A

Additional Borrowers: Additional persons who contribute income and/or credit history for the purpose of additional financial strength for loan qualification.

Adjustable Rate Mortgage (ARM): A mortgage tied to an index and separated by a margin that allows the interest rate to change based on the index changes.

Adjustment Period:  The frequency that interest rate adjustments are possible (i.e. 6 months, 1-year, etc.).

Amortization:  Repayment of a mortgage loan through monthly installments.  Monthly payment is based on a schedule that will allow you to own the home (reduce balance to zero) at the end of a specified period of time (i.e. 15 years, 30 years, etc.).

Annual Percentage Rate (APR):  The actual average interest rate calculated by using a standard form.  APR shows the true cost of the loan.  This yearly rate includes loan fees, such as interest, points, mortgage insurance, and other related fees attributed to the loan.

Application:  The first step in the loan process.  The formal application is a form used by lenders to record important information about a potential borrower or borrowers necessary to the loan approval process.

Appraisal:  An official report that determines the fair market value of the subject property by means of using comparable homes that have sold in the same location.  This report is generally required by the lender before final loan approval.

Appraiser:  Generally a licensed person who exercises his or her expertise in the preparation of their opinion of fair market value.

B

Balloon Mortgage:  A mortgage that amortizes over a 30 year period but ends in a shorter period, usually 5, 7, or 10-years.  At that time, the balance of the loan is typically refinanced by the borrower.

Borrower:  A person who has been approved for a mortgage loan and who is also obligated to repay said loan according to its terms (also known as mortgagor).

Buy down:  Where the borrower, seller, or third party pays points (a percentage of the loan amount paid to the lender to increase the net yield and to reduce the interest rate.  One point = 1% of the loan amount) to the lender in order to offer an attractive interest rate.  Buy downs can be permanent (i.e. fixed for the term of the loan) or temporary (i.e. for one year, two years, etc.) usually used as an aid to help the borrower qualify for a mortgage loan. 

C

Caps:  A limit of the amount that an interest rate can change in one adjustment period or over the life of an adjustable rate mortgage.

Cash Out Refinance:  A mortgage loan that pays off the existing balance and also allows cash proceeds to the borrower after the payment of closing costs. 

Closing:  The point at which settlement between the buyer and the seller is executed, and the new loan (mortgage) begins.

Closing Costs:  A customary cost associated with purchasing real property and obtaining a mortgage loan.  Generally, these costs vary by geographic location and are typically disclosed at the time of loan application in the document knows as a "Good Faith Estimate".

Controlled Business Arrangement:  Referrals made from one company to another in which there is common ownership. 

Credit Report:  A report that lists all past and present debts and records how they were repaid.

Credit Score:  A number representing the credit history of a proposed borrower.  This number is established by the author of the credit report. 

D

Deed:  The instrument that transfers ownership from seller to buyer.

Discount Point:  An amount, usually 1% of the loan amount, which is paid to the lender to enhance the yield and reduce the interest rate.   

Down payment:  That portion of the homes purchase which is not paid in the new mortgage. Typically, paid in cash by the borrower (down payments typically range from zero to 30% depending upon loan type and program).

Down payment Assistance:  Money's typically donated by the seller through a third party non-profit organization to the borrower at close of escrow to offset the down payment.  These moneys typically are not expected to be repaid.

E

Earnest Money:  Money put down by the borrower and typically held by real estate broker or escrow agent at the time of the purchase contract.  This money shows that the purchaser is serious about purchasing the subject property.  It also becomes an offset to down payment and/or other related costs.  However, in the event that the purchaser backs out, this amount could be forfeited to the seller.

Escrow:  An unbiased third party that handles the closing or settlement. 

Escrow Account:  Amounts paid in the monthly mortgage payment that create a fund held by the lender to pay expenses such as homeowners insurance, real property taxes, private mortgage insurance, etc.

F

Fair Market Value:  The price a prudent buyer will pay and seller will agree upon both acting freely, carefully, and knowledgeably without outside influence.

FICO Score:  A numerical scoring system that reflects the repayment history of the borrower.

Fixed Rate Mortgage:  A mortgage with a steady interest rate and principal and interest payment, neither of which will change through the life of the loan.

Foreclosure:  The process in which the real property is sold in order to pay off the debt of a defaulting borrower.

G

Gift Funds:  Funds gifted to the borrower to offset down payment or closing costs.  Typically, received from a parent, grandparent, or an individual of close relationship with no intention of repayment.

Good Faith Estimate:  An estimate of closing related costs, such as prepaid escrow, discounts, origination fee, etc., etc.  This document must be delivered from the lender to the borrower within three days of loan application submission.   

Grants:  A down payment assistance program where moneys are gifted by a third party, typically a non-profit organization.

H

Home Inspection:  An inspection of the subject property by a competent third party that makes the buyer aware of things that may be needed as pertaining to structure, mechanical systems, and general safety of the property.

Home Warranty:  A quasi insurance policy that covers mechanical systems and appliances against unexpected repairs not covered by homeowners coverage.  Warranties are for a specific amount of time, usually one year and usually renewable.

Homeowners Insurance:  An insurance policy required by the lender that protects the insured for losses of natural causes, fire, vandalism. disasters, etc.

HUD1 Statement: The closing document which shows all costs and discloses payment responsibility - also known as settlement sheet. 

I

Interest:  The fee charged for the use of money.

Interest Rate:  The amount of interest charged expressed as a percentage.

J

Judgment:  A legal decision usually based on the default of a debt.

L

Lien:  The legal claim against real property that must be satisfied prior to its sale.

Loan to Value (LTV):  Percentage calculated by dividing the loan amount by the purchase price.

Lock-in:  Interest rates frequently change.  Many lenders offer a lock-in that guarantees a specific interest if the loan  is closed and funded within a specific time. 

M

Margin:  An amount added to the index to determine the new interest rate on adjustable rate mortgages. 

Mortgage:  A lien against the property that secures the repayment - in some areas, also known as a deed of trust.

Mortgagee:  The lender.

Mortgage Insurance/MI:  A policy that protects lenders against losses that can occur when a buyer defaults.  Typically required on loan to values (LTV's) in excess of 80%. 

Mortgagor:  The borrower.

O

Origination Fee:  A fee charged by the lender for originating a mortgage loan - usually 1% of the loan amount.

P

PITI:  The four parts of a mortgage payment - i.e. principal, interest, taxes,and insurance.

Points:  The amount paid to a lender to enhance his yield and reduce the interest rate.  Typically a percentage of the loan amount.

PMI:  Private mortgage insurance typically required on loans with less than 20% of purchase price as down payment.

Pre-approve: Lender commits to lend to a potential borrower typically for a specified amount of time and conditioned upon no financial changes.

Pre-qualify:  When a lender determines an amount which a borrower would be eligible for.  Pre-qualifications are subject to verification and are usually done prior to the selection of a property.

Principal and Interest/PI:  That portion of the monthly payment devoted to accrued interest and principal reduction.

Q

Qualify:  The process of preparing and submitting a  loan application which prepares a credit package for an underwriting decision to see if that borrower fits the desired program in terms of loan-to-value, debt-to-income, credit history, etc.

R

Real Estate Agent:  A person, typically state licensed, who arranges viewings, prepares contracts, and helps to negotiate the purchase of real property on your behalf.

Real Estate Settlement and Procedures Act (RESPA):  A federal act to help prospective purchasers of real property via disclosures enabling them to be informed in the decision process.

Refinance:  Repaying an old loan with a new loan, typically for better terms or cash out.

S

Settlement:   The final settlement or closing.

Sweat Equity:  Purchaser provides his own labor in an improvement to the property, typically  new construction.  The value of this labor will offset the down payment.

T

Tax Credit Certificates:  A certificate that enables federal tax credits or a credit toward federal tax due available only through the federal government and specific programs.  These credits will allow higher debt-to-income ratios enabling the purchaser to stretch his borrowing power, however, an early sale may incur a recovery of funds.

Title Insurance:  An insurance that protects the borrower and the lender against claims or liens on the subject property.

Truth in lending:  A federal regulation that requires the lender to disclose all fees, terms and conditions of the loan proposal.  Also,specifics of adjustable rate mortgages, i.e. adjustable rate term, adjustable rate cap, life cap.

U

Underwriting:  The decision process in which the lender analyzes the credit package as well as the appraisal and the credit history.  The ultimate goal being loan approval.

V

VA:  The Department of Veteran Affairs that issues loan guarantees to lenders as a benefit to eligible veterans.

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