Confused about terms you’ve been hearing throughout the home buying process? Browse our glossary for clarification on some often-used mortgage and real estate industry terms.

A     B     C     D         F     G     H     I     J     K     L         N     O     P     Q     R     S     T     U     V  W     X  Y  Z

A

Abstract of Title: Summary of various activities affecting ownership of property (not in all states).
Abstractor: Person designated (often an attorney) to research and verify the activities affecting ownership of the property. The abstractor typically provides the abstract of title opinion letter.
Adjustments: Any money that the buyer and seller “credit” each other at closing, such as taxes, down payments, etc.
Adjustable Rate Mortgage (ARM): Mortgage loans in which the interest rate is adjusted periodically based on predetermined factors such as an assigned index or designated market factor (such as the weekly average of US Treasury Bills over a one-year period). There is typically a limit to how often and by how much the interest rate can fluctuate. Also known as renegotiable rate mortgages or variable rate mortgages. The adjustment date is the date the interest rate changes. The adjustment interval (or adjustment period) is the time between changes in the interest rate and/or the monthly payment (typically one, three or five years).
Amortization: The number of years it will take to pay back your mortgage loan. The loan payment is made up of two parts: one portion will be applied to pay the accruing interest on a loan and the other portion is applied to the principal. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified time. Typical amortization periods are 15 or 30 years. Therefore, an amortized mortgage is one that requires periodic payments that include both interest and principal. An amortization schedule is a table that provides a breakdown of the principal and interest payments and the amount owed at any given point during the amortization period.
Annual Percentage Rate (APR) : An interest rate reflecting the cost of a mortgage as a yearly rate. Because it takes into account points and other credit costs, the APR is likely to be higher than the mortgage rate. It is a basis of comparison for mortgage loan costs.
Appraisal: The act of estimating the market value of a property.
Appreciation: The increase in value in a home from when the home was first purchased.
Asset: Anything with a dollar value that you own. Mortgagees consider your assets when determining how much you can borrow.

B

Back-End Ratio or Debt Ratio: The amount you pay in monthly debt (car payments, credit cards, student loans, etc.) divided by your gross monthly income.
Balanced Market: A market condition where the demand for property equals the supply of available properties for sale. There are typically a good number of homes available to choose from at fair and stable prices.
Balloon Payment Mortgage, Term Mortgage: A short-term fixed-rate loan which involves small payments for a certain time period and then one large payment (the balloon payment, for the remainder of the loan) at a predetermined date.
Bill of Sale: A written document that attests the transfer of the ownership (title) of personal property.
Borrower (Mortgager): One that mortgages property; a person who applies for and receives a mortgage loan.
Broker: A mortgage broker is an individual whose business is to help arrange funds or negotiate contracts for a client but who doesn’t loan money himself. A real estate broker is a real estate agent who is licensed to list property. A Realtor is a broker or agent who is a member of the National Association of Realtors (NAR).
Buy Down: A fixed-rate mortgage where the interest rate is “bought down” for a temporary period, usually one to three years. After that time, the borrower’s payment is calculated at the note rate. In order to temporarily buy down the initial rate, a lump sum is paid to the lender and held in an account used to supplement the borrower’s monthly payment. These funds usually come from the seller as an incentive to induce someone to buy their property.
Buyer’s Market: A market condition where there are a higher number of homes to choose from, than buyers able to purchase. Houses will typically remain un-sold for longer periods and tend to sell at a lower price, allowing for increased negotiating leverage for buyers.

C

Caps (interest): Limits on the amount that the interest rate on an ARM can change per year and/or during the life of the loan. Payment caps limit the amount that monthly payments for an ARM may change.
Cash Flow: The amount of cash gained over a period of time from an income-producing property. It should be enough to pay the expenses for that property (mortgage payment, maintenance, utilities, etc.)
Certificate of Eligibility: A document given to qualified veterans entitling him/her to VA loans for homes or businesses.
Certificate of Reasonable Value (CRV): An appraisal issued by the VA showing a property’s current market value.
Certificate of Title: A document which confirms that the title to a property is legally held by the current owner.
Chain of Title: The history of all of the title transfers (conveyances and encumbrances) to a piece of real estate.
Clear Title: A title that is free of liens and mortgages.
Closing: The final meeting between the buyer, seller and lender (or their agents) at which the property and funds legally change hands.
Closing Costs: Costs, in addition to the purchase price of the property, incurred by buyers and sellers in transferring ownership of a property, such as an origination fee, taxes, title insurance, transfer fees, points, title charges, credit report fee, document preparation fee, mortgage insurance premium, inspections, appraisals, prepayments for property taxes, deed recording fee, and homeowners insurance. Closing costs typically range from 2% – 4% of a property’s selling price and are payable on the closing day.
Closing statement: A detailed written summary of the financial settlement of a real estate transaction, showing all charges and credits made, all cash received and paid.
Cloud on title: Anything found by the title search which indicates that a property is not owned free and clear by the purported owner.
Collateral: Something of value (such as a car or a home) deposited with a lender to guarantee the repayment of a loan.
Comps, Comparables: Comparable properties; properties in close proximity which have sold recently that are about the same size with similar amenities, used to determine value of a property by comparison.
Compound Interest: Interest computed on the principal and the unpaid accumulated interest of a loan.
Conditional Offer: An Offer to Purchase that is subject to specified conditions, for example, on approved financing or upon an approved home inspection. Conditional offers typically have a stipulated time limit within which the specified conditions must be met.
Construction Loan (Interim Loan): A loan to provide the funds necessary to pay for the construction of buildings or homes. The lender advances funds to the builder at periodic intervals as the work progresses.
Contingency: A specific condition that must be met before a contract is legally binding. Usually that the house must pass the home inspection and the borrower must get a loan.
Contract for Deed (Conditional Sales Contract, Installment Contract): A contract for the sale of real estate where the deed (title) of the property is transferred only after all payments have been made.
Conventional Mortgage: A mortgage loan not insured by the FHA or guaranteed by the VA. Loan up to a maximum of 80% of the lending value of the home. Can be a higher loan to value (LTV) with private mortgage insurance (PMI).
Convertibility Clause: A clause in some ARMs which allows the buyer (borrower) to change to a fixed-rate mortgage at a specified time.
Conveyance: A written document (such as a deed or lease) that transfers ownership interest in a property from one person to another.

D

Debt-To-Income Ratio: The ratio (expressed as a percentage) which describes a borrower’s monthly payments on long-term debts divided by their “net effective income” (for FHA and VA loans) or gross monthly income (for conventional loans).
Deed: A legal document that is signed by both the vendor and the purchaser, transferring ownership. This document is registered as evidence of ownership.
Deed of Trust: Used in place of a mortgage to secure the payment of a note (not in every state).
Default: Failure to abide by the terms of a mortgage loan agreement. A failure to make mortgage payments may give cause to the mortgage holder to take legal action to foreclose the mortgaged property.
Deferred Interest: Unpaid interest added to the loan balance.
Delinquency: Failing to make a mortgage payment on time.
Department of Veterans Affairs (VA): An independent governmental agency which guarantees long-term, low- or no-money-down mortgages to eligible veterans.
Depreciation: The decrease in value in a home from when the home was first purchased.
Down Payment: The portion of the house price the buyer must pay up front, before securing a mortgage. Deposits generally range from 3.5% – 25% of the purchase price.
Due-On-Interest: A mortgage clause that allows a lender to call a loan due and payable upon the transfer of the property. Known as “paragraph 17” in FNMA/FHLMC mortgages.

E

Earnest Money: Money given by a buyer to a seller as a form of deposit (part of the purchase price) in order to bind a transaction or to ensure payment.
Easement: A right acquired for access to or over another person’s land for a specific purpose, such as a driveway or public utilities.
Encroachment: An illegal intrusion on someone else’s property.
Encumbrance: A lien or claim on a property.
Entitlement: VA home loan benefit is known as entitlement and/or eligibility.
Equal Credit Opportunity Act (ECOA): A federal law that requires lenders 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 programs.
Equity: The value an owner has in real estate over and above the debt of the property. The homeowner’s equity increases or decreases accordingly as the value of the house increases or decreases. The lender’s equity is equal to the value of the outstanding loan.
Escrow: Funds that are set aside and held in trust. Usually used for payment of taxes, insurance, etc.

F

Fannie Mae, Federal National Mortgage Association (FNMA): A corporation created by Congress that purchases and sells conventional, FHA and VA residential mortgages. Makes mortgage money more available and affordable.
Federal Housing Administration (FHA): A division of the Department of Housing and Urban Development (HUD) which insures residential mortgage loans made by private lenders and sets standards for underwriting mortgages. FHA loans are insured by the FHA and open to all qualified homebuyers for moderately priced homes almost anywhere in the country. Borrowers need to be able to put 3-4 percent down, and higher qualifying ratios make it easier to qualify for FHA loans. FHA mortgage insurance is a way of insuring an FHA loan. It requires a small fee (up to 3.8 percent of the loan amount) paid at closing or a portion of the fee added to each monthly payment. Also requires an annual fee of 0.5 percent 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 mortgage with a set interest rate for the entire loan, regardless of interest rate fluctuations. This creates consistent, predictable payments.
Foreclosure: When the homeowner is unable to make principal and/or interest payments on his/her mortgage, the lender, be it a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract. The lender attempts to recover the balance of a loan by forcing the sale of the asset used as the collateral for the loan.
Freddie Mac, Federal Home Loan Mortgage Corporation (FHLMC): A quasi-governmental agency that purchases conventional mortgage loans from insured depository institutions (savings and loans) and HUD-approved mortgage bankers.
Front-End Ratio: Your prospective monthly mortgage payments divided by your gross monthly income. This comes out to a percentage, and a lender uses this percentage to get an idea of how much of your income will be going to pay your loan.

G

Ginnie Mae, Government National Mortgage Association (GNMA): A governmental agency that provides sources of funds for residential FHA-insured or VA-guaranteed mortgages.
Graduated Payment Mortgage (GPM): A type of flexible-payment mortgage where the payments increase for a period of time and then level off.

Gross Income: The total amount of income you receive – not just salary – before taxes and other deductions are taken out.
Guaranty: An agreement by which one person assumes responsibility of assuring payment or fulfillment of another’s debts or obligations, or something given as security for the execution, completion, or existence (or payment) of something else.

H

Hazard Insurance: A form of insurance that protects the insured from specified losses due to hazards such as fire, flood, wind damage, etc.
Holdback: The amount of money withheld by the lender during construction of a property to ensure that construction at every state is satisfactory.
Home Equity Line of Credit: A loan against the amount of equity you have in a property. The equity serves as security for the new loan.
Home Inspection: A complete and thorough inspection of the physical condition of a property, including all major systems and structural elements, conducted by someone who knows what to look for and who will disclose the findings to you.
Homeowner’s Insurance: An insurance policy required by many lenders when you take ownership that combines personal liability insurance and hazard insurance for the home as well as its contents.
Homeowner’s Warranty: A warranty provided by the seller (or the builder on new homes) as a condition of the sale. Covers repairs to specified parts of a house for a specific period of time.
Housing Expenses-To-Income Ratio: A borrower’s housing expenses divided by his /her net effective income (for FHA/VA loans) or gross monthly income (for conventional loans). Expressed as a percentage.
HUD-1 Statement, Closing Statement, and Settlement Sheet: An itemized listing of whatever costs must be paid at closing, such as real estate commissions, loan fees, points, and initial escrow amounts, utilized in transactions that are not subject to TRID requirements.

I

Impound, Reserves: A portion of the monthly payment held by the lender to pay for things like taxes, hazard insurance and mortgage insurance as they become due.
Indenture: A document or deed expressing certain objects between the parties.
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 (such as one-, three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans).
Interest Adjustment: If the closing (the date on which the buyer takes possession of the property) occurs at a time of the month other than the date on which the mortgage payment is due, the borrower will pay an amount to cover interest from the interest adjustment date.
Interest Rate: The percentage which is charged for the use of borrowed money.
Interest Rate Ceiling: The maximum interest rate for an ARM loan.
Interest Rate Floor: The minimum interest rate for an ARM loan.

J

Jumbo Loan: A loan which is larger than the limits set by the FNMA and the FHLMC.

K

Key Lot: One property in a development that is key to the entire development’s success.

L

Lease: A way for homebuyers to lease a home with an option to buy. A portion of each month’s rent payment goes toward principal, interest, taxes, insurance and a down payment.
Lien: A claim against a property for money owing.
Listing: A written agreement between a property owner and a real estate representative authorizing the agency to offer the owner’s real property for sale.
Loan Assumption: The terms and balance of an existing mortgage is transferred to another party. Generally, the assuming party still needs to qualify under lender or guarantor guidelines.
Loan-to-Value Ratio: The ratio of the loan to the lending value of a property presented as a percentage.
Lock: A written agreement from the lender to offer a specified interest rate if the mortgage closes in a certain time period.
Lump Sum Prepayment: An extra payment made to reduce the principal balance of a mortgage (with or without penalty). A closed mortgage typically restricts lump sum payments. However, with open mortgages, a lump sum prepayment can be made without penalty.

M

Margin: The amount a lender adds to the index on an ARM to establish the adjusted interest rate.
Market Value: The amount that a seller may expect to obtain in the open market.
Maturity Date: The last day of the term of the mortgage. On this day, the mortgage loan must either be paid in full or the agreement renewed.
Mortgage: Security for a loan to purchase property. Not in every state.
Mortgage Backed Security: An asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by an accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution.
Mortgage Banker: An individual or company who originates mortgages for resale in the secondary mortgage market.
Mortgage Broker: An individual or company that offers loans to borrowers from numerous sources and is paid a commission for their services.
Mortgage Insurance: Money paid to insure the mortgage when the down payment is less than 20 percent.
Mortgage Insurance Premium (MIP): The 0.5 percent borrowers pay each month on FHA-insured mortgage loans. It is insurance from the FHA to the lender against incurring a loss on account of the borrower’s default.
Mortgage Payment: A regularly scheduled payment that can be blended to include both principal and interest.
Mortgagee: The lender who provides the mortgage loan.
Mortgagor: The borrower who pledges the property as security for the loan.

N

Negative Amortization: When your monthly payments are not large enough to pay all the interest due on the loan, the unpaid interest is added to the unpaid balance of the loan. The mortgagor ends up owing more than the original amount of the loan.
Net Worth: An individual’s total financial worth. This is calculated by subtracting total liabilities from total assets.
Note: A signed obligation to pay a debt.

O

Offer to Purchase: A written contract detailing the terms under which the buyer agrees to buy. If accepted by the seller, it forms a legally binding contract subject to the terms and conditions stated in the document.
Operating Costs: The monthly expenses required to operate a home. Typically, this includes property taxes, property insurance, utilities, telephone and home maintenance.
Origination fee: The fee (usually a percentage of the loan) to provide services associated with a loan process.

P

PITI: Principal, interest, taxes and insurance.
Points: Prepaid interest assessed at closing by the lender. Each point equals 1 percent of the loan amount.
Prepaid Expenses: Money necessary to create an escrow account or to adjust the seller’s existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
Prepayment: Allows the borrower to make payments before they are due.
Prepayment Penalty: Fees for early repayment of debt.
Principal: The amount of money borrowed, not including interest, to purchase the home. Mortgage payments consist of payment against the principal plus the interest the lender is charging for the borrowed money.
Private Mortgage Insurance (PMI): Insurance for conventional loans.
Property Taxes: Taxes charged to the homeowner by the municipality where the home is located based on the value of the property.

Q

Qualification Rate: Rate of interest used to calculate whether or not a borrower qualifies for a mortgage.
Qualification Requirements: Guidelines used by lenders to decide whether to loan money to an applicant.
Qualified Acceptance, Conditional Acceptance: Acceptance for a loan (or other contract) provided that certain conditions are met.
Qualified Buyer: A person who has been pre-approved for a mortgage loan.
Quit Claim Deed: A document that transfers a title, right or claim to another person, giving up all claims to a possession.

R

Radon: A radioactive gas which seeps up from the ground and can cause health problems. A radon test is often part of the home inspection.
Realtor: A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
Recording: Recording the home sale with local authorities, making it public record.
Recording Fees: Money paid to a title company for recording the home sale.
Refinance: Obtaining a new mortgage loan on a property already owned, often to replace existing loans.
Real Estate Broker: A brokerage that represents a principal in a real estate trade.
Real Estate Owned Home: Also known as REO, are foreclosed homes owned by banks and lenders.
Rescission Notice: Used by borrowers to cancel refinance transactions prior to funding.
Reverse Annuity Mortgage (RAM): A mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as collateral.
Right of First Refusal: A portion of an agreement that requires a property owner to give one party the opportunity to buy or lease the property before the property is made available to other potential buyers.

S

Second Mortgage: An additional mortgage on a property that already has a mortgage.
Secondary Mortgage Market: The market in which primary mortgage lenders sell their loans to obtain more funds to originate more new loans.
Seller’s Market: A market condition where there are a higher number of buyers than homes available to purchase. Houses will typically sell faster and at a higher price.
Servicing: The operations a lender performs to keep a loan in good standing, such as collection of payments and payment of taxes, insurance, property inspections, etc.
Short Sale: A sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens’ full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.
A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower; however both will often result in a negative credit report against the property owner.
Survey: A detailed measurement of a property, boundaries and measurements, specifies its dimensions, the location of buildings on the property, and indicates any easements or encroachments. Prepared by a registered land surveyor.
Sweat equity: Equity created by a purchaser performing work on a property being mortgaged.

T

Tenant: An individual who occupies land or tenement under a landlord.
Term: The length of time during which a borrower pays a specific interest rate on the mortgage loan.

TIP: Total Interest Percentage, the total amount of interest that a borrower pays over the loan term, expressed as a percentage of the loan amount.
Title: A document that gives evidence of an individual’s ownership of property. Gives the holder full and exclusive ownership of the land and building for an indefinite period.
Title Insurance: Insurance, usually issued by a title insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually a percentage of the property value.
Title Search: The examination of municipal records by a title company to determine the legal ownership of property.

TRID: TILA/RESPA Integrated Disclosures, a federal law that requires lenders to provide a borrower with the Loan Estimate within three days of taking a loan application and with the Closing Disclosure at least three days prior to closing
Truth-In-Lending: A federal law requiring disclosure of the APR to homebuyers shortly after they apply for the loan.

U

Underwriting: The decision whether to make a loan to a potential homebuyer based on credit, employment, assets and other factors; and the matching of this risk to an appropriate rate and term or loan amount.
USDA Loan: A United States Department of Agriculture (USDA) Loan, also known as a Rural Housing Loan, is a government-insured home loan that allows you to purchase a home with no money down and offers 100% financing to qualified buyers. In order to qualify for a USDA Loan your home must be located in a designated area.

V

VA Loan: A long-term, low- or no-down-payment loan guaranteed by the Department of Veterans Affairs. Restricted to those qualified by military service or other entitlements.
VA Mortgage Funding Fee: A premium of up to 1-7/8 percent (depending on the size of the down payment) paid on a VA-backed loan.
Variable-Rate Mortgage: A type of mortgage with fixed payments, but fluctuating interest rates. The fluctuating interest rates do not alter your mortgage payment, but determine how much of each payment is applied against the principal opposed to how much is applied to pay the interest.
Valuation: The act of ascertaining how much a specific property is worth.

Z

Zoning: City regulations determining the character or use of property. Zoning laws divide cities into different areas according to use, from single-family residences to industrial plants. Zoning ordinances control the size, location, and use of buildings within these different areas.
Zoning Bylaws: Municipal or regional laws that direct the use of land.