Finally Home! Homebuyer Education

Glossary

—A—

Adjustable-rate mortgage (ARM) A mortgage whose interest rate changes over time. The rate is based on an index that reflects current market conditions.

Amortized To pay off a debt gradually, within a certain amount of time, by making regular payments.

Amortization schedule A schedule that shows the amount of each payment that is applied to interest and principal, as well as the balance.

Annual gross income The amount of money you make each year, before taxes.

Annual percentage rate (APR) The total cost of a mortgage stated as a yearly rate. Includes interest rate, points, broker fees, prepaid interest, and other credit costs, which may be paid by the borrower.

Appraisal A professional estimate of the market value of a property.

Appreciation An increase in the value of a property due to changes in market conditions, home improvements, or other causes.

Assessed value The valuation placed upon property by a public tax assessor that is used to compute property taxes.

Assumption A homebuyer’s agreement to take over making payments on an already-existing mortgage from the home seller.

—B—

Balloon mortgage A mortgage with monthly payments based on a 30-year amortization schedule, with the unpaid principal balance due in one lump sum payment at the end of a specific period (usually five to seven years).

Bankruptcy A legal procedure that declares that you are unable to pay your debts. Bankruptcy information stays on your credit report for ten years.

Binder A preliminary agreement between a buyer and seller, which includes the price and terms of the agreement. See also: Insurance binder

Budget A spending plan designed to help you manage your money.

Buyer’s agent A real estate agent working in behalf of the buyer, with a signed contract stating the relationship.

Buyer’s market A term used when there are many homes for sale, but not as many buyers in the area. Sellers will need to keep home prices low to entice buyers, as the buyers will have many homes to choose from.

—C—

Capacity Your ability to make your mortgage payments on time, depending on your income, income stability, debts, and other obligations.

Capital Assets or money that is available for use.

Cash reserves The amount of money the buyer has available to them, in savings accounts, checking accounts, or in cash.

Circuit Breaker program Reduces property taxes for qualified applicants, based on income for the previous calendar year. Qualified applicants would be age 65 or older, widowed, blind, fatherless or motherless child under 18, former prisoner of war, or disabled.

Clear title A title that is free of liens and legal questions as to ownership of the property.

Closing The completion of the real estate transaction between the buyer and the seller. At closing, all documents are signed, monies are exchanged, and title to the property is assigned to the buyer.

Closing costs The costs to complete the real estate transaction, which are in addition to the price of the home. These costs are paid at closing, and may include points, taxes, title insurance, financing costs, and others.

Closing Disclosure A final listing of the costs of the mortgage transaction. Includes the sales price and down payment amount, as well as the total settlement costs required from the buyer and the seller. This form also provides loan disclosures and is required to be issued 3 days before closing.

Collateral Property that is pledged as security for a debt. With a home loan, the home, the land, and other buildings and improvements are the collateral.

Commission An agent’s fee for services relating to a real estate transaction, usually expressed as a percentage of the sales price.

Commitment letter A letter from the lender that states the amount of the mortgage, the number of years to repay the loan (terms), the interest rate, the loan origination fee, the annual percentage rate, and the monthly charges.

Comparative market analysis A written report that compares the selling prices of other homes on the market that are similar to the home you want to buy.

Contingencies Conditions that must be met before a contract is legally binding.

Contract to buy and sell real estate A document used to present an offer or counter offer for the purchase of real estate. Both buyer and seller must sign the contract before it becomes legally binding. See also: sales contract, earnest money agreement, purchase contract or real estate purchase and sale agreement

Conventional loans Any mortgage not insured or guaranteed by FHA, VA, or another government entity.

Counter-offer An offer made in return by the person who rejects the previous offer.

Covenants, conditions and restrictions (CC&R) Agreements or restrictions in real estate documents that regulate the use of the property. CC&R’s are usually determined by the real estate developer or homeowner association.

Credit An arrangement to buy something and pay for it later or over a period of time.

Credit agency or credit bureau An organization or company who gathers information on consumers who use credit. The credit bureau then sells the information to credit lenders in the form of a credit report.

Credit history A record of credit use that lists individual consumer debts and records whether or not these debts were paid back on time or as agreed.

Credit insurance Insurance paid for by the borrower that will pay off any outstanding credit balance in the event of death or disability.

Credit rating (score) A computer-generated number that summarizes an individual’s credit profile and predicts the likelihood that the borrower will repay future debts.

Credit report A report of an individual’s credit history and record of repaying debt.

—D—

Debt-to-income ratio The percentage of gross monthly income that goes toward paying debts.

Deed of trust A legal document in which the borrower conveys the title of the property to a third party, a trustee, to hold as security for the lender. When the loan is paid in full the trustee reconveys the deed to the borrower.

Deficit When the expenses and debt that should be paid each month are greater than the individual’s income.

Delinquent Being late in making the payments one has promised to make.

Down payment A portion of the price of a home that is paid up front, in cash, and is not financed with the mortgage.

—E—

Earnest money A deposit made by the potential buyer to show that he or she is serious about buying the home.

Earnest money agreement A document used to present an offer or counter offer for the purchase of real estate. Both buyer and seller must sign the contract before it becomes legally binding. See also: sales contract, contract to buy and sell real estate, purchase contract or real estate purchase and sale agreement

Easements A right of way giving persons other than the owner access to or over a property.

Encumbrances A claim or lien by another party on property. Encumbrances must usually be paid or satisfied before selling the property.

Equal Credit Opportunity Act A federal law that prohibits lenders from discriminating on the basis of the borrower’s race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity The homeowner’s financial interest in their property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.

Escrow (1) The holding of documents and money by a third party prior to closing on a real estate transaction. (2) An account held by the lender or the loan servicer into which the homeowner pays money for taxes and insurance.

Escrow account An account held by the lender or the loan servicer into which the homeowner pays money for taxes and insurance.

—F—

Fair Credit Reporting Act A consumer protection law that regulates the disclosure of consumer credit reports by consumer reporting agencies, and establishes procedures for correcting mistakes on your credit record.

Fair Housing Act A federal law which makes it illegal to refuse to sell or rent housing to someone based on their race, what color they are or what nation they are from, what religion they belong to, their age, sex or marital status, or whether they receive public assistance.

Fair market value The price at which property is transferred between a willing buyer and a willing seller, each having reasonable knowledge of all pertinent facts and being under no compulsion to buy or sell.

Fannie Mae and Freddie Mac Both organizations were chartered by Congress to increase the supply of funds that mortgage lenders, such as commercial banks, mortgage bankers, savings institutions and credit unions, can make available to homebuyers.

Fannie Mae and Freddie Mac buy mortgages from lenders, packaging the mortgages into securities and selling them to investors. Both will only buy loans that meet their guidelines, so they play an important role in setting what criteria are used to evaluate a mortgage application.

FHA mortgage A mortgage that is insured by the Federal Housing Administration.

FICO score Stands for Fair, Isaac and Company (a credit scoring method) See also: credit score

Fixed-rate mortgage A mortgage loan in which the interest rate does not change throughout the whole life of the loan.

Flood insurance Insurance required for property that is located in a federally designated flood zone. Flood insurance covers physical property damage due to flooding.

Forbearance The lender’s postponement of foreclosure to give the borrower time to catch up on overdue payments.

Foreclosure A legal action that terminates all ownership rights when the homebuyer fails to make the mortgage payments or is otherwise in default under the terms of the mortgage. This process allows the lender to sell the home to recover at least some of the money owed on the loan.

—G—

Ginnie Mae A government-owned agency that buys mortgages from lending institutions, securitizes them, and then sells them to investors.

Government-insured loans Loan programs that provide insurance or guarantees to the lender. The government insures the loan so the lender doesn’t have to worry about not getting repaid.

Graduated payment mortgage A mortgage that starts with a low monthly payment that increases at a predetermined rate over a specific period of time.

—H—

Hazard insurance Insurance that protects against certain hazards, such as storms and fires.

Home equity loans Loans that borrow against the amount of equity the owner has in their home.

Homeowner’s exemption A program that allows a homeowner to exempt 50% or $50,000, whichever is less, of the value of the home they live in for the assessment of property taxes.

Homeowner’s association An organization of property owners, usually within a condominium or planned unit development.

The association administers the affairs of the common property, collects dues, and carries out the rules of the organization.

Homeowner’s insurance Insurance that combines personal liability coverage and hazard insurance coverage for the home and its contents. Homeowner’s insurance protects both the homeowner and the lender and is required by the lender.

Housing ratio The percentage of gross monthly income that goes toward paying for housing expenses.

—I—

Index The published index of interest rates on a publicly traded debt security used to calculate the interest rate for an ARM. The index is usually an average of the interest rates on a particular type of security such as the LIBOR.

Insurance A contract that promises to reimburse the insured in the case of a loss, in exchange for regular payments of the insurance premium. See also: Homeowners insurance

Insurance binder A document provided by an insurance agent which states that the homeowner has purchased homeowners insurance. The binder includes the property address, the homeowner’s name, amount of coverage, the yearly premium amount, the lender’s name and address, and the loan number.

Interest The fee charged for borrowing money.

Interest rate lock-in A written agreement guaranteeing the homebuyer a specific interest rate, provided the loan is closed within a certain period of time.

—L—

Liabilities Your debts and other financial obligations.

Liens A legal claim to a property that must be paid before a property can be sold.

Lifetime cap A provision of an adjustable rate mortgage that limits the total increase in interest rates over the life of the loan.

Line of credit A loan that allows you to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home.

Loan Estimate A document that estimates the closing costs and fees you will have to pay. The lender is required to send the Loan Estimate to you within three days after you have applied for a loan.

Loan origination fees The fees paid to your mortgage lender for processing the mortgage application. This fee is usually in the form of points. One point equals 1% of the mortgage amount.

Loan-to-value ratio A percentage describing the amount of a loan compared to the value of the property.

Lock-in A written agreement guaranteeing the homebuyer a specific interest rate provided the loan is closed within a certain period of time. The cost of a lock-in is in points to be paid at closing.

—M—

Manufactured housing Homes that are built in factories and then moved to the property site.

Margin With adjustable rate mortgages, the set percentage the lender adds to the index rate to determine the current interest rate.

Market value The current value of a home based on what a willing buyer would pay. See also: fair market value.

Mortgage A loan secured by a lien on your home. Indicates the amount of money borrowed, with interest, to purchase real estate.

Mortgage insurance An insurance policy that reimburses the lender for losses if a borrower fails to repay the loan. Usually needed for mortgages with low down payments. See also: private mortgage insurance, mortgage insurance premium

Mortgage insurance premium The fee paid by a borrower for FHA or private mortgage insurance.

Mortgage term The length of time it takes to pay off a mortgage.

Mortgagee Another word for the lender, or holder of a mortgage.

Mortgagor Another word for the borrower in a mortgage agreement.

Mortgagee’s title insurance A required insurance policy that protects the lender (mortgagee) against loss arising from disputes over ownership of the property. The premium is paid by the buyer at closing, and is a one-time charge.

Multiple Listing Service A computerized list of homes for sale in a certain area, providing basic information about the homes.

—N—

Negative amortization A situation in which a borrower is paying less interest than what is actually being charged for a mortgage loan. The unpaid interest is added to the loan’s principal, so the borrower may end up owing more than the original amount of the mortgage.

Net monthly income Take-home pay after taxes; the amount actually received in your paycheck.

Nonprofit housing organizations An organization that exists to educate and assist others with housing issues, whose partners or trustees do not benefit financially from their membership.

Non-traditional financial report Your payment history with landlords, utility companies, doctors and dentists, day care, and other regular bills that can show your history of making regular and on-time payments.

—O—

Offer A formal bid from the homebuyer to the seller to purchase the home.

Open House: When the seller’s real estate agent opens the seller’s house for the public to view.

Owner’s title insurance A policy to protect the buyer from problems that may surface with the title to their property, so they would not lose the money they put into the house. An owner’s policy will pay any valid claims and cover the cost, legal or otherwise, if the owners have to defend an attack on the title to their home.

—P—

Points One-percent of the mortgage loan. For example, if a loan is made for $50,000, one point equals $500.

Pre-approval Being pre-approved means you have a letter from the mortgage lender indicating that you qualify for a mortgage of a certain dollar amount. Having a pre-approval letter can show the seller that you are a serious buyer.

Predatory lending Lending practices that make it difficult for the borrower to pay back the loan by charging excessive fees, giving loans to borrowers who don’t have the income to repay them, repeatedly refinancing a loan, or other unethical methods.

Prepayment penalty A fee that is charged as a penalty for paying a mortgage before the actual due date.

Pre-qualified Being pre-qualified means that you have a letter from a lender that states that you are pre-qualified to buy a home but does not commit the lender to a particular mortgage amount.

Principal (1) The original amount of money borrowed. (2) The unpaid amount of your loan. This does not include the amount of interest you will pay to borrow the money.

Private mortgage insurance (PMI) An insurance policy that reimburses the lender for losses when a borrower fails to make payments. Usually needed for mortgages with low down payments. See also: mortgage insurance, mortgage insurance premium

Promissory note A written promise to pay a certain sum of money within a certain amount of time.

Property taxes A tax or required contribution to a government entity, based on the value of the property.

Purchase contract A document used to present an offer or counter offer for the purchase of real estate. Both buyer and seller must sign the contract before it becomes legally binding. See also: sales contract, earnest money agreement, contract to buy or sell real estate, or real estate purchase and sale agreement

—R—

Rate cap The limit on the amount that the interest rate on an ARM can increase or decrease during any one adjustment period.

Real Estate Purchase and Sale Agreement A document used to present an offer or counter offer for the purchase of real estate. Both buyer and seller must sign the contract before it becomes legally binding. See also: sales contract, earnest money agreement, contract to buy or sell real estate, or purchase agreement

Real property Property consisting of houses and land.

REALTOR® A real estate professional who is a member of the National Association of REALTORS®.

Recording fees Fees charged for recording documents with the county recording office.

Refinance Using a new mortgage to pay off an existing mortgage.

Replacement cost The cost to replace damaged personal property without a deduction for depreciation of the property.

Repossession To reclaim property because the buyer did not make the payments for the item as promised.

—S—

Sales Contract A document used to present an offer or counter offer for the purchase of real estate. Both buyer and seller must sign the contract before it becomes legally binding. See also: earnest money agreement, purchase contract, contract to buy and sell real estate or real estate purchase and sale agreement

Second mortgage A mortgage taken out on property that already has one mortgage, with the first mortgage having priority in settlement of claims. The second mortgage is riskier than the first, so it will usually carry a higher rate of interest.

Secondary market The market in which existing mortgages are bought and sold by lenders.

Seller’s agent A real estate agent working on behalf of the seller.

Settlement sheet A final listing of the costs of the mortgage transaction. Includes the sales price and down payment amount, as well as the total settlement costs required from the buyer and the seller. See also: HUD-1 Settlement statement

Sub-prime lending Lending to customers that do not qualify for conventional, prime loans because of blemished credit records or unproven credit or income histories. These loans are high-risk loans, so they include higher fees and rates. While these loans provide funding to families that might not otherwise qualify for home financing, they can also provide opportunities for predatory lending by dishonest lenders.

Survey The process by which the legal boundaries of a property are determined and mapped.

Sweat equity Manual labor, either in renovation or construction, which is performed in return for home ownership.

—T—

Take-home pay The amount of money in your paycheck after all taxes and deductions are taken out.

Taxes A required financial contribution for the support of a government. When referring to a mortgage payment, the taxes are in the form of property taxes. See also: Property taxes

Tax value The value put on your property for the purpose of assessing property taxes. The tax value may not be the market value of the house, but the tax value can help you compare the house with others priced the same.

Title A legal document that is evidence of ownership of real property.

Title insurance In the case of legal problems with the title, this insurance protects lenders and homeowners against loss of their financial interest in the property.

Title search A search of public records to make sure the seller has clear title or ownership of the property.

—U—

Underwriting The process of analyzing a loan application to determine whether or not to approve a loan. This may include evaluating the property and the borrower’s credit and ability to pay the mortgage.

—V—

VA loan A mortgage loan for eligible veterans that is guaranteed by the Department of Veterans Affairs.

—W—

Warranty Written guarantee by a seller that a home and its systems are without major defects, as promised.

Warranty deed The legal document that transfers ownership of real property.

—Z—

Zoning restrictions City or county laws specifying how property may be used in specific areas.