203(b): FHA program which provides mortgage insurance to protect lenders from default; used to
finance the purchase of a new or existing one- to four- family housing; characterized by low down payment, flexible qualifying
guidelines, limited fees, and a limit on maximum loan amount
203(k): this 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
Amenity: a feature of the home or property that serves as a benefit to the buyer
but that is not necessary to its use; may be natural (like location, woods, water) or man-made (like a swimming pool or garden)
Amortization: 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)
Annual Percentage Rate (APR): calculated by using a standard formula, the APR
shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other
fees associated with a loan
Application: 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
Appraisal: 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 amount is not more than
the value of the property
Appraiser: a qualified individual who uses his or her experience and knowledge
to prepare the appraisal estimate
ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes in interest
rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the change in monthly
payment amount, however, is usually subject to a cap
Assessor: a government official who is responsible for determining the value
of a property for the purpose of taxation.
Assumable mortgage: a mortgage that can be transferred from a seller to a buyer;
once the loan is assumed by the buyer, the seller is no longer responsible for repaying it; there may be a fee and/or credit
package involved in the transfer of an assumable mortgage
Balloon Mortgage: a mortgage that typically offers low rates for an initial period of time (usually
5, 7, or 10 years); after that time elapses, the balance is due or is refinanced by the borrower
Bankruptcy: a federal 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
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
Bridal Registry: a program supported by the FHA that allows couples to open ("register" for) 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
Building code: based on agreed upon safety standards within a specific area, a building code is
a regulation that determined the design, construction, and materials used in the building
Budget: a detailed record of all income earned and spent during a specific
period of time
Cap: a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment
or interest rate can increase or decrease
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
Certificate of title: a document provided by a qualified source (such as a title company) that
shows the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and
free or all liens or other claims
Closing: also known as settlement, this is the time at which the property is formally sold and
transferred from the seller to the buyer; it is at this time that the borrower receives title from the seller
Closing costs: customary costs above and beyond the sale price of the property that must be paid
to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed
to the borrower after submission of a loan application
Commission: an amount, usually a percentage of the property sales price, that
is collected by a real estate professional as a fee for negotiating the transaction
Condominium: a form of ownership in which individuals purchase and own a unit of housing in a
mulit-unit complex; the owner also shares financial responsibility for common areas
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
Credit history: history of an individual's debt payment; 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 possibility a borrower may default; it is based
upon credit history and is used to determine ability to qualify for a mortgage loan
Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses; with the
FHA, the monthly mortgage payment should be no more that 29% of monthly gross income (before taxes) and the mortgage payment
combined with non-housing debts should not exceed 41% of the income
Deed: the document that transfers ownership of a property
Deed-in-lieu: to avoid foreclosure ("in lieu" of foreclosure), 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
Default: the inability to pay monthly mortgage payments in a timely manner or to otherwise meet
the mortgage terms
Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement
Discount point: 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
Down payment: the portion of a home's purchase price that is paid in cash and is not part of the
mortgage loan
Earnest money: 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
EEM: Energy Efficient Mortgage; 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
Equity: 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 homebuying 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
the are acting freely, carefully, and with complete knowledge or 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
FHA: Federal Housing Administration: established in 1934 to advance homeownership opportunities
for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most potential losses that may occur
when a borrower defaults; this encourages lenders to make loans to borrowers 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 before approving a loan
Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting
borrower
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation
that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders with funds for
new homeowners
Ginnie Mae: Government National Mortgage Association (GNMA); government-owned corporation overseen
by the US 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
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
HELP: Homebuyer Education Learning Program; an education program from the FHA
that councils people about the homebuying process; HELP covers topics like budgeting, finding a home, getting a loan, and
home maintenance; in most cases, competition of the program may entitle the homebuyer to a reduced initial FHA mortgage insurance
premium-from 2.25% to 1.75% of the home purchase price
Home inspection: an examination of the structure and mechanical systems to determine a home's
safety; makes the potential homebuyer aware of any repairs that may be needed
Home warranty: offers protection for mechanical systems and attached appliances against unexpected
repairs not covered by homeowner's insurance; coverage extends over a specific time period and does not cover the home's structure
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
Housing counseling agency: provides counseling and assistance to individuals on a variety of issues,
including loan default, fair housing, and homebuying
HUD: the US 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 sheet," it itemizes all closing costs; must be
given to the borrower at or before closing
HVAC: Heating, Ventilation and Air Conditioning; a home's heating and cooling system
Index: a measurement used by lenders to determine changes to the interest rate charged on an adjustable
rate mortgage
Inflation: the number of dollars in circulation exceeds the amount of goods and services available
for purchase; inflation results in the decrease in the dollar's value
Interest: 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
Insurance: protection against a specific loss over a period of time that is secured by the payment
of a regularly scheduled premium
Judgment: a legal decision; when requiring debt repayment, a judgment may include a property lien
that secures the creditor's claim by providing a collateral source
Lease purchase: assists low- to-moderate-income homebuyers in purchasing a home by allowing them
to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount
that is credited to an account for use as a down payment
Lien: a legal claim against property that must be satisfied when the property is sold
Loan: money borrowed that is usually repaid with interest
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 a down
payment
Lock-in: 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 help a borrower who has been
unable to make loan payments and is in danger of defaulting on his or her loan
Margin: an amount the lender adds to an index to determine the interest rate on an adjustable
rate mortgage
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 firm that originates and processes loans for a number of 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 payments
Offer: indication by a potential buyer of a willingness to purchase a home at a specific price;
generally put forth in writing
Origination: the process of preparing, submitting, and evaluating a loan application; generally
includes a credit check, verification of employment, and a property appraisal
Origination fee: the charge for originating a loan; is usually calculated in the form of points
and paid at closing
Partial Claim: a loss mitigation option offered by the FHA that allows a borrower, with the help
from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date
PITI: 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
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
Pre-approve: 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
Pre-qualify: a lender informally determines the maximum amount an individual is eligible to borrow
Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage
Prepayment: payment of the mortgage loan before the scheduled due date; may be subject to a prepayment
penalty
Principal: the amount borrowed from a lender; doesn't include interest or additional fees
Radon: a radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems
Real estate agent: an individual who is licensed to negotiate and arrange real estate sales; works
for real estate broker
REALTOR®: a real estate agent or broker who is a member of the NATIONAL ASSOCIATION
OF REALTORS® and its local and state associations
Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure
better loan terms (like lower interest rate)
Rehabilitation mortgage: a mortgage that covers the costs of rehabilitating (repairing or improving)
a property; some rehabilitating mortgages- like the FHA's 203(k) - allow a borrower to roll the costs of rehabilitation and
home purchase into one mortgage loan
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, relationships
Settlement: 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
Subordinate: to place in a rank of lesser importance or to make one claim secondary to another
Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of
way, improvement locations. etc.
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 insurance: insurance that protects the lender against any claims that arise from arguments
about ownership of the property; also available for homebuyers
Title search: a check of public records to be sure that the seller is the recognized owner of
the real estate and that there are no unsettled liens or other claims against the property
Truth-in-Lending: 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 or adjustable rate mortgage that has one interest rate for a predetermined
initial period and then adjusts to another rate that lasts for the term of the loan
Underwriting: 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 history and a judgment of the property value
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