Abstract of Title - A summary of recorded transactions concerning a property. (An attorney or title insurance company examines an abstract of title for any title defects which must be cleared before a buyer can purchase clear, marketable and insurable title.) Accrued Interest - Interest which has been incurred but not paid. Adjustable Rate Mortgage (ARM) - A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Subject to certain limitations, the rate and payments on an ARM loan rise and fall with the market. Adjustment Interval or Adjustment Period - The length of time between rate adjustments on an Adjustable Rate Mortgage (ARM). Alternative Documentation - A substitute method of providing the documentation necessary to approve a loan. For example, bank statements may be substituted if it is not possible to provide written verification of the bank balance directly from the borrower’s bank. Amortization - The process of paying off a mortgage in regular increments. Amortization Schedule - A monthly repayment schedule outlining how a loan will be paid off in fixed payments combining principal and interest. Annual Percentage Rate (APR) - A calculation that expresses the total cost of a mortgage loan as a yearly rate (according to a federally mandated procedure). The APR calculation takes into account monthly interest payments, mortgage insurance, points, and certain fees paid at origination. It generally results in a rate slightly higher than the stated interest rate on the loan. Appraisal - A written estimate of a property’s current market value, based on recent sales information for similar properties, the condition of the property and the neighborhood’s impact on future property value. Appraisal Fee - A fee charged by a licensed, certified appraiser to provide an appraisal. Assessment - A local tax levied against a property for a specific purpose, such as road or sidewalk construction or sewer or street light installation. Assignment - The transfer of property rights by one person, the assignor, to another, the assignee. Assumability - A loan feature that allows the loan to be transferred from the seller to the purchaser of a home with the same terms and conditions, subject to lender approval. Balloon Mortgage - A short-term, fixed-rate loan with low payments for a set number of years and a large balloon payment of the remainder of the principal due at the end of the term. Cash Out - A refinance for more than the balance of the current mortgage. The excess money taken out reduces the borrower’s equity. Cashier’s Check (or Bank Check) - A check whose payment is guaranteed because it was paid for in advance and is drawn on the bank’s account instead of the customer’s. CC&Rs - See Covenants, Conditions and Restrictions Ceiling - The maximum allowable interest rate of an adjustable rate mortgage. Certificate of Occupancy - Document issued by local government agency stating that a property meets the requirements of health and building codes. Certificate of Title - Written opinion of the status of title to a property, given by an attorney or title company. This certificate does not offer the protection given by title insurance. Closing Agent - Neutral third party appointed to act as a custodian for documents and funds during the transfer of property from seller to buyer. Depending on local law and custom, this could be an attorney, escrow agent or title company. Closing Costs - Fees incurred in a real estate or mortgage transaction paid by borrower and/or seller at the closing of the transaction. Closing/Settlement Statement - A form prepared by the closing agent that itemizes the closing costs associated with purchasing or refinancing a home. Also see HUD-1. Combined Loan to Value (CLTV) - The percentage of the property valued borrowed through a combination of more than one loan (for example, first mortgage and home equity line of credit. Mathematically, combined loan and line of credit amounts/property value = Combined Loan to Value Ratio). COFI - See Cost of Funds Index Collateral - Assets that secure a loan (in the case of a mortgage, real property serves as collateral). Condominium - A form of property ownership in which the homeowner holds title to an individual dwelling unit and an interest in common areas and facilities of a multi-unit project. Conforming Loan - A mortgage loan eligible for purchase by the two Federally sponsored housing agencies, Fannie Mae and Freddie Mac. Construction Loan - A short term interim loan to fund the construction of buildings or homes, which usually advances the money in installments as work progresses. Construction-to-Permanent (CTP) Loan - A construction loan that automatically converts to a permanent loan at the end of the construction period. Cost of Funds Index (COFI) -A common index used in adjustable rate loans based on the weighted-average interest rate paid for deposits by savings institutions that are members of the 11th Federal Home Loan Bank District. Covenants, Conditions and Restrictions (CC&Rs) - A document that defines the use, requirements and restrictions of a condominium or Planned Unit Development (PUD). Credit Report - A report detailing the credit history of a prospective borrower, used by lenders to help determine creditworthiness. Debt-to-Income Ratio/ - A figure, expressed as a ratio, that compares the amount of recurring debt payments a borrower is obligated to make to the amount of their income. Deed - Legal document by which title to a property is transferred from one owner to another. The deed contains a description of the property and is signed, witnessed, and delivered to the buyer at closing. Deed of Trust - Document creating a lien on a property as security for the payment of a debt. In some states, a mortgage is used instead. Default - Failure to meet legal obligations in a contract, including failure to make payments on a loan. A mortgage is generally considered to be in default when a payment is 30 days past due. Deferred Interest - Amount added to the balance of a loan when monthly payments are insufficient to cover the interest incurred. This results in negative amortization. Discount Points - See Points Down Payment - In a home purchase, the difference between the purchase price and the mortgage amount. Earnest Money - Deposit made by a buyer toward the down payment as evidence of good faith when the purchase agreement is signed. ECOA - See Equal Credit Opportunity Act Encumbrance - A legal right or interest in a property that affects title and may lessen the property value. Equal Credit Opportunity Act (ECOA) - Federal law requiring 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 difference between the current market value of a property and the outstanding mortgage balance. Escrow Account - Account held by lender containing funds collected in conjunction with monthly mortgage payments. Also known as impounds, the funds in this account are held in trust by the lender on behalf of the borrower, and are used to pay expenses such as property taxes and homeowner’s insurance. Escrow Officer - See Closing Agent Estimated Settlement (or Closing) Statement - A document provided by the closing agent a few days before closing, detailing all costs and indicating the final sum the buyer will be required to bring to the closing. Expense-to-Income Ratio - Also known as Back-End Ratio and Debt-to-Income Ratio. The figure derived by dividing a borrower’s monthly financial obligations by his/her gross monthly income. Fannie Mae (FNMA) - Corporation created by Congress that buys and sells residential mortgages. Fannie Mae provides funds for one in seven mortgages. First Mortgage - The primary lien against a property. Fixed-Rate Mortgage - A mortgage whose interest rate does not change for the life of the loan. Payments are also fixed. Federal Home Loan Mortgage Corporation (FHLMC) - See Freddie Mac Flood Insurance - A form of hazard insurance required by the federal government to cover property damage or loss in flood zones. Floor - The minimum interest rate payable on an adjustable-rate mortgage. Federal National Mortgage Association (FNMA) - See Fannie Mae Freddie Mac (FHLMC) - Quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers. Good Faith Estimate - Written estimate of costs the borrower will pay at closing, provided by a lender within three days of loan application. Gross Monthly Income - Total monthly income before taxes or expenses are deducted. Used in the loan origination process to calculate borrower’s ability to make payments on a loan. Hazard Insurance - A policy that protects the insured against loss due to fire or certain natural disasters in exchange for a premium paid to the insurer. Also known as Home Owner’s Insurance or fire insurance. Home Equity Loan - An additional mortgage secured by the equity in the home. All funds for this loan are disbursed at closing. (In contrast, see Home Equity Line of Credit) Home Equity Line of Credit - A revolving line of credit secured by the equity in the home. Unlike a Home Equity Loan, these funds may be drawn and repaid like a credit card. HUD-1 Settlement Statement - A form mandated by the federal government that itemizes the closing costs associated with purchasing a home. Also see Estimated Settlement Statement. Impound Account - See Escrow Account Index - A published rate used by lenders to calculate interest adjustments on adjustable rate mortgages (Index + Margin = Interest Rate). Common indexes include 1-Year Treasury securities, COFI (Cost Of Funds Index) and Six-Month LIBOR (London Interbank Offered Rate). Initial Rate - The rate charged during the first interval of an adjustable rate mortgage. Interest - Charge paid for borrowing money. Interest Rate - The rate expressed as a percentage of the outstanding balance used to calculate interest charges. Jumbo Loan - A mortgage with a principal balance that exceeds the amount eligible for purchase by Fannie Mae and Freddie Mac. Jumbo loans generally carry a higher interest rate. LIBOR (London Interbank Offered Rate) - The interest rate charged among banks for short-term Eurodollar loans, and a common index for adjustable rate mortgages. Lien - A legal claim against a property that must be paid when the property is sold. Lifetime Interest Rate Cap - The highest interest rate that can be charged for an adjustable rate mortgage during the life of the loan . Loan Origination Fee (Processing Fee) - Fee charged by a lender that compensates for the work in evaluating and processing the loan. Loan to Value (LTV) Ratio - The percentage of the property value borrowed (loan amount/property value = loan to value ratio). LTV - See Loan To Value Ratio Margin - The percentage amount added to an index to calculate the interest rate of an adjustable rate mortgage at each adjustment. Monthly Housing Expense - Total monthly expense of principal, interest, taxes and insurance. Mortgagee - The lender in a mortgage loan transaction. Mortgage - Document creating a lien on a property as security for the payment of a debt. In some states, a Deed of Trust is used instead. Mortgage Banker - A lender that originates and funds, then sells and services mortgage loans. Mortgage Broker - A person or entity that arranges financing for borrowers, but places loans with lenders rather than funding them with the broker’s own money. Mortgage Insurance - Insurance purchased by a buyer to cover the lender’s risk of loss. Mortgage Insurance is generally required by lenders when the down payment is less than 20% of the purchase price. Mortgagor - The borrower in a mortgage loan transaction. Negative Amortization - Increase in principal balance that occurs when monthly payments are not large enough to pay all interest incurred on a loan, usually caused when payment caps prevent sufficient payment increases. Deferred interest is added to the loan balance, resulting in the borrower owing more than the original amount of the loan. Note - Legal document stating the terms of a debt and a promise to repay it. Origination Fee - See Loan Origination Fee Payment Cap - Limit on the amount by which a borrower’s adjustable rate mortgage payments may increase, regardless of rise in interest rates. May result in negative amortization. Periodic Interest Rate Cap - A limit on the amount that interest rates can change at each adjustment period. PITI - Abbreviation for Principal, Interest, Taxes and Insurance, the components of a monthly mortgage payment, also called Monthly Housing Expenses. Points (or Discount Points) - Money paid to a lender at closing in exchange for a lower interest rate. Each point is equal to 1% of the loan amount. Prepaid Expenses - Taxes, insurance and assessments paid in advance of due dates. Prepaid Interest - Interest charged to a borrower at closing to cover interest on the loan between closing and the end of the month in which the loan closes. Prepayment - Full or partial payment of the principal before the due date. This might occur if the borrower makes extra payments, sells the property, or refinances the existing loan. Prepayment Penalty - Fee that may be charged by a lender for early payment of debt. Prequalification - The process of estimating how much money a prospective homebuyer will be eligible to borrow prior to application for a loan. Prime Rate - Lowest commercial interest rate charged by a bank on short-term loans to its most credit-worthy customers. Often used as an index for home equity lines of credit. Principal - The amount of debt, not counting interest, left on a loan. Private Mortgage Insurance (PMI) - See Mortgage Insurance Profit and Loss Statement - Financial statement showing sales, expenses and profits over a period of time. Often a requirement for self-employed borrowers. Property Tax - A government tax based on the market value of a property. PUD (Planned Unit Development) - A project or subdivision that includes common property that is owned and maintained by a homeowners’ association for the benefit and use of the individual PUD unit owner. Purchase Agreement - Contract signed by buyer and seller stating the terms and conditions under which a property will be purchased. Qualifying Ratio - Comparison of a borrower’s expenses (housing or total debt) to income. Rate Lock or Lock-In - A lender’s guarantee of an interest rate and related points for a set period of time, usually between loan application and loan closing. Protects borrower against rate increases during that time. Real Estate Settlement Procedures Act (RESPA) - Law requiring lenders to give borrowers advance notice of closing costs. Recording - The act of entering documents concerning title to a property into the public records. Recording Fee - Money paid to an agent for entering the sale of a property into the public records. Refinancing - The process of paying off one loan with the proceeds from a new loan secured by the same property. Rescission - Federal law that guarantees the consumer the right to cancel a mortgage for a period of three business days following the signing of the documents if the subject loan is a refinance of the borrower’s primary residence. RESPA - See Real Estate Settlement Procedures Act Second Mortgage - A subordinate mortgage made in addition to a first mortgage. Settlement (or Closing) - Meeting between the buyer, seller and closing agent at which property and funds legally change hands. Settlement Costs - See Closing Costs Settlement Cost (HUD guide) - Booklet published by the department of Housing and Urban Development (HUD) that provides an overview of the lending process, given to consumers after completing their loan applications. Survey - A measurement of land, prepared by a licensed surveyor, showing a property’s boundaries, elevations, improvements, and relationship to surrounding tracts. Tax Impound - See Escrow Account Term - The number of years it will take to pay off a loan. Title - Document which gives evidence of ownership of a property and the rights of ownership and possession of that property. Title Company - A company that insures title to property. Title Insurance - Insurance which protects the lender (lender’s policy) or the buyer (owner’s policy) against loss due to disputes over ownership of a property. Title Search - Examination of municipal records to ensure that the seller is the legal owner of a property and that no liens or other claims exist against the property. Transfer Tax - Tax paid when title passes from one owner to another. Not applicable in all jurisdictions. Truth-In-Lending Act - Federal law requiring written disclosure of the terms of a mortgage by a lender to a prospective borrower within three business days of application. Underwriting - The process of verifying data and evaluating a loan for approval. Walk-through - A final inspection of a home to check for problems that may need to be corrected before closing.