Amortization Schedule
A schedule that shows the gradual repayment of debt through regular installments. The amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining principal balance after each payment is made.
Annual Percentage Rate (APR)
A measure of the total cost of credit (interest as well as other charges) expressed as a yearly percentage rate. Because all lenders must apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans.
Adjustable Rate Mortgage (ARM)
A mortgage loan is subject to changes in interest rates. When rates change, ARM monthly payments increase or decrease at intervals stated in the note; the change in monthly payment amount, however, may be subject to a cap.
Appraisal
A document from a licensed or certified 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.
Closing
A meeting, typically held at a title company or attorney's office, where the borrower finalizes a sale or refinances a property by signing the mortgage documents, paying closing costs and other costs as applicable. Also known as the “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.
Construction Loan
A short-term loan 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 subcontractor pours the foundation and inspectors approve it, the lender will pay for their service.
Conventional Loan
A private sector loan, one that is not guaranteed or insured by the U.S. government.
Credit History
A record of an individual that lists current and past 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 Score
A score calculated by credit reporting agencies using a person’s credit report to determine the likelihood of a loan being repaid on time. Scores range from about 300 to 850. A lower score means a person is a higher risk, while a higher score means that there is less risk.
Debt-to-Income Ratio
A comparison or ratio of housing and non-housing expenses to gross income.
Deed
A document that legally transfers ownership of property from one person to another. The deed is placed on public record with the property description and the owner's signature. Also known as the title.
Down Payment
The portion of a home’s purchase price that is paid in cash and is not part of any mortgage loan or line of credit secured by the property. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual amount of any debt secured by the property.
Earnest Money Deposit
A deposit made by the potential homebuyer to show that he or she is serious about buying the house. The earnest money may be applied toward the down payment at closing. If the sale does not go through, the earnest money deposit will be forfeited to the seller unless the purchase contract expressly provides conditions for its return to the buyer.
Escrow
The deposit of funds by the borrower to the lender in order to pay taxes and insurance premiums when they become due. Escrow could also be a deposit of funds to an attorney or escrow agent, which are disbursed once certain requirements are met.
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.
Fixed-Rate Mortgage
A mortgage with principal and interest payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Good Faith Estimate
An estimate of all closing fees including pre-paid and escrow items as well as lender charges. It must be given to the borrower within three days after submission of a loan application.
Home Equity Line of Credit
A mortgage loan, which may be a first or a second lien, allowing a borrower to obtain cash against the equity of a home, up to a predetermined amount.
Home Inspection
An inspection that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser. (Not to be confused with the appraisal of the property.)
Homeowner’s Insurance
An insurance policy, also called hazard insurance, that combines protection against damage to a dwelling and its contents from fire, storms, or other damages with protection against claims of negligence or inappropriate action that result in someone’s injury or property damage. Most lenders require homeowner’s insurance and may escrow the cost. Flood insurance is generally not included in standard policies and must be purchased separately.
HUD1 Settlement Statement
Also known as the “settlement sheet” or “closing statement,” this statement itemizes all funds due from and credited to the buyer and seller, and must be given to the borrower at or before closing. Items that appear on the statement include real estate commissions, loan fees, points and escrow amounts.
Interest
A percentage rate used to calculate the monthly payment of a mortgage loan.
Loan-to-Value (LTV) Ratio
A percentage calculated by dividing the amount borrowed by the lesser of the purchase price or the appraised value of the home to be purchased. The higher the LTV, the less cash a borrower is required to pay as down payment.
Market Value
The amount a willing buyer would pay a willing seller for a home. An appraised value is an estimate of the current fair market value.
Mortgage
A lien on the property that secures the promise to repay a loan. A security agreement between the lender and the buyer in which the property is collateral for the loan. The mortgage gives the lender the right to collect payment on the loan and to foreclose if the loan obligations are not met.
Mortgage Insurance
Insurance that is required for the loan-to-value ratio that exceeds a certain percent, which insures the lender against loss caused by a borrower’s default on the mortgage. Mortgage insurance is issued by a private mortgage insurance (PMI) company, or in the case of an FHA loan, by the federal government. The percentage of coverage and the amount of the premium will vary depending on the type of loan and the mortgage insurance company.
Origination
The process of preparing, submitting, and evaluating a loan application. It generally includes a credit check, verification of employment and a property appraisal.
Origination Fee
A fee or charge for work involved in the evaluation, preparation and submission of a proposed mortgage loan.
PITI
Abbreviation for Principal, Interest, Taxes and Insurance, which make up a monthly mortgage payment.
Points
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $95,000, one point equals $950. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to increase the yield on the mortgage and to cover loan closing costs. These points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.
Pre-Approval
A lender commits to lend to a potential borrower up to a stated loan amount based on receipt of a completed loan application, credit reports, income, debt, savings and underwriter review. The commitment remains in effect for a specified period of time as long as the borrower still meets the qualification requirements at the time the borrower enters into a purchase contract for a home. A pre-approval is also contingent upon the lender’s receipt of an acceptable appraisal of the property and satisfaction of any underwriting conditions related to the property or the borrower.
Prepayment
Any amount paid to partially or fully reduce the principal balance of a loan before the due date.
Principal
The principal balance is the amount owed on a loan at any given time. It is the original loan amount minus the total repayments of principal made. Principal does not include the interest paid on the loan.
Pre-Qualify
A lender informally determines the maximum amount an individual is eligible to borrow. This is not a commitment by a lender to make a loan.
Private Mortgage Insurance (PMI)
Insurance which protect the lender for the risk associated with making high loan-to-value loans, generally for loans having an LTV greater than 80 percent.
Refinance
The process of paying off one loan with the proceeds from a new loan, using the same property as collateral.
Second Mortgage
An additional mortgage on a property. In the case of a borrower default, the first mortgage holder has repayment priority over any second mortgage holder. Second mortgage loans and lines of credit are more risky for the lender and usually carry a higher interest rate than a first mortgage loan.
Survey
A property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc. Surveys are conducted by licensed surveyors and are normally required by the lender in order to confirm that the property boundaries and features such as buildings and easements are correctly described in the legal description of the property and there are no encroachments or easements that would adversely impact the value or use of the property.
Title
A legal document establishing the right of ownership that is recorded to make it part of the public record. Also known as a Deed.
Title Insurance
An insurance policy protecting the insured from loss related to errors and omission of the closing attorney and/or title company such as unpaid prior liens, unpaid property taxes and failure to comply with the lender’s closing requirements. A policy that protects the buyer from similar errors and omissions is known as an owner’s title policy and may be obtained at a nominal additional cost if issued simultaneously with a lender’s title policy.
Title Search
A review of the public records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner. The title search also verifies any unpaid liens, overdue special assessments, other claims or outstanding restrictive covenants in the records, which would adversely affect the marketability or value of title.
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, ability to repay the loan and the acceptability of the property as collateral to secure the loan.
Warranty Deed
A legal document that includes the guarantee that the seller is the true owner of the property, has the right to sell the property, and that there are no claims against the property.
