Home Buyers' Tutorial

Home Purchase Basics

Terms of the Agreement of Sale

Loan Approval Process

Mortgage Glossary




  • 2/1 Buy Down Mortgage
  • Acceleration Clause
  • Additional Principal Payment
  • Adjustable-Rate Mortgage (ARM)
  • Adjusted Basis
  • Adjustment Date
  • Adjustment Period
  • Affordability Analysis
  • Amortization
  • Amortization Term
  • Annual Percentage Rate (APR)
  • Appraisal
  • Appraised Value
  • Asset
  • Assignment
  • Assumability
  • Assumption Fee
  • Balance Sheet
  • Balloon Mortgage
  • Balloon Payment
  • Before-tax Income
  • Biweekly Payment Mortgage
  • Bridge Loan
  • Broker
  • Buydown
  • Cap
  • Certificate of Eligibility
  • Certificate of Reasonable Value (CRV)
  • Change Frequency
  • Closing
  • Closing Costs
  • Compound Interest
  • Consumer Reporting Agency (or Bureau)
  • Conversion Clause
  • Credit Report
  • Credit Risk Score
  • Deed of Trust
  • Default
  • Delinquency
  • Deposit
  • Discount
  • Down Payment
  • Effective Gross Income
  • Equity
  • Escrow
  • Escrow Disbursements
  • Escrow Payment
  • Fannie Mae
  • FHA Mortgage
  • First Mortgage
  • Fixed Installment
  • Fixed-Rate Mortgage (FRM)
  • Fully Amortized ARM
  • GNMA
  • Growing-Equity Mortgage (GEM)
  • Guarantee Mortgage
  • Housing Expense Ratio
  • HUD-1 statement
  • Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
  • Index
  • Initial Interest Rate
  • Installment
  • Insured Mortgage
  • Interest
  • Interest Accrual Rate
  • Interest Rate Buydown Plan
  • Interest Rate Ceiling
  • Interest Rate Floor
  • Late Charge
  • Lease-Purchase Mortgage Loan
  • Liabilities
  • Lifetime Payment Cap
  • Lifetime Rate Cap
  • Line of Credit
  • Liquid Asset
  • Loan
  • Loan-to-Value (LTV) Percentage
  • Lock-In Period
  • Margin
  • Maturity
  • Monthly Fixed Installment
  • Mortgage
  • Mortgage Banker
  • Mortgage Broker
  • Mortgage Insurance
  • Mortgage Insurance Premium (MIP)
  • Mortgage Life Insurance
  • Mortgagor
  • Negative Amortization
  • Net Worth
  • Non Liquid Asset
  • Note
  • Origination Fee
  • Owner Financing
  • Payment Change Date
  • Periodic Payment Cap
  • Periodic Rate Cap
  • PITI Reserves
  • Points
  • Prepayment Penalty
  • Pre-Approval
  • Prime Rate
  • Principal
  • Principal Balance
  • Principal, Interest, Taxes, and Insurance (PITI)
  • Private Mortgage Insurance (PMI)
  • Qualifying Ratios
  • Rate Lock
  • Real Estate Agent
  • Real Estate Settlement Procedures Act (RESPA)
  • Realtor®
  • Recording
  • Refinance
  • Revolving Liability
  • Secondary Mortgage Market
  • Security
  • Seller Carry-back
  • Servicer
  • Standard Payment Calculation
  • Step-Rate Mortgage
  • Third-Party Origination
  • Total Expense Ratio
  • Treasury Index
  • Truth-in-Lending
  • Two-step Mortgage
  • Underwriting
  • VA Mortgage
  • "Wrap Around" Mortgage

  • 2/1 buy Down Mortgage
    The 2/1 Buy Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term.

    Borrowers often refinance at the end of the second year to obtain the best long term rates, however even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.
    Back to Top

    Acceleration Clause
    Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.
    Back to Top

    Additional Principal Payment
    A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.
    Back to Top

    Adjustable-Rate Mortgage (ARM)
    A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).
    Back to Top

    Adjusted Basis
    The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
    Back to Top

    Adjustment Date
    The date that the interest rate changes on an adjustable-rate mortgage (ARM).
    Back to Top

    Adjustment Period
    The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
    Back to Top

    Affordability Analysis
    An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
    Back to Top

    The gradual repayment of a mortgage loan, both principal and interest, by installments.
    Back to Top

    Amortization Term
    The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.
    Back to Top

    Annual Percentage Rate (APR)
    The cost of credit, expressed as a yearly rate including interest and mortgage insurance and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate.
    Back to Top

    A written analysis prepared by a qualified appraiser and estimating the value of a property.
    Back to Top

    Appraised Value
    An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.
    Back to Top

    Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
    Back to Top

    The transfer of a mortgage from one person to another.
    Back to Top

    An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
    Back to Top

    Assumption Fee
    The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.
    Back to Top

    Balance Sheet
    A financial statement that shows assets, liabilities, and net worth as of a specific date.
    Back to Top

    Balloon Mortgage
    A mortgage with level monthly payments that amortizes over a stated term but also requires that a lump sum payment be paid at the end of an earlier specified term.
    Back to Top

    Balloon Payment
    The final lump sum paid at the maturity date of a balloon mortgage.
    Back to Top

    Before-tax Income
    Income before taxes are deducted.
    Back to Top

    Biweekly Payment Mortgage
    A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.
    Back to Top

    Bridge Loan
    A second trust that is collateralized by the borrower's present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as "swing loan."
    Back to Top

    An individual or company that brings borrowers and lenders together for the purpose of loan origination.

    Back to Top

    When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage.Buydowns can occur in both fixed and adjustable rate mortgages.
    Back to Top

    Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don't limit the amount of interest the lender is earning and may cause negative amortization.
    Back to Top

    Certificate of Eligibility
    A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
    Back to Top

    Certificate of Reasonable Value (CRV)
    A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
    Back to Top

    Change Frequency
    The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).
    Back to Top

    A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called "settlement."
    Back to Top

    Closing Costs
    These are expenses - over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.
    Back to Top

    Compound Interest
    Interest paid on the original principal balance and on the accrued and unpaid interest.
    Back to Top

    Consumer Reporting Agency (or Bureau)
    An organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and from other sources.
    Back to Top

    Conversion Clause
    A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
    Back to Top

    Credit Report
    A report detailing an individual's credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness.
    Back to Top

    Credit Risk Score
    A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.
    Back to Top

    Deed of Trust
    The document used in some states instead of a mortgage. Title is conveyed to a trustee.
    Back to Top

    Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
    Back to Top

    Failure to make mortgage payments on time.
    Back to Top

    This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.
    Back to Top

    In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.
    Back to Top

    Down Payment
    Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
    Back to Top

    Effective Gross Income
    A borrowers normal annual income, including overtime that is regular or guaranteed.Salary is usually the principal source, but other income may qualify if it is significant and stable.
    Back to Top

    The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.
    Back to Top

    An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.
    Back to Top

    Escrow Disbursements
    The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
    Back to Top

    Escrow Payment
    The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
    Back to Top

    Fannie Mae
    A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds.
    Back to Top

    FHA Mortgage
    A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
    Back to Top

    First Mortgage
    The primary lien against a property.
    Back to Top

    Fixed Installment
    The monthly payment due on a mortgage loan including payment of both principal and interest.
    Back to Top

    Fixed-Rate Mortgage (FRM)
    A mortgage interest that are fixed throughout the entire term of the loan.
    Back to Top

    Fully Amortized ARM
    An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
    Back to Top

    A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.
    Back to Top

    Growing-Equity Mortgage (GEM)
    A fixed-rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.
    Back to Top

    Guarantee Mortgage
    A mortgage that is guaranteed by a third party.
    Back to Top

    Housing Expense Ratio
    The percentage of gross monthly income budgeted to pay housing expenses.
    Back to Top

    HUD-1 statement
    A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing.
    Back to Top

    Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
    A combination fixed rate and adjustable rate loan - also called 3/1,5/1,7/1 - can offer the best of both worlds. A lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a "5/1 loan" has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It's a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.
    Back to Top

    The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time.The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.
    Back to Top

    Initial Interest Rate
    This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It's also known as "start rate" or "teaser."
    Back to Top

    The regular periodic payment that a borrower agrees to make to a lender.
    Back to Top

    Insured Mortgage
    A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).
    Back to Top

    The fee charged for borrowing money.
    Back to Top

    Interest Accrual Rate
    The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.
    Back to Top

    Interest Rate Buydown Plan
    An arrangement that allows the property seller to deposit money to an account. That money is then released each month to reduce the mortgagor's monthly payments during the early years of a mortgage.
    Back to Top

    Interest Rate Ceiling
    For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.
    Back to Top

    Interest Rate Floor
    For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.
    Back to Top

    Late Charge
    The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
    Back to Top

    Lease-Purchase Mortgage Loan
    An alternative financing option that allows low- and moderate-income home buyers to lease a home with an option to buy. Each month's rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a downpayment.
    Back to Top

    A person's financial obligations. Liabilities include long-term and short-term debt.
    Back to Top

    Lifetime Payment Cap
    For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.
    Back to Top

    Lifetime Rate Cap
    For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.
    Back to Top

    Line of Credit
    An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.
    Back to Top

    Liquid Asset
    A cash asset or an asset that is easily converted into cash.
    Back to Top

    A sum of borrowed money (principal) that is generally repaid with interest.
    Back to Top

    Loan-to-Value (LTV) Percentage
    The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.
    Back to Top

    Lock-In Period
    The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.
    Back to Top

    The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
    Back to Top

    The date on which the principal balance of a loan becomes due and payable.
    Back to Top

    Monthly Fixed Installment
    That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn't cover all of the interest. The loan balance therefore increases instead of decreasing.
    Back to Top

    A legal document that pledges a property to the lender as security for payment of a debt.
    Back to Top

    Mortgage Banker
    A company that originates mortgages exclusively for resale in the secondary mortgage market.
    Back to Top

    Mortgage Broker
    An individual or company that brings borrowers and lenders together for the purpose of loan origination.
    Back to Top

    Mortgage Insurance
    A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
    Back to Top

    Mortgage Insurance Premium (MIP)
    The amount paid by a mortgagor for mortgage insurance.
    Back to Top

    Mortgage Life Insurance
    A type of term life insurance In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.
    Back to Top

    The borrower in a mortgage agreement.
    Back to Top

    Negative Amortization
    Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn't covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.
    Back to Top

    Net Worth
    The value of all of a person's assets, including cash.
    Back to Top

    Non Liquid Asset
    An asset that cannot easily be converted into cash.
    Back to Top

    A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
    Back to Top

    Origination Fee
    A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.
    Back to Top

    Owner Financing
    A property purchase transaction in which the party selling the property provides all or part of the financing.
    Back to Top

    Payment Change Date
    The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.
    Back to Top

    Periodic Payment Cap
    A limit on the amount that payments can increase or decrease during any one adjustment period.
    Back to Top

    Periodic Rate Cap
    A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
    Back to Top

    PITI Reserves
    A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).
    Back to Top

    A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender.Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.
    Back to Top

    Prepayment Penalty
    A fee that may be charged to a borrower who pays off a loan before it is due.
    Back to Top

    The process of determining how much money you will be eligible to borrow before you apply for a loan.
    Back to Top

    Prime Rate
    The interest rate that banks charge to their preferred customers.Changes in the prime rate influence changes in other rates, including mortgage interest rates.
    Back to Top

    The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
    Back to Top

    Principal Balance
    The outstanding balance of principal on a mortgage not including interest or any other charges.
    Back to Top

    Principal, Interest, Taxes, and Insurance (PITI)
    The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.
    Back to Top

    Private Mortgage Insurance (PMI)
    Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
    Back to Top

    Qualifying Ratios
    Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
    Back to Top

    Rate Lock
    A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
    Back to Top

    Real Estate Agent
    A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
    Back to Top

    Real Estate Settlement Procedures Act (RESPA)
    A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
    Back to Top

    A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Realtors.
    Back to Top

    The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.
    Back to Top

    Paying off one loan with the proceeds from a new loan using the same property as security.
    Back to Top

    Revolving Liability
    A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods and services.
    Back to Top

    Secondary Mortgage Market
    Where existing mortgages are bought and sold.
    Back to Top

    The property that will be pledged as collateral for a loan.
    Back to Top

    Seller Carry-back
    An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See owner financing.
    Back to Top

    An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
    Back to Top

    Standard Payment Calculation
    The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
    Back to Top

    Step-Rate Mortgage
    A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.
    Back to Top

    Third-party Origination
    When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.
    Back to Top

    Total Expense Ratio
    Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
    Back to Top

    Treasury Index
    An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury's daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
    Back to Top

    A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
    Back to Top

    Two-step Mortgage
    An adjustable-rate mortgage (ARM) with one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term.
    Back to Top

    The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.
    Back to Top

    VA Mortgage
    A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.
    Back to Top

    "Wrap Around" Mortgage
    A mortgage that includes the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the "Wrap Around" mortgagee, who then forwards the payments on the first mortgage to the first mortgagee. These mortgages may not be allowed by the first mortgage holder, and if discovered, could be subject to a demand for full payment.
    Back to Top


                  Niki's Blog