Glossary of Terms

Amortization – The gradual reduction of debt by means of periodic payments sufficient to pay principal and interest and thereby liquidate the debt.

ARM – Adjustable Rate Mortgage. Interest rates on this type of mortgage are periodically adjusted up or down, depending on a specified financial index.

Appraisal – An Unbiased, professional estimate of the value or worth of a property. Completed by a licensed appraiser and required by the Lender as a condition of loan approval.

Balloon Mortgage – A short term loan, usually 5 to 7 years that features a fixed interest rate, and a final large balloon payment for balance of the mortgage.

Borrower – A person who receives funds in the form of a loan with the obligation of repaying the loan in full with interest, if applicable.

Broker – One who, for a commission or fee, brings parties together and assists in negotiating contracts between them. In real estate transactions, the broker usually brings together the buyer and the seller.

Caps - The limit on how much the interest rate can change in an ARM. For example a 2/6 cap means that the ARM cannot adjust more than 2% up or down each adjustment, or 6% from the start rate during its life.

Closing – The final settlement of the transfer of the property. Involves the buyer’s signing the mortgage note and exchange of title.

Closing Agent – Assures that all documentation related to the sale of a house has been completed properly, including the title search and title insurance. The closing agent explains all closing documents to the buyer and the seller, obtains their signatures where necessary, and records the documents.

Closing Costs – Fees and other charges paid the buyer and seller at closing.

Co-Borrower – The person who is sharing the mortgage responsibility with the borrower.

Contingency – A clause within an Offer to Purchase or within the Contract for Sale that requires a certain condition be met before proceeding to closing.

Contract – Binding written legal agreement between two or more parties that delineates the conditions for the exchange of value. (ex. Money exchanged for title to property.)

Contract for Sale – AKA: Conditional Sales Contract – a sales contract whereby the borrower has possession of the property, but seller retains ownership of the property until the buyer has fulfilled the obligations put forth in the contract.

Conventional Mortgage – A Mortgage not insurance by the government, such as FHA or VA.

Counter Offer – The offer made by one party (buyer or seller) in response to an offer presented by the other.

Credit Report – A report to a prospective lender on the credit standing of a prospective borrower, used to help determine credit worthiness.

Debt-to Income Ratio – Long-term debt expense as a percentage to monthly income. 

Deed – The instrument that transfers title from seller to the buyer.

Down Payment – The buyer’s payment to the seller at closing for a percentage of the purchase price required by the buyer’s mortgage loan.

Earnest Money – Money paid by the buyer to the seller at the time the Offer to Purchase is presented. Generally, earnest money is applied to the purchase price. 

Equity – The home owner’s interest in a property. It is difference between fair market value and the current amount the owner owes on the property.

Far Market Value – The price at which a property is transferred between a willing buyer and a willing seller, each of whom has a reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell.

FHA – Federal Housing Administration – A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lender.

FHLMC – Federal Home Loan Mortgage Corporation – A private corporation created by Congress to support the secondary mortgage market. It sells participation certificates secured by pools of conventional mortgage loans, their principal and interest guaranteed 
by the Federal government through FHLMC. Popularly known as Freddie Mac.

FNMA – Federal National Mortgage Association – A private corporation created by Congress to support the secondary mortgage market. FNMA sells mortgage – backed securities backed by pools of conventional loans. Payment of principal and interest on these securities is backed by the US Government. Popularly known as Fannie Mae.

Gross Monthly Income – The amount of consistent and stable income that an individual receives each month. Averaged over a period of time. This amount includes overtime pay, bonuses, commissions, and income from dividends and interest, provided that the individual can show a consistent history of receiving such income. 

Hazard Insurance – Compensates for property damage from specific hazards such as fire and wind. Insurance must be obtained prior to settlement by Buyer.

Homeowners Association – An organization of homeowners residing within a particular development whose major purpose is to maintain and provide community facilities and services for the common enjoyment of the resident. 

Housing Expense Ratio – A home owner’s percentage of their monthly income.

Interest – the cost of borrowing money, usually expressed as a percentage over time.

Loan-To-Value Ratio – The relationship between the amount of a home loan and the total value of the property. For example if you receive a loan of $95,000 on a home that costs $100,000, the loan-to-value ratio is 95%.

Mortgage Insurance – A policy that allows mortgage lenders to recover part of their financial losses if a borrower fails to fully re-rep a loan. Mortgage insurance makes it possible to buy a home with as little 5% down.

Offer to Purchase – A legally-binding, written contract that declares how much a buyer will pay for a house provided certain conditions are met. 

Origination Fee – Similar to a point, it is a fee paid to lender for originating the mortgage.

PITI – Principal, interest, taxes and insurance, forming the basis for monthly mortgage payment.

Planned Unit Development – (PUD) – A subdivision having lots or areas owned in common and reserved for the use of some or all of the owners of the separately owned lots.

Pre-Approval – Having the loan processed, underwritten, and obtaining loan approval before and Offer to Purchase has been accepted by a seller.

Pre-Qualify – Preliminary indications on how large a mortgage a buyer can quality for.

Qualify – Ability to meet a lender’s mortgage approval requirements.

Servicer – After a mortgage loan closes, the loan servicer collects the payments, manages escrow account, pays taxes and insurance, and manages delinquent payments. Lenders may often sell or “release” servicing to another business, which means that a home buyer will not necessarily send house payments to the original lender.

Title – The right of ownership and possession of a property.

Title insurance – A policy that protects a buyer against errors or omissions or defects in the title of the property.

Types of Ownership – There are four (4) types of ownership. 

· Sole Ownership – Only one person/entity owns the property entirely.

· Tenants in Common – Two or more persons have a divided and specific ownership in the property. The percentage of ownership does not have to be equal; each party has a right to sell their interest, and upon the death of that owner’s interest in the property passes to his/hers heirs.

· Joint Tenants – Ownership taken by two or more persons at the same time in equal percentages with an undivided right to possession. If one owner dies, his or her interest automatically passes to the remaining owner(s) through right of survivorship.

· Tenants by the Entirety – Owners are husband and wife and they hold title together of the property with a right of survivorship. Upon the death of either husband or wife, the survivor takes sole ownership to the exclusion of the deceased spouse’s heirs.


Veterans Administration – (VA) An independent agency of the federal government created in 1930. The VA home loan guaranty program is designed to encourage lenders to offer long-term, low down payment mortgages to eligible veterans by guaranteeing the lender against loss.