
A policy that protects the owner of a title from loss resulting from disputes
over ownership claims.
Top Ratio
Also called a Front-End Ratio. This is a calculation of your total monthly
housing expenses divided by your income. Lenders use a front-end ratio as
a guideline to see if you qualify for a loan.
Total Debt Ratio
Monthly debt and housing payments divided by gross monthly income. Also known
as 'Obligations-to-Income Ratio' or 'Back-End Ratio.'
Truth-in-Lending Act
A U.S. federal law requiring lenders to reveal all of the terms of a mortgage.
Underwriting
The analysis of risk involved in making a mortgage loan to determine whether
the risk is acceptable to the lender. Underwriting involves evaluating the
property as outlined in the appraisal report, and also evaluating the borrower's
ability and willingness to repay the loan.
VA Loan
A loan guaranteed by the Department of Veterans Affairs. To obtain a VA loan,
the borrower must have served in the armed forces.
Valuation
The estimation of a property's price value through an appraisal.
Variable Interest Rate
Interest rate that fluctuates as the prevailing rate moves up or down. In mortgages
there are usually maximums regarding the frequency and the amount of fluctuation.
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