The Real Estate Marketplace Glossary: How to Talk the Talk

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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.

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

2 Glossary

parties agree in advance to agree with

the decision of the arbitrator. There is

a hearing where both parties have an

opportunity to be heard, after which the

arbitrator makes a decision.

Asbestos: A toxic material that was

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

homes. However, some older homes may

still have asbestos in these materials.

Assessed Value: Typically the value

placed on property for the purpose of

taxation.

Assessor: A public official who estab-

lishes the value of a property for taxa-

tion purposes.

Asset: Anything of monetary value that

is owned by a person or company. As-

sets include real property, personal

property, stocks, mutual funds, etc.

Assignment of Mortgage: A document

evidencing the transfer of ownership of a

mortgage from one person to another.

Assumable Mortgage: A mortgage loan

that can be taken over (assumed) by the

buyer when a home is sold. An assump-

tion of a mortgage is a transaction in

which the buyer of real property takes

over the seller’s existing mortgage; the

seller remains liable unless released by

the lender from the obligation. If the

mortgage contains a due-on-sale clause,

the loan may not be assumed without

the lender’s consent.

Assumption: A homebuyer’s agreement

to take on the primary responsibility

for paying an existing mortgage from a

home seller.

Assumption Fee: A fee a lender charges

a buyer who will assume the seller’s ex-

isting mortgage.

Automated Underwriting: An auto-

mated process performed by a technol-

ogy application that streamlines the

processing of loan applications and

provides a recommendation to the lender

to approve the loan or refer it for manual

underwriting.

Balance Sheet: A financial statement

that shows assets, liabilities, and net

worth as of a specific date.

Balloon Mortgage: A mortgage with

monthly payments often based on a

30-year amortization schedule, with

the unpaid balance due in a lump sum

payment at the end of a specific period

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

gage may contain an option to “reset”

the interest rate to the current market

rate and to extend the due date if certain

conditions are met.

Balloon Payment: A final lump sum

payment that is due, often at the matu-

rity date of a balloon mortgage.

Bankruptcy: Legally declared unable to

pay your debts. Bankruptcy can severely

impact your credit and your ability to

borrow money.

Before-tax Income: Income before taxes

are deducted. Also known as “gross in-

come.”

Biweekly Payment Mortgage: A mort-

gage with payments due every two weeks

(instead of monthly).

Bona fide: In good faith, without fraud.

Bridge Loan: A short-term loan secured

by the borrower’s current home (which

is usually for sale) that allows the pro-

ceeds to be used for building or closing

on a new house before the current home

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

Glossary 3

Broker: An individual or firm that acts

as an agent between providers and users

of products or services, such as a mort-

gage broker or real estate broker. See

also “Mortgage Broker.”

Building Code: Local regulations that

set forth the standards and require-

ments for the construction, maintenance

and occupancy of buildings. The codes

are designed to provide for the safety,

health and welfare of the public.

Buydown: An arrangement whereby

the property developer or another third

party provides an interest subsidy to

reduce the borrower’s monthly payments

typically in the early years of the loan.

Buydown Account: An account in

which funds are held so that they can be

applied as part of the monthly mortgage

payment as each payment comes due

during the period that an interest rate

buydown plan is in effect.

Cap: For an adjustable-rate mortgage

(ARM), a limitation on the amount the

interest rate or mortgage payments may

increase or decrease. See also “Lifetime

Payment Cap,” “Lifetime Rate Cap,” “Pe-

riodic Payment Cap,” and “Periodic Rate

Cap.”

Capacity: Your ability to make your

mortgage payments on time. This de-

pends on your income and income

stability (job history and security), your

assets and savings, and the amount of

your income each month that is left over

after you’ve paid for your housing costs,

debts and other obligations.

Cash-out Refinance: A refinance trans-

action in which the borrower receives

additional funds over and above the

amount needed to repay the existing

mortgage, closing costs, points, and any

subordinate liens.

Certificate of Deposit: A document is-

sued by a bank or other financial institu-

tion that is evidence of a deposit, with the

issuer’s promise to return the deposit plus

earnings at a specified interest rate within

a specified time period.

Certificate of Eligibility: A document is-

sued by the U.S. Department of Veterans

Affairs (VA) certifying a veteran’s eligibility

for a VA-guaranteed mortgage loan.

Chain of Title: The history of all of the

documents that have transferred title to

a parcel of real property, starting with the

earliest existing document and ending

with the most recent.

Change Orders: A change in the original

construction plans ordered by the prop-

erty owner or general contractor.

Clear Title: Ownership that is free of

liens, defects, or other legal encumbranc-

es.

Closing: The process of completing a

financial transaction. For mortgage

loans, the process of signing mortgage

documents, disbursing funds, and, if

applicable, transferring ownership of

the property. In some jurisdictions, clos-

ing is referred to as “escrow,” a process

by which a buyer and seller deliver legal

documents to a third party who completes

the transaction in accordance with their

instructions. See also “Settlement.”

Closing Agent: The person or entity that

coordinates the various closing activities,

including the preparation and recordation

of closing documents and the disburse-

ment of funds. (May be referred to as an

escrow agent or settlement agent in some

jurisdictions.) Typically, the closing is con-

ducted by title companies, escrow compa-

nies or attorneys.

Closing Costs: The upfront fees charged

in connection with a mortgage loan trans-

action. Money paid by a buyer (and/or

seller or other third party, if applicable)

4 Glossary

to effect the closing of a mortgage loan,

generally including, but not limited to

a loan origination fee, title examination

and insurance, survey, attorney’s fee,

and prepaid items, such as escrow de-

posits for taxes and insurance.

Closing Date: The date on which the

sale of a property is to be finalized and a

loan transaction completed. Often, a real

estate sales professional coordinates the

setting of this date with the buyer, the

seller, the closing agent, and the lender.

Closing Statement: See “HUD-1 Settle-

ment Statement.”

Co-borrower: Any borrower other than

the first borrower whose name appears

on the application and mortgage note,

even when that person owns the prop-

erty jointly with the first borrower and

shares liability for the note.

Collateral: An asset that is pledged as

security for a loan. The borrower risks

losing the asset if the loan is not repaid

according to the terms of the loan agree-

ment. In the case of a mortgage, the

collateral would be the house and real

property.

Commission: The fee charged for ser-

vices performed, usually based on a

percentage of the price of the items sold

(such as the fee a real estate agent earns

on the sale of a house).

Commitment Letter: A binding of-

fer from your lender that includes the

amount of the mortgage, the interest

rate, and repayment terms.

Common Areas: Those portions of a

building, land, or improvements and

amenities owned by a planned unit

development (PUD) or condominium

project’s homeowners’ association (or

a cooperative project’s cooperative cor-

poration) that are used by all of the

unit owners, who share in the common

expenses of their operation and main-

tenance. Common areas include swim-

ming pools, tennis courts, and other

recreational facilities, as well as common

corridors of buildings, parking areas,

means of ingress and egress, etc.

Comparables: An abbreviation for “com-

parable properties,” which are used as a

comparison in determining the current

value of a property that is being ap-

praised.

Concession: Something given up or

agreed to in negotiating the sale of a

house. For example, the sellers may

agree to help pay for closing costs.

Condominium: A unit in a multiunit

building. The owner of a condominium

unit owns the unit itself and has the

right, along with other owners, to use

the common areas but does not own the

common elements such as the exterior

walls, floors and ceilings or the struc-

tural systems outside of the unit; these

are owned by the condominium associa-

tion. There are usually condominium as-

sociation fees for building maintenance,

property upkeep, taxes and insurance

on the common areas and reserves for

improvements.

Construction Loan: A loan for financ-

ing the cost of construction or improve-

ments to a property; the lender disburs-

es payments to the builder at periodic

intervals during construction.

Contingency: A condition that must be

met before a contract is legally binding.

For example, home purchasers often

include a home inspection contingency;

the sales contract is not binding unless

and until the purchaser has the home

inspected.

Conventional Mortgage: A mortgage

loan that is not insured or guaranteed

by the federal government or one of its

agencies, such as the Federal Housing

Administration (FHA), the U.S. Depart-

ment of Veterans Affairs (VA), or the

Glossary 5

Rural Housing Service (RHS). Contrast

with “Government Mortgage.”

Conversion Option: A provision of some

adjustable-rate mortgage (ARM) loans

that allows the borrower to change the

ARM to a fixed-rate mortgage at speci-

fied times after loan origination.

Convertible ARM: An adjustable-rate

mortgage (ARM) that allows the borrower

to convert the loan to a fixed-rate mort-

gage under specified conditions.

Cooperative (Co-op) Project: A project

in which a corporation holds title to a

residential property and sells shares to

individual buyers, who then receive a

proprietary lease as their title.

Cost of Funds Index (COFI): An in-

dex that is used to determine interest

rate changes for certain adjustable-rate

mortgage (ARM) loans. It is based on the

weighted monthly average cost of de-

posits, advances, and other borrowings

of members of the Federal Home Loan

Bank of San Francisco.

Counter-offer: An offer made in re-

sponse to a previous offer. For example,

after the buyer presents their first offer,

the seller may make a counter-offer with

a slightly higher sale price.

Credit: The ability of a person to bor-

row money, or buy goods by paying

over time. Credit is extended based on a

lender’s opinion of the person’s financial

situation and reliability, among other

factors.

Credit Bureau: A company that gath-

ers information on consumers who use

credit. These companies sell that infor-

mation to lenders and other businesses

in the form of a credit report.

Credit History: Information in the files

of a credit bureau, primarily comprised

of a list of individual consumer debts

and a record of whether or not these

debts were paid back on time or “as

agreed.” Your credit history is called a

credit report when provided by a credit

bureau to a lender or other business.

Credit Life Insurance: A type of insur-

ance that pays off a specific amount of

debt or a specified credit account if the

borrower dies while the policy is in force.

Credit Report: Information provided by

a credit bureau that allows a lender or

other business to examine your use of

credit. It provides information on money

that you’ve borrowed from credit institu-

tions and your payment history.

Credit Score: A numerical value that

ranks a borrower’s credit risk at a given

point in time based on a statistical eval-

uation of information in the individual’s

credit history that has been proven to be

predictive of loan performance.

Creditor: A person who extends credit

to whom you owe money.

Creditworthy: Your ability to qualify for

credit and repay debts.

Debt: Money owed from one person or

institution to another person or institu-

tion.

Debt-to-Income Ratio: The percent-

age of gross monthly income that goes

toward paying for your monthly hous-

ing expense, alimony, child support, car

payments and other installment debts,

and payments on revolving or open-end-

ed accounts, such as credit cards.

Deed: The legal document transferring

ownership or title to a property

Deed-in-Lieu of Foreclosure: The

transfer of title from a borrower to the

lender to satisfy the mortgage debt and

avoid foreclosure. Also called a “volun-

tary conveyance.”

6 Glossary

Deed of Trust: A legal document in

which the borrower transfers the title to

a third party (trustee) to hold as security

for the lender. When the loan is paid in

full, the trustee transfers title back to

the borrower. If the borrower defaults on

the loan the trustee will sell the property

and pay the lender the mortgage debt.

Default: Failure to fulfill a legal obliga-

tion. A default includes failure to pay on

a financial obligation, but also may be a

failure to perform some action or ser-

vice that is non-monetary. For example,

when leasing a car, the lessee is usually

required to properly maintain the car.

Delinquency: Failure to make a pay-

ment when it is due. The condition of a

loan when a scheduled payment has not

been received by the due date, but gen-

erally used to refer to a loan for which

payment is 30 or more days past due.

Depreciation: A decline in the value of

a house due to changing market condi-

tions or lack of upkeep on a home.

Discount Point: A fee paid by the bor-

rower at closing to reduce the interest

rate. A point equals one percent of the

loan amount.

Down Payment: A portion of the price

of a home, usually between 3-20%, not

borrowed and paid up-front in cash.

Some loans are offerend with zero down-

payment.

Due-on-Sale Clause: A provision in a

mortgage that allows the lender to de-

mand repayment in full of the outstand-

ing balance if the property securing the

mortgage is sold.

Earnest Money Deposit: The deposit to

show that you’re committed to buying

the home. The deposit usually will not

be refunded to you after the seller ac-

cepts your offer, unless one of the sales

contract contingencies is not fulfilled.

Easement: A right to the use of, or ac-

cess to, land owned by another.

Employer-Assisted Housing: A program

in which companies assist their employ-

ees in purchasing homes by providing

assistance with the down payment, clos-

ing costs, or monthly payments.

Encroachment: The intrusion onto

another’s property without right or per-

mission.

Encumbrance: Any claim on a property,

such as a lien, mortgage or easement.

Equal Credit Opportunity Act (ECOA):

A federal law that requires lenders to

make credit equally available without

regard to the applicant’s race, color, reli-

gion, national origin, age, sex, or marital

status; the fact that all or part of the ap-

plicant’s income is derived from a public

assistance program; or the fact that the

applicant has in good faith exercised any

right under the Consumer Credit Protec-

tion Act. It also requires various notices

to consumers.

Equity: The value in your home above

the total amount of the liens against

your home. If you owe $100,000 on your

house but it is worth $130,000, you

have $30,000 of equity.

Escrow: An item of value, money, or

documents deposited with a third party

to be delivered upon the fulfillment of

a condition. For example, the deposit

by a borrower with the lender of funds

to pay taxes and insurance premiums

when they become due, or the deposit of

funds or documents with an attorney or

escrow agent to be disbursed upon the

closing of a sale of real estate.

Escrow Account: An account that a

mortgage servicer establishes on behalf

of a borrower to pay taxes, insurance

Glossary 7

premiums, or other charges when they

are due. Sometimes referred to as an

“impound” or “reserve” account.

Escrow Analysis: The accounting that

a mortgage servicer performs to deter-

mine the appropriate balances for the

escrow account, compute the borrower’s

monthly escrow payments, and deter-

mine whether any shortages, surpluses

or deficiencies exist in the account.

Eviction: The legal act of removing

someone from real property.

Exclusive Right-to-Sell Listing: The

traditional kind of listing agreement un-

der which the property owner appoints

a real estate broker (known as the list-

ing broker) as exclusive agent to sell the

property on the owner’s stated terms,

and agrees to pay the listing broker a

commission when the property is sold,

regardless of whether the buyer is found

by the broker, the owner or another

broker. This is the kind of listing agree-

ment that is commonly used by a list-

ing broker to provide the traditional full

range of real estate brokerage services.

If a second real estate broker (known as

a selling broker) finds the buyer for the

property, then some commission will be

paid to the selling broker.

Exclusive Agency Listing: A listing

agreement under which a real estate

broker (known as the listing broker) acts

as an exclusive agent to sell the prop-

erty for the property owner, but may be

paid a reduced or no commission when

the property is sold if, for example, the

property owner rather than the listing

broker finds the buyer. This kind of list-

ing agreement can be used to provide

the owner a limited range of real estate

brokerage services rather than the tra-

ditional full range. As with other kinds

of listing agreements, if a second real

estate broker (known as a selling broker)

finds the buyer for the property, then

some commission will be paid to the

selling broker.

Executor: A person named in a will and

approved by a probate court to adminis-

ter the deposition of an estate in accor-

dance with the instructions of the will.

Fair Credit Reporting Act (FCRA): A

consumer protection law that imposes

obligations on (1) credit bureaus (and

similar agencies) that maintain consum-

er credit histories, (2) lenders and other

businesses that buy reports from credit

bureaus, and (3) parties who furnish

consumer information to credit bureaus.

Among other provisions, the FCRA limits

the sale of credit reports by credit bu-

reaus by requiring the purchaser to have

a legitimate business need for the data,

allows consumers to learn the informa-

tion on them in credit bureau files (in-

cluding one annual free credit report),

and specifies procedure for challenging

errors in that data.

Fair Market Value: The price at which

property would be transferred between

a willing buyer and willing seller, each

of whom has a reasonable knowledge of

all pertinent facts and is not under any

compulsion to buy or sell.

Fannie Mae: A New York stock ex-

change company. It is a public company

that operates under a federal charter

and is the nation’s largest source of

financing for home mortgages. Fannie

Mae does not lend money directly to

consumers, but instead works to en-

sure that mortgage funds are available

and affordable, by purchasing mortgage

loans from institutions that lend directly

to consumers.

Fannie Mae-Seller/Servicer: A lender

that Fannie Mae has approved to sell

loans to it and to service loans on Fan-

nie Mae’s behalf.

Fannie Mae/Freddie Mac Loan Limit:

The current 2006 Fannie Mae/Freddie

8 Glossary

Mac loan limit for a single-family home

is $417,000 and is higher in Alaska,

Guam, Hawaii, and the U.S. Virgin

Islands. The Fannie Mae loan limit is

$533,850 for a two-unit home; $645,300

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

a four-unit home. Also referred to as the

“conventional loan limit.”

Federal Housing Administration

(FHA): An agency within the U.S. De-

partment of Housing and Urban Devel-

opment (HUD) that insures mortgages

and loans made by private lenders.

FHA-Insured Loan: A loan that is in-

sured by the Federal Housing Adminis-

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

Housing and Urban Development (HUD).

First Mortgage: A mortgage that is the

primary lien against a property.

First-Time Home Buyer: A person with

no ownership interest in a principal

residence during the three-year period

preceding the purchase of the security

property.

Fixed-Period Adjustable-Rate Mort-

gage: An adjustable-rate mortgage (ARM)

that offers a fixed rate for an initial

period, typically three to ten years, and

then adjusts every six months, annually,

or at another specified period, for the

remainder of the term. Also known as a

“hybrid loan.”

Fixed-Rate Mortgage: A mortgage with

an interest rate that does not change

during the entire term of the loan.

Flood Certification Fee: A fee charged

by independent mapping firms to identi-

fy properties located in areas designated

as flood zones.

Flood Insurance: Insurance that com-

pensates for physical property damage

resulting from flooding. It is required for

properties located in federally designated

flood hazard zones.

Foreclosure: A legal action that ends

all ownership rights in a home when the

homebuyer fails to make the mortgage

payments or is otherwise in default un-

der the terms of the mortgage.

Forfeiture: The loss of money, property,

rights, or privileges due to a breach of a

legal obligation.

Fully Amortized Mortgage: A mortgage

in which the monthly payments are de-

signed to retire the obligation at the end

of the mortgage term.

General Contractor: A person who

oversees a home improvement or con-

struction project and handles various

aspects such as scheduling workers and

ordering supplies.

Gift Letter: A letter that a family mem-

ber writes verifying that s/he has given

you a certain amount of money as a gift

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

can use this money towards a portion

of your down payment with some mort-

gages.

Good-Faith Estimate: A form required

by the Real Estate Settlement Proce-

dures Act (RESPA) that discloses an esti-

mate of the amount or range of charges,

for specific settlement services the bor-

rower is likely to incur in connection

with the mortgage transaction.

Government Mortgage: A mortgage

loan that is insured or guaranteed by a

federal government entity such as the

Federal Housing Administration (FHA),

the U.S. Department of Veterans

Affairs (VA), or the Rural Housing

Service (RHS).

Government National Mortgage

Association (Ginnie Mae): A govern-

ment-owned corporation within the U.S.

Department of Housing and Urban De-

Glossary 9

velopment (HUD) that guarantees se-

curities backed by mortgages that are

insured or guaranteed by other gov-

ernment agencies. Popularly known as

“Ginnie Mae.”

Gross Monthly Income: The income

you earn in a month before taxes and

other deductions. It also may include

rental income, self-employed income,

income from alimony, child support,

public assistance payments, and re-

tirement benefits.

Ground Rent: Payment for the use of

land when title to a property is held as

a leasehold estate (that is, the borrow-

er does not actually own the property,

but has a long-term lease on it).

Growing-Equity Mortgage (GEM):

A fixed-rate mortgage in which the

monthly payments increase according

to an agreed-upon schedule, with the

extra funds applied to reduce the loan

balance and loan term.

Hazard Insurance: Insurance cover-

age that compensates for physical

damage to a property from fire, wind,

vandalism, or other covered hazards

or natural disasters.

Home Equity Conversion Mortgage

(HECM): A special type of mortgage

developed and insured by the Federal

Housing Administration (FHA) that

enables older home owners to convert

the equity they have in their homes

into cash, using a variety of payment

options to address their specific finan-

cial needs. Sometimes called a “re-

verse mortgage.”

Home Equity Line of Credit

(HELOC): A type of revolving loan,

that enables a home owner to obtain

multiple advances of the loan pro-

ceeds at his or her own discretion, up

to an amount that represents a specified

percentage of the borrower’s equity in

the property.

Home Inspection: A professional in-

spection of a home to determine the

condition of the property. The inspec-

tion should include an evaluation of the

plumbing, heating and cooling systems,

roof, wiring, foundation and pest infesta-

tion.

Homeowner’s Insurance: A policy that

protects you and the lender from fire or

flood, which damages the structure of

the house; a liability, such as an injury

to a visitor to your home; or damage to

your personal property, such as your

furniture, clothes or appliances

Homeowner’s Warranty (HOW): In-

surance offered by a seller that covers

certain home repairs and fixtures for a

specified period of time.

Homeowners’ Association: An organi-

zation of homeowners residing within a

particular area whose principal purpose

is to ensure the provision and main-

tenance of community facilities and

services for the common benefit of the

residents.

Housing Expense Ratio: The percent-

age of your gross monthly income that

goes toward paying for your housing

expenses.

HUD-1 Settlement Statement: A final

listing of the closing costs of the mort-

gage transaction. It provides the sales

price and down payment, as well as the

total settlement costs required from the

buyer and seller.

Hybrid Loan: An adjustable-rate mort-

gage (ARM) that offers a fixed rate for

an initial period, typically three to

ten years, and then adjusts every six

months, annually, or at another speci-

fied period, for the remainder of the

term.

10 Glossary

Income Property: Real estate developed

or purchased to produce income, such

as a rental unit.

Index: A number used to compute

the interest rate for an adjustable-rate

mortgage (ARM). The index is generally

a published number or percentage, such

as the average interest rate or yield on

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

the index to determine the interest rate

that will be charged on the ARM. This

interest rate is subject to any caps on

the maximum or minimum interest rate

that may be charged on the mortgage,

stated in the note.

Individual Retirement Account (IRA):

A tax-deferred plan that can help you

build a retirement nest egg.

Inflation: An increase in prices.

Initial Interest Rate: The original inter-

est rate for an adjustable-rate mortgage

(ARM). Sometimes known as the “start

rate.”

Inquiry: A request for a copy of your

credit report by a lender or other busi-

ness, often when you fill out a credit

application and/or request more credit.

Too many inquiries on a credit report

can hurt your credit score; however,

most credit scores are not affected by

multiple inquiries from auto or mortgage

lenders within a short period of time.

Installment: The regular periodic pay-

ment that a borrower agrees to make to

a lender.

Installment Debt: A loan that is repaid

in accordance with a schedule of pay-

ments for a specified term (such as an

automobile loan).

you. Interest is usually expressed as a

percentage of the amount borrowed.

Interest Accrual Rate: The percentage

rate at which interest accumulates or

increases on a mortgage loan.

Interest Rate Cap: For an adjustable-

rate mortgage (ARM), a limitation on the

amount the interest rate can change per

adjustment or over the lifetime of the

loan, as stated in the note.

Interest Rate Ceiling: For an adjust-

able-rate mortgage (ARM), the maximum

interest rate, as specified in the mort-

gage note.

Interest Rate Floor: For an adjustable-

rate mortgage (ARM), the minimum in-

terest rate, as specified in the mortgage

note.

Investment Property: A property pur-

chased to generate rental income, tax

benefits, or profitable resale rather than

to serve as the borrower’s primary resi-

dence. Contrast with “second home.”

Judgment Lien: A lien on the property

of a debtor resulting from the decree of a

court.

Jumbo Loan: A loan that exceeds the

mortgage amount eligible for purchase

by Fannie Mae or Freddie Mac. Also

called “non-conforming loan.”

Junior Mortgage: A loan that is subor-

dinate to the primary loan or first-lien

mortgage loan, such as a second or third

mortgage.

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

business. Contributions to the Keogh

plan are tax-deductible.

Late Charge: A penalty imposed by the

lender when a borrower fails to make a

scheduled payment on time.

Lease-Purchase Option: An option

sometimes used by sellers to rent a

property to a consumer, who has the op-

tion to buy the home within a specified

period of time. Typically, part of each

rental payment is put aside for the pur-

pose of accumulating funds to pay the

down payment and closing costs.

Liabilities: A person’s debts and other

financial obligations.

Liability Insurance: Insurance coverage

that protects property owners against

claims of negligence, personal injury or

property damage to another party.

LIBOR-Index: An index used to deter-

mine interest rate changes for certain

adjustable-rate mortgage (ARM) plans,

based on the average interest rate at

which international banks lend to or

borrow funds from the London Inter-

bank Market.

Lien: A claim or charge on property for

payment of a debt. With a mortgage,

the lender has the right to take the title

to your property if you don’t make the

mortgage payments.

Lifetime Cap: For an adjustable-rate

mortgage (ARM), a limit on the amount

that the interest rate or monthly pay-

ment can increase or decrease over the

life of the loan.

Liquid Asset: A cash asset or an asset

that is easily converted into cash.

Loan Origination: The process by which

a loan is made, which may include tak-

ing a loan application, processing and

underwriting the application, and clos-

ing the loan.

Loan Origination Fees: Fees paid to

your mortgage lender or broker for pro-

cessing the mortgage application. This

fee is usually in the form of points. One

point equals one percent of the mortgage

amount.

Loan-To-Value (LTV) Ratio: The re-

lationship between the loan amount

and the value of the property (the lower

of appraised value or sales price), ex-

pressed as a percentage of the property’s

value. For example, a $100,000 home

with an $80,000 mortgage has an LTV of

80 percent.

Lock-In Rate: A written agreement

guaranteeing a specific mortgage inter-

est rate for a certain amount of time.

Low-Down-Payment Feature: A feature

of some mortgages, usually fixed-rate

mortgages, that helps you buy a home

with a low down payment.

Manufactured Housing: Homes that

are built entirely in a factory in accor-

dance with a federal building code ad-

ministered by the U.S. Department of

Housing and Urban Development (HUD).

Manufactured homes may be single-

or multi-section and are transported

from the factory to a site and installed.

Homes that are permanently affixed to

a foundation often may be classified as

real property under applicable state law,

and may be financed with a mortgage.

Homes that are not permanently affixed

to a foundation generally are classified

as personal property, and are financed

with a retail installment sales agree-

ment.

12 Glossary

Margin: A percentage added to the index

for an adjustable-rate mortgage (ARM) to

establish the interest rate on each ad-

justment date.

Market Value: The current value of your

home based on what a purchaser would

pay. An appraisal is sometimes used to

determine market value.

Maturity Date: The date on which a

mortgage loan is scheduled to be paid in

full, as stated in the note.

Merged Credit Report: A credit report

issued by a credit reporting company

that combines information from two or

three major credit bureaus.

Modification: Any change to the terms

of a mortgage loan, including changes to

the interest rate, loan balance, or loan

term.

Money Market Account: A type of in-

vestment in which funds are invested in

short-term securities.

Mortgage: A loan using your home as

collateral. In some states the term mort-

gage is also used to describe the docu-

ment you sign (to grant the lender a lien

on your home). It also may be used to

indicate the amount of money you bor-

row, with interest, to purchase your

house. The amount of your mortgage

often is the purchase price of the home

minus your down payment.

Mortgage Broker: An individual or firm

that brings borrowers and lenders to-

gether for the purpose of loan origina-

tion. A mortgage broker typically takes

loan applications and may process

loans. A mortgage broker also may close

the loan.

Mortgage Insurance (MI): Insurance

that protects lenders against losses

caused by a borrower’s default on a

mortgage loan. MI typically is required

if the borrower’s down payment is less

than 20 percent of the purchase price.

Mortgage Insurance Premium (MIP):

The amount paid by a borrower for

mortgage insurance, either to a govern-

ment agency such as the Federal Hous-

ing Administration (FHA) or to a private

mortgage insurance (PMI) company.

Mortgage Lender: The lender providing

funds for a mortgage. Lenders also man-

age the credit and financial information

review, the property and the loan appli-

cation process through closing.

Mortgage Life Insurance: A type of

insurance that will pay off a mortgage if

the borrower dies while the loan is out-

standing; a form of credit life insurance.

Mortgage Rate: The interest rate you

pay to borrow the money to buy your

house.

Mortgagee: The institution or individual

to whom a mortgage is given.

Mortgagor: The owner of real estate who

pledges property as security for the re-

payment of a debt; the borrower.

Multifamily Mortgage: A mortgage loan

on a building with five or more dwelling

units.

Multifamily Properties: Typically,

buildings with five or more dwelling

units.

Multiple Listing Service (MLS): A

clearinghouse through which member

real estate brokerage firms regularly and

systematically exchange information

on listings of real estate properties and

share commissions with members who

locate purchasers. The MLS for an area

is usually operated by the local, private

real estate association as a joint venture

among its members designed to foster

real estate brokerage services.

Mutual Funds: A fund that pools the

money of its investors to buy a variety of

securities.

Glossary 13

Negative Amortization: An increase in

the balance of a loan caused by adding

unpaid interest to the loan balance; this

occurs when the payment does not cover

the interest due.

Net Monthly Income: Your take-home

pay after taxes. It is the amount of

money that you actually receive in your

paycheck.

Net Worth: The value of a company or

individual’s assets, including cash, less

total liabilities.

Non-Liquid Asset: An asset that cannot

easily be converted into cash.

Note: A written promise to pay a speci-

fied amount under the agreed upon

conditions.

Note Rate: The interest rate stated on a

mortgage note, or other loan agreement.

Offer: A formal bid from the home buyer

to the home seller to purchase a home.

Open House: When the seller’s real

estate agent opens the seller’s house to

the public. You don’t need a real estate

agent to attend an open house.

Original Principal Balance: The total

amount of principal owed on a mortgage

before any payments are made.

Origination Fee: A fee paid to a lender

or broker to cover the administrative

costs of processing a loan application.

The origination fee typically is stated in

the form of points. One point is one per-

cent of the mortgage amount.

Owner Financing: A transaction in

which the property seller provides all or

part of the financing for the buyer’s pur-

chase of the property.

Owner-Occupied Property: A property

that serves as the borrower’s primary

residence.

Partial Payment: A payment that is less

than the scheduled monthly payment on

a mortgage loan.

Payment Change Date: The date on

which a new monthly payment amount

takes effect, for example, on an adjust-

able-rate mortgage (ARM) loan.

Payment Cap: For an adjustable-rate

mortgage (ARM) or other variable rate

loan, a limit on the amount that pay-

ments can increase or decrease during

any one adjustment period.

Personal Property: Any property that is

not real property.

PITI: An acronym for the four primary

components of a monthly mortgage

payment: principle, interest, taxes, and

insurance (PITI).

PITI Reserves: A cash amount that a

borrower has available after making a

down payment and paying closing costs

for the purchase of a home. The princi-

pal, interest, taxes, and insurance (PITI)

reserves must equal the amount that the

borrower would have to pay for PITI for a

predefined number of months.

Planned Unit Development (PUD): A

real estate project in which individuals

hold title to a residential lot and home

while the common facilities are owned

and maintained by a homeowners’ as-

sociation for the benefit and use of the

individual PUD unit owners.

Point: One percent of the amount of the

mortgage loan. For example, if a loan

14 Glossary

is made for $50,000, one point equals

$500.

Power of Attorney: A legal document

that authorizes another person to act

on one’s behalf. A power of attorney can

grant complete authority or can be lim-

ited to certain acts and/or certain peri-

ods of time.

Pre-Approval: A process by which a

lender provides a prospective borrower

with an indication of how much money

he or she will be eligible to borrow when

applying for a mortgage loan. This pro-

cess typically includes a review of the

applicant’s credit history and may in-

volve the review and verification of in-

come and assets to close.

Pre-Approval Letter: A letter from a

mortgage lender indicating that you

qualify for a mortgage of a specific

amount. It also shows a home seller that

you’re a serious buyer.

Pre-Qualification: A preliminary assess-

ment by a lender of the amount it will

lend to a potential home buyer. The pro-

cess of determining how much money a

prospective home buyer may be eligible

to borrow before he or she applies for a

loan.

Pre-Qualification Letter: A letter from

a mortgage lender that states that you’re

pre-qualified to buy a home, but does

not commit the lender to a particular

mortgage amount.

Predatory Lending: Abusive lending

practices that include making mort-

gage loans to people who do not have

the income to repay them or repeatedly

refinancing loans, charging high points

and fees each time and “packing” credit

insurance onto a loan.

Prepayment: Any amount paid to re-

duce the principal balance of a loan

before the scheduled due date.

Prepayment Penalty: A fee that a bor-

rower may be required to pay to the

lender, in the early years of a mortgage

loan, for repaying the loan in full or pre-

paying a substantial amount to reduce

the unpaid principle balance.

Principal: The amount of money bor-

rowed or the amount of the loan that

has not yet been repaid to the lender.

This does not include the interest you

will pay to borrow that money. The

principal balance (sometimes called the

outstanding or unpaid principal balance)

is the amount owed on the loan minus

the amount you’ve repaid.

Private Mortgage Insurance: Insur-

ance for conventional mortgage loans

that protects the lender from loss in the

event of default by the borrower. See

Mortgage Insurance

Promissory Note: A written promise to

repay a specified amount over a speci-

fied period of time.

Property Appreciation: See “Apprecia-

tion.”

Purchase and Sale Agreement: A docu-

ment that details the price and condi-

tions for a transaction. In connection

with the sale of a residential property,

the agreement typically would include:

information about the property to be

sold, sale price, down payment, earnest

money deposit, financing, closing date,

occupancy date, length of time the offer

is valid, and any special contingencies.

Purchase Money Mortgage: A mortgage

loan that enables a borrower to acquire

a property.

Qualifying Guidelines: Criteria used to

determine eligibility for a loan.

Glossary 15

Qualifying Ratios: Calculations that are

used in determining the loan amount

that a borrower qualifies for, typically

a comparison of the borrower’s total

monthly income to monthly debt pay-

ments and other recurring monthly

obligations.

Quality Control: A system of safeguards

to ensure that loans are originated, un-

derwritten and serviced according to the

lender’s standards and, if applicable, the

standards of the investor, governmental

agency, or mortgage insurer.

Radon: A toxic gas found in the soil

beneath a house that can contribute to

cancer and other illnesses.

Rate Cap: The limit on the amount an

interest rate on an adjustable-rate mort-

gage (ARM) can increase or decrease

during an adjustment period.

Rate Lock: An agreement in which an

interest rate is “locked in” or guaranteed

for a specified period of time prior to

closing. See also “Lock-in Rate.”

Ratified Sales Contract: A contract

that shows both you and the seller of

the house have agreed to your offer. This

offer may include sales contingencies,

such as obtaining a mortgage of a cer-

tain type and rate, getting an acceptable

inspection, making repairs, closing by a

certain date, etc.

Real Estate Professional: An individual

who provides services in buying and

selling homes. The real estate profes-

sional is paid a percentage of the home

sale price by the seller. Unless you’ve

specifically contracted with a buyer’s

agent, the real estate professional rep-

resents the interest of the seller. Real

estate professionals may be able to refer

you to local lenders or mortgage brokers,

but are generally not involved in the

lending process.

Real Estate Settlement Procedures

Act (RESPA): A federal law that requires

lenders to provide home mortgage bor-

rowers with information about transac-

tion-related costs prior to settlement, as

well as information during the life of the

loan regarding servicing and escrow ac-

counts. RESPA also prohibits kickbacks

and unearned fees in the mortgage loan

business.

Real Property: Land and anything

permanently affixed thereto — including

buildings, fences, trees, and minerals.

Recorder: The public official who keeps

records of transactions that affect real

property in the area. Sometimes known

as a “Registrar of Deeds” or “County

Clerk.”

Recording: The filing of a lien or other

legal documents in the appropriate pub-

lic record.

Refinance: Getting a new mortgage with

all or some portion of the proceeds used

to pay off the prior mortgage.

Rehabilitation Mortgage: A mortgage

loan made to cover the costs of repair-

ing, improving, and sometimes acquiring

an existing property.

Remaining Term: The original number

of payments due on the loan minus the

number of payments that have been

made.

Repayment Plan: An arrangement by

which a borrower agrees to make ad-

ditional payments to pay down past due

amounts while still making regularly

scheduled payments.

Replacement Cost: The cost to replace

damaged personal property without a

deduction for depreciation.

16 Glossary

Rescission: The cancellation or annul-

ment of a transaction or contract by

operation of law or by mutual consent.

Borrowers have a right to cancel certain

mortgage refinance and home equity

transactions within three business days

after closing, or for up to three years in

certain instances.

Revolving Debt: Credit that is extended

by a creditor under a plan in which

(1) the creditor contemplates repeated

transactions; (2) the creditor may im-

pose a finance charge from time to time

on an outstanding unpaid balance; and

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

tended to the consumer during the term

of the plan is generally made available to

the extent that any outstanding balance

is repaid.

Right of First Refusal: A provision in

an agreement that requires the owner

of a property to give another party the

first opportunity to purchase or lease

the property before he or she offers it for

sale or lease to others.

Rural Housing Service (RHS): An

agency within the U.S. Department of

Agriculture (USDA), which operates a

range of programs to help rural commu-

nities and individuals by providing loan

and grants for housing and community

facilities. The agency also works with

private lenders to guarantee loans for

the purchase or construction of single-

family housing.

Securities: A financial form that shows

the holder owns a share or shares of a

company (stock) or has loaned money to

a company or government organization

(bond).

Sale-Leaseback: A transaction in which

the buyer leases the property back to

the seller for a specified period of time.

Second Mortgage: A mortgage that has

a lien position subordinate to the first

mortgage.

Secondary Mortgage Market: The mar-

ket in which mortgage loan and mort-

gage-backed securities are bought and

sold.

Secured Loan: A loan that is backed by

property such as a house, car, jewelry,

etc.

Security: The property that will be given

or pledged as collateral for a loan.

Securities: Financial forms that shows

the holder owns a share or shares of a

company (stocks) or has loaned money

to a company or government organiza-

tion (bonds).

Seller Take-Back: An agreement in

which the seller of a property provides

financing to the buyer for the home pur-

chase. See also “Owner Financing.”

Servicer: A firm that performs servicing

functions, including collecting mortgage

payments, paying the borrower’s taxes

and insurance and generally managing

borrower escrow accounts.

Servicing: The tasks a lender performs

to protect the mortgage investment,

including the collection of mortgage

payments, escrow administration, and

delinquency management.

Settlement: The process of complet-

ing a loan transaction at which time the

mortgage documents are signed and

then recorded, funds are disbursed, and

the property is transferred to the buyer

(if applicable). Also called closing or es-

crow in different jurisdictions. See also

“Closing”

Settlement Statement: A document

that lists all closing costs on a consumer

mortgage transaction.

Glossary 17

Single-Family Properties: One- to

four-unit properties including detached

homes, townhouses, condominiums, and

cooperatives, and manufactured homes

attached to a permanent foundation and

classified as real property under appli-

cable state law.

Soft Second Loan: A second mortgage

whose payment is forgiven or is deferred

until resale of the property.

Servicemembers Civil Relief Act: A

federal law that restricts the enforce-

ment of civilian debts against certain

military personnel who may not be able

to pay because of active military service.

It also provides other protections to cer-

tain military personel.

Subordinate Financing: Any mortgage

or other lien with lower priority than the

first mortgage.

Survey: A precise measurement of a

property by a licensed surveyor, show-

ing legal boundaries of a property and

the dimensions and location of improve-

ments.

Sweat Equity: A borrower’s contribution

to the down payment for the purchase of

a property in the form of labor or ser-

vices rather than cash.

Taxes and Insurance: Funds collected

as part of the borrower’s monthly pay-

ment and held in escrow for the pay-

ment of the borrower’s, or funds paid by

the borrower for, state and local prop-

erty taxes and insurance premiums.

Termite Inspection: An inspection to

determine whether a property has ter-

mite infestation or termite damage. In

many parts of the country, a home must

be inspected for termites before it can be

sold.

Third-Party Origination: A process by

which a lender uses another party to

completely or partially originate, pro-

cess, underwrite, close, fund, or pack-

age a mortgage loan. See also “Mortgage

Broker.”

Title: The right to, and the ownership

of, property. A title or deed is sometimes

used as proof of ownership of land.

Title Insurance: Insurance that pro-

tects lenders and homeowners against

legal problems with the title.

Title Search: A check of the public re-

cords to ensure that the seller is the le-

gal owner of the property and to identify

any liens or claims against the property.

Trade Equity: Real estate or assets

given to the seller as part of the down

payment for the property.

Transfer Tax: State or local tax payable

when title to property passes from one

owner to another.

Treasury Index: An index that is used

to determine interest rate changes for

certain adjustable-rate mortgage (ARM)

plans. It is based on the results of auc-

tions by the U.S. Treasury of Treasury

bills and securities.

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

eral law that requires disclosure of a

truth-in-lending statement for consumer

credit. The statement includes a sum-

mary of the total cost of credit, such as

the annual percentage rate (APR) and

other specifics of the credit.

Two- to Four- Family Property: A

residential property that provides liv-

ing space (dwelling units) for two to

four families, although ownership of the

structure is evidenced by a single deed;

a loan secured by such a property is

considered to be a single-family mort-

gage.

18 Glossary

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.

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).

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