Any informed borrower is simply less vulnerable to fraud and abuse. -Alan Greenspan

Glossary

A

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

Annuity An amount paid yearly or at other regular intervals, often at a guaranteed minimum amount. Also, a type of insurance policy in which the policy holder makes payments for a fixed period or until a stated age, and then receives annuity payments from the insurance company.

Appraisal A written estimate or opinion of a property's value prepared by a qualified appraiser.

Appreciation An increase in the value of an item (e.g., the increase in the market value of real estate).

Asset Anything of monetary value that is owned by a person or company. Assets include real property, personal property, stocks, mutual funds, etc.

B

Balance Sheet A financial statement that shows assets, liabilities, and net worth as of a specific date.

Balloon Mortgage A mortgage in which the borrower's monthly payments are amortized over a longer period than the actual term of the mortgage. As a result, at the end of the loan term, the borrower must pay off the remaining balance with a single lump sum payment or refinance the loan.

Bankruptcy A legal proceeding that allows debtors to eliminate or restructure debts when they have financial difficulties.

Before-Tax Income Income before taxes are deducted. Also known as "gross income."

Bridge Loan A short-term loan secured by the borrower's current home (which is usually for sale) that allows the proceeds to be used for building or closing on a new house before the current home is sold. Also known as a "swing loan."

Broker An individual or firm that acts as an agent between providers and users of products or services, such as a mortgage broker or real estate broker.

C

Cap For an adjustable-rate mortgage (ARM), a limitation on the amount the interest rate or mortgage payments may increase or decrease.

Cash-out Refinance A refinance transaction 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.

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.

Clear Title Ownership that is free of liens, defects, or other legal encumbrances.

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, closing 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.

Closing Costs The fees charged in connection with a mortgage loan transaction. Money paid by a buyer (and/or seller or other third party, if applicable) 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 deposits for taxes and insurance.

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 agreement.

Commitment Letter A binding offer by a lender to loan money at a future date subject to the borrower's compliance with stated conditions.

Comparables An abbreviation for "comparable properties," which are used as a comparison in determining the current value of a property that is being appraised.

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 FHA, VA or RHS.

Cost of Funds Index (COFI) An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the weighted monthly average cost of deposits, advances, and other borrowings of members of the Federal Home Loan Bank of San Francisco.

D

Debt-to-Income Ratio The relationship between a borrower's total monthly debt payments (including proposed housing expenses) and his or her gross monthly income; this calculation is used in determining the mortgage amount that a borrower qualifies for.

Deed The legal document conveying title to a property (i.e., transferring the ownership of real property from one party to another.)

Delinquency Failure to make a payment when it is due. The condition of a loan when a scheduled payment has not been received by the due date, but generally used to refer to a loan for which payment is 30 or more days past due.

E

Earnest Money Deposit A deposit submitted with a purchase offer to show that the buyer's offer is being made in "good faith."

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, religion, national origin, age, sex, or marital status; the fact that all or part of the applicant'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 Protection Act.

Equity The owner's interest in a property, calculated as the current fair market value of the property less the amount of existing liens.

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.

Exclusive Listing A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time.

F

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.

FHA-Insured Loan A loan that is insured by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD).

First Mortgage A mortgage that is the primary lien against a property.

Fixed-Period Adjustable-Rate Mortgage 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.

Fixed-Rate Mortgage (FRM) A mortgage loan in which the interest rate does not change during the entire term.

Flood Insurance Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood hazard zones.

G

General Contractor A person who oversees a home improvement or construction project and handles various aspects such as scheduling workers and ordering supplies.

Good Faith Estimate (GFE) A form required by the Real Estate Settlement and Procedures Act (RESPA) that discloses an estimate of the amount or range of charges, for specific settlement services the borrower is likely to incur in connection with the mortgage transaction.

H

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

Home Equity Line of Credit A type of revolving loan, that enables a home owner to obtain multiple advances of the loan proceeds 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 An examination of the construction, condition and internal systems of a home prior to purchase; satisfactory home inspection may be a condition of purchase.

Homeowner's Insurance A broad form of insurance coverage that combines hazard insurance with personal liability protection and other coverage.

HUD-1 Settlement Statement A document that lists all closing costs on a real estate purchase or refinance transaction. Also known as the "closing statement" or "settlement sheet."

I

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.

Initial Interest Rate The original interest rate for an adjustable-rate mortgage (ARM). Sometimes known as the "start rate."

Installment Debt A loan that is repaid in accordance with a schedule of payments for a specified term (such as an automobile loan).

Investment Property A property purchased to generate rental income, tax benefits, or profitable resale rather than to serve as the borrower's primary residence.

J

Jumbo Loan A loan that exceeds the mortgage amount eligible for purchase by Fannie Mae or Freddie Mac. Also called "nonconforming loan."

Junior Mortgage A loan that is subordinate to the primary loan or first-lien mortgage loan, such as a second or third mortgage.

L

Late Charge A penalty imposed by the lender when a borrower fails to make a scheduled payment on time.

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.

Lien A legal encumbrance or claim on property as security for a debt.

Liquid Asset A cash asset or an asset that is easily converted into cash.

Loan Origination The process by which a lender makes a loan which may include taking a loan application, processing and underwriting the application, and closing the loan.

Loan-To-Value (LTV) Ratio The relationship between the loan amount and the value of the property (the lower of appraised value or sales price), expressed 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 An agreement in which the lender agrees to "lock-in" the borrower's interest rate for a set period of time before closing.

M

Margin For an adjustable-rate mortgage (ARM), the amount that is added to the index to determine the interest rate on each adjustment date, as stated in the note.

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 the three major credit repositories.

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% of the purchase price.

Mortgage Life Insurance A type of insurance that will pay off a mortgage if the borrower dies while the loan is outstanding; a form of credit life insurance.

N

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 Worth The value of a company or individual's assets, including cash, less total liabilities.

Nonliquid Asset An asset that cannot easily be converted into cash.

O

Payment Change Date The date on which a new monthly payment amount takes effect, for example, on an adjustable-rate mortgage (ARM) loan.

Payment Cap For an adjustable-rate mortgage (ARM) or other variable rate loan, a limit on the amount that payments can increase or decrease during any one adjustment period.

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 principal, 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' association for the benefit and use of the individual PUD unit owners.

Point An amount equal to 1 percent of the loan amount.

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 limited to certain acts and/or certain periods 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 process typically includes a review of the applicant???s credit history and may involve the review and verification of income and assets to close.

Pre-Qualification A preliminary assessment by a lender of the amount it will lend to a potential homebuyer. The process of determining how much money a prospective home buyer may be eligible to borrow before he or she applies for a loan.

Prepayment Penalty A fee that a borrower may be required to pay to the lender, in the early years of a mortgage loan, for repaying the loan in full or prepaying a substantial amount to reduce the unpaid principal balance.

Private Mortgage Insurance (PMI) Insurance for conventional mortgage loans that protects the lender from loss in the event of default by the borrower.

Purchase and Sale Agreement A document that details the price and conditions 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.

Q

Qualifying Guidelines Criteria used to determine eligibility for a loan.

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 payments and other recurring monthly obligations.

Quality Control A system of safeguards to ensure that loans are originated, underwritten and serviced according to the lender's standards and, if applicable, the standards of the investor, governmental agency, or mortgage insurer.

R

Repayment Plan An arrangement by which a borrower agrees to make additional payments to pay down past due amounts while still making regularly scheduled payments.

Rescission The cancellation or annulment of a transaction or contract by operation of law or by mutual consent. Borrowers may have a right to cancel certain mortgage refinance 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 impose a finance charge from time to time on an outstanding unpaid balance; and (3) the amount of credit that may be extended 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 communities 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.

S

Second Mortgage A mortgage that has a lien position subordinate to the first mortgage.

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.

Servicer A firm that performs servicing functions, including collecting mortgage payments, paying the borrower's taxes and insurance and generally managing borrower escrow accounts.

Settlement The process of completing 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 escrow in different jurisdictions.

Subordinate Financing Any mortgage or other lien with lower priority than the first mortgage.

Sweat Equity A borrower's contribution to the down payment for the purchase of a property in the form of labor or services rather than cash.

T

Title Insurance Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against losses arising from defects in the title not listed in the title report or abstract.

Transfer Tax State or local tax payable when title to property passes from one owner to another.

Truth-in-Lending A federal law intended to promote the informed use of consumer credit by requiring disclosure about its terms and costs. Creditors are required to disclose the cost of credit as a dollar amount (the finance charge) and as an annual percentage rate (APR).

V

VA Guaranteed Loan A mortgage loan that is guaranteed by the U.S. Department of Veterans Affairs (VA).

W

Walkthrough 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.