Glossary of Terms

ADJUSTMENT CAP - a provision of an ARM limiting how much interest rates may increase per adjustment period

AMORTIZATION - the gradual repayment of a mortgage by installments; the loan amount will be paid in full upon completion of all payments

AMORTIZATION SCHEDULE - a timetable for payment of a mortgage showing the amount of each payment applied to interest and principal

ANNUAL PERCENTAGE RATE (APR) - the total yearly cost of a mortgage stated as a percentage of the loan amount; includes the base interest rate, mortgage insurance, and loan origination fee (points)

APPRAISAL - a professional opinion of the market value of a property as of a specific date. The appraiser determines the market value of a home based on the selling prices of homes which have recently sold in the area and the condition of the property

APPRECIATION - an increase in the value of a property due to changes in market conditions

ASSESSED VALUE - the valuation placed upon property by a public tax assessor for purposes of taxation

BALLOON MORTGAGE - a mortgage which is not fully amortized resulting in a “balloon” or lump sum due at a specific date, usually at the end of the term of the loan

BUILDING CODE - local regulation that control the design, construction, and materials used in construction; based on health and safely standards

CASH RESERVES - a requirement of some lenders that buyers have sufficient cash remaining after closing

CLEAR TITLE - a title that is free of liens and legal questions as to ownership of the property

CLOSING - the conclusion of a transaction. Includes the disbursement of funds necessary to the sale or loan transaction, the “Closing Statement” which gives an accounting of all funds received (including escrow deposits, taxes, hazard insurance, mortgage insurance) delivery of a deed, etc.

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”

COMMISSION - an agent’s fee for negotiating a real estates loan transaction, often expressed as a percentage of the sales price or mortgage amount

COMMUNITY PROPERTY - a type of ownership for married couples

CONDOMINIUM - a form of property ownership in which the homeowner holds title to an individual dwelling unit plus an interest in common areas of a multi-unit project

CONTINGENCY - a condition that must be met before a contract is legally binding; Example: the sale of a house might be contingent upon the borrower qualifying for a loan or the seller paying for certain repairs

CREDIT REPORT - a report of an individual’s credit history prepared by credit bureau and used by a lender in determining a loan applicant’s creditworthiness

DEED (also known as a GRANT DEED) - the legal document conveying title to the property

DEED OF TRUST - lender’s security instrument signed by the borrower and recorded against the real property to secure the payment of a note

DEFAULT - failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage

DEPOSIT - Earnest money offered when sales contract is signed (often deposit into an escrow account after the offer is accepted)

DISCOUNT POINTS (see Points)

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 in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage

EARNEST MONEY - a deposit given to the seller to show that a prospective is serious about buying a house

EASEMENT - a right of way giving persons other than the owner access to or over a property; entitles holder to specified limited use, privilege, or benefit

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, marital status, or receipt of income from public assistance programs

EQUITY- the difference between the market value of a property and the homeowner’s outstanding mortgage balance

ESCROW - the holding of documents and money by a neutral third party prior to closing

ESCROW AGENT - assures that all documentation related to the sale of a house has been completed properly, including the title search and title insurance, explains all closing documents to the buyer and the seller, obtains their signatures where necessary and records the documents

ESCROW ACCOUNT (also called an IMPOUND or RESERVE ACCOUNT) - account held by the lender into which a homeowner pays money for taxes and insurance

FAIR CREDIT REPORTING ACT- a consumer protection law that sets up a procedure for correcting mistakes on one’s credit report

FAIR MARKET VALUE - price at which a seller is willing to sell and a buyer is willing to buy, each of whom has reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell

FHA (Federal Housing Administration) - a division of the Department of Housing and Urban Development, whose main activity is insuring of residential mortgage loans made by private lenders

FHLMC (Federal Home Loan Mortgage Corp.) - a private corporation created by Congress to support the secondary market. It sells participation certificates secured by pools of conventional mortgage loans. Popularly known as Freddie Mac

FIRST TRUST DEED - the real estate loan that creates a primary lien against real property; has first claim in the event of default

FIXED RATE MORTGAGE -a mortgage in which the interest rate and payment amount are the same for the entire term of the loan

FLOOD INSURANCE - insurance required for properties in federally designated flood areas

FNMA (Federal National Mortgage Association) - a private corporation created by Congress to support the secondary market. FNMA sells mortgage-backed securities backed by pools of conventional loans. Popularly known as Fannie Mae

GROSS MONTHLY INCOME - The amount of consistent and stable income that an individual receives each month, averaged over a period of time. This amount includes overtime pay, bonuses, commissions, and income from dividends or interest, provided that the individual can show a consistent history of receiving such income

HOMEOWNERS ASSOCIATION - an organization of homeowners residing within a particular development, whose major purpose is to maintain and provide community facilities and services for the common enjoyment of the residents

HAZARD INSURANCE - insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism, or other hazards

HOMEOWNER’S INSURANCE - an insurance policy that combines liability coverage and hazard insurance

HOMEOWNER’S WARRANTY - a type of insurance that covers repairs to specified parts of a house for a specific period of time

INDEX - Basis for adjustment as stated in the Note. Indices include COFI (Cost of Funds Index-based on banks cost of funds; this is the most stable index), 1 Year Treasury, 6 Months CD, Libor (a European Index), etc. The Index fluctuates. When the index is added to the Margin it gives you the ‘Fully indexed Rate” This rate may be limited by a Payment Cap or Lifetime Cap

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 right of survivorship

LATE CHARGE - the penalty a borrower must pay when a payment is made after the due date

LIEN - a legal claim against a property that must be paid when the property is sold

LIFETIME CAP - the highest the rate can go over the life of the loan

LOAN-TO-VALUE RATIO (LTV) - the relationship between the amount of a mortgage and the total value of the property; Example: $100,000 Purchase Price with $95,000 loan, LTV is 95%

LOCK-IN (Rate Lock) - a written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed with in a set period of time (and provided the borrower has met the lender’s requirements and conditions). The lock-in also usually specifies the number of points to be paid at closing

MARGIN - the set percentage the lender adds to the index rate to determine the interest rate of ARM

MARKET VALUE - the highest price a willing buyer will pay and the lowest price a willing seller would accept

MORTGAGE - a legal document that pledges a property to the lender as security for payment of a debt

MORTGAGE INSURANCE (also Private Mortgage Insurance) - insurance provided by non-government insurers that protects lenders against loss if a borrower defaults

MORTGAGE INSURANCE PREMIUM (MIP) - the fee paid by a borrower to FHA or a private insurer for mortgage insurance

MORTGAGE NOTE - a legal document obligating a borrower to repay a loan stated interest rate during a specified period of time; the agreement is secured by a mortgage

NEGATIVE AMORTIZATION - payment terms under which the borrower’s monthly payments do not cover the interest due; as a result, the loan balance increases

NOTICE OF DE FAULT - 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 a lender for processing a loan application; stated as a percentage of the mortgage amount, or points

OWNER FINANCING - a purchase in which the seller provides all or part of the financing

PAYMENT CAP - a provision of some ARMs limiting how much a borrower’s payments may increase regardless of how much the interest rate increases; may result in negative amortization

PITI (principal, interest, taxes, and insurance) - the components of a monthly housing payment

PLANNED UNIT DEVELOPMENT (PUD) - a subdivision having lots or areas owned in common and reserved for the use of some or all of the owners of the separately owned lots

POINTS - “1” point equals “1” percent of the amount of the mortgage

PREPAYMENT PENALTY - a fee charged to a borrower who pays off a loan before it is due (most do not have prepayment penalties)

PREAPPROVAL - the process of completing the loan application, running the credit report, and collecting all documentation on the borrower, the borrower is then “approved” by the lender for a specified amount, subject to making an offer on a property and approval of the property (appraisal, etc.)

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, the part of the monthly payment that reduces the outstanding balance of a mortgage

PROPERTY INSPECTION - the property/ mechanical inspector examines a home to evaluate its plumbing, electrical, appliances, heating and cooling systems

PURCHASE AND SALE AGREEMENT (Purchase Contract) - a written contract signed by the buyer and seller stating the terms and conditions under which the property will be sold

QUALIFYING RATIOS - guidelines applied by lenders to determine how large a loan to grant a home buyer

REAL ESTATE AGENT - a person licensed to negotiate and transact the sale of real estate on behalf of the owner

REAL ESTATE SETTLEMENT PROCEDURES ACT - a consumer protection law that requires lenders to give borrowers advance notice of closing costs

RESPA- REAL ESTATE SETTLEMENT PROCEDURES ACT - a federal law that requires lenders to provide home mortgage borrowers with information about known estimated settlement costs

SECOND MORTGAGE - a mortgage that has rights that are subordinate to the rights of the first mortgage holder

SECONDARY MORTGAGE MARKET - the buying and selling of existing mortgages

SELLER CARRY BACK - see Owner Financing

SETTLEMENT STATEMENT - the computation of costs payable at closing which determines the seller’s net proceeds and buyer’s net payment

SETTLEMENT COSTS - money paid by borrowers and sellers to effect the closing of a real estate transaction. This normally includes origination fees, discount points, loan fees, title insurance and prepaid items such as taxes and insurance

SERVICER - after a mortgage closes, the loan servicer collects the payments, manages impound accounts, pay escrowed taxes and insurance, and manages delinquent payments

SURVEY - a drawing showing the legal boundaries of a property

TITLE - a legal document establishing the right of ownership; may be acquired through purchase, inheritance, gift, or foreclosure of a mortgage

TITLE COMPANY - a company that specializes in insuring title to property

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

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

TITLE VESTING - how title is held on the property

TENANCY IN COMMON - a type of joint ownership in a property without the right of survivorship

UNDERWRITING - the process of evaluating the property as outlined in the appraisal report and the loan application and documentation of the borrower (willingness and ability to repay the loan) to determine the risk involved for the lender

VETERANS ADMINISTRATION (VA) - an independent agency of the federal government created in 1930. The VA home loan guaranty program is designed to encourage lenders to offer long-term, low down payment mortgages to eligible veterans by guaranteeing the lender against loss

ZONING - city or county laws specifying how property may be used in specific areas