Real Estate Glossary
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Glossary (A-D) | Glossary (E-Z)
earnest money deposit
A deposit made by the potential home buyer to show that he
or she is serious about buying the house.
equity
A homeowner's financial interest in a property. Equity is
the difference between the fair market value of the property
and the amount still owed on its mortgage.
equity loan
A loan based on the borrower's equity in his/her home.
escrow
An item of value, money, or documents deposited with a third
party to be delivered upon the fulfillment of a condition.
For example, the deposit by a borrower with the lender of
funds to pay taxes and insurance premiums when they become
due, or the deposit of funds or documents with an attorney
or escrow agent to be disbursed upon the closing of a sale
of real estate.
fair market value
The highest price that a buyer, willing but not compelled
to buy, would pay, and the lowest a seller, willing but not
compelled to sell, would accept.
FHA mortgage
A mortgage that is insured by the Federal Housing Administration
(FHA). Also known as a government mortgage.
finance charge
The cost of credit as a dollar amount (i.e. total amount of
interest and specific other loan charges to be paid over the
term of the loan and other loan charges to be paid by the
borrower at closing). Loan charges include origination fees,
discount points, mortgage insurance, and other applicable
charges. If the seller pays any of these charges, they cannot
be included in the finance charge.
first mortgage
A mortgage that is the primary lien against a property.
fixed installment
The monthly payment due on a mortgage loan. The fixed installment
includes payment of both principal and interest.
fixed rate mortgage (FRM)
A mortgage in which the interest rate does not change during
the entire term of the loan.
floating
The term used when a purchaser elects not to lock-in an interest
rate at the time of application.
forbearance
The lender's postponement of foreclosure to give the borrower
more time to catch up on payments.
foreclosure
The legal process by which a borrower in default under a mortgage
is deprived of his or her interest in the mortgaged property.
This usually involves a forced sale of the property at public
auction with the proceeds of the sale being applied to the
mortgage debt.
fully amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that
is sufficient to amortize the remaining balance, at the interest
accrual rate, over the amortization term.
good faith estimate (GFE)
A disclosure required under the Real Estate Settlement Procedures
Act (RESPA) that must be given to all mortgage loan applicants
at application time. The disclosure is an estimate of all
settlement charges likely to be incurred at closing.
government mortgage
A mortgage that is insured by the Federal Housing Administration
(FHA) or guaranteed by the Department of Veterans Affairs
(VA) or the Rural Housing Service (RHS). Contrast with conventional
mortgage.
graduated payment mortgage
A mortgage that starts with low monthly payments that increase
at a predetermined rate.
growing-equity mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment increases
over an established period of time, with the increased amount
of the monthly payment applied directly toward reducing the
remaining balance of the mortgage.
hazard insurance
Insurance coverage that compensates for physical damage to
a property from fire, wind, vandalism, or other hazards.
home equity line of credit
A mortgage loan, which is usually in a subordinate position,
that allows the borrower to obtain multiple advances of the
loan proceeds at his or her own discretion, up to an amount
that represents a specified percentage of the borrower's equity
in a property.
index
A number used to compute the interest rate for an adjustable-rate
mortgage (ARM). The index is generally a published number
or percentage, such as the average interest rate or yield
on Treasury bills. A margin is added to the index to determine
the interest rate that will be charged on the ARM.. This interest
rate is subject to any caps that are associated with the mortgage.
inflation
An increase in the amount of money or credit available in
relation to the amount of goods or services available, which
causes an increase in the general price level of goods and
services. Over time, inflation reduces the purchasing power
of a dollar, making it worth less.
initial interest rate
The original interest rate of the mortgage at the time of
closing. This rate changes for an adjustable-rate mortgage
(ARM). Sometimes known as "start rate" or "teaser."
interest
The fee charged for borrowing money.
interest accrual rate
The percentage rate at which interest accrues on the mortgage.
In most cases, it is also the rate used to calculate the monthly
payments, although it is not used for an adjustable-rate mortgage
(ARM) with payment change limitations.
interest rate
The rate of interest in effect for the monthly payment due.
interest rate buy-down plan
An arrangement wherein the property seller (or any other party)
deposits money to an account so that it can be released each
month to reduce the mortgagor's monthly payments during the
early years of a mortgage. During the specified period, the
mortgagor's effective interest rate is "bought down"
below the actual interest rate.
interest rate cap
A provision of an arm limiting how much interest rates may
increase or decrease per adjustment period or over the life
of the loan.
interest rate ceiling
For an adjustable-rate mortgage (ARM), the maximum interest
rate, as specified in the mortgage note.
interest rate floor
For an adjustable-rate mortgage (ARM), the minimum interest
rate, as specified in the mortgage note.
jumbo loan
A loan that exceeds Fannie Mae’s legislated mortgage
amount limits. Also called a nonconforming loan.
lease
A written agreement between the property owner and a tenant
that stipulates the conditions under which the tenant may
possess the real estate for a specified period of time and
rent.
lease-purchase mortgage loan
An alternative financing option that allows low- and moderate-income
home buyers to lease a home from a nonprofit organization
with an option to buy. Each month's rent payment consists
of principal, interest, taxes and insurance (PITI) payments
on the first mortgage plus an extra amount that is earmarked
for deposit to a savings account in which money for a down
payment will accumulate.
liabilities
A person's financial obligations. Liabilities include long-term
and short-term debt, as well as any other amounts that are
owed to others.
liability insurance
Insurance coverage that offers protection against claims alleging
that a property owner's negligence or inappropriate action
resulted in bodily injury or property damage to another party.
lien
A legal claim against a property that must be paid off when
the property is sold.
liquid asset
A cash asset or an asset that is easily converted into cash.
loan-to-value (LTV) percentage
The relationship between the principal balance of the mortgage
and the appraised value (or sales price if it is lower) of
the property. For example, a $100,000 home with an $80,000
mortgage has a LTV percentage of 80 percent.
lock-in
A written agreement in which the lender guarantees a specified
interest rate if a mortgage goes to closing within a set period
of time. The lock-in also usually specifies the number of
points to be paid at closing.
margin
For an adjustable-rate mortgage (ARM), the amount
that is added to the index to establish the interest rate
on each adjustment date, subject to any limitations on the
interest rate change.
maturity
The date on which the principal balance of a loan, bond, or
other financial instrument becomes due and payable.
merged credit report
A credit report that contains information from three credit
repositories. When the report is created, the information
is compared for duplicate entries. Any duplicates are combined
to provide a summary of your credit.
monthly fixed installment
That portion of the total monthly payment that is applied
toward principal and interest. When a mortgage negatively
amortizes, the monthly fixed installment does not include
any amount for principal reduction.
monthly payment mortgage
A mortgage that requires payments to reduce the debt once
a month.
mortgage
A legal document that pledges a property to the lender as
security for payment of a debt.
mortgage banker
A company that originates mortgages exclusively for resale
in the secondary mortgage market.
mortgage broker
An individual or company that brings borrowers and lenders
together for the purpose of loan origination. Mortgage brokers
typically require a fee or a commission for their services.
mortgage insurance
A contract that insures the lender against loss caused by
a mortgagor's default on a government mortgage or conventional
mortgage. Mortgage insurance can be issued by a private company
or by a government agency such as the Federal Housing Administration
(FHA). Depending on the type of mortgage insurance, the insurance
may cover a percentage of or virtually all of the mortgage
loan.
mortgage insurance premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either
to a government agency such as the Federal Housing Administration
(FHA) or to a private mortgage insurance (MI) company.
negative amortization
A gradual increase in mortgage debt that occurs when the monthly
payment is not large enough to cover the entire principal
and interest due. The amount of the shortfall is added to
the remaining balance to create "negative" amortization.
net cash flow
The income that remains for an investment property after the
monthly operating income is reduced by the monthly housing
expense, which includes principal, interest, taxes, and insurance
(PITI) for the mortgage, homeowners' association dues, leasehold
payments, and subordinate financing payments.
non-liquid asset
An asset that cannot easily be converted into cash.
note
A legal document that obligates a borrower to repay a mortgage
loan at a stated interest rate during a specified period of
time.
notice of default
A formal written notice to a borrower that a default has occurred
and that legal action may be taken.
original principal balance
The total amount of principal owed on a mortgage before any
payments are made.
origination fee
A fee paid to a lender for processing a loan application.
The origination fee is stated in the form of points. One point
is 1 percent of the mortgage amount.
owner financing
A property purchase transaction in which the property seller
provides all or part of the financing.
periodic payment cap
For an adjustable-rate mortgage (ARM), a limit on the amount
that payments can increase or decrease during any one adjustment
period.
periodic rate cap
For an adjustable-rate mortgage (ARM), a limit on the amount
that the interest rate can increase or decrease during any
one adjustment period, regardless of how high or low the index
might be.
PITI
principal, interest, taxes, and insurance.
points
A one-time charge by the lender for originating a loan. A
point is 1 percent of the amount of the mortgage.
prepaid interest
Mortgage interest that is paid in advance of when it is due
to obtain tax advantages.
prepayment
Any amount paid to reduce the principal balance of a loan
before the due date. Payment in full on a mortgage that may
result from a sale of the property, the owner's decision to
pay off the loan in full, or a foreclosure. In each case,
prepayment means payment occurs before the loan has been fully
amortized. Often, a fee may be charged to a borrower who pays
off a loan before it is due.
prequalification
The process of determining how much money a prospective home
buyer will be eligible to borrow before he or she applies
for a loan.
prime rate
The interest rate that banks charge to their preferred customers.
Changes in the prime rate influence changes in other rates,
including mortgage interest rates.
principal
The amount borrowed or remaining unpaid. The part of the monthly
payment that reduces the remaining balance of a mortgage.
principal balance
The outstanding balance of principal on a mortgage. The principal
balance does not include interest or any other charges.
principal, interest, taxes, and insurance (PITI)
The four components of a monthly mortgage payment. Principal
refers to the part of the monthly payment that reduces the
remaining balance of the mortgage. Interest is the fee charged
for borrowing money. Taxes and insurance refer to the amounts
that are paid into an escrow account each month for property
taxes and mortgage and hazard insurance.
private mortgage insurance (PMI)
Mortgage insurance that is provided by a private mortgage
insurance company to protect lenders against loss if a borrower
defaults. Most lenders generally require MI for a loan with
a loan-to-value (LTV) percentage in excess of 80 percent.
promissory note
A written promise to repay a specified amount over a specified
period of time.
pro rate
The allocation of proportionate shares of income, ownership,
or of an obligation, which a buyer and seller share at the
time of closing.
purchase and sale agreement
A written contract signed by the buyer and seller stating
the terms and conditions under which a property will be sold.
rate lock
A commitment issued by a lender to a borrower or other mortgage
originator guaranteeing a specified interest rate for a specified
period of time.
realtor
A person licensed to negotiate and transact the sale of real
estate on behalf of the property owner.
real property
Land and appurtenances, including anything of a permanent
nature such as structures, trees, minerals, and the interest,
benefits, and inherent rights thereof.
remaining balance
The amount of principal that has not yet been repaid. See
principal balance.
repayment plan
An arrangement made to repay delinquent installments or advances.
Lenders' formal repayment plans are called "relief provisions."
right of first refusal
A provision in an agreement that requires the owner of a property
to give another party the first opportunity to purchase or
lease the property before he or she offers it for sale or
lease to others.
second mortgage
A mortgage that has a lien position subordinate to the first
mortgage.
secured loan
A loan that is backed by collateral.
settlement
Another term for "closing".
sweat equity
Contribution to the construction or rehabilitation of a property
in the form of labor or services rather than cash.
title
A legal document evidencing a person's right to or ownership
of a property.
title company
A company that specializes in examining and insuring titles
to real estate.
title insurance
Insurance that protects the lender (lender's policy) or the
buyer (owner's policy) against loss arising from disputes
over ownership of a property.
transfer tax
State or local tax payable when title passes from one owner
to another.
Treasury index
An index that is used to determine interest rate changes for
certain adjustable-rate mortgage (ARM) plans. It is based
on the results of auctions that the U.S. Treasury holds for
its Treasury bills and securities or is derived from the U.S.
Treasury's daily yield curve, which is based on the closing
market bid yields on actively traded Treasury securities in
the over-the-counter market.
Truth-in-Lending
A federal law that requires lenders to fully disclose, in
writing, the terms and conditions of a mortgage, including
the annual percentage rate (APR) and other charges.
two-step mortgage
An adjustable-rate mortgage (ARM) that has one interest rate
for the first five or seven years of its mortgage term and
a different interest rate for the remainder of the amortization
term.
trustee
A fiduciary who holds or controls property for the benefit
of another.
underwriting
The process of evaluating a loan application to determine
the risk involved for the lender. Underwriting involves an
analysis of the borrower's creditworthiness and the quality
of the property itself.
unsecured loan
A loan that is not backed by collateral.
Uniform Residential Loan Application (URLA)
Standard form where mortgage applicants provide the lender
with information essential to loan approval.
VA mortgage
A mortgage that is guaranteed by the Department of Veterans
Affairs (VA). Also known as a government mortgage.
verification of deposit (VOD)
A form that requests and secures verifications of amounts
on deposit at financial institutions. When a depository institution
is also the applicant’s creditor, the VOD verifies the
obligation.
verification of employment (VOE)
A form that requests and secures documentation of a mortgage
applicant’s work history and/or occupation, to assist
in the lender’s credit investigation.
verification of mortgage (VOM)
A form that requests and secures verification of payments
made on an applicant’s current or past mortgage.
vested
Having the right to use a portion of a fund such as an individual
retirement fund. For example, individuals who are 100 percent
vested can withdraw all of the funds that are set aside for
them in a retirement fund. However, taxes may be due on any
funds that are actually withdrawn.
Veterans Administration (VA)
A government agency that aids veterans of the U.S. armed forces
in various ways; its housing assistance takes the form of
a guarantee to the financial institution on loans with low
down payments to qualified veterans.
wraparound mortgage
A mortgage that includes the remaining balance on an existing
first mortgage plus an additional amount requested by the
mortgagor. Full payments on both mortgages are made to the
wraparound mortgagee, who then forwards the payments on the
first mortgage to the first mortgagee.
Glossary (A-D) | Glossary (E-Z)