This is a tool to educate you about the terminology lenders use. Feel free to use it as a reference point, when someone says something you do not understand.

If after reading this material you have further questions, do not hesitate to contact me. I hope this helps in your quest to understand the lending process and I hope your lending experience is a good one.

(Loan Terms are organized alphabetically.)

A  B  C  D  E   F  G  H   I  J  K   L  M  N   O  P  Q   R  S  T   U  V  W   X  Y  Z

-A-
Acceleration clause
A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

Adjustable-rate mortgage (ARM)
A mortgage whose interest rate changes over time based on an index and a margin. Rate changes are made in prescribed times and within prescribed limits (caps) as defined in the mortgage contract.

Amortization
The gradual repayment of a mortgage by installments.

Amortization schedule
A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance on the loan.

Annual percentage rate (APR)
The total yearly cost of a mortgage stated as a percentage of the loan amount. This includes the base interest rate, mortgage insurance, origination fees, and some other related fees. See your lender for a more complete explanation of what fees are used to calculate your APR.

Appraisal
The process of estimating and supporting an opinion of value.

Appreciation
An increase in the value of a house due to changes in market conditions or other causes.

As Is
A contract clause indicating the seller will not fix any problems with the property.

Assessed value
The valuation placed upon a property by a public tax assessor for purposes of taxation.

Assumable mortgage

A mortgage that can be taken over ("assumed") by the buyer when a home is sold.

Assumption
The transfer of the seller's existing mortgage to the buyer.

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-B-
Binder
A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.

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-C-
Cap
A provision of an ARM limiting how much the interest rate or mortgage payments may increase.

Cash reserve
A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two mortgage payments.

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

Closing
The occasion where a sale is finalized; the buyer signs the mortgage, and closing costs are paid. Also called "settlement."

Closing Costs
Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called "settlement costs."

Commitment Letter
A formal offer by a lender stating the terms under which it agrees to loan money to a home buyer.

Competitive market analysis (CMA)
A comparison approach used by real estate professionals to help sellers set a likely selling price for property.

Condominium
A form of property ownership in which each occupant of a multiunit building owns his or her dwelling unit separately and an undivided interest with other owners in the property's common elements (lobbies, hallways, etc.).

Condominium bylaws
Rules passed by the condominium owners' association that are used to administer the property.

Condominium owners' association
An association of all the owners in a condominium. They may elect a Board of Directors to oversee the administration and management of the condominium.

Contingency
A condition that must be met before a contract is legally binding.

Construction loan
A loan that provides funds for real estate projects. The lender usually disburses the money as work is completed (called draws).

Conventional mortgage
Any mortgage that is not insured or guaranteed by the federal government.

Convertible ARM
An adjustable-rate mortgage that can be converted to a fixed rate mortgage under specified conditions.

Cooperatives (Co-ops)
A form of property ownership in which a corporation owns the building and the tenants purchase shares in the corporation that give them a right to occupy a unit in the building.

Credit report
A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's credit worthiness.

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-D-
Deed
The legal document conveying title to a property.

Deed of trust
The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.

Default
Failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage.

Delinquency
A loan in which a payment is overdue but not yet in default.

Depreciation
A decline in the value of a property; the opposite of "appreciation."

Down payment
The part of the purchase price that the buyer pays in cash and does not finance with a mortgage.

Due-on-sale clause
A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

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-E-
Earnest money
A deposit given to the seller to show that a prospective buyer is serious about buying the house.

Easement
The right to use another's land.

Equal Credit Opportunity Act (ECOA)
A federal law that prohibits lenders from denying mortgages 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 difference between the market value of a property and the home owner's outstanding mortgage balance. If your home is worth $100,000 and you owe $65,000, you are said to have 35% equity in your home.

Equity loan
A loan based on the borrower's equity in his or her home.

Escrow
The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a homeowner pays money for taxes and insurance.

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-F-
Fair Credit Reporting Act
A consumer protection law that sets up a procedure for correcting mistakes on one's credit record.

FHA loan
A mortgage insured by the Federal Housing Administration.

First mortgage
The mortgage that has first claim (or "lien") in the event of a default.

Fixed-rate mortgage
A mortgage in which the interest rate does not change during the entire term of the loan.

Flood certificate
Issued by a company to show whether property is in a flood zone.

Flood insurance
Insurance required for properties in federally designated flood areas.

Forbearance
The lender's postponement of foreclosure to give the borrower time to catch upon overdue payments.

Foreclosure
The process by which a mortgaged property may be sold when a mortgage is in default.

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-G-
Good Faith Estimate
An estimate required by RESPA and provided to the buyer by the lender stating the expected closing costs the buyer will incur.

Graduated payment mortgage (GPM)
A mortgage that starts with low monthly payments that increase at a predetermined rate. Be aware that most GPM's include a negative amortization clause.

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-H-
Hazard insurance
Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism and other hazards.

Home Inspection
An inspection done by a individual or company of the borrowers choosing that covers the working components of a home from the roof to the foundation.

Home owner's insurance
An insurance policy that combines liability coverage and hazard insurance.

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-I-
Interest
The fee, or rent, charged by the lender for borrowing money.

Interest rate cap
A provision of an ARM limiting how much interest rates may be increased in a given adjustment period. See also "Lifetime cap."

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-J-
Joint tenancy
A form of co-ownership giving each tenant equal interest and equal rights in the property, including the right of survivorship.

Junk Fees
Fees that are outside of the normal lender fees that may have official sounding names that pad the loan price.

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-K-

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-L-
Late charge
The penalty a borrower must pay when a payment is made after the due date.

Lien
A legal claim against a property that must be paid when the property is sold.

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

Loan servicing
The collection of mortgage payments from borrowers and the related responsibilities of a loan servicer, such as foreclosure, tax and insurance escrow, etc.

Lock-in
A written agreement guaranteeing the home buyer a specified interest rate provided the loan closes with that buyer within a set period of time.

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-M-
Margin
The set percentage the lender adds to the index rate to determine the current interest rate of an ARM.

Mortgage
A legal document that pledges a property to the lender as security for payment of a debt, usually a loan on the house itself.

Mortgage banker
A company that originates mortgages exclusively for resale in the secondary market (such as to GNMA, FNMA and FHMLC).

Mortgage broker
A company that for a fee matches borrowers with lenders.

Mortgage insurance premium (MIP)
Fee paid by a borrower to FHA or a private insurer for mortgage insurance.

Mortgage note
A legal document obliging a borrower to repay a loan at a stated interest rate during a specified period of time: the agreement is secured by a mortgage.

Mortgagee
The lender in a mortgage agreement.

Mortgagor
The borrower in a mortgage agreement.

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-N-
Negative amortization
Payment terms under which the borrower's monthly payments do not cover the interest due: as a result, the balance due is added to the loan balance making it rise.

No-document loan
A loan in which the borrower does not have to prove income or assets.

Non-conforming loan
A mortgage not eligible for sale and delivery on the secondary market for various reasons, including the loan amount, loan characteristics or underwriting guidelines.

Notice of default
A formal written notice to a borrower that a default has occurred and that legal action may be taken.

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-O-
Origination fee
A fee paid to a lender for processing a loan application; it is stated as a percentage of the loan amount. (1% is generally known as one point).

1 Month Option ARM
An adjustable rate mortgage loan with four payment options: minimum payment, interest only, full principal and interest (30-year term) and full principal and interest (15-year term). These loans have an initial fixed interest rate for one month. After this period, the rate charged on the loan adjusts monthly, and payment option amounts adjust annually. Deferred interest, or negative amortization, is possible with these loans.

Owner financing
A purchase in which the seller provides all or part of the financing.

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-P-
Payment cap
A provision of some ARM's limiting how much the interest rate increases.

PITI
An acronym describing principal (P), interest (I), taxes (T), insurance (I), the most common components of a mortgage.

Points
Are interest, usually paid at closing. A point is 1% of the loan amounts.

Pre-approval
A commitment from a lender to make a loan after their review of pertinent documents.

Predatory Loans
High interest, excessive fee loans.

Pre-payment penalty
A fee charged to a borrower who pays off a loan before it is due.

Pre-qualification
The process before the borrower is pre-approved or the loan applied for, how much home a borrower is able to afford.

Principal
The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

Private Mortgage insurance (PMI)
Insurance provided by a nongovernmental insurer that protects lenders against a loss if a borrower defaults. Usually required on all loans with an "LTV" of more than 80%.

Purchase and sale agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

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-Q-
Qualifying ratios
Guidelines applied by lenders to determine how large a loan to grant the home buyer. The debt-to-income ratio is your current monthly debt on loans and credit cards divided by your gross income. The housing-to-income ratio is your new housing payment divided by your gross income.

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-R-
Radon
A radioactive gas found in some homes that in sufficient concentrations can cause health problems. Your lender may require a radon check on your home.

Real estate agent
A person licensed to negotiate and transact the sale of real estate on behalf of either the borrower or seller, or in some cases both parties.

Real Estate Settlement Procedures Act(RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs, including an "APR".

Refinancing
The process of paying off one loan with the proceeds from a new loan secured by the same property. This is most often done to get the better interest rate offered by the new loan or to pull cash out.

Regulation Z
Federal regulation issued by the Fed to implement the Truth-in-Lending Law.

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-S-
Second mortgage
A mortgage that has rights that are subordinate to the rights of the first mortgage. As such, these loans are often less secure and may demand a slightly higher interest rate.

Secondary mortgage market
A market where existing mortgages are bought and sold. Mortgages are originated in the primary mortgage market.

Seller carry-back
An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

Settlement sheet
The computation of costs payable at closing that determines the seller's net proceeds and the buyer's net payment.

Stated income loan
A loan that the borrowers tell the lender what their income is with no verification by the lender.

Sub-prime loans
Loans not able to be delivered and sold on the secondary market, normally because of high ratios, credit problems or unusual loan circumstances.

Survey
A drawing showing the legal boundaries of a property, it's fixtures, and any easements or encroachments.

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-T-
Tenancy by entirety
A type of joint ownership of a property available only to a husband and wife.

Tenancy in common
A type of joint ownership in a property without right of survivorship.

Title
A legal document establishing the right of ownership.

Title company
A company that specializes in title searches and insuring title to property.

Title insurance
Insurance to protect the lender (lender's policy) or the buyer (buyer's policy) against loss arising from disputes over ownership of a property.

Title search
A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Transfer tax
State or local tax payable when title passes from one owner to another.

Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

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-U-
Underwriting
The process of evaluating a loan application to determine the risk involved for the lender.

Uniform settlement statement (HUD-1)
A form required by RESPA to be used at closings that details financial information of the transactions.

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-V-
VA loan
A loan that is guaranteed by the Veterans Administration.

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-W-

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-X-

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-Y-

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-Z-

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