Adjustable Rate Mortgage (ARM) – A mortgage in which the interest rate is adjusted periodically based on changes to an index, such as the prime rate or a bank’s cost of funds. This may also be called a Variable Rate mortgage.
Amortization – Paying off the outstanding balance of a loan by making equal payments on a regular schedule (usually monthly). The payments are structured so that the borrower pays both interest and principal with each equal payment.
Annual Percentage Rate (APR) – A calculation of the total yearly cost of a mortgage expressed as the actual rate of interest paid. The APR includes the base interest rate, points, and any other add-on fees and costs. As a result, APR is invariably higher for the rate of interest that the lender quotes for the mortgage but gives a more accurate picture of the likely cost of the loan. Keep in mind, however, that most mortgages are not held for their full 15 or 30 year terms, so the effective annual percentage rate is higher than the quoted APR because the points and loan fees are spread out over fewer years.
Appraisal – The determination of property value made by an independent professional using generally accepted appraisal practices.
Appreciation – Increases in property value due to fluctuations in the market, inflation, property improvements and other conditions.
Clear Title – A title that is free of liens or any legal question as to the ownership of the property.
Closing – Final arrangements to transfer title of property as well as the allocation of charges and credits.
Closing Costs – Fees paid by the borrower when a property is purchased or refinanced. These include loan origination fees, discount points, appraisal fees, title insurance, inspections, taxes, deed recording fee, and credit report charges. All closing costs are separated into “non-recurring,” and “pre-paid.” Non-recurring charges are any items that are paid only once because a loan was obtained or a property purchased. Pre-paid charges are those that recur over time, like insurance and property taxes. These costs are summarized in the Good Faith Estimate.
Commitment Letter – A written letter of agreement which details the terms and conditions under which the lender will lend and the borrower will borrow funds to finance a home.
Conventional Mortgage – A mortgage loan that has no additional guarantees for repayment, such as FHA or VA insurance, other than the borrower’s promise to repay the loan.
Credit Rating – A rating of a borrower made using the borrower’s credit history and capacity for making future payments. Credit ratings are expressed using letter grades such as A, B, or C. These ratings are based on various factors such as a borrower’s payment history, foreclosures, bankruptcies and charge-offs. There is no exact science to rating a borrower’s credit, and different lenders may assign different grades to the same borrower.
Earnest Money Deposit – A deposit made by a potential home buyer to show that they are serious about purchasing the property.
Equity – The difference between the current market value of a property and the principal balance of all outstanding loans.
Escrow – A third party activity that receives, holds, and/or disburses certain funds or documents until certain conditions are met. For example, an earnest money deposit is put into escrow until the transaction is closed. Only then can the seller receive the deposit.
Fannie Mae (FNMA) – The Federal National Mortgage Association. Fannie Mae is a congressionally chartered, shareholder-owned company and the nation’s largest supplier of home mortgage funds.
FHA Loan – A government-backed mortgage loan backed by the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD).
Fixed-Rate Mortgage – A mortgage where the interest rate does not change for the life of the loan.
Good-Faith Estimate – An estimate of charges which a borrower is likely to incur in connection with a loan closing.
Gross Monthly Income – The total amount the borrower earns per month, before taxes or expenses. This is often used in calculations to determine whether a borrower will qualify for a particular loan on the basis of their capacity to make payments.
Hazard Insurance – A form of insurance in which the insurance company protects the insured from certain losses, such as fire, storms and certain other natural causes.
Home Inspection – A thorough assessment by a professional inspector of the structural and mechanical condition of a property.
Homeowner’s Insurance – An insurance policy that covers certain property repairs, should they be necessary, for a specified period following the purchase of a home.
Rate Lock Period – The number of days during which a lender will guarantee a rate. Some lenders will lock rates at the time of application while others will allow the borrower to lock the rate after the application is taken.
Monthly Housing Expense – Total principal, interest, taxes, and insurance paid by the borrower on a monthly basis.
Mortgage Insurance – Insurance that covers the lender against losses incurred as a result of a default on a home loan. This is usually required on all loans where the buyer is making less than a 20% down payment of the purchase price. Mortgages where borrowers have less than a 20% equity stake in the property have higher payment rates, either to cover the cost of the mortgage insurance or to compensate the lender for the added risk.
Origination Fee – The fee imposed by a lender to cover certain processing expenses in connection with making a loan. Usually a percentage of the amount loaned. Also known as “points”.
Owner’s Title Policy – A policy protecting the buyer for the amount of the purchase price in the event of a future title dispute.
Personal Property – Movable property that does not fit the definition of realty, or real property.
PITI – An acronym for principal, interest, taxes, and insurance. If your loan has a impound account, your lender will collect payments for all four items, plus mortgage insurance if it is required. Loans that do not have impound accounts collect payments only for principal and interest; the homeowner is required to pay taxes and insurance separately.
Pre-paids – Expenses such as taxes, insurance, and assessments, which are paid in advance of their due date, and on a prorated basis at closing.
Principal – The amount of debt, not counting interest, left on a loan.
Qualifying Ratio – The ratio of the borrower’s fixed monthly expenses to his gross monthly income. Ratios are expressed as two numbers: the front-end ratio and the back-end ratio.
The Front-End Ratio is the percentage of a borrower’s gross monthly income (before income taxes) that would cover the cost of PITI (Mortgage Principal Payment + Mortgage Interest Payment + Property Taxes + Homeowners Insurance). In the case of a 28% Front-End Ratio, a borrower could qualify if the proposed monthly PITI payments were 28% or less than the borrower’s gross monthly income.
Qualifying ratios are only a rough guideline in determining a potential borrower’s credit risk. Other factors include past credit performance, the amount of the borrower’s down payment and the size of loan can also influence a lender’s decision to make a loan. Regardless of how you think you might qualify, it’s always a good idea to discuss your particular profile with your lender.
Real Estate (Real Property) – A portion of the earth’s surface extending downward to the center to the earth and upward into space, including all things permanently attached to the property by nature or man and all legal rights therein.
Recording – The formal filing of documents describing or affecting a property’s title. These documents are recorded with a local government agency, such as a recorder’s office or a registry of deeds. This process helps ensure that property ownership is a matter of public record, and that land cannot be accumulated out of public sight.
Regulation Z – A truth-in-lending provision that requires lenders to reveal to borrowers the actual costs of borrowing. This is disclosed in a good-faith estimate offered by the lender at the start of the application process.
Title – A legal document showing a person’s right to or ownership of a property.
Title Insurance – Insurance policies that insure a lender and possibly the homebuyer against any title search errors or mistakes, and against loss due to disputes over property ownership. The cost of title insurance is usually a set value per thousand of dollars of the total loan amount.
Total Debt Ratio – Monthly debt and housing payments divided by gross monthly income. Also known as the Back-End Ratio.
Transfer Tax – State or local tax payable when the title passes from one owner to another.
VA Loan – A government-backed mortgage loan supported by the US Veterans Administration.