203(b): FHA program which provides mortgage insurance to protect lenders from default. It is also used to finance the purchase of new or existing 1 -4 family housing. Offers low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amount.
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203(k): An FHA mortgage insurance program which allows homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.
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Amenity: This is a feature of the home or property that serves as a benefit to the buyer but is not necessary to its use. Examples of amenities are swimming pools, gardens, woods, or beautiful views.
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Amortization: The repayment of a mortgage loan through monthly installments of principal and interest. The monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years).
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Annual Percentage Rate (APR): The APR is calculated by using a standard formula and shows the cost of a loan. It is expressed as a yearly interest rate and includes the interest, points, mortgage insurance, and other fees associated with the loan.
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Application: The loan application is a form that is used to collect important information about the potential borrower which is necessary to the loan underwriting process. The application is the first step in the loan approval process.
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Appraisal: An appraisal is a documented estimate of a home's fair market value. It is generally required by lenders before the mortgage loan is approved to ensure that the loan amount does not exceed the property value.
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Appraiser: A qualified and licensed professional who uses his or her experience and knowledge to prepare the appraisal estimate.
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ARM: Adjustable Rate Mortgage is a mortgage loan subject to changes in interest rates. ARM monthly payments increase or decrease at intervals determined by the lender. The change in the monthly payment is usually subject to a cap that is outlined in the loan documentation.
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Assessor: A government official who is responsible for determining the value of a property for the purpose of taxation.
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Assumable mortgage: This is a mortgage that can be transferred from a seller to a buyer. Once the loan has been assumed by the buyer the seller is no longer responsible for repaying it. The transfer of an assumable mortgage will typically involve fees and/or a credit package.
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Balloon Mortgage: A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years and after that time period elapses, the balance is due or is refinanced by the borrower.
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Bankruptcy: A federal law where a person's assets are turned over to a trustee and used to pay off outstanding debts.
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Borrower: A person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
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Building code: A regulation that determines the design, construction, and materials used in building. Building codes are based on agreed upon safety standards within a specific area.
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Budget: A detailed record of all income earned and spent during a specific period of time.
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Cap: This refers to a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
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Cash reserves: A cash amount sometimes required to be held in reserve in addition to the down payment and closing costs. The amount of the reserve is determined by the lender.
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Certificate of title: This document is provided by a qualified source, such as a title company and shows that the property legally belongs to the current owner. Certificates of title are checked for liens and claims before the title is transferred at closing.
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Closing: The closing is also referred to as settlement and is the time when the property is formally sold and transferred from the seller to the buyer. At the closing, the borrower takes on the loan obligation, signs documentation, pays all closing costs, and receives title from the seller.
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Closing costs: These costs are above and beyond the sales prices and may include title fees, escrow fees, first loan payment, loan costs, etc. These costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.
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Commission: Amount paid to the real estate professional for negotiating the transaction. Typically a percentage of the sales price.
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Condominium: A form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex. The owner shares financial responsibility for common areas.
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Conventional loan: A loan that is not guaranteed or insured by the government.
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Cooperative (Co-op): Residents purchase stock in a cooperative corporation that owns a structure and each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
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Credit history: History of an individual's debt payment and is used by lenders to gauge a potential borrower's ability to repay a loan.
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Credit report: A documentation of an individual's credit history that lists past and present debts, timeliness of payments, past and current employers and residences.
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Debt-to-income ratio: A comparison of gross income to housing and non-housing expenses. It is generally recommended that the monthly mortgage payment should be no more than 28% of monthly gross income and the mortgage payment combined with non-housing debts should not exceed 40% of income.
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Deed: The document that transfers ownership of a property.
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Deed-in-lieu: A deed is given to the lender, in lieu of foreclosure, to fulfill the obligation to repay the debt. While the process doesn't allow the borrower to remain in the house it does help avoid the costs, time, and effort associated with foreclosure.
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Default: The inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.
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Delinquency: Failure of a borrower to make timely mortgage payments under a loan agreement.
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Discount point: This is normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.
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Down payment: The upfront payment that is paid toward the home's purchase price and is not part of the mortgage loan. Down payments can vary from 0 to 25% of the home's purchase price.
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Earnest money: This is money put down by a potential buyer to show that he or she is serious about purchasing the home. It becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.
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EEM: Energy Efficient Mortgage is an FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase
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Equity: This represents a homeowner's financial interest in a property and is calculated by subtracting the amount still owed on the mortgage from the fair market value of the property.
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Escrow account: A separate account into which the lender puts a portion of each monthly mortgage payment. Expenses such as property taxes, homeowners insurance, mortgage insurance, etc. are paid from the escrow account.
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Fair Housing Act: Law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.
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Fair market value: The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.
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Fannie Mae: Federal National Mortgage Association (FNMA is a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors. By purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.
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FHA: Federal Housing Administration. Established in 1934 to advance homeownership opportunities for all Americans, FHA assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults. This encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
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Fixed-rate mortgage: A mortgage in which the payments remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
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Flood insurance: Insurance that protects homeowners against losses from a flood. The lender will require flood insurance before approving a loan for homes located in flood zones.
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Foreclosure: Legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
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Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM) is a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders with funds for new homebuyers.
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Ginnie Mae: Government National Mortgage Association (GNMA). Government-owned Corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as With Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.
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Good faith estimate: This is an estimate of all closing fees including pre-paid and escrow items as well as lender charges. Good faith estimates must be given to the borrower within three days after submission of a loan application.
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Home inspection: An examination of the structure and mechanical systems to determine a home's safety and makes the potential homebuyer aware of any repairs that may be needed.
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Home warranty: Offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance.
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Homeowner's insurance: Insurance policy that protects the homeowner from damage to the dwelling and its contents. Homeowner's insurance can include specific coverage for damage from floods, fires, earthquakes, theft, etc. This insurance can also protect homeowners from claims against them for damage or injury that occurs on the property.
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HUD: U.S. Department of Housing and Urban Development. Agency established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
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HUD1 Statement: Also known as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing.
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HVAC: Heating, Ventilation and Air Conditioning; a home's heating and cooling system.
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Index: Measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage.
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Interest: Cost of borrowing money expressed as a percentage of the amount borrowed.
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Insurance: Protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.
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Introductory Rate: Also known as a teaser rate. Some loans have a lower introductory interest rate, which is in effect for a limited time. At the end of the introductory period, the interest rate will increase.
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Lien: A legal claim against property that must be satisfied when the property is sold. Typically liens are for mortgage, taxes or judgments.
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Loan: Money borrowed that is usually repaid with interest.
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Loan-to-value (LTV) ratio: A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased. The higher the LTV, the less cash a borrower is required to pay as down payment.
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Lock-in: As interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.
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Loan Term: Length of time until your loan is due and payable.
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Margin: An amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
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Mortgage: A lien on the property that secures the promise to repay a loan.
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Mortgage insurance: Policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan. Mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price.
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Mortgage insurance premium (MIP): a monthly payment that is usually part of the mortgage payment which is paid by a borrower for mortgage insurance.
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Offer: Generally in writing and indicates a potential buyer's willingness to purchase a home at a specific price.
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Origination: Refers to the process of preparing, submitting, and evaluating a loan application. Loan origination generally includes a credit check, verification of employment, and a property appraisal.
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Origination fee: The charge for originating a loan. It is usually calculated in the form of points and paid at closing.
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PITI: Principal, Interest, Taxes, and Insurance - These are the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
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PMI, Private Mortgage Insurance: Privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
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Pre-approve: The lender commits to lend to a potential borrower and the commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
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Pre-foreclosure sale: Allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.
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Pre-qualify: Informal process in which a lender determines the maximum amount an individual is eligible to borrow. Pre-qualification does not include a credit check and is not a pre-approval for a loan.
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Prepayment: Payment of the mortgage loan before the scheduled due date. Prepayment may be subject to penalty fee.
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Principal: The amount borrowed from a lender and does not include interest or additional fees.
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Radon: A radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.
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Rehabilitation mortgage: A mortgage that covers the costs of rehabilitating (repairing or Improving) a property. Some rehabilitation mortgages such as the FHA's 203(k) enable borrowers to roll the costs of rehabilitation and home purchase into one mortgage loan.
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RESPA, Real Estate Settlement Procedures Act: A law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships.
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Settlement: Also called closing. Time in which the property transfers from seller to buyer.
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Survey: A diagram of the property that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
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Sweat equity: Using labor to build or improve a property as part of the down payment.
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Title 1: FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home.
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Title insurance: Insurance that protects the lender against any claims that arise from arguments about ownership of the property. Title insurance is also available for homebuyers.
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Title search: A check of public records to ensure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.
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Truth-in-Lending: Federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.
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Underwriting: The process of analyzing a loan application to determine the amount of risk involved in making the loan. The underwriting process includes a review of the potential borrower's credit history and a judgment of the property value.
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VA: Department of Veterans Affairs. A federal agency which guarantees loans made to veterans. Similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.
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