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Federal Trade Commission ftc.gov

The Real Marketplace Glossary: How to Talk the Talk

Buying a can be exciting. It also can be somewhat daunting, even if you’ve done it before. You will deal with mortgage options, credit reports, applications, , points, appraisals, change orders, inspections, warranties, walk-throughs, sheets, accounts, fees, , ...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 and mortgage marketplace. A Annual Percentage Rate (APR): The cost of Appraisal: A professional analysis used a loan or financing as an annual rate. to estimate the of the . This The APR includes the 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 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 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 : A process where disputes are mortgage to processing costs. settled by referring them to a fair and neu- tral third party (arbitrator). The disputing  Glossary

parties agree in advance to agree with Automated Underwriting: An auto- the decision of the arbitrator. There is mated process performed by a technol- a hearing where both parties have an ogy application that streamlines the opportunity to be heard, after which the processing of loan applications and arbitrator makes a decision. provides a recommendation to the lender to approve the loan or refer it for manual Asbestos: A toxic material that was underwriting. once used in insulation and fireproofing. Because some forms of as- bestos have been linked to certain lung diseases, it is no longer used in new B . However, some older homes may Balance Sheet: A financial statement still have asbestos in these materials. that shows assets, liabilities, and net worth as of a specific date. Assessed Value: Typically the value placed on property for the purpose of Balloon Mortgage: A mortgage with taxation. monthly payments often based on a 30-year amortization schedule, with Assessor: A public official who estab- the unpaid balance due in a lump sum lishes the value of a property for taxa- payment at the end of a specific period tion purposes. of (usually 5 or 7 years). The mort- gage may contain an option to “reset” Asset: Anything of monetary value that the to the current market is owned by a person or company. As- rate and to extend the due date if certain sets include , personal conditions are met. property, stocks, mutual funds, etc. Balloon Payment: A final lump sum of Mortgage: A document payment that is due, often at the matu- evidencing the transfer of of a rity date of a balloon mortgage. mortgage from one person to another. Bankruptcy: Legally declared unable to Assumable Mortgage: A pay your . Bankruptcy can severely that can be taken over (assumed) by the impact your credit and your ability to buyer when a home is sold. An assump- borrow money. tion of a mortgage is a transaction in which the buyer of real property takes Before- Income: Income before taxes over the seller’s existing mortgage; the are deducted. Also known as “gross in- seller remains liable unless released by come.” the lender from the obligation. If the mortgage contains a due-on-sale clause, Biweekly Payment Mortgage: A mort- the loan may not be assumed without gage with payments due every two weeks the lender’s consent. (instead of monthly).

Assumption: A homebuyer’s agreement Bona fide: In good faith, without . to take on the primary responsibility for paying an existing mortgage from a Bridge Loan: A -term loan secured home seller. by the borrower’s current home (which is usually for sale) that allows the pro- Assumption Fee: A fee a lender charges ceeds to be used for building or a buyer who will assume the seller’s ex- on a new before the current home isting mortgage. is sold. Also known as a “swing loan.” Glossary 

Broker: An individual or firm that acts Certificate of Deposit: A document is- as an agent between providers and users sued by a bank or other financial institu- of products or services, such as a mort- tion that is of a deposit, with the gage broker or real estate broker. See issuer’s promise to return the deposit plus also “Mortgage Broker.” earnings at a specified interest rate within a specified time period. Building Code: Local that set forth the standards and require- Certificate of Eligibility: A document is- ments for the , maintenance sued by the U.S. Department of Veterans and of buildings. The codes Affairs (VA) certifying a veteran’s eligibility are designed to provide for the safety, for a VA-guaranteed mortgage loan. health and welfare of the public. Chain of : The history of all of the Buydown: An arrangement whereby documents that have transferred title to the property developer or another third a parcel of real property, starting with the party provides an interest subsidy to earliest existing document and ending reduce the borrower’s monthly payments with the most recent. typically in the early years of the loan. Change Orders: A change in the original Buydown Account: An account in construction plans ordered by the prop- which funds are held so that they can be erty owner or general contractor. applied as part of the monthly mortgage payment as each payment comes due Clear Title: Ownership that is free of during the period that an interest rate , defects, or other legal encumbranc- buydown plan is in effect. es.

Closing: The process of completing a financial transaction. For mortgage C , the process of signing mortgage Cap: For an adjustable-rate mortgage documents, disbursing funds, and, if (ARM), a limitation on the amount the applicable, transferring ownership of interest rate or mortgage payments may the property. In some jurisdictions, clos- increase or decrease. See also “Lifetime ing is referred to as “escrow,” a process Payment Cap,” “Lifetime Rate Cap,” “Pe- by which a buyer and seller deliver legal riodic Payment Cap,” and “Periodic Rate documents to a third party who completes Cap.” the transaction in accordance with their instructions. See also “Settlement.” Capacity: Your ability to make your mortgage payments on time. This de- Closing Agent: The person or entity that pends on your income and income coordinates the various closing activities, stability ( history and ), your including the preparation and recordation assets and savings, and the amount of of closing documents and the disburse- your income each month that is left over ment of funds. (May be referred to as an after you’ve paid for your housing costs, escrow agent or settlement agent in some debts and other obligations. jurisdictions.) Typically, the closing is con- ducted by title companies, escrow compa- Cash-out Refinance: A refinance trans- nies or attorneys. action in which the borrower receives additional funds over and above the : The upfront fees charged amount needed to repay the existing in connection with a mortgage loan trans- mortgage, closing costs, points, and any action. Money paid by a buyer (and/or subordinate liens. seller or other third party, if applicable)  Glossary

to effect the closing of a mortgage loan, tenance. Common areas include swim- generally including, but not limited to ming pools, tennis , and other a loan origination fee, title examination recreational facilities, as well as common and insurance, survey, attorney’s fee, corridors of buildings, parking areas, and prepaid items, such as escrow de- means of ingress and egress, etc. posits for taxes and insurance. Comparables: An abbreviation for “com- Closing Date: The date on which the parable properties,” which are used as a sale of a property is to be finalized and a comparison in determining the current loan transaction completed. Often, a real value of a property that is ap- estate sales professional coordinates the praised. setting of this date with the buyer, the seller, the closing agent, and the lender. : Something given up or agreed to in negotiating the sale of a Closing Statement: See “HUD-1 Settle- house. For example, the sellers may ment Statement.” agree to help pay for closing costs.

Co-borrower: Any borrower other than : A unit in a multiunit the first borrower whose name appears building. The owner of a condominium on the application and , unit owns the unit itself and has the even when that person owns the prop- right, along with other owners, to erty jointly with the first borrower and the common areas but does not own the shares liability for the note. common elements such as the exterior walls, floors and ceilings or the struc- : An asset that is pledged as tural outside of the unit; these security for a loan. The borrower risks are owned by the condominium associa- losing the asset if the loan is not repaid tion. There are usually condominium as- according to the terms of the loan agree- sociation fees for building maintenance, ment. In the case of a mortgage, the property upkeep, taxes and insurance collateral would be the house and real on the common areas and reserves for property. improvements.

Commission: The fee charged for ser- Construction Loan: A loan for financ- vices performed, usually based on a ing the cost of construction or improve- percentage of the price of the items sold ments to a property; the lender disburs- (such as the fee a real earns es payments to the builder at periodic on the sale of a house). intervals during construction.

Commitment Letter: A binding of- Contingency: A condition that must be fer from your lender that includes the met before a is legally binding. amount of the mortgage, the interest For example, home purchasers often rate, and repayment terms. include a home inspection contingency; the sales contract is not binding unless Common Areas: Those portions of a and until the purchaser has the home building, , or improvements and inspected. amenities owned by a planned unit development (PUD) or condominium Conventional Mortgage: A mortgage project’s homeowners’ association (or loan that is not insured or guaranteed a project’s cooperative cor- by the federal government or one of its poration) that are used by all of the agencies, such as the Federal Housing unit owners, who share in the common Administration (FHA), the U.S. Depart- expenses of their operation and main- ment of Veterans Affairs (VA), or the Glossary 

Rural Housing (RHS). Contrast agreed.” Your credit history is called a with “Government Mortgage.” credit report when provided by a credit bureau to a lender or other . Option: A provision of some adjustable-rate mortgage (ARM) loans Credit Life Insurance: A type of insur- that allows the borrower to change the ance that pays off a specific amount of ARM to a fixed-rate mortgage at speci- or a specified credit account if the fied after loan origination. borrower dies while the policy is in force.

Convertible ARM: An adjustable-rate Credit Report: provided by mortgage (ARM) that allows the borrower a credit bureau that allows a lender or to convert the loan to a fixed-rate mort- other business to examine your use of gage under specified conditions. credit. It provides information on money that you’ve borrowed from credit institu- Cooperative (Co-op) Project: A project tions and your payment history. in which a corporation holds title to a residential property and sells shares to Credit Score: A numerical value that individual buyers, who then receive a ranks a borrower’s at a given proprietary as their title. point in time based on a statistical eval- uation of information in the individual’s Cost of Funds Index (COFI): An in- credit history that has been proven to be dex that is used to determine interest predictive of loan performance. rate changes for certain adjustable-rate mortgage (ARM) loans. It is based on the Creditor: A person who extends credit weighted monthly average cost of de- to whom you owe money. posits, advances, and other borrowings of members of the Federal Home Loan Creditworthy: Your ability to qualify for Bank of San Francisco. credit and repay debts.

Counter-offer: An offer made in re- sponse to a previous offer. For example, after the buyer presents their first offer, D the seller may make a counter-offer with Debt: Money owed from one person or a slightly higher sale price. institution to another person or institu- tion. Credit: The ability of a person to bor- row money, or buy goods by paying Debt-to-Income Ratio: The percent- over time. Credit is extended based on a age of gross monthly income that goes lender’s opinion of the person’s financial toward paying for your monthly hous- situation and reliability, among other ing expense, alimony, child support, car factors. payments and other installment debts, and payments on revolving or open-end- Credit Bureau: A company that gath- ed accounts, such as credit cards. ers information on consumers who use credit. These companies sell that infor- : The legal document transferring mation to lenders and other ownership or title to a property in the form of a credit report. Deed-in-Lieu of : The Credit History: Information in the files transfer of title from a borrower to the of a credit bureau, primarily comprised lender to satisfy the mortgage debt and of a list of individual consumer debts avoid foreclosure. Also called a “volun- and a record of whether or not these tary conveyance.” debts were paid back on time or “as  Glossary

Deed of Trust: A legal document in cepts your offer, unless one of the sales which the borrower transfers the title to contract contingencies is not fulfilled. a third party () to hold as security for the lender. When the loan is paid in : A right to the use of, or ac- full, the trustee transfers title back to cess to, land owned by another. the borrower. If the borrower defaults on the loan the trustee will sell the property Employer-Assisted Housing: A program and pay the lender the mortgage debt. in which companies assist their employ- ees in purchasing homes by providing : Failure to fulfill a legal obliga- assistance with the down payment, clos- tion. A default includes failure to pay on ing costs, or monthly payments. a financial obligation, but also may be a failure to perform some action or ser- Encroachment: The intrusion onto vice that is non-monetary. For example, another’s property without right or per- when leasing a car, the lessee is usually mission. required to properly maintain the car. : Any claim on a property, Delinquency: Failure to make a pay- such as a , mortgage or easement. ment when it is due. The condition of a loan when a scheduled payment has not Equal Credit Opportunity Act (ECOA): been received by the due date, but gen- A federal that requires lenders to erally used to refer to a loan for which make credit equally available without payment is 30 or more days past due. regard to the applicant’s race, color, reli- gion, national origin, age, sex, or marital Depreciation: A decline in the value of ; the fact that all or part of the ap- a house due to changing market condi- plicant’s income is derived from a public tions or lack of upkeep on a home. assistance program; or the fact that the applicant has in good faith exercised any Discount Point: A fee paid by the bor- right under the Consumer Credit Protec- rower at closing to reduce the interest tion Act. It also requires various notices rate. A point equals one percent of the to consumers. loan amount. : The value in your home above Down Payment: A portion of the price the total amount of the liens against of a home, usually between 3-20%, not your home. If you owe $100,000 on your borrowed and paid up-front in cash. house but it is worth $130,000, you Some loans are offerend with zero down- have $30,000 of equity. payment. Escrow: An item of value, money, or Due-on-Sale Clause: A provision in a documents deposited with a third party mortgage that allows the lender to de- to be delivered upon the fulfillment of mand repayment in full of the outstand- a condition. For example, the deposit ing balance if the property securing the by a borrower with the lender of funds mortgage is sold. 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 E closing of a sale of real estate. Earnest Money Deposit: The deposit to show that you’re committed to buying Escrow Account: An account that a the home. The deposit usually will not establishes on behalf be refunded to you after the seller ac- of a borrower to pay taxes, insurance Glossary  premiums, or other charges when they Executor: A person named in a will and are due. Sometimes referred to as an approved by a to adminis- “impound” or “reserve” account. ter the deposition of an estate in accor- dance with the instructions of the will. Escrow Analysis: The accounting that a mortgage servicer performs to deter- mine the appropriate balances for the escrow account, compute the borrower’s F monthly escrow payments, and deter- Fair Credit Reporting Act (FCRA): A mine whether any shortages, surpluses law that imposes or deficiencies exist in the account. obligations on (1) credit bureaus (and similar agencies) that maintain consum- : The legal act of removing er credit histories, (2) lenders and other someone from real property. businesses that buy reports from credit bureaus, and (3) parties who furnish -to-Sell Listing: The consumer information to credit bureaus. traditional kind of listing agreement un- Among other provisions, the FCRA limits der which the property owner appoints the sale of credit reports by credit bu- a real estate broker (known as the list- reaus by requiring the purchaser to have ing broker) as exclusive agent to sell the a legitimate business need for the data, property on the owner’s stated terms, allows consumers to learn the informa- and agrees to pay the listing broker a tion on them in credit bureau files (in- commission when the property is sold, cluding one annual free credit report), regardless of whether the buyer is found and specifies procedure for challenging by the broker, the owner or another errors in that data. broker. This is the kind of listing agree- ment that is commonly used by a list- Fair Market Value: The price at which ing broker to provide the traditional full property would be transferred between range of real estate brokerage services. a willing buyer and willing seller, each If a second real estate broker (known as of whom has a reasonable knowledge of a selling broker) finds the buyer for the all pertinent facts and is not under any property, then some commission will be compulsion to buy or sell. paid to the selling broker. : A New York stock ex- Exclusive Agency Listing: A listing change company. It is a public company agreement under which a real estate that operates under a federal broker (known as the listing broker) acts and is the nation’s largest source of as an exclusive agent to sell the prop- financing for home mortgages. Fannie erty for the property owner, but may be Mae does not lend money directly to paid a reduced or no commission when consumers, but instead works to en- the property is sold if, for example, the sure that mortgage funds are available property owner rather than the listing and affordable, by purchasing mortgage broker finds the buyer. This kind of list- loans from institutions that lend directly ing agreement can be used to provide to consumers. the owner a limited range of real estate brokerage services rather than the tra- Fannie Mae-Seller/Servicer: A lender ditional full range. As with other kinds that Fannie Mae has approved to sell of listing agreements, if a second real loans to it and to service loans on Fan- estate broker (known as a selling broker) nie Mae’s behalf. finds the buyer for the property, then some commission will be paid to the Fannie Mae/ Loan Limit: selling broker. The current 2006 Fannie Mae/Freddie  Glossary

Mac loan limit for a single-family home Foreclosure: A legal action that ends is $417,000 and is higher in Alaska, all ownership rights in a home when the Guam, Hawaii, and the U.S. Virgin homebuyer fails to make the mortgage Islands. The Fannie Mae loan limit is payments or is otherwise in default un- $533,850 for a two-unit home; $645,300 der the terms of the mortgage. for a three-unit home; and $801,950 for a four-unit home. Also referred to as the Forfeiture: The loss of money, property, “conventional loan limit.” rights, or privileges due to a breach of a legal obligation. Federal Housing Administration (FHA): An agency within the U.S. De- Fully Amortized Mortgage: A mortgage partment of Housing and Urban Devel- in which the monthly payments are de- opment (HUD) that insures mortgages signed to retire the obligation at the end and loans made by private lenders. of the mortgage term.

FHA-Insured Loan: A loan that is in- sured by the Federal Housing Adminis- tration (FHA) of the U.S. Department of G Housing and Urban Development (HUD). General Contractor: A person who oversees a home improvement or con- First Mortgage: A mortgage that is the struction project and handles various primary lien against a property. aspects such as scheduling workers and ordering supplies. First-Time Home Buyer: A person with no ownership interest in a principal Letter: A letter that a family mem- residence during the three-year period ber writes verifying that s/he has given preceding the purchase of the security you a certain amount of money as a gift property. and that you don’t have to repay it. You can use this money towards a portion Fixed-Period Adjustable-Rate Mort- of your down payment with some mort- gage: An adjustable-rate mortgage (ARM) gages. that offers a fixed rate for an initial period, typically three to ten years, and Good-Faith Estimate: A form required then adjusts every six months, annually, by the Real Estate Settlement Proce- or at another specified period, for the dures Act (RESPA) that discloses an esti- of the term. Also known as a mate of the amount or range of charges, “hybrid loan.” for specific settlement services the bor- rower is likely to incur in connection Fixed-Rate Mortgage: A mortgage with with the mortgage transaction. an interest rate that does not change during the entire term of the loan. Government Mortgage: A mortgage loan that is insured or guaranteed by a Flood Certification Fee: A fee charged federal government entity such as the by independent mapping firms to identi- Federal Housing Administration (FHA), fy properties located in areas designated the U.S. Department of Veterans as flood zones. Affairs (VA), or the Rural Housing Service (RHS). : Insurance that com- pensates for physical Government National Mortgage resulting from flooding. It is required for Association (Ginnie Mae): A govern- properties located in federally designated ment-owned corporation within the U.S. flood hazard zones. Department of Housing and Urban De- Glossary 

velopment (HUD) that guarantees se- to an amount that represents a specified curities backed by mortgages that are percentage of the borrower’s equity in insured or guaranteed by other gov- the property. ernment agencies. Popularly known as “Ginnie Mae.” Home Inspection: A professional in- spection of a home to determine the Gross Monthly Income: The income condition of the property. The inspec- you earn in a month before taxes and tion should include an evaluation of the other deductions. It also may include plumbing, heating and cooling systems, rental income, self-employed income, roof, wiring, foundation and pest infesta- income from alimony, child support, tion. public assistance payments, and re- tirement benefits. Homeowner’s Insurance: A policy that protects you and the lender from fire or : Payment for the use of flood, which damages the structure of land when title to a property is held as the house; a liability, such as an injury a (that is, the borrow- to a visitor to your home; or damage to er does not actually own the property, your , such as your but has a long-term lease on it). furniture, clothes or appliances

Growing-Equity Mortgage (GEM): Homeowner’s Warranty (HOW): In- A fixed-rate mortgage in which the surance offered by a seller that covers monthly payments increase according certain home repairs and fixtures for a to an agreed-upon schedule, with the specified period of time. extra funds applied to reduce the loan balance and loan term. Homeowners’ Association: An organi- zation of homeowners residing within a particular area whose principal purpose is to ensure the provision and main- H tenance of community facilities and Hazard Insurance: Insurance cover- services for the common benefit of the age that compensates for physical residents. damage to a property from fire, wind, vandalism, or other covered hazards Housing Expense Ratio: The percent- or natural disasters. age of your gross monthly income that goes toward paying for your housing Conversion Mortgage expenses. (HECM): A special type of mortgage developed and insured by the Federal HUD-1 Settlement Statement: A final Housing Administration (FHA) that listing of the closing costs of the mort- enables older home owners to convert gage transaction. It provides the sales the equity they have in their homes price and down payment, as well as the into cash, using a variety of payment total settlement costs required from the options to address their specific finan- buyer and seller. cial needs. Sometimes called a “re- verse mortgage.” Hybrid Loan: An adjustable-rate mort- gage (ARM) that offers a fixed rate for Home Equity Line of Credit an initial period, typically three to (HELOC): A type of revolving loan, ten years, and then adjusts every six that enables a home owner to obtain months, annually, or at another speci- multiple advances of the loan pro- fied period, for the remainder of the ceeds at his or her own discretion, up term. 10 Glossary

you. Interest is usually expressed as a I percentage of the amount borrowed.

Income Property: Real estate developed Interest Accrual Rate: The percentage or purchased to produce income, such rate at which interest accumulates or as a rental unit. increases on a mortgage loan.

Index: A number used to compute Interest Rate Cap: For an adjustable- the interest rate for an adjustable-rate rate mortgage (ARM), a limitation on the mortgage (ARM). The index is generally amount the interest rate can change per a published number or percentage, such adjustment or over the lifetime of the as the average interest rate or yield on loan, as stated in the note. U.S. Treasury bills. A margin is added to the index to determine the interest rate Interest Rate Ceiling: For an adjust- that will be charged on the ARM. This able-rate mortgage (ARM), the maximum interest rate is to any caps on interest rate, as specified in the mort- the maximum or minimum interest rate gage note. that may be charged on the mortgage, stated in the note. Interest Rate Floor: For an adjustable- rate mortgage (ARM), the minimum in- Individual Account (IRA): terest rate, as specified in the mortgage A tax-deferred plan that can help you note. build a retirement nest egg. Investment Property: A property pur- Inflation: An increase in prices. chased to generate rental income, tax benefits, or profitable resale rather than Initial Interest Rate: The original inter- to serve as the borrower’s primary resi- est rate for an adjustable-rate mortgage dence. Contrast with “second home.” (ARM). Sometimes known as the “start rate.”

Inquiry: A request for a copy of your J credit report by a lender or other busi- ness, often when you fill out a credit Judgment Lien: A lien on the property application and/or request more credit. of a resulting from the of a Too many inquiries on a credit report court. can hurt your credit score; however, most credit scores are not affected by Jumbo Loan: A loan that exceeds the multiple inquiries from auto or mortgage mortgage amount eligible for purchase lenders within a short period of time. by Fannie Mae or Freddie Mac. Also called “non-.” Installment: The regular periodic pay- ment that a borrower agrees to make to Junior Mortgage: A loan that is subor- a lender. dinate to the primary loan or first-lien mortgage loan, such as a second or third mortgage. Installment Debt: A loan that is repaid in accordance with a schedule of pay- ments for a specified term (such as an automobile loan). K 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 Loan Origination: The process by which business. Contributions to the Keogh a loan is made, which may include tak- plan are tax-deductible. ing a loan application, processing and underwriting the application, and clos- ing the loan.

L Loan Origination Fees: Fees paid to Late Charge: A penalty imposed by the your mortgage lender or broker for pro- lender when a borrower fails to make a cessing the mortgage application. This scheduled payment on time. fee is usually in the form of points. One point equals one percent of the mortgage Lease-Purchase Option: An option amount. sometimes used by sellers to rent a property to a consumer, who has the op- Loan-To-Value (LTV) Ratio: The re- tion to buy the home within a specified lationship between the loan amount period of time. Typically, part of each and the value of the property (the lower rental payment is put aside for the pur- of appraised value or sales price), ex- pose of accumulating funds to pay the pressed as a percentage of the property’s down payment and closing costs. value. For example, a $100,000 home with an $80,000 mortgage has an LTV of Liabilities: A person’s debts and other 80 percent. financial obligations. Lock-In Rate: A written agreement Liability Insurance: Insurance coverage guaranteeing a specific mortgage inter- that protects property owners against est rate for a certain amount of time. claims of , or property damage to another party. Low-Down-Payment Feature: A feature of some mortgages, usually fixed-rate -Index: An index used to deter- mortgages, that helps you buy a home mine interest rate changes for certain with a low down payment. adjustable-rate mortgage (ARM) plans, based on the average interest rate at which international banks lend to or M borrow funds from the London Inter- bank Market. Manufactured Housing: Homes that are built entirely in a factory in accor- Lien: A claim or charge on property for dance with a federal building code ad- payment of a debt. With a mortgage, ministered by the U.S. Department of the lender has the right to take the title Housing and Urban Development (HUD). to your property if you don’t make the Manufactured homes may be single- mortgage payments. or multi-section and are transported from the factory to a site and installed. Lifetime Cap: For an adjustable-rate Homes that are permanently affixed to mortgage (ARM), a limit on the amount a foundation often may be classified as that the interest rate or monthly pay- real property under applicable law, ment can increase or decrease over the and may be financed with a mortgage. life of the loan. Homes that are not permanently affixed to a foundation generally are classified Liquid Asset: A cash asset or an asset as personal property, and are financed that is easily converted into cash. with a installment sales agree- ment. 1 Glossary

Margin: A percentage added to the index Premium (MIP): for an adjustable-rate mortgage (ARM) to The amount paid by a borrower for establish the interest rate on each ad- mortgage insurance, either to a govern- justment date. ment agency such as the Federal Hous- ing Administration (FHA) or to a private Market Value: The current value of your mortgage insurance (PMI) company. home based on what a purchaser would pay. An appraisal is sometimes used to Mortgage Lender: The lender providing determine market value. funds for a mortgage. Lenders also man- age the credit and financial information Maturity Date: The date on which a review, the property and the loan appli- mortgage loan is scheduled to be paid in cation process through closing. full, as stated in the note. Mortgage Life Insurance: A type of Merged Credit Report: A credit report insurance that will pay off a mortgage if issued by a credit reporting company the borrower dies while the loan is out- that combines information from two or standing; a form of credit life insurance. three major credit bureaus. Mortgage Rate: The interest rate you Modification: Any change to the terms pay to borrow the money to buy your of a mortgage loan, including changes to house. the interest rate, loan balance, or loan term. Mortgagee: The institution or individual to whom a mortgage is given. Account: A type of in- vestment in which funds are invested in Mortgagor: The owner of real estate who short-term securities. pledges property as security for the re- payment of a debt; the borrower. Mortgage: A loan using your home as collateral. In some states the term mort- Multifamily Mortgage: A mortgage loan gage is also used to describe the docu- on a building with five or more dwelling ment you sign (to the lender a lien units. on your home). It also may be used to indicate the amount of money you bor- Multifamily Properties: Typically, row, with interest, to purchase your buildings with five or more dwelling house. The amount of your mortgage units. often is the purchase price of the home minus your down payment. (MLS): A clearinghouse through which member Mortgage Broker: An individual or firm real estate brokerage firms regularly and that brings borrowers and lenders to- systematically exchange information gether for the purpose of loan origina- on listings of real estate properties and tion. A mortgage broker typically takes share commissions with members who loan applications and may process locate purchasers. The MLS for an area loans. A mortgage broker also may close is usually operated by the local, private the loan. real estate association as a joint venture among its members designed to foster Mortgage Insurance (MI): Insurance real estate brokerage services. that protects lenders against losses caused by a borrower’s default on a Mutual Funds: A fund that pools the mortgage loan. MI typically is required money of its to buy a variety of if the borrower’s down payment is less securities. than 20 percent of the purchase price. Glossary 1

part of the financing for the buyer’s pur- N chase of the property.

Negative Amortization: An increase in Owner-Occupied Property: A property the balance of a loan caused by adding that serves as the borrower’s primary unpaid interest to the loan balance; this residence. occurs when the payment does not cover the interest due.

Net Monthly Income: Your take-home P pay after taxes. It is the amount of money that you actually receive in your Partial Payment: A payment that is less paycheck. than the scheduled monthly payment on a mortgage loan. Net Worth: The value of a company or individual’s assets, including cash, less Payment Change Date: The date on total liabilities. which a new monthly payment amount takes effect, for example, on an adjust- able-rate mortgage (ARM) loan. Non-Liquid Asset: An asset that cannot easily be converted into cash. Payment Cap: For an adjustable-rate mortgage (ARM) or other variable rate Note: A written promise to pay a speci- fied amount under the agreed upon loan, a limit on the amount that pay- conditions. ments can increase or decrease during any one adjustment period. Note Rate: The interest rate stated on a mortgage note, or other loan agreement. Personal Property: Any property that is not real property.

PITI: An acronym for the four primary O components of a monthly mortgage payment: , interest, taxes, and Offer: A formal bid from the home buyer insurance (PITI). to the home seller to purchase a home. PITI Reserves: A cash amount that a Open House: When the seller’s real borrower has available after making a estate agent opens the seller’s house to down payment and paying closing costs the public. You don’t need a real estate for the purchase of a home. The princi- agent to attend an open house. pal, interest, taxes, and insurance (PITI) reserves must equal the amount that the Original Principal Balance: The total borrower would have to pay for PITI for a amount of principal owed on a mortgage predefined number of months. before any payments are made. Planned Unit Development (PUD): A Origination Fee: A fee paid to a lender real estate project in which individuals or broker to cover the administrative hold title to a residential lot and home costs of processing a loan application. while the common facilities are owned The origination fee typically is stated in and maintained by a homeowners’ as- the form of points. One point is one per- sociation for the benefit and use of the cent of the mortgage amount. individual PUD unit owners.

Owner Financing: A transaction in Point: One percent of the amount of the which the property seller provides all or mortgage loan. For example, if a loan 1 Glossary

is made for $50,000, one point equals Prepayment Penalty: A fee that a bor- $500. rower may be required to pay to the lender, in the early years of a mortgage Power of Attorney: A legal document loan, for repaying the loan in full or pre- that authorizes another person to act paying a substantial amount to reduce on one’s behalf. A power of attorney can the unpaid principle balance. grant complete authority or can be lim- ited to certain acts and/or certain peri- Principal: The amount of money bor- ods of time. rowed or the amount of the loan that has not yet been repaid to the lender. Pre-Approval: A process by which a This does not include the interest you lender provides a prospective borrower will pay to borrow that money. The with an indication of how much money principal balance (sometimes called the he or she will be eligible to borrow when outstanding or unpaid principal balance) applying for a mortgage loan. This pro- is the amount owed on the loan minus cess typically includes a review of the the amount you’ve repaid. applicant’s credit history and may in- volve the review and verification of in- Private Mortgage Insurance: Insur- come and assets to close. ance for conventional mortgage loans that protects the lender from loss in the Pre-Approval Letter: A letter from a event of default by the borrower. See mortgage lender indicating that you Mortgage Insurance qualify for a mortgage of a specific amount. It also shows a home seller that : A written promise to you’re a serious buyer. repay a specified amount over a speci- fied period of time. Pre-Qualification: A preliminary assess- ment by a lender of the amount it will Property Appreciation: See “Apprecia- lend to a potential home buyer. The pro- tion.” cess of determining how much money a prospective home buyer may be eligible Purchase and Sale Agreement: A docu- to borrow before he or she applies for a ment that details the price and condi- loan. tions for a transaction. In connection with the sale of a residential property, Pre-Qualification Letter: A letter from the agreement typically would include: a mortgage lender that states that you’re information about the property to be pre-qualified to buy a home, but does sold, sale price, down payment, earnest not commit the lender to a particular money deposit, financing, closing date, mortgage amount. occupancy date, length of time the offer is valid, and any special contingencies. Predatory Lending: Abusive lending practices that include making mort- Purchase Money Mortgage: A mortgage gage loans to people who do not have loan that enables a borrower to acquire the income to repay them or repeatedly a property. loans, charging high points and fees each time and “packing” credit insurance onto a loan. Q Prepayment: Any amount paid to re- Qualifying Guidelines: Criteria used to duce the principal balance of a loan determine eligibility for a loan. before the scheduled due date. Glossary 1

Qualifying Ratios: Calculations that are but are generally not involved in the used in determining the loan amount lending process. that a borrower qualifies for, typically a comparison of the borrower’s total Real Estate Settlement Procedures monthly income to monthly debt pay- Act (RESPA): A federal law that requires ments and other recurring monthly lenders to provide home mortgage bor- obligations. rowers with information about transac- tion-related costs prior to settlement, as Control: A of safeguards well as information during the life of the to ensure that loans are originated, un- loan regarding servicing and escrow ac- derwritten and serviced according to the counts. RESPA also prohibits kickbacks lender’s standards and, if applicable, the and unearned fees in the mortgage loan standards of the , governmental business. agency, or mortgage insurer. Real Property: Land and anything permanently affixed thereto — including R buildings, , trees, and minerals. Radon: A toxic gas found in the soil Recorder: The public official who keeps beneath a house that can contribute to records of transactions that affect real cancer and other illnesses. property in the area. Sometimes known as a “Registrar of ” or “County Rate Cap: The limit on the amount an Clerk.” interest rate on an adjustable-rate mort- gage (ARM) can increase or decrease Recording: The filing of a lien or other during an adjustment period. legal documents in the appropriate pub- lic record. Rate Lock: An agreement in which an interest rate is “locked in” or guaranteed Refinance: Getting a new mortgage with for a specified period of time prior to all or some portion of the proceeds used closing. See also “Lock-in Rate.” to pay off the prior mortgage.

Ratified Sales Contract: A contract Rehabilitation Mortgage: A mortgage that shows both you and the seller of loan made to cover the costs of repair- the house have agreed to your offer. This ing, improving, and sometimes acquiring offer may include sales contingencies, an existing property. such as obtaining a mortgage of a cer- tain type and rate, getting an acceptable Remaining Term: The original number inspection, making repairs, closing by a of payments due on the loan minus the certain date, etc. number of payments that have been made. Real Estate Professional: An individual who provides services in buying and Repayment Plan: An arrangement by selling homes. The real estate profes- which a borrower agrees to make ad- sional is paid a percentage of the home ditional payments to pay down past due sale price by the seller. Unless you’ve amounts while still making regularly specifically contracted with a buyer’s scheduled payments. agent, the real estate professional rep- resents the interest of the seller. Real Replacement Cost: The cost to replace estate professionals may be able to refer damaged personal property without a you to local lenders or mortgage brokers, deduction for depreciation. 1 Glossary

Rescission: The cancellation or annul- : A mortgage that has ment of a transaction or contract by a lien subordinate to the first operation of law or by mutual consent. mortgage. Borrowers have a right to cancel certain mortgage refinance and home equity Secondary Mortgage Market: The mar- transactions within three business days ket in which mortgage loan and mort- after closing, or for up to three years in gage-backed securities are bought and certain instances. sold.

Revolving Debt: Credit that is extended : A loan that is backed by by a creditor under a plan in which property such as a house, car, jewelry, (1) the creditor contemplates repeated etc. transactions; (2) the creditor may im- pose a finance charge from time to time Security: The property that will be given on an outstanding unpaid balance; and or pledged as collateral for a loan. (3) the amount of credit that may be ex- tended to the consumer during the term Securities: Financial forms that shows of the plan is generally made available to the holder owns a share or shares of a the extent that any outstanding balance company (stocks) or has loaned money is repaid. to a company or government organiza- tion (bonds). Right of First Refusal: A provision in an agreement that requires the owner Seller Take-Back: An agreement in of a property to give another party the which the seller of a property provides first opportunity to purchase or lease financing to the buyer for the home pur- the property before he or she offers it for chase. See also “Owner Financing.” sale or lease to others. Servicer: A firm that performs servicing Rural Housing Service (RHS): An functions, including collecting mortgage agency within the U.S. Department of payments, paying the borrower’s taxes Agriculture (USDA), which operates a and insurance and generally managing range of programs to help rural commu- borrower escrow accounts. nities and individuals by providing loan and grants for housing and community Servicing: The tasks a lender performs facilities. The agency also works with to protect the mortgage investment, private lenders to guarantee loans for including the collection of mortgage the purchase or construction of single- payments, escrow administration, and family housing. delinquency .

Settlement: The process of complet- ing a loan transaction at which time the S mortgage documents are signed and Securities: A financial form that shows then recorded, funds are disbursed, and the holder owns a share or shares of a the property is transferred to the buyer company (stock) or has loaned money to (if applicable). Also called closing or es- a company or government organization crow in different jurisdictions. See also (). “Closing”

Sale-: A transaction in which Settlement Statement: A document the buyer the property back to that lists all closing costs on a consumer the seller for a specified period of time. mortgage transaction. Glossary 1

Single-Family Properties: One- to Third-Party Origination: A process by four-unit properties including detached which a lender uses another party to homes, townhouses, , and completely or partially originate, pro- , and manufactured homes cess, underwrite, close, fund, or pack- attached to a permanent foundation and age a mortgage loan. See also “Mortgage classified as real property under appli- Broker.” cable state law. Title: The right to, and the ownership Soft Second Loan: A second mortgage of, property. A title or deed is sometimes whose payment is forgiven or is deferred used as of ownership of land. until resale of the property. : Insurance that pro- Servicemembers Civil Relief Act: A tects lenders and homeowners against federal law that restricts the enforce- legal problems with the title. ment of civilian debts against certain military personnel who may not be able : A check of the public re- to pay because of active military service. cords to ensure that the seller is the le- It also provides other protections to cer- gal owner of the property and to identify tain military personel. any liens or claims against the property.

Subordinate Financing: Any mortgage Trade Equity: Real estate or assets or other lien with lower priority than the given to the seller as part of the down first mortgage. payment for the property.

Survey: A precise measurement of a : State or local tax payable property by a licensed surveyor, show- when title to property passes from one ing legal boundaries of a property and owner to another. the dimensions and location of improve- ments. Treasury Index: An index that is used to determine interest rate changes for Sweat Equity: A borrower’s contribution certain adjustable-rate mortgage (ARM) to the down payment for the purchase of plans. It is based on the results of auc- a property in the form of labor or ser- tions by the U.S. Treasury of Treasury vices rather than cash. bills and securities.

Truth-In-Lending Act (TILA): A fed- eral law that requires disclosure of a T -in-lending statement for consumer Taxes and Insurance: Funds collected credit. The statement includes a sum- as part of the borrower’s monthly pay- mary of the total cost of credit, such as ment and held in escrow for the pay- the annual percentage rate (APR) and ment of the borrower’s, or funds paid by other specifics of the credit. the borrower for, state and local prop- erty taxes and insurance premiums. Two- to Four- Family Property: A residential property that provides liv- Termite Inspection: An inspection to ing space (dwelling units) for two to determine whether a property has ter- four families, although ownership of the mite infestation or termite damage. In structure is evidenced by a single deed; many parts of the country, a home must a loan secured by such a property is be inspected for termites before it can be considered to be a single-family mort- sold. gage. 1 Glossary U 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. V 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). W 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.

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