Annual Percentage Rate (APR): calculated by using the standard finance formula. (the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, origination, mortgage insurance, and other fees associated with the loan.)
Application: the initial step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
Appraisal: a report that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
ARM: Adjustable Rate Mortgage; a mortgage loan that features variable interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.
Balloon Mortgage: a mortgage feature that usually offers reduced rates for an initial period of time after that time period elapses, the total balance is due.
Bankruptcy: a federal law Whereby a person's assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.
Borrower: a person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
Cash reserves: a cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.
Closing: also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.
Closing costs: customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.
Credit report: a record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.
Debt to Income Ratio: an analysis of gross income to housing and non-housing expenses.(expressed as a percentage)
Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.
Down payment: the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.
Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.
Escrow account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc
Fannie Mae: Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.
FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
Fixed-rate mortgage: a mortgage with payments that do not change throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders With funds for new homebuyers.
Good faith estimate: an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.
Home inspection: an examination of the structure and mechanical systems to determine a home's safety; makes the potential homebuyer aware of any repairs that may be needed.
HUD-1statement: also known as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing
Interest rate: the amount of interest charged on a mortgage loan payment that are expressed as a percentage.
Loan: cash borrowed that is paid back at a specific interest rate.
Loan fraud: purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.
Loan-to-value (LTV) ratio.- a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Lock-in: since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.
Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
Mortgage: a lien on the property that secures the Promise to repay a loan.
Mortgage insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price.
Mortgage insurance premium (MIP): a monthly payment -usually part of the mortgage payment - paid by a borrower for mortgage insurance.
Origination fee: the charge for originating a loan; is usually calculated in the form of points and paid at closing.
PITI: Principal, Interest, Taxes, and Insurance - the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
Pre-approval: lender or broker commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
Pre-qualify: a lender informally determines the maximum amount an individual is eligible to borrow.
Prepayment: payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.
Principal: the amount borrowed from a lender; doesn't include interest or additional fees.
Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships
Title insurance: insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers.
Truth-in-Lending: a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.
Underwriting: The critical process for approving or declining a loan application in which underwriters evaluate the worthiness of a prospective borrower. .
VA: Department of Veterans Affairs: a federal agency which guarantees loans made to veterans.