A Amortization Regularly scheduled installment payments calculated to pay off your debt by a specific date. Amortization affects housing expense budgets more than anything else, so it pays to make certain your payments are calculated correctly and your payment obligations can be met. Appraisal A survey of a property completed by a professional appraiser to determine the estimated value of the property. Approval Conditional loan approval is based on information provided to the mortgage lender verbally and as set forth on the application. The conditional approval is subject to the verification and/or receipt of additional information. Once all closing conditions and lender requirements are satisfied, the loan will receive final approval. APR (Annual Percentage Rate) The annual percentage rate is a measure of the cost of credit on a yearly basis. The APR allows you to compare various kinds of mortgages based on the yearly cost of each loan. ARM (Adjustable Rate Mortgage) A mortgage that has an initial rate that adjusts periodically, in accordance with a current interest rate index (a predetermined margin is added to the index to compute the interest rate). Payments can be low if interest rates are low and will increase as rates rise. CAPS govern the limit an ARM loan's rate can adjust to at one time and over the life of the loan. Generally, ARMs have lower rates than fixed-rate mortgages and are easier to qualify for - but because they're based on changing interest rates, your payment amounts can be unpredictable. ARM types include Two-Step and Convertible ARM. Arm's-Length Transaction A transaction negotiated by unrelated parties, each acting in his/her own best interest. B Back-end Ratio Your total debt-to-income ratio - That is, your total monthly obligations (debt), divided by your gross monthly income. Your monthly obligations include such items as your mortgage payment, property taxes, insurance premiums, installment loans, and revolving debt (credit cards). This ratio is used to determine your capacity to repay the mortgage and all other debts. Your debt-to-income ratio is a crucial calculation in determining the loan amount for which you can qualify. In conjunction with your expenses-to-income ratio, it represents your financial capacity to assume and repay debt. Balloon Mortgage A mortgage that has level monthly payments over a stated term but which provides for a lump-sum payment to be due at the end of an previously specified time (e.g., five- and seven- year balloon mortgages, where the payment is fixed for 5 or 7 years, then the remaining balance becomes due and payable at the end of the term). Bankruptcy A legal procedure petitioned either by the debtor (voluntary) or by creditors (involuntary) when the debtor is unable to make his or her payments, in which the court distributes the debtor's property to creditors to fulfill repayment of debts. Base Income The borrower's salary. If the borrower is self-employed, it is the net income - that is, your income after expenses. Broker A professional who does not lend money directly, but who arranges financing and contracts for a client for a fee and commission. Brokers basically bring together borrowers and lenders. Buy Down An arrangement where a party pays a lender an up-front fee, or premium, to reduce ("buy down") a borrower's interest rate on a loan for a temporary time period, usually one to three years. By paying fees up-front to reduce a loan's interest rate, the borrower's monthly payments will be lower. This will also reduce the total amount of interest paid over the life of the loan. The buy down arrangement is usually expressed as two numbers. For example, in a 2/1 buy down, the 2 represents a 2 percent interest rate buy down the first year and the 1 represents a 1 percent interest rate buy down the second year; in the third year of the loan the interest rate would revert to the straight note rate. C Caps Consumer safeguards on adjustable-rate mortgages that limit the increase or decrease of interest rate changes per year or during the life of the loan, and/or a limit on the amount that monthly payments can change. These safeguards protect you as interest rates rise. Cash Reserves The amount of liquid assets the borrower has remaining after the mortgage loan transaction is completed. Cash-out Refinance A transaction that provides cash proceeds to the borrower in excess of 1 percent of the mortgage amount or provides cash that is used to pay off non-mortgage debt. COFI (Cost of Funds Index) An index used to determine interest rate changes for certain ARMs. It represents the weighted average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco. Closing Costs Money paid by borrowers and sellers to affect the closing of a loan. These costs usually include such items as origination fees, discount fees, title search and title insurance, survey fees, attorney's fees, appraisal fees, credit report fees, prepaid items such as taxes and insurance. Closing costs generally run from 3 percent to 6 percent of the loan amount. Most lenders generally quote a "good faith estimate" of closing costs - but it's only an estimate and almost invariably increases. CLTV (Combined loan-to-value) The CLTV is the ratio of the total mortgage liens against the subject property to the lesser of either the appraised value or the sales price. Co-borrower A person who is jointly and equally liable for repayment of the mortgage obligation. A co-borrower completes an application and submits all documentation and may or may not be on the security instrument. Collateral An object that a borrower offers as security to a creditor to guarantee repayment of a loan. In the case of home loans, collateral is a piece of real property (land and/or a building). Borrowers are bound to repay loans (plus interest) to their lender(s). If they fail to do so - or default - the lender can take possession of, or foreclose on, the collateral. Comparables An estimate of value based on comparable sales (comps). Conforming Loans Loans that conform to Federal Home Loan Mortgage Corporation (FHLMC) and Fannie Mae (FNMA) requirement(s) and do not exceed the current maximum loan amount and loan-to-value (LTV) limitations established by FNMA or FHLMC: Property Type Loan Limits AK & HI Only 1 Unit (SFR, CONDO, PUD) $322,700 $484,050 2 Units $413,100 $619,650 3 Units $499,300 $748,950 4 Units $620,500 $930,750 Construction Perm Construction-to-permanent financing involves the granting of a long-term mortgage for the purpose of replacing interim construction financing that the borrower obtained to fund the construction of a new residence. The transaction may be considered to be a purchase or a refinance. Convertible ARM A type of adjustable rate mortgage that includes an option for the mortgagor to change the mortgage to a fixed-rate mortgage at specified intervals during a predetermined time. Credit Bureau Company An organization that prepares credit reports used by credit grantors to determine the creditworthiness of an individual. Credit Bureau Repository An organization that compiles credit history data directly from lenders and creditors to build in-file credit reports for individuals. Credit Report A report covering an individual's credit history and current credit standing. This report is a very important measure used in the loan approval process, so maintaining a good credit rating should be a high priority for those who plan to buy a house. D Debt-to-Income Ratio The ratio of the borrower's total monthly obligations - including housing expenses and recurring debts - to monthly income. It's used to determine your capacity to repay the mortgage and all other debts. Your debt-to-income ratio is a crucial calculation in determining the loan amount for which you can qualify. It represents your qualifying ratio - that is, your financial capacity to assume and repay debt. See also Back-end Ratio. Deed of Trust A legal instrument used instead of a mortgage in certain states. This document allows legal title to a real property to be vested in trustees to secure payment of a note. Default Failure to meet the legal obligations in a loan contract by not providing monthly mortgage payments. Delinquency Failure to make monthly mortgage payments on time. This is serious for the borrower since it can result in foreclosure on a property. Discount Points Payable to the lender by the borrower or seller to decrease the interest rate. One point is equal to 1 percent of the loan amount. Down Payment Money paid by the borrower that is the difference between the purchase price of the property and the amount of the mortgage. Drive-by Appraisal An estimate of value from an independent appraiser that is based primarily on recent comparable sales. E Earnest Money Money the buyer pays to the seller to solidify an offer to purchase a property. The money is applied to the purchase price of the house. EFT (Electronic Fund Transfer) The monthly-automated payments are processed through the Automated Clearing House (ACH) system. With proper authorization, the monthly mortgage payment is electronically transferred from the borrower's account to the mortgage lender. Equity The value of a homeowner's unencumbered interest on real estate. Equity is computed by subtracting the total of the unpaid mortgage balance and any outstanding liens or other debts against the property from the property's fair market value. A homeowner's equity increases as he or she pays off his or her mortgage and/or as the property appreciates in value. When a mortgage and all other debts against the property are paid in full, the homeowner has 100 percent equity in his or her property. Escrow Funds paid by one party to another (the escrow agent) to hold until the occurrence of a specific event, after which the funds are released to a designated individual. The money is held in a trust fund, provided by the lender for the buyer. Such funds should be adequate to cover yearly anticipated expenditures for mortgage insurance premiums, taxes, hazard insurance premiums, and special assessments. Escrow Account An account in which a portion of the monthly payment is held by the lender on the borrower's behalf for the payment of future taxes, mortgage and hazard insurance, special assessments insurance, and other on-going payments as they occur. Also called an Impound Account. Impound/escrow accounts allow one to make fractional payments for these charges as part of the monthly mortgage payments. The funds are gradually collected in the escrow account then paid out in full when the charges become due. Escrow Closing The deposit of funds or documents with an attorney or escrow agent to be disbursed upon closing of the real estate transaction. F Fannie Mae A tax-paying corporation, created by Congress to support the secondary mortgage market. It makes mortgage money more available. It buys and sells conventional residential mortgages, as well as VA-guaranteed and FHA-insured mortgages. FHA (Federal Housing Administration) A government mortgage insurance agency that sets requirements for underwriting mortgages and insures residential mortgages made by private lenders against loss from default of borrowers on residential properties. Fixed-Rate Mortgage A mortgage set up with one fixed interest rate for the entire term of the mortgage, so the borrower pays the same monthly payments for the life of the loan. This offers predictability, an advantage for borrowers on fixed or limited incomes. Foreclosure The legal process by which a borrower in default under a mortgage or deed of trust loses all rights to, and interest in, the mortgaged property. This usually involves a forced sale of the property at a public auction, with the proceeds of the sale being applied to the mortgage debt. Foreclosure can result if mortgage payments are not made on time. Freddie Mac (Federal Home Loan Mortgage Corporation) A tax-paying corporation, created by Congress, that purchases conventional mortgages in the secondary mortgage market from insured financial institutions and qualified mortgage bankers. Front-end Ratio The ratio of house payment(s) - including insurance, PMI, and property taxes - to income. G Gift Funds Funds donated on behalf of the borrower from certain eligible sources to assist the borrower in meeting closing costs. Generally, eligible sources are relatives, churches, municipalities, or nonprofit organizations. Good Faith Estimate An estimate of the closing costs. Gross Monthly Income The total amount a borrower earns each month prior to any deductions. H Hazard Insurance Insurance coverage that compensates for physical damage to the property caused by fire, wind, or other natural disasters. HELOC (Home Equity Line of Credit) A real estate loan, usually in a second lien position, that allows borrower to withdraw equity in real-estate-owned property with specific limitations. Basically, one can draw cash against his or her line of credit to use when and as needed. HOA (Homeowners Association) A nonprofit association whose directors and officers are elected by the unit owners of a condominium or PUD project. Primary responsibilities are to manage the common areas, expenses, and services of the condominium or PUD project. Home Equity Loan A loan in which the lender acquires an interest in one's home up to the amount of this loan, giving the borrower the funds he or she needs for a purchase opportunity, home maintenance, debt consolidation, or major expenses. Housing Debt-to-Income Ratio The sum of all monthly housing mortgage expenses, such as PITI, homeowners dues, private mortgage insurance, and any special assessments, as a percentage of the borrower's gross qualifying income. I Impound Account or Escrow Account An account in which a portion of the monthly payment is held by the lender on the borrower's behalf for the payment of future taxes, mortgage and hazard insurance, special assessments insurance, and other ongoing payments as they occur. Impound/escrow accounts allow one to make fractional payments for these charges as part of the monthly mortgage payments. The funds are gradually collected in the escrow account, then paid out in full when the charges become due. Income-to-Expenses Ratio The ratio of your monthly income (gross unless self-employed - in which case net income) to monthly expenses. It is used to determine one's ability to repay debt and thus is a crucial consideration in determining if, and for how large a loan, one can qualify to borrow. Index A published interest rate - such as the Prime Rate, LIBOR, T-Bill rate, or the 11th District COF - against which lenders compare other investments. Lenders use an index to establish and adjust interest rates on adjustable mortgages, or to compare investment returns. You can find these rates published in the real estate or business portion of newspapers or on the Internet. To compute the interest rate on an adjustable-rate mortgage, a predetermined margin is added to the index. Installment Debt Borrowed money that is repaid in successive payments, usually at regular intervals; the monthly debt service is sometimes excluded for debt-to-income calculator purposes if 10 or fewer payments remain to be made. Investment Property A non-owner occupied residential property used to generate income. J Junior Lien Any lien that is subordinate or subsequent to the claims of a prior lien. A second mortgage is a junior lien. L Lien A claim on property to guarantee payment of a loan. uracy of information submitted by the applicant. Limited Cash-Out Loan A refinance transaction in which the mortgage amount is limited to the sum of the unpaid principal balance of the existing first mortgage, closing costs, prepaid items, points, and the amount required to satisfy any subordinate mortgage liens that are more than one year old, and funds back to the borrower that do not exceed 1 percent of the principal amount of the new mortgage. Loan Application A document required by a lender before issuing a loan commitment. It includes information such as the name of the borrower, terms and amount of loan, and details of the property being mortgaged. It's the first and foremost measure of one's ability to qualify for a loan, so it's crucial that one submit complete and accurate information. Loan Commitment An agreement to lend money, usually for a specific amount to be repaid by a specific date. This commitment is contingent on the accuracy of information submitted by the applicant. Lock-in Rate The interest rate percentage for the loan that will remain the same until funding. M Margin The amount added to the index to create the mortgage interest rate for an adjustable-rate mortgage (ARM). Market Value The price of a property calculated by finding the seller's lowest acceptable price and the buyer's highest acceptable bid. Maturity The date when the loan is repaid in full. Mortgage A note or other evidence of real property being pledged as the security for a debt - also referred to as a Deed of Trust, Trust Deed, or Security Instrument. Mortgage Insurance (MI) Insurance that protects a mortgage lender against loss in the event of default by the borrower. This insurance allows lenders to make loans with lower down payments (loan-to-value ratios above 80 percent - that is, when a down payment is less than 20 percent of the total selling price of the property). Mortgagee The lender or the institution that holds one's loan. Mortgagor The borrower. N Negative Amortization A gradual increase in the mortgage debt caused by unpaid interest that is added to the mortgage principal because the payment is not sufficient to cover the full amount of interest due. Nonconforming Loans Loans that do not conform to traditional Fannie Mae or Freddie Mac conditions. Generally, loans above $322,700 (for all states except Arkansas and Hawaii) are nonconforming loans. They are also known as Jumbo loans. Note A legal instrument in which a borrower promises to repay his or her loan under a specific set of circumstances (e.g., interest rate or late charge information). O Origination Fee A fee charged by the lender to prepare loan documents, inspect and appraise the house, and arrange a credit check. The fee is computed as a percentage of the loan's face value. P Payback Period The amount of time it takes to pay back the fees for obtaining a loan on a property. Piggyback Borrowers often use a "piggyback" second mortgage in conjunction with a first mortgage so that they do not have to provide a 20 percent down payment in order to avoid PMI. PITI (Principal, Interest, Taxes, and Insurance) Principal, interest, taxes, and insurance - a term used to refer to the components of one's monthly mortgage payments. PMI (Private Mortgage Insurance) Insurance coverage a lender requires the borrower to obtain to protect the lender against loss in the event of a mortgage default. It's mandatory for higher loan-to-value mortgages (those above 80 percent LTV in most cases - that is, where the loan amount is 80 percent or more of the property's appraised value). Points A prepaid finance charge assessed by the lender at closing. Paying points will decrease the loan's interest rate. One point equals 1 percent of the loan amount. They are also called discount points. Pre-approval Mortgage pre-approval specifies the actual amount a buyer is pre-approved by a lender to borrow before a house is purchased. The buyer has to apply and qualify for the mortgage. Pre-approval allows the buyer to negotiate like a cash buyer. Even if the buyer is not granted pre-approval status, it's a helpful step to take, as it illuminates existing problems in securing a loan and allows the buyer to take steps toward resolving them. Prepaid Items Items that generally must be paid for at the time of closing and are generally recurring charges. Prepaid items may include taxes; first-year premiums for hazard, flood, and mortgage insurance; prorated interest, any special assessments that must be prepaid (e.g., water/sewer connection); escrow account for any of the above. Pre-qualification Providing financial information (credit ratings, employment status and income, and outstanding debts) to a lender in order to calculate a suitable mortgage for the buyer. Pre-qualification grants no legal rights, but is helpful in showing how large a mortgage one can handle and, by extension, how much house one can afford. Principal The remaining debt on a loan, not counting interest. Property Value The value of a piece of real property - either the appraised amount or the purchase amount, whichever is lower. PUD (Planned Unit Development) A real estate project in which each unit owner has title to a residential lot and a nonexclusive easement on the common areas of the project. Purchase Money Mortgage A mortgage used to purchase real property where the title is conveyed from one individual to another. Q Qualifying Ratios The percentage of payment-to-income (P/I) and debt-to-income (D/I - also called Back-end Ratio) that is used to measure the borrower's capacity to repay the mortgage debt. R Rate and Term Refinance A refinance of any mortgage in which the new mortgage amount is limited to the unpaid principal balance of the existing first mortgage plus any closing costs. Rate-lock Policy The amount of time prior to funding that a loan's interest rate will remain the same. Recording Fees Fees charged by a county recorder's office to record a mortgage or deed of trust. Refinance The process in which one replaces the original mortgage loan with a new one to take advantage of lower interest rates or better terms or to get cash. An alternative is taking out a second mortgage, which involves the same process as refinancing, but adds a junior lien on the property. Revolving Debt A debt that does not have a fixed payment, although repayment is usually a percentage of the outstanding balance and made at regular intervals; the most common type of revolving debt is credit cards issued by banks and department stores. S Second Mortgage A mortgage that is in a second position behind (or subordinate to) the original first mortgage; see also Junior Lien. A second mortgage is a good alternative to refinancing when one has an original first mortgage loan with a low interest rate. A second mortgage will give the borrower a lump sum of funds to use as needed. The qualification process and debt-to-income ratio requirement are the same as refinancing. Self-Employed Borrower A borrower whose income is derived from a business source in which he or she has an ownership interest of 25 percent or more. Servicing All the operations carried out by the lender to keep a loan in good standing, including payment of taxes and insurance. SFR (Single-Family Residence) A structure intended to house one family. Subordinate Financing Secondary financing secured by a lien that is junior to the first mortgage or senior claim - for example, a second mortgage. Supplemental Income Income derived from sources such as interest/dividends, capital gains, and rental properties; these sources require tax returns to support the qualifying income. Survey A report prepared by a registered land survey professional that shows the precise location of the property. Sweat Equity The exchange of labor or services in lieu of paying cash for the purpose of receiving credit toward the down payment. Not generally an eligible source of down payment. T Tax Service Contract The lender's verification of payment of property taxes. Temporary Buydown A loan on which the interest rate has been "bought down" for a temporary period of time at the beginning of the loan by escrowing funds at the time of closing, which will be applied to the total monthly mortgage payment as each becomes due. See Buy Down. Time-share A real estate development in which a buyer can purchase the exclusive right to occupy a unit for a specified period of time each year. Title A legal document that proves property ownership. Title Insurance A type of policy that insures a home buyer against any errors made in the title search and defects in the title that were not listed in the title work or abstract. It is normally issued by a title company. Title Search A process providing proof of legal ownership of a property by researching municipal record - usually performed by a title company. Townhouse An architectural type of construction; a row house on a small lot that has exterior limits common to other similar units; title to the unit and its lot is vested in the individual owner with a fractional interest in common areas. Truth in Lending A federal law requiring disclosure of the Annual Percentage Rate, finance charges, payment schedule, and other disclosures to home buyers immediately after they apply for a loan. The annual percentage rate must be sent to applicants within three business days of their application date. Two-step ARM An ARM (adjustable-rate mortgage) that has a fixed interest rate for the first five or seven years of the mortgage term, then adjusts at the current market rate plus a predetermined margin, then remains fixed at that rate for the remainder of the term. See also ARM (Adjustable-Rate Mortgage). Two-to-Four Family Properties A structure that provides dwelling units for two, three, or four families, although ownership is evidenced by a single deed. U Underwriter An analyst who reviews the supportive documentation to determine the risk associated with the loan request. The person who gives final loan approval. Underwriting The process used by lenders in deciding whether to make a loan to the buyer. The lender carefully examines credit history, employment, and assets to determine if and how large a loan should be approved. V VA (Veterans Administration) A government agency designed to encourage mortgage lenders to offer long-term, low-down-payment financing to eligible veterans by partially guaranteeing the lender against loss from default. VA Loan A long-term, no-down-payment or low-down-payment loan guaranteed by the Department of Veterans Affairs. Individuals usually qualify by proof of military service. Z Zoning The creation of districts by local governments in which specific types of property uses are authorized (e.g., commercial, industrial, residential, high density, mixed use).