Glossary of Real Estate & Loan Terms

Adjustable Rate Mortgage (ARM)
An ARM is a loan that has a varying interest rate and payment based on an adjustment period and a benchmark index. This loan is also known as a variable rate mortgage.

Amount Financed
The actual amount of credit made available to a borrower in a loan. Specifically, it is the amount of the loan principal, less prepaid finance charges (loan origination fees, so-called points, adjusted interest, etc.) and any required deposit balance. The amount financed is used to calculate the annual percentage rate.

Annual Percentage Rate or APR
The APR is the effective rate of interest charged on a loan expressed on a yearly basis and represents the full cost of all elements associated with obtaining a full mortgage into a single formula.

Appraisal
An appraisal is the evaluation of a property by a licensed appraiser on its price based on previous sales of similar properties. The appraised value is used by a bank to determine the lending limit on a given property. A seller may also have a property appraised to determine the offering price during a sale.

Buy down
Buy down is the voluntary paying of discount points by a borrower to reduce mortgage interest rate at the time the loan is made.

Closing or Close of Escrow (COE)
The closing is when the transfer of ownership of a property from the seller to the buyer occurs according to the sales contract.

Closing Costs
Closing costs are the expenses incurred in the purchase and sale of real property paid at the time of settlement or closing. Some examples of closing costs are title insurance, attorney fees, appraisal fees, recording fees and taxes.

Closing Disclosure 
A government mandated disclosure that outlines the terms and charges of a home loan in a short format. Required 3 days prior to signing loan docs (consummation).

Completion Date
Completion date is the date of completion of construction on a new home. This is typically confirmed by a “Certificate of Occupancy” (CofO or COO)

Conforming Loan
A conforming loan is a mortgage issued within the framework of FNMA/FHLMC (Fannie Mae/Freddie Mac) guidelines in terms and amount. In general, any loan which does not meet these guidelines is a non-conforming loan. Criteria include debt-to-income ratio limits and documentation requirements. The maximum loan amount is based on the October-to-October changes in median home price, above which a mortgage is considered a jumbo loan, and typically has higher rates associated with it.

Contingency
Contingency is a condition in a contract relieving a party of liability if a specified event occurs or fails to occur.

Contract
A contract is a legally binding agreement between two parties, and in order to have a valid Contract of Sale in real estate there must be: an offer, an acceptance, competent parties, consideration, legal purpose, written documentation, description of the property, and signatures of the principals.

Debt-to-Income Ratio or Debt-Service Ratio
The debt-to-income ratio is the relationship of a borrower’s monthly payment obligation on long-term debts divided by gross monthly income, expressed as a percentage. It is also known as bottom ratio.

Down Payment
A type of payment made in cash during the onset of the purchase of an expensive good/service. The payment typically represents only a percentage of the full purchase price; in some cases it is not refundable if the deal falls through. Financing arrangements are made by the purchaser to cover the remaining amount owed to the seller.

Earnest Money
A deposit made to a seller showing the buyer’s good faith in a transaction. Earnest money is typically held jointly by the seller and buyer in a trust or escrow account.

Escrow
A state where consideration, benefits, legal rights, document, or a sum of money is held by one person in trust for another, for the purpose of assuring performance under an agreement. 

Federal Housing Administration (FHA)
The Federal Housing Administration is a federal agency that is part of the Department of Housing and Urban Development (HUD) that sets policy for mortgage underwriting and provides insurance for residential mortgages.

FHA Insured Loan
An FHA insured loan is a mortgage insured by the Federal Housing Administration.

Fixed Interest Rate
An interest rate on a liability, such as a loan or mortgage, that remains fixed for the entire term of the loan. 

Interest Rates
The interest rate is the cost of borrowing money from a lender. Rates will vary and will change over time.

Loan Estimate
A Loan Estimate is an estimate of the fees a mortgage borrower will be required to pay at closing. It is required by Federal law that the lender provides the Loan Estimate within three business days of the initial loan application.

Loan-to-Value Ratio (LTV)
The loan-to-value ratio is the mortgage amount divided by the lower of the purchase price or the appraised value of the property. This ratio is expressed as a percentage. A lender will use this ratio in determining the maximum mortgage loan that it will make on the property.

Lock-In / Rate Lock Agreement
A lock-in is an agreement by the lender guaranteeing the applicant a specified interest rate on the mortgage loan provided the loan closes within a set period of time.

Market Value
The market value of a property is an estimation of the price for a property in relation to the current real estate market.

Mortgage Interest
The interest charged on a loan used to purchase a residence. Mortgage interest is charged for both primary and secondary loans, home equity loans, lines of credit, and as long as the residence is used to secure the loan. Mortgage interest is deductible on form 1040.

Mortgage Insurance (or Private Mortgage Insurance / PMI)
Mortgage insurance is insurance that protects the lender in case the home buyer does not make their mortgage payments. Typically, a borrower would be required to pay a fee for mortgage insurance if their down payment is less than 20%.

Origination
Origination is the first step in the mortgage loan process consisting of the completion of the application.

PITI
PITI is an acronym for a mortgage payment that includes principal, interest, taxes and insurance.

Points
Points refer to the payment made to a lender as consideration for issuing a mortgage, usually based on a percentage of the loan amount. A point is 1% of the principal of the mortgage.

Pre-Approval
A pre-approval is a process in which a conditional commitment is issued after a loan profile is underwritten with all standard documentation except a property appraisal and a title search.

Pre-Qualification
A pre-qualification is a process in which a loan officer calculates the housing-to-income ratio and the total debt-to-income ratio to determine an approximate maximum mortgage loan amount.

Prepaid Finance Charge
Charges on a loan agreement which are not included as part of the principal amount being borrowed. Prepaid finance charges can include such things as administration fees, loan insurance and discount points. Typically must be paid by the borrower at the close of escrow.

Primary Residence
Generally, a primary residence of an owner or renter is one that they occupy the majority of time, usually considered to be 6 months and 1 day out of every year.

Principal
The principal in the mortgage is the amount that is borrowed and on which interest is paid or received.

Private Mortgage Insurance (PMI)
See Mortgage Insurance.

Property Tax
The tax issued by a municipality on the ownership of a property.

Ratios
Ratios are guidelines applied by the lender during underwriting a mortgage loan application to determine how large a loan to grant an applicant. The ratios the lenders use are generally the Loan-to-Value Ratio, Housing-to-Income Ratio, and Debt-to-Income ratio.

Recording
Recording is registering the ownership, lien, or claim of a party to a specific parcel of real estate with the local county.

Recording Fees
Recording fees are the fees charged by the recorder’s office to record a document such as a mortgage, deed of trust, deed and UCC Financing Statement.

Settlement Statement
A statement that summarizes all the fees and charges that both the homebuyer and seller face during the settlement process of a housing transaction. This form, is also known as the HUD-1.

Title
The title of a property is the evidence or documentation that an owner is in lawful possession of the property, such as a property deed.

Title Insurance
Title insurance is an insurance policy protecting the insured from financial loss caused by a defect or question about the title to real property.

Title Transfer Tax
Title transfer tax is a tax imposed on the conveyance of title to real property by deed.

Truth-in-Lending Disclosure
Federal law requires that the lender must give this document to the home buyer within three business days after the loan application. This disclosure gives details of the mortgage payments along with the corresponding APR and finance charges.

Underwriting
In mortgage lending, underwriting is the decision-making process used to determine whether the loan risk is acceptable to the lender. Underwriting involves the satisfactory review of the property appraisal and examination of the borrower’s ability and willingness to repay the debt and sufficiency of collateral value of the property.

Up-Front Mortgage Insurance – UFMI
An insurance premium that is collected, typically on FHA loans, at the time the loan is initially made. Up-front mortgage premiums are added to a pool of money that is used to help entities, such as the FHA, insure loans for certain borrowers.