Glossary

If you need a description or clarification of any terms used on this website, you may click on the letters below.

B C D E F G H I J L M N O P Q R S T U

Adjustable-Rate Mortgage (ARM): A mortgage loan in which the interest rate adjusts periodically based on changes in a predetermined market rate index.

Amortization: A term used to describe the process of paying off a loan over a predetermined period of time at a specific interest rate. The amortization of a loan includes payment of interest and a portion of the outstanding principal balance during each payment cycle.

Annual Percentage Rate (APR): The total yearly cost of a mortgage stated as a percentage of the loan amount; includes such items as the base interest rate, primary mortgage insurance, and loan origination fee (points).

Appraisal: A professional analysis, including references to sales of comparable properties, is used to estimate the value of the property.

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

Assessed Value: The valuation placed upon property by a public tax assessor for purposes of taxation.

Asset: Tangible or intangible property that has monetary value. An asset is used to pay for a down payment and closing costs, and provides future benefits.

Bi-Weekly Mortgage: A mortgage loan in which principal and interest (P&I) payments are made every two weeks and the payment amount is equal to one-half of the monthly payment.

Cap: A provision of an Adjustable Rate Mortgage (ARM), limiting how much the interest rate or mortgage payments may increase or decrease.

Cash-Out Refinance: A mortgage refinancing transaction in which the borrower receives cash from the new loan in excess of the required amount to repay the first mortgage, closing costs, and any subordinate liens. A limited cash-out refinance is a similar transaction in which the borrower does not receive any additional cash from the new mortgage. In a no-cash-out refinance, the borrower receives a mortgage only for the outstanding principal balance of the first mortgage (rounded to the next $100 increment).

Cash Reserve: A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two monthly mortgage payments.

Clear Title: A title that is free of liens or legal questions as to ownership of property.

Closing: A meeting at which sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called "settlement".

Closing Costs: Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called "settlement costs".

Commitment Letter: A formal offer, in writing by a lender, stating the terms under which it agrees to lend money to a homebuyer.

Condominium: A form of property ownership in which the homeowner holds title to an individual dwelling unit, an undivided interest in common areas of a multi-unit project, and sometimes the exclusive use of certain limited common areas.

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

Contingent Liability: Potential debt that a borrower may incur as a result of cosigning a loan for another (primary) payor to obtain credit.

Conventional Mortgage: Any mortgage that is not insured or guaranteed by the federal government.

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

Credit Score: A numerical value that summarizes a borrower’s credit risk at a given point in time. Credit scores are calculated using statistical methods that evaluation certain information that has proven to be indicative of loan performance.

Creditworthiness: The ability of a borrower to successfully manage his or her finances and make timely payments on debt as demonstrated by the borrower’s credit history.

Deed: The legal document conveying title to a property.

Default: The failure to make a mortgage payment on a timely basis or to otherwise comply with other requirements of a mortgage.

Delinquency: A loan in which a payment is overdue but not yet in default.

Depreciation: A decline in the value of a property; the opposite of "appreciation".

Down Payment: The part of the purchase price which the buyer pays in cash and does not finance with a mortgage.

Due-On-Sale Clause: A provision on a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

Earnest Money: A deposit made by the potential home buyer to show that he or she is serious about buying the house.

Easement: A right of way giving persons other than the owner access to or over a property.

Equal Credit Opportunity Act (ECOA): A federal law that prohibits lenders from denying mortgages on the basis of the borrower's race, color, religion, national origin, age, sex, martial status, or receipt of income from public assistance programs.

Equity: A homeowner's financial interest in a property. Equity is the difference between the fair market value of a property and the amount still owed on the mortgage.

Escrow: The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.

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

FICO Score: A generic credit score developed by Fair, Isaac and Company, Inc., that was designed to predict the possibility of borrowers becoming seriously delinquent in their credit obligations.

First Mortgage: A mortgage that has first claim in the event of default.

Flood Insurance: Insurance that compensates for physical property damages resulting from flooding. It is required for properties located in federally designated flood areas.

Forbearance: The lender's postponement of foreclosure to give the borrower time to catch up on overdue payments.

Foreclosure: The legal process by which a mortgaged property may be sold when a mortgage is in default.

Gross Monthly Income: An individual’s total annual income, allocated by month, before taxes and benefits are deducted.

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

Homeowner's Insurance: An insurance policy that combines personal liability coverage and hazard insurance coverage for a dwelling and its contents.

Interest: The fee charged for borrowing money.

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

Late Charge: The penalty a borrower must pay when a payment is made after the due date.

Liability: A debt.

Lien: A legal claim against a property that must be paid off when the property is sold.

Loan-To-Value (LTV) Ratio: The relationship between the amount of the mortgage loan a borrower is requesting and the estimated market value of the property. LTV is expressed as a percentage of the property’s value (e.g., an LTV of 80 percent means the loan will represent 80 percent of the property’s cost).

Lock-In: A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.

Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Note: A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the mortgage note is secured by a mortgage.

Mortgage Interest Rate: The rate of interest in effect for the monthly payment due.

Mortgagee: The lender in a mortgage agreement.

Mortgagor: The borrower in a mortgage agreement.

Net Worth: The value of all assets minus liabilities.

Notice of Default: A formal written notice to a borrower that a default has occurred and that legal action may be taken.

Origination Fee: A fee paid to the lender for processing a loan application; it is stated as a percentage of the mortgage amount.

PITI: Stands for principal, interest, taxes, and insurance - the components of a monthly mortgage payment.

Planned Unit Developments (PUDs): A planned unit development is a project or subdivision that consists of common property that is owned and maintained by an owners' association for the benefit and use of the individual PUD unit owners.

Points: A one-time charge by the lender to increase the yield of the loan; a point is 1 percent of the amount of the mortgage.

Prepayment Penalty: A fee that may be charged to a borrower who pays off a loan before it is due.

Prequalification: The process of determining how much money a prospective home buyer will be eligible to borrow before a loan is applied for.

Principal: The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

Principal and Interest (P&I) Payment: The portion of a borrower’s monthly mortgage payment that comprises the debt service on the loan.

Private Mortgage Insurance (PMI): Insurance provided by non-government insurers that protect lenders against loss if a borrower defaults. Fannie Mae generally requires private mortgage insurance for loans with loan-to-value (LTV) percentages greater than 80 percent.

Purchase and Sale Agreement: A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Qualifying Ratios: Guidelines applied by the lenders to determine how large a loan to grant a home buyer.

Radon: A radioactive gas found in some homes that in sufficient concentrations can cause health problems.

Real Estate Sales Professional: A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA): A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Refinancing: The process of paying off one loan with the proceeds from a new loan using the same property as security.

Secondary Mortgage Market: The buying and selling of existing mortgages.

Second Trust (Mortgage): A mortgage that is subordinated or junior to a first mortgage.

Settlement Sheet: The computation of costs payable at closing that determines the seller's net proceeds and the buyer's net payment.

Tenancy By Entirety: A type of joint ownership of property that provides right of survivorship and is available only to a husband and wife.

Tenancy In Common: A type of joint ownership in a property without right of survivorship.

Title: A legal document evidencing a person's right to or ownership of a property.

Title Company: A company that specializes in examining and insuring titles to real estate.

Title Insurance: Insurance to protect the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.

Title Search: A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Transfer Tax: State or local tax payable when title passes from one owner to another. This may vary from state to state.

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

Underwriting: The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower's creditworthiness and the quality of the property itself.