Annual Percentage Rate (APR) – The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. The APR is often slightly higher than the published interest rate because it takes into account the financing of closing costs or pre-paid percentage points.
Appraisal – A professional appraiser’s estimate of the market value of a property. Appraisals take into account the local market conditions and the characteristics of a property. They are required by most lenders.
Appreciation – An increase in a property’s value due to market changes, home improvements, or other factors.
Assessed Value – The value placed on a home by city or county assessors that determines property taxes. Generally based on a percentage of the home’s overall market value.
Balloon Loans – A type of loan where the regular monthly payments are followed by a lump sum or “balloon” payment of the total remaining balance.
Cap – The maximum amount an interest rate or monthly payment may increase, either at adjustment time or over the life of the mortgage. Adjustable rate mortgages (ARMs) usually have both annual and lifetime caps. Also known as a Rate Cap.
Cash Reserve – Cash that is sometimes required to be held in reserve in addition to the down payment and closing costs. The amount is determined by the lender.
Clear Title – A clear title is one with no “defects” (no liens on the property, etc.). Only properties with clear titles can be sold. Think of the expression: “You own it free and clear.”
Closing – The official transfer of property ownership from seller to buyer. It usually happens in the form of a formal meeting between the buyer, seller, settlement agent, and the buyer’s and seller’s agents. At closing, the buyer will sign the mortgage, the seller will receive payment for the property, and the buyer and/or seller will pay the closing costs. Also referred to as Settlement.
Closing Costs – The total costs of completing the transfer of ownership of the property, other than the purchase price. Closing Costs usually include fees for loan origination, home appraisal, survey and real estate agent’s commission. They may also include prepayment of taxes and insurance, and real estate transfer taxes. Closing costs usually amount to about 2 to 4 percent of the purchase price of the home.
Comparative Market Analysis – A real estate evaluation that estimates the current market value of a home by comparing it with recently sold homes in the same area.
Contingency – Any condition that must be met before a contract becomes binding. For example, an agreement can be contingent on the sale of the buyer’s current home.
Conventional Mortgage – Any mortgage that’s not insured or guaranteed by the federal government.
Counter Offer – A response to a purchase offer that rejects all or part of the original offer but keeps the negotiations open in hopes of reaching an agreement.
Credit Bureau – A credit-reporting agency that gives financial information about potential borrowers to lenders. Currently, there are three companies that maintain national credit-reporting databases: Equifax, Experian, and Trans Union.
Credit Report – A report provided by credit bureaus containing information about a borrower’s credit history. Your credit report is like a report card of how you’ve paid your credit card debt and other loans over the years (as well as how much debt you currently have).
Credit Score – A computer-generated score used to determine how likely a person is to repay a loan. Your credit score is based on your credit report. Lenders use this score to analyze your credit report and to determine your credit worthiness. You’ll find more information about credit scores and reports at www.homebuyingguide.org [Free information provided by the Fannie Mae Foundation]
Debt-to-Income Ratio – Also known as debt-to-earnings ratio. A ratio (expressed as a percentage) calculated by dividing gross monthly debt by gross monthly income. Debt-to-income is one of the key factors lenders will look at when considering your credit worthiness.
Deed – A written document that shows ownership of property. Includes the signatures of current owners and a legal description of the property. Also known as a Title.
Default – Failure to meet the legal obligations of a contract. In the case of home buying, failure to make the monthly payments on a mortgage.
Depreciation – A decrease in the value of property over time (as a result of market changes, wear and tear on the property, etc.).
Disclosures – Information provided about a property for sale – particularly information related to defects or problems. “Full disclosure” refers to the seller’s responsibility to provide any and all information they know about the property.
Down Payment – The money paid by the buyer to the lender at the time of the closing. Because it’s paid in advance, the down payment is not part of the mortgage loan. Smaller down payments (those less than the standard 20 percent) usually require mortgage insurance.
Earnest Money – Money given by a buyer to a seller to show that the buyer is serious about purchasing the home. Earnest money becomes part of the down payment if the offer is accepted, gets returned to the buyer if the offer is rejected, or is forfeited if the buyer backs out of the deal.
Equity – The value of a property, usually calculated by subtracting the remaining amount owed on the mortgage from the fair market value of the property.
Escrow – Also “escrow account.” Funds set aside and held by a neutral third party, usually for payment of taxes and insurance.
Fair Credit Reporting Act – A set of rules that governs the activities of credit bureaus and controls the release of confidential information by those bureaus.
Fair Housing Act – A law that prohibits discrimination during the home-buying process on the basis of race, color, national origin, religion, sex, familial status or disability.
Fannie Mae – The Federal National Mortgage Association, a tax-paying corporation created by the U.S. Congress that buys and sells conventional residential mortgages as well as those insured by the guaranteed by the VA. By purchasing mortgages, Fannie Mae increases the availability and affordability of home loans for low- and middle-income Americans.
FHA Mortgage – A mortgage insured by the Federal Housing Administration (FHA) of the United States Department of Housing and Urban Development (HUD). The FHA mortgage is insured by the FHA/HUD, but it’s actually provided by an approved lender.
The FHA’s insurance encourages lenders to make loans to borrowers who may not otherwise qualify for a conventional mortgages. There are limits to the size of FHA loans, but they are usually enough to cover most moderately priced homes.
First Mortgage – The first mortgage is the primary lien against the property. In other words, the first mortgage has first claim in the event of default.
Fixed-Rate Mortgage – A mortgage with payments that stay the same during the entire life of the loan. The loan’s interest rate is fixed and will not fluctuate with market changes.
Flood Insurance – Insurance required by lenders on homes located within a flood plain. This type of insurance protects homeowners against damage and losses incurred by a flood.
Foreclosure – The legal process that allows the lender to recover and sell a property after the owner has defaulted on the loan (failed to make mortgage payment). Sometimes referred to as Repossession of Property.
Freddie Mac – The Federal Home Loan Mortgage Corporation. A private corporation created by Congress to support the secondary mortgage market by purchasing residential mortgages, securitizing them, and selling them to investors. By purchasing mortgages, Freddie Mac increases the availability and affordability of home loans for low- and middle-income Americans. Similar to Fannie Mae, defined previously.
FSBO (For Sale by Owner) – A home being sold by the owner without the assistance of a seller’s agent.
Home Inspection – A complete “top to bottom” inspection of a home’s physical condition. Home inspections should be conducted by a professional, licensed home inspector and should cover all major systems and structural elements of the property. Home inspection fees are typically paid by the buyer.
Homeowner’s Insurance – Insurance that protects the homeowner’s property against damage from fire, storms and other hazards. Most lenders require home insurance before they will let you close on the home. Also known as Hazard Insurance.
Homestead Credit – A state-sponsored property-tax credit program (only available in some states); reduces property taxes for eligible households. Ask your agent if your state offers such a program. Also known as Homestead Exemption.
Late Payment Charge – A penalty the homeowner pays when a mortgage payment is late. Late charges vary by state, type of loan, etc., but often run 5% of the payment amount (e.g., the late charge on a $1,000 payment might be $50).
Lien – A claim of money against a property. Example: a tax lien for unpaid property taxes. A lien is a defect, or “cloud,” on the title and must be resolved before ownership of the home can be transferred.
Lock-In – A written guarantee from a lender that the buyer will receive a specific interest rate for a specific period of time. Also known as Rate Lock and Rate Lock-In.
Market Value – The amount that a seller may expect to obtain in the open market, based on current market conditions and recent comparable sales. An appraised value is an estimate of the current fair market value (see previous definition of “appraisal”).
Mortgage – A financial agreement between a lender and a buyer in which the property is used as collateral for the loan. A mortgage gives the lender the right to collect payments on the loan (and to foreclose on the property if those payments are not made).
Mortgage Broker – An individual or company that offers loans to borrowers and is paid a commission for their services.
Mortgage Insurance – Insurance purchased by the buyer to protect the lender in the event of default. Mortgage insurance is usually required on loans with less than 20 percent down payment. The cost of mortgage insurance is usually rolled into the monthly mortgage payment. When mortgage insurance is obtained through a private company (not from the federal government), it’s also known as Private Mortgage Insurance or PMI.
Mortgage Interest Deduction – A tax deduction based on the interest cost of a mortgage. Mortgage interest on a primary residence is usually fully tax-deductible.
Mortgage Note – A legal document that obligates the borrower to repay the loan (for a mortgage in this case).
Mortgagee – The lender in a mortgage agreement.
Mortgagor – The borrower in a mortgage agreement.
Multiple Listing Service (MLS) – A computerized database of virtually all the homes for sale in a specific area.
Origination Fee – A fee charged by the lender to cover the administrative costs of making the mortgage. This fee is paid during closing (or “settlement”) and varies with the lender and type of loan. Origination fees of 1 to 2 percent of the mortgage are common.
Owner Financing – A purchase in which the seller acts as a lender, providing all or part of the financing for the buyer.
Payment Cap – A limit on how much an adjustable rate mortgage (ARM) payment may increase during the life of the loan.
PITI – Principal, interest, (property) taxes, and insurance. The typical components of a mortgage payment.
Planned Development – A neighborhood that is planned, developed and built as a single entity. Usually, the homes in a planned development bear certain features in common. Most planned developments also share common land or facilities that are managed by the homeowners’ association or neighborhood association. Also known asa Planned Unit Development or PUD.
Points – Points are sometimes paid at closing as a way to lower the monthly payment interest rate. Paying mortgage points may be a wise option if you plan on living in the home for more than a few years. One point is equal to 1 percent of the loan amount (for example, two points on a $100,000 mortgage equals $2,000). Also known as Discount Points.
Pre-approval – The process of applying for a loan and gaining approval for a certain amount before having an actual purchase agreement.
Prepayment Penalty – A fee charged to a homeowner who repays a mortgage debt early (before the due date).
Principal – The actual amount of money borrowed, not counting interest. The part of the monthly payment that actually reduces the remaining balance of a mortgage.
Purchase Offer – A detailed, written document that makes an offer to purchase a property. The offer may be modified, or “amended,” several times during the course of negotiations. When the offer is signed by all parties involved, it becomes a legally binding contract. Also known as the Offer or Contract.
Qualifying Ratios – Guidelines used by lenders to determine if a borrower can qualify for a mortgage. The lender will consider the borrower’s income and current debt, as well as the size of loan the borrower is trying to obtain.
Radon – A colorless, odorless radioactive gas that seeps up from the earth ( as the result of the natural decay of uranium in the earth). Radon may leak into some homes and build up to unhealthy levels. For this reason, radon tests are often part of the home inspection process.
Second Mortgage – A mortgage obtained after another mortgage and subordinate to the first. “Subordinate” meaning that in the event of default, the lender of the second mortgage gets paid after the lender of the first mortgage. As a result of their “subordinate” nature, secondary mortgage loans are riskier for the lender and therefore bring a higher interest rate.
Settlement Statement – A document required by the Real Estate Settlement Procedures Act (RESPA). An itemized statement of charges that must be paid at closing or settlement. The buyer has the right to examine the settlement statement one day before the closing. Also known as a Closing Statement or a HUD-1 Settlement Statement.
Survey – A survey can refer to both a process and the document produced by that process. The process is conducted by a licensed surveyor (and is required by the lender) to confirm that the property boundaries – and features such as buildings, improvements and easements – are true and accurate as described in the deed. The document produced by a survey is a diagram showing legal boundaries, easements, encroachments, rights of way, etc.
Title – A written document that shows ownership of property. Includes the signatures of current owners and a legal description of the property. Also known as a Deed.
Title Defect – An outstanding claim on a property that prevents the legal sale of that property. Also known as a Cloud on the title. A title with defects is not a “clear” title.
Title Insurance – Insurance that protects the lender against claims that may arise in the event of disputes over property ownership. This charge is usually part of the closing costs.
Title Search – A review of public records and legal documents to ensure that the seller is the true, legal owner of the property (and that there are no unsettled claims or liens against the property).
Truth-in-Lending – A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan (usually within three days of loan application). It also requires the lender to fully disclose all terms and conditions of the loan. The information provided by the lender is referred to as the Truth-in-Lending Statement.
Underwriting – A critical step in obtaining a mortgage, underwriting is the lender’s process of analyzing a loan application to determine the amount of risk involved in making the loan. It includes a comprehensive review of the borrower’s credit history and a judgment of the property’s real value.
Walk-Through – In the case of the “final walk-through,” this is a final inspection of the property by the buyer and the buyer’s agent. The final walk-through normally takes place a day or two before closing / settlement. The purpose of this walk-through is to ensure that any repairs agreed upon in advance have been made, and that no other issues have arisen.
Zoning – The ability of local governments to control the use of land in a particular zone. For example, some areas may be designated for residential use and others for commercial use.