Additional Principal Payment

Money paid to the lender in addition to the established payment amount used directly against the loan principal to shorten the length of the loan.

Adjustable-Rate Mortgage (ARM)

A mortgage loan that does not have a fixed interest rate. During the life of the loan the interest rate will change based on the index rate. Also referred to as adjustable mortgage loans (AMLs) or variable-rate mortgages (VRMs).

Additional Principal Payment

Money paid to the lender in addition to the established payment amount used directly against the loan principal to shorten the length of the loan.

Adjustment Date

The actual date that the interest rate is changed for an ARM.

Adjustment Index

The published market index used to calculate the interest rate of an ARM at the time of origination or adjustment.

Affidavit

A signed, sworn statement made by the buyer or seller regarding the truth of information provided.

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

A payment plan that enables you to reduce your debt gradually through monthly payments. The payments may be principal and interest, or interest-only. The monthly amount is based on the schedule for the entire term or length of the loan.

Annual Percentage Rate (APR)

A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is a higher rate than the simple interest of the mortgage.

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 from a professional that gives an estimate of a property's fair market value based on the sales of comparable homes in the area and the features of a property; 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.

Appraisal Fee

Fee charged by an appraiser to estimate the market value of a property.

Appraisal Management Company (AMC)

A business entity that administers a network of certified, licensed, and approved appraisers to fulfill appraisal assignments and assure compliance with federal regulations.

Appraised Value

An estimation of the current market value of a property.

Appraiser

A qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.

Appreciation

An increase in property value.

Arbitration

A legal method of resolving a dispute without going to court.

As-is Condition

The purchase or sale of a property in its existing condition without repairs.

Assessed Value

The value that a public official has placed on any asset (used to determine taxes).

Assessments

The method of placing value on an asset for taxation purposes.

Assessor

A government official who is responsible for determining the value of a property for the purpose of taxation.

Assets

Any item with measurable value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

Automated Underwriting

Loan processing completed through a computer-based system that evaluates past credit history to determine if a loan should be approved. This system removes the possibility of personal bias against the buyer.

Back End Ratio (debt ratio)

A ratio that compares the total of all monthly debt payments (mortgage, real estate taxes and insurance, car loans, and other consumer loans) to gross monthly income.

Balloon Loan or 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.

Balloon Payment

The final lump sum payment due at the end of a balloon mortgage.

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.

Biweekly Payment Mortgage

A mortgage paid twice a month instead of once a month, reducing the amount of interest to be paid on the loan.

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.

Bridge Loan

A short-term loan paid back relatively fast. Normally used until a long-term loan can be processed.

Buy Down

The seller, builder or buyer pays an amount to the lender so the lender provides a lower rate and lower payments many times for an ARM. The seller may increase the sales price to cover the cost of the buy down.

Cap

A limit, such as one placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage. Payment caps do not limit the amount of interest the lender is earning, so they may cause negative amortization.

Capacity

The ability to make mortgage payments on time, dependant on assets and the amount of income each month after paying housing costs, debts and other obligations.

Capital Gain

The profit received based on the difference of the original purchase price and the total sale price.

Cash-Out Refinance

When a borrower refinances a mortgage at a higher principal amount to get additional money. Usually this occurs when the property has appreciated. For example, if a home has a current value of $100,000 and an outstanding mortgage of $60,000, the owner could refinance $80,000 and have additional $20,000 in cash.

Cash Reserves

A cash amount sometimes required of the buyer to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.

Certificate of Eligibility

A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.

Certificate of Reasonable Value (CRV)

A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.

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 of all liens or other claims.

Chapter 7 Bankruptcy

Liquidate a bankruptcy that requires assets in exchange for the cancellation of debt.

Chapter 13 Bankruptcy

This type of bankruptcy sets a payment plan between the borrower and the creditor monitored by the court. The homeowner can keep the property, but must make payments according to the court's terms within a 3- to 5-year period.

Charge-Off

The portion of principal and interest due on a loan that is written off when deemed uncollectible.

Clear Title

A property title that has no defects. Properties with clear titles are marketable for sale.

Closing

The final step in property purchase where the title is transferred from the seller to the buyer. Closing occurs at a meeting between the buyer, seller, settlement agent, and other agents. At the closing, the seller receives payment for the property. Also known as settlement.

Closing Costs

Fees for final property transfer not included in the price of the property. Typical closing costs include charges for the mortgage loan such as origination fees, discount points, appraisal fee, survey, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes. A common estimate of a Buyer's closing costs is 2 to 4 percent of the purchase price of the home. A common estimate for Seller's closing costs is 3 to 9 percent.

Closing Disclosure

Is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).  The Closing Disclosure must be provided at least three days before your closing.

Co-Borrower

An additional person that is responsible for loan repayment and is listed on the title.

Co-Signed Account

An account signed by someone in addition to the primary borrower, making both people responsible for the amount borrowed.

Co-Signer

A person that signs a credit application with another person, agreeing to be equally responsible for the repayment of the loan.

Collateral

Security in the form of money or property pledged for the payment of a loan. For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made.

Collection Account

An unpaid debt referred to a collection agency to collect on the bad debt. This type of account is reported to the credit bureau and will show on the borrower's credit report.

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. Traditionally the home seller pays the commission. The amount of commission is determined by the real estate professional and the seller and can be as much as 6% of the sales price.

Comparative Market Analysis (COMPS)

A property evaluation that determines property value by comparing similar properties sold within the last year.

Compensating Factors

Factors that show the ability to repay a loan based on less traditional criteria, such as employment, rent, and utility payment history.

Condominium

A form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex. The owner also shares financial responsibility for common areas.

Conforming Loan

Is a loan that does not exceed Fannie Mae and Freddie Mac's loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans.

Construction Loan

A short-term, to finance the cost of building a new home. The lender pays the builder based on milestones accomplished during the building process. For example, once a sub-contractor pours the foundation and it is approved by inspectors the lender will pay for their service.

Consumer Reporting Agency (or Bureau)

An organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and from other sources.

Contingency

A clause in a purchase contract outlining conditions that must be fulfilled before the contract is executed. Both, buyer or seller may include contingencies in a contract, but both parties must accept the contingency.

Conventional Loan

A private sector loan, one that is not guaranteed or insured by the U.S. government.

Convertible ARM

An adjustable-rate mortgage that provides the borrower the ability to convert to a fixed-rate within a specified time.

Cost of Funds Index (COFI)

An index used to determine interest rate changes for some adjustable-rate mortgages.

Counter Offer

A rejection to all or part of a purchase offer that negotiates different terms to reach an acceptable sales contract.

Covenants

Legally enforceable terms that govern the use of property. These terms are transferred with the property deed. Discriminatory covenants are illegal and unenforceable. Also known as a condition, restriction, deed restriction, or restrictive covenant.

Credit

An agreement that a person will borrow money and repay it to the lender over time.

Credit Bureau

An agency that provides financial information and payment history to lenders about potential borrowers. Also known as a National Credit Repository.

Credit Grantor

The lender that provides a loan or credit.

Credit History

A record of an individual that lists all debts and the payment history for each. The report that is generated from the history is called a credit report. Lenders use this information to gauge a potential borrower's ability to repay a loan.

Credit Repair Companies

Private, for-profit businesses that claim to offer consumers credit and debt repayment difficulties assistance with their credit problems and a bad credit report.

Credit Report

A report generated by the credit bureau that contains the borrower's credit history for the past seven years. Lenders use this information to determine if a loan will be granted.

Credit Risk

A term used to describe the possibility of default on a loan by a borrower.

Credit Score

A score calculated by using a person's credit report to determine the likelihood of a loan being repaid on time. Scores range from about 360 to 840: a lower score meaning a person is a higher risk, while a higher score means that there is less risk.

Creditor

The lending institution providing a loan or credit.

Creditworthiness

The way a lender measures the ability of a person to qualify and repay a loan.

Debtor

The person or entity that borrows money. The term debtor may be used interchangeably with the term borrower.

Debt-to-Income Ratio

A comparison or ratio of gross income to housing and non-housing expenses; With the FHA, the-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.

Deductible

The amount of cash payment that is made by the insured (the homeowner) to cover a portion of a damage or loss. Sometimes also called "out-of-pocket expenses." For example, out of a total damage claim of $1,000, the homeowner might pay a $250 deductible toward the loss, while the insurance company pays $750 toward the loss. Typically, the higher the deductible, the lower the cost of the policy.

Deed

A document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description and the owner's signature. The deed is also known as the title.

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 does not allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.

Default

The inability to make timely monthly mortgage payments or otherwise comply with mortgage terms. A loan is considered in default when payment has not been paid after 60 to 90 days. Once in default the lender can exercise legal rights defined in the contract to begin foreclosure proceedings.

Delinquency

Failure of a borrower to make timely mortgage payments under a loan agreement. Generally, after fifteen days a late fee may be assessed.

Deposit (Earnest Money)

Money put down by a potential buyer to show that they are 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. During the contingency period, the money may be returned to the buyer if the contingencies are not met to the buyer's satisfaction.

Depreciation

A decrease in the value or price of a property due to changes in market conditions, wear and tear on the property, or other factors.

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. In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to give you a lower rate and lower payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate will probably go up depending on the index rate.

Down Payment

The portion of a home's purchase price that is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual mortgage loan amount. Mortgage insurance is required when a down payment less than 20 percent is made.

Document Recording

After closing on a loan, certain documents are filed and made public record. Discharges for the prior mortgage holder are filed first. Then the deed is filed with the new owner's and mortgage company's names.