Home Buying Terms
FHA program which provides mortgage insurance to protect lenders from default, used to finance the purchase of new or existing one-to-four-family residences; characterized by low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amounts.
FHA mortgage insurance program enables homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.
- Adjustable Rate Mortgage (ARM)
A mortgage loan subject to changes in interest rates; ARM monthly payments may increase or decrease at specific intervals determined by the lender, and disclosed at inception of the mortgage. ARM’s interest percentage rate is tied to either the T-Bill or Treasury Note and there is a cap on the changes over the life of the loan.
A feature in a home or property which serves as a benefit to the buyer but is not necessary to its use; may be natural (i.e. location, woods, water) or man-made (i.e. fireplace, sprinkler system, a swimming pool)
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 (e.g. 15 or 30 years)
- Annual Percentage Rate (APR)
Calculated by using a standard formula, the APR shows the total cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process
A document that gives an estimate of a property’s fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan is justified by the property value. It protects the lender from loaning more money then a property is worth.
A state licensed individual who uses his or her experience and strict appraisal guidelines to prepare the appraisal estimate.
A government official who is responsible for determining the value of a property for the purpose of taxation.
- Assumable mortgage
A mortgage loan that can be transferred from a seller to a buyer when the property is sold. All assumable loans issued after 1989 are “qualified assumable” which means that the buyer has to go through the same loan approval process as an ordinary buyer.
- Balloon Mortgage
A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years, after that time period elapses, the balance is due in full.
A federal debtor protection law whereby a person’s assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay. Chapter 7 of the bankruptcy code allows for most debts to be completely discharged and not repaid. Chapter 13 of the bankruptcy code allows the debtor to keep most of their property and repay their debts after discount and over time.
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
- Bridal Registry
A program supported by the FHA that allows couples to open a bridal registry account into which family and friends can deposit gifts of cash; the funds in this account may then be used for a down payment on a house. This is one of the only vehicles whereby a borrower can receive a gift of money for down payment.
- Building Code
Local regulations that determine the design, construction, and materials which are used in buildings constructed within a certain area.
A detailed record of all income earned and spent during a specific period of time
A fee, paid by the seller of a home, to lower the borrower’s interest rate. This reduces the monthly payment and allows for an increased purchase price and generally more money for the seller.
A limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease over the life of the loan.
- Cash Reserves
A cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender and represents a safety net to be used in difficult times.
- Cash to Close
The total amount needed to bring to the closing attorney’s office on closing day. It typically includes down payment, fees, pre-paid taxes, homeowner’s insurance, and any homeowners association (HOA) fees that may be applicable. Cash to close is usually paid in the form of a wire transfer or a certified bank or cashier’s check.
Also known as settlement, this is the time at which the property is legally sold and transferred from the seller to the buyer; it is at this time that the borrower assumes the loan obligation, pays closing costs, and receives title from the seller.
An amount, usually a percentage of the property sales price or loan value as a fee for handling the transaction. The real estate broker, mortgage company, property insurance agent, and title company all earn commissions from the sale or purchase of a property.
A unit of housing in a multi-unit complex; typically the condominiums owners share financial responsibility for common areas and exterior maintenance. The land is not owned by the condominium owner, instead it is owned by the condominium association.
- Conforming Loan
A designation given when a loan is made to a borrower who has good credit and the property value is within the conforming loan limits as set by Fannie Mae or Freddie Mac.
- Conventional Loan
A private sector loan, one that is not guaranteed or insured by the U.S. government
- Cooperative (Co-op)
Residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
- Conversion Option
A clause in a mortgage or note that allows the borrower to convert an Adjustable Rate Mortgage to a Fixed-Rate Mortgage at designated times.
- Credit History
History of an individual’s debt and repayment history; lenders use this information to gauge a potential borrower’s ability to repay a loan.
- Credit Report
A record that lists all past and present debts and the timeliness of their repayment; it documents an individual’s credit history.
- Credit Bureau Score
A number representing the credit worthiness of a borrower; it is based upon credit history and is used to determine ability to qualify for a mortgage loan. Scores range from 400 to 844.
- Debt-to-Income Ratio
A comparison of gross income to housing and non-housing expenses; with the FHA, the normal accepted monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
The document that transfers ownership of property.
To avoid foreclosure (“in lieu”), a deed is given to the lender to fulfill the obligation to repay the debt; this process doesn’t allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.
The inability to pay monthly mortgage payments or to otherwise meet the mortgage terms. If the default is not corrected the lender will foreclose on the mortgage loan.
Failure of a borrower to make timely mortgage payments under a loan agreement.
- Discount Point
May be collected by the lender to reduce the borrower’s interest rate on the mortgage. A point equals 1% of the loan amount and is paid in advance.
- Down Payment
The portion of a home’s purchase price that is paid in cash at the time of purchase and is not part of the mortgage loan.
- Earnest Money
Money put down by a potential buyer as good faith to show that he or she is serious about purchasing the home; it can be used as part of the down payment or closing costs if the offer is accepted. If the offer is rejected or the borrower does not receive lender approval for the loan then the earnest money is returned.
- Energy Efficient Mortgage (EEM)
An FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy-efficiency features to new or existing home as part of the home purchase.
An owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.
- Escrow Account
A separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowner’s insurance, mortgage insurance, etc.
- Fair Housing Act
A 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.
- Fair Market Value
The hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
- Fannie Mae
Federal National Mortgage Association (FNMA); 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.
The Federal Housing Administration was established in 1934 to advance homeownership opportunities for all Americans; 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 borrower’s who might not qualify for conventional mortgages.
- Fixed-Rate Mortgage
A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
- Flood Insurance
Insurance that protects homeowners against losses from a flood; if a home is located in a flood plain the lender will require flood insurance as a condition of loan approval.
A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
- Freddie Mac
Federal Home Loan Mortgage Corporation (FHLMC); 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.
- Ginnie Mae
Government National Mortgage Association (GNMA); a 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 borrower’s by lenders.
- Good Faith Estimate
An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.
- Graduated Payment Mortgage
A flexible mortgage where payments increase during the first five to ten years of the loan and then level off. This allows a borrower to qualify for a larger purchase price but can result in negative amortization during the first years.
- Gross Monthly Income (GMI)
The amount of income you earn monthly before taxes are withheld. If you are an hourly employee then your GMI is calculated by taking your hourly wage times 40 hours per week, times 52 weeks per year, then divided by 12 months.
- Home Inspection
An examination of the structure and mechanical systems to determine a home’s safety and condition; makes the potential homebuyer aware of any repairs that may be needed prior to purchasing the home.
- Home Warranty
Offers protection for mechanical systems and attached appliances against unexpected repairs. There is a deductible paid for by the homeowner and the Home Warranty Company chooses the repair company that is sent out to service the covered item; coverage extends over a specific time period and does not cover the home’s structure.
- Homeowners Association (HOA)
An association comprised of elected officials from the neighborhood who enforce the recorded covenants and restrictions and who propose new restrictions or changes. There is usually a monthly or annual fee charged to the homeowners in this neighborhood to pay for the upkeep of common neighborhood grounds, lighting or trash removal.
- Homeowner’s Insurance
An insurance policy that combines protection against damage to a dwelling and its contents with protection against claims of negligence or inappropriate action that result in someone’s injury or property damage. Lenders require insurance coverage by the borrower for at least the amount of the loan.
- Housing Counseling Agency
Provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and home buying.
The U.S. Department of Housing and Urban Development; 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.
- HUD-1 Statement
Also known as the “settlement statement”, It itemizes all closing costs; must be given to the borrower at or before closing and is signed by both the buyer and seller.
Heating, Ventilation and Air Conditioning, a home’s heating and cooling system
A measurement used by lenders to determine changes to the interest rate charged on an adjustable rate mortgage.
The number of dollars in circulation exceeds the amount of goods and services available for purchase causing the prices of those goods and services to increase; inflation results in a decrease in the value of a dollar.
Protection again a specific loss over a period of time that is secured by the payment of a regularly scheduled premium
A fee charged for the use of money.
- Interest Rate
The amount of interest charged on a monthly loan payment; usually expressed as a percentage.
A legal decision rendered by a court; when requiring debt repayment, a judgment may include a property lien that secures the creditor’s claim by providing a collateral source.
- Lease Purchase
Allows a prospective purchaser to enter into a contract with a seller to purchase the home they are leasing and to close on the property at a later date. This can be done for different reasons such as the buyer not being able to qualify for a loan due to credit problems or not having enough money for down payment or closing costs. The seller may or may not apply part of the rent income to the borrower’s down payment or closing costs.
A legal claim against property that must be satisfied when the property is sold.
Money borrowed that is usually repaid with interest. Mortgage loans can either be conventional or government. Conventional loans can be either conforming or non-conforming depending on the borrower’s credit and the type or value of the property.
- Loan Fraud
Purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.
- 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. A 97LTV loan would require the borrower to have 3% for the down payment.
Since 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.
- Loss Mitigation
A process to avoid foreclosure; the lender tries to work with a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.
An amount the lender adds to indexes to determine the interest rate on an adjustable rate mortgage.
A lien on the property that secures the promise to repay a loan.
- Mortgage Banker
A company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.
- Mortgage Broker
A person or firm that originates and processes loans for a number of different lenders.
- Mortgage Insurance
A 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
- Mortgage Insurance Premium (MIP)
A monthly payment, usually part of the mortgage payment, paid by a borrower for mortgage insurance.
- Mortgage Modification
A loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payment.
- Negative Amortization
A loan payment schedule in which the outstanding principal balance goes up because payments do not cover the full amount of interest due.
- Non-Conforming Loan
A designation given when a loan is made to a borrower who has marginal credit and/or the property value is outside the conforming loan limits as set by Fannie Mae or Freddie Mac.
Willingness of a potential buyer to purchase a home at a specific price; generally put forth in writing.
The process of preparing, submitting the loan documents for the purchase of a home at a specific price and interest rate.
- Origination Fee
One of the fees the broker charges for originating a loan; usually calculated in the form of a percentage and paid at closing.
- Partial Claim
A loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.
- Payment Cap
A limit on how much the monthly payment for an Adjustable Rate Mortgage can increase. This doesn’t limit the amount of interest the lender is earning just the amount you pay so negative amortization may result.
Principal. Interest, Taxes, and Insurance – 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. PITI is required on a FHA loan. On some conventional or non-conforming loans the taxes and insurance are not escrowed and are the responsibility of the homeowner when they become due.
- Planned Unit Development (PUD)
This is a planned neighborhood which typically has common grounds, sidewalks, often times a park, with the covenants and restrictions recorded at the courthouse. Some of the newer PUD’s may have a school on the grounds. There are often different types of housing in a PUD such as single family residences, condominiums, or patio homes. There is usually a required Homeowners Association fee charged to each homeowner to provide the services that are maintained by the Association.
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.
Lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
- Pre-Foreclosure Sale
Allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure
A lender informally determines the maximum amount an individual may be eligible to borrow.
An amount paid on a regular schedule by a policyholder that maintains insurance coverage
Payment of the mortgage loan before the scheduled due date; may be subject to a prepayment penalty.
The amount borrowed from a lender for the purchase of property; doesn’t include interest or additional fees.
A radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.
- Rate Cap
A limit on how much the interest rate can change on an Adjustable Rate Mortgage. Periodic caps limit the rate increased from one adjustment period to the next. Overall caps limit the rate increase over the life of the loan.
- Real Estate Agent
An individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.
A real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS and its local and state associations.
Paying off one loan by obtaining another and generally done to secure better loan terms (lower rate) or to obtain cash from the homeowner’s equity to improve the property or purchase a needed item.
- Rehabilitation Mortgage
A mortgage that covers the costs of rehabilitating (repairing or improving) a property; some rehabilitation mortgages like the FHA’s 203(k) allow a borrower to roll the costs of rehabilitation and the home purchase into one mortgage loan
- Real Estate Settlement Procedures Act (RESPA)
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
- Reverse Annuity Mortgage
A form of mortgage in which the lender makes periodic payments to the buyer, using the buyer’s equity in the home as security. This is becoming very popular as a means of supplementing a person’s income during retirement.
Another name for closing.
- Special Forbearance
A loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.
To place in a rank of lesser importance or to make one claim secondary to another. A term usually applied to a second mortgage.
A property diagram that indicates legal boundaries, easements, encroachments, rights of way, and improvements.
- Sweat Equity
Using labor to build or improve a property as part of the down payment.
- Title I
An FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don’t require a property lien.
- Title Commitment
A document provided by an abstractor or title company after they have searched the property records and committing that they will provide a specified amount of insurance for the title. The document provides the owner of record, current mortgages, assignments, and liens, if any. It also slows any restrictions or covenants that are recorded pertaining to this property as well as the legal description of the property.
- Title Insurance
Insurance that protects the lender against any claims that arise about ownership of the property.
- Title Search
A check of public records to confirm the owner on a specific property, and any mortgages or assignments that have been granted on the property. This is completed prior to issuing the Title Commitment.
A federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan.
- Two-Step Mortgage
A type of adjustable rate mortgage that has one interest rate for a predetermined initial period and then adjusts to a fixed rate that lasts for the term of the loan
The process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower’s credit, employment and rental history and an appraisal of the property value.
- USDA Rural Development (RDA)
Created in 1994 this new organization assumed responsibility for the Farmers Home Administration, Rural Development Administration (RDA) and other United States Department of Agriculture (USDA) programs. The RDA is a loan program whereby the USDA subsidizes the interest on a loan if the applicant earns less than a certain amount annually. RDA loans are only available in rural areas as determined by the USDA and the underwriting requirements are similar to that of FHA.