GLOSSARY OF REAL ESTATE TERMS
Adjustable Rate Mortgage (ARM): A home loan with an interest rate that periodically adjusts to reflect changes in a specified financial index
Adjustment period: The amount of time between interest rate adjustments in an ARM
Amortization: The process of paying the principal and interest on a loan through regularly scheduled payments
Appraisal: A professional opinion of the value of a property by a licensed real estate appraiser
APR (annual percentage rate): A measure of interest that expresses the cost of a mortgage as a yearly rate on the loan balance. The APR assumes the loan is held for its full term. For ARM loans, the APR assumes the loan’s index doesn’t change from its initial value.
Assets: Items of value which include cash, real estate, securities and investments
Back end ratio: A calculation used by lenders to compare a borrower’s total debt to their gross monthly income
Balloon loan: A mortgage loan where the monthly payments are not large enough to repay the loan by the end of the term, resulting in a lump sum due on the final payment date
Basis point: A basis point is one one-hundredth of one percentage point. For example, the difference between a home loan at 5.25% and one at 5.37% is 12 basis points
Bill of Sale: A legal document transferring ownership of personal property
Bridge loan: A short term loan for borrowers who need more time to find permanent financing. Also known as “interim financing”
Buydown mortgage: A home loan program where the lender receives a premium as an enticement to reduce the interest rate during the early years of the mortgage
Caps (interest rate caps): Consumer safeguards which limit the amount the interest rate on an ARM which may change per year and/or the life of the loan
Cash reserve: Cash remaining after closing
Cashier’s check: The check the bank draws on itself rather than on a depositor’s account
Certificate of Occupancy (CO): A document stating that a home or other building has met all building codes and is suitable for habitation
Clear title: A title to property that does not have liens, defects or other legal encumbrances
Closing: The final procedure in which loan and title documents are signed between the buyer and the seller and their respective representation. Also called “settlement”
Closing costs: Expenses related to the sale of real estate including loan, title and appraisal fees. These costs are above and beyond the price of the property and are paid at closing. Most closing costs are one-time expenses.
Closing statement: A document which details the final financial details of a property sale between a buyer and a seller and the costs paid by each party. Also called a “settlement statement” or “HUD 1”
Commitment: A promise by a lender to make a loan with specific terms for a specified period
Conditional commitment: A promise by a lender to make a loan if the borrower meets certain conditions
Conforming loan: A home loan that meets qualifications to be purchased by Fannie Mae or Freddie Mac
Construction loan: A short term loan for construction. Lenders usually disburse funds from construction loans in draws according to completion of defined stages throughout the construction process
Construction to Permanent Loan: A construction loan that is converted to a longer term traditional mortgage after constructions has been completed
Contingency: A condition that must be met before a contract is legally binding
Conventional loan: A loan term loan a lender makes for the purchase of a home
Credit Report: A detailed account of an individual’s credit, employment and residence history. A lender uses this report to determine a loan applicant’s creditworthiness. The 3 largest credit bureaus are TransUnion, Equifax and Experian
Credit Score: A credit score is a statistical summary of the information contained in a consumer’s credit report. The most well known type of credit score is the Fair Isaac or FICO score. The score represents the answer from a mathematical formula that assigns numerical value to various pieces of information in a credit report
Debt to Income Ratio: The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts in divided by his or her gross monthly income
Deed: The legal document that transfers property ownership from the seller to the buyer
Deed of trust: A document that gives a lender the right to foreclose on a piece of property if the borrower defaults on the loan
Default: The failure to fulfill a duty or discharge an obligation- such as making monthly mortgage payments
Discount points: Fees charged by a lender to provide a lower interest rate. One discount point equals one percent (1%) of the loan amount
Down payment: The difference between the purchase price and the portion financed by a mortgage lender
Earnest money: Money a buyer provides with an offer to purchase a property. Also called a “deposit”
Easement: A right given to a third party to use a portion of the property for certain purposes, such as power lines or sewage mains
Equal Credit Opportunity Act (ECOA): Federal law that requires lender and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance
Equity: The value of a property after existing liens are deducted
Escrow: A neutral third party holds documents and money for a real estate transaction and ensures that all conditions of a sale are met before any disbursement of funds or articles
Escrow account: An account that a mortgage lender or mortgage servicing company establishes to hold funds for the payment of expenses such as homeowners insurance and property taxes. Also called an “impound account”
Fair Housing Act: Federal law making it illegal to refuse to rent or sell to anyone based on race, color, religion, sex, national origin, familial status or disability
Fannie Mae (FNMAE): The office name of the Federal National Mortgage Association- it is a congressionally chartered, shareholder-owned company that buys mortgages from lenders and resells them as securities on the secondary mortgage market
Farmers Home Administration (FMHA): The US Dept of Agriculture agency that provides credit to farmers and rural residents
Federal Home Loan Mortgage Corporation (FHLMC): Also known as “Freddie Mac”. This corporation buys mortgages from lending institutions, pools them with other loans and sells shares to investors
Federal Housing Administration (FHA): This government agency provides low-rate mortgages to buyers to make a down payment as small as 3%
FHA Mortgage Insurance: Requires a fee (up to 2.25% of the loan amount) paid at closing to insure the loan with the FHA. I n addition to the one time fee, the FHA also requires an additional insurance of up to 0.5% of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid
Fixed Rate Mortgage: A home loan with an interest rate that will remain at a specific rate for the term of the loan
Flood certification: The process of determining whether a property is located within a known flood zone
For Sale by Owner (FSBO): A selling method whereas the owner of the property acts as the selling agent and handles the sales process directly with the buyer or buyer’s agent. This is most commonly done by owners in order to avoid paying a listing commission
Front end ratio: A lender calculation that compares a borrower’s monthly housing expense (principal, interest, taxes and insurance) to gross monthly income
Gift: Funds a buyer receives from a relative or other source. Mortgage lenders require a gift letter from the donor of the “gift money” stating that the money does not have to be repaid
Good Faith Estimate: An estimate from a mortgage lender or broker showing all the costs associated with obtaining a home loan
Government National Mortgage Association (GNMA): Also known as “Ginnie Mae”. This government agency buys home loans from lenders, pools them with other loans and sells shares to investors. However, unlike Fannie Mae and Freddie Mac, Ginnie Mae only purchases loans backed by the federal government
Graduated Payment Mortgage: A mortgage that requires a borrower to make larger monthly payments over the term of the loan. Payments are lower for the first few years but gradually rise until year 3 or 5, when payments become fixed
Gross income: The total household income before taxes or expenses are subtracted
Hazard insurance: Hazard insurance provides coverage for damage from items such as fire or wind. Mortgage lenders require coverage for at least the replacement value of the home. Also known as “Homeowners insurance” or “Fire Insurance”
Home Equity Loan: A loan that allows owners to borrow against the equity in their homes
Home inspection: An examination of a home’s condition by a licensed inspector
Homeowners Association (HOA): a group that governs a subdivision, condominium or planned community. The association collects monthly fees from all owners to pay for common area maintenance, handle legal and safety issues and enforce the covenants, conditions and restrictions set by the developer
Homestead: A parcel of land used by the owner as a primary residence
Housing Expense Ratio: The ratio, expressed as a percentage, which results when a borrower’s expenses are divided by his/gross monthly income
Impound: A portion of the monthly mortgage payment that is placed in an account and used to pay for hazard insurance, property taxes and private mortgage insurance (if applicable)
Index: A published interest rate against which lenders measure the difference between the current interest rate on an ARM and that earned by other investments, which is then used to adjust the interest rate
Interest Rate: The fee, expressed as a percentage, charged for a loan
Interest Only Loan: The borrower pays only the interest that accrues on the loan balance each month. Because each payment goes toward interest, the outstanding balance of the loan does not decline with each payment
Joint Tenancy: Ownership by 2 or more people that gives equal shares to a piece of property. Rights pass to the surviving owner or owners
Jumbo loan: Loans that exceed the conforming limits set annually by Fannie Mae & Freddie Mac
Liabilities: A borrower’s debts and financial obligations
LIBOR: Acronym for “London Interbank Offered Rate”. An index used to determine interest rate changes for ARMs. Very popular index for Interest Only mortgages
Lien: A claim laid by one person or company on the property of another as security for money owed
Life cap: Limits the amount a loan’s interest rate can change during the mortgage term. For example, if the rate for an ARM begins at 4% and has a life cap of 6%, it cannot go above 10%
Liquid assets: Cash and all other assets that can be converted to cash relatively quickly. Liquid assets can include money in savings and checking accounts, money market accounts and most CDs
Loan application: A document that details a borrower’s income, debt and other obligations to determine credit worthiness
Loan Origination Fee: A fee charged by the lenders to cover the direct costs of arranging the loan
Loan to Value Ratio (LTV): The relationship between the amount of the mortgage loan and the appraised value of the property, expressed as a percentage
Lock in: A lender’s commitment to a borrower to guarantee a specific interest rate for a limited amount of time
Margin: A percentage added to the index and fixed for the life of the loan. When the initial interest rate on an ARM has expired, the interest rate moves toward the sum of its index plus a margin
Market value: The price a piece of property sells for at a particular point in time
Mortgage: A sum of money borrowed to purchase a home using the property as collateral. A mortgage is the legal document that pledges the property as collateral for the loan.
Mortgage Banker: A company that provides home loans using its own money. The loans are usually sold to investors such as insurance companies and Fannie Mae
Mortgage Insurance: Required by lenders on some loans to protect lenders from a possible default. Most conventional loans with down payments or home equity percentages that are less than 20% of the home value requires private mortgage insurance (PMI)
Mortgagee: A bank or other financial institution that lends money to the borrower.
Mortgagor: The person who borrows money to purchase a house
Note: A legal document that requires a borrower to repay a mortgage at a certain interest rate over a specified period of time
Option: A situation in which a buyer puts down money for the right to purchase a piece of real estate within a set time period but does not have an obligation to buy
Per Diem interest: Interest charged or accrued daily
PITI: A payment amount calculated by a mortgage lender to include the total payment of all principal, interest, taxes and insurance due monthly
Pre-approval: A thorough assessment made by a lender of a potential borrower’s ability to pay for a home and a confirmation of the amount to be borrowed.
Prepaid expenses: Expenses including taxes, insurance and assessments that are paid before the due date