Real Estate and Mortgage Glossary
06/18/2018 Katy Herbst de Cortina
Buying a property can be stressful enough without having unfamiliar words thrown in too. Even if it's not your first mortgage, it can still be a confusing process. This glossary demystifies common words used in mortgage transactions.
- Ability to Repay (ATR) Rule:
- The ability-to-repay rule generally requires lenders to make a reasonable, good faith determination of a borrower's ability to repay the mortgage. This rule was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This rule requires lenders to collect and document information on your income and assets, and run employment verification and credit history checks.
- Adjustable-Rate Mortgage (ARM):
- Also referred to as a variable-rate mortgage, the interest rate fluctuates-or adjusts-over time to reflect market conditions. Learn more about adjustable rate mortgages.
- Mortgage value over a period of time, specifically the schedule for loan repayment. The percentage of the monthly mortgage payment going toward interest typically decreases while principal increases as time progresses.
- Annual Percentage Rate (APR):
- The annual rate charged for borrowing or earned through an investment, and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan.The APR includes fees or additional costs associated with the transaction (e.g., origination fees, closing costs, etc.) and it is a way of measuring the full cost a lender charges per year for a loan.
- An unbiased report on the value of a home in the fair market, performed by a trained and licensed individual.
- Measurable value-increase of a home or property due to market improvements and home renovations.
- Assessed Value:
- Value determined by local government accessors that's used to calculate property/real estate taxes.
- Assumable Mortgage:
- A mortgage-inclusive of interest rate-that can be transferred from a seller to a buyer.
- Balloon Mortgage:
- Short-term, high-risk loan with the potential to leave the borrower with a high loan balance at the end of the loan term. Some renew at current market rates, while others demand that the balloon payment is paid in full at the end of the term.
- Bridge Loan:
- Short-term loan-most common in commercial lending-that is used to quickly sell a home while pending, conventional real estate financing comes through.
- Buy Down:
- When a seller or lender contributes money to lower the initial interest rate on a home loan in an effort to make a sale appealing for the buyer.
- Buyer's Agent:
- A licensed real estate agent working on behalf of the homebuyer.
- Homeowners secure a new loan to replace the current mortgage, for more than the amount currently owed. The homeowner may then use the additional cash refinanced to pay off high interest debt or to make home improvements.
- Closing Agent:
- A closing agent performs the closing process, which includes fund disbursement, title insurance issuance, and deed recording.
- Closing Costs:
- Payments that cover the expenses and fees associated with finalizing a mortgage and completing a real estate transaction.
- Closing Disclosure (CD):
- The final documents that the borrower must read and agree to the terms, which include your rate, term, payment, etc.
- Closing Statement:
- Itemized list of closing costs in order to provide better transparency to the buyers and sellers regarding all fees and other costs.
- Person with good credit who agrees to share the responsibility of a home loan. A co-borrower is different from a cosigner in that a cosigner takes responsibility for the debt should the borrower default, but does not have ownership in the property.
- Combination Loan:
- Type of loan that combines an initial loan-often for new home construction-with a second, conventional home loan to replace the first.
- Commitment Letter:
- Letter from the lender to a borrower that officially states the terms of a loan.
- Comparable Sales (“Comps”):
- Similar home sales in an area, used to determine a home's appraised value.
- Conforming Loan:
- A Conforming Loan must meet specific criteria that allows Fannie Mae and Freddie Mac to purchase the loan, unlike Non-Conforming Loans, where Fannie Mae and Freddie Mac cannot purchase these loans.
- Clause in the home purchase contract stating that if the prospective buyer cannot get a mortgage-or sell the current home to obtain purchase funds-within a fixed period of time with the specified terms, the buyer can cancel the deal and get back the deposit.
- Construction Mortgage (Construction Loan):
- Type of loan that provides financing during new home construction. Upon completion of construction, the loan can be converted to permanent financing or is refinanced.
- Credit Score:
- Statistical number that evaluates a consumer's creditworthiness, based on the consumer's lending and payment history. Lenders use credit scores to indicate the likelihood that an individual will repay a debt.
- Debt-to-Income (DTI) Ratio:
- Calculation for which the lender compares monthly debts and payments to pre-tax monthly income. The income amount is divided into the expense amount, resulting in a percentage.
- Legal, official, and publicly available document establishing property ownership.
- Deed of Trust:
- Security measure for which you pledge your home as security for a loan. If you default on the loan, your lender can foreclose on the home.
- The point when a borrower gets behind on making regular, consecutive loan payments. If default continues, the property may move into foreclosure.
- Measurable loss in home or property value, often driven by a poor economy or property damage.
- Discount Points (“Points”):
- Percentage-based fee, essentially prepaid interest, that the buyer pays at closing. Each point is equal to 1% of your total loan amount, and it's a way to lower your monthly mortgage payment.
- Down Payment:
- Amount of a home's purchase price that the buyer pays at the time of purchase. Lenders typically require a specific down payment in order for a borrower to qualify for a mortgage, though these amounts vary by loan type.
- Energy Efficient Mortgage (EEM):
- Also known as Green Mortgages, allow a borrower to finance energy-saving renovations as part of their home loan during the original purchase or the refinancing of an existing home.
- Enterprise-Paid Mortgage Insurance (EPMI):
- An alternative to traditional mortgage insurance, paid by an approved insurance provider, like a government-sponsored enterprise (GSE) for borrowers with LTVs greater than 80%.
- Earnest Money:
- Buyer's deposit made to a seller as a sign of good faith. Typically about 1-2% of the property's purchase price, this money serves as a sign of ” good faith ” or commitment to following through with the sales process.
- Measurable value of a home or property beyond what's owed on a loan, which homeowners can often borrow against.
- Escrow, Impound (see also Impound Account):
- A financial account set up by a lender to collect property taxes, homeowner's insurance, and mortgage insurance. Borrowers make monthly payments, and the lender then pays those bills on the buyer's behalf.
- Escrow, Pre-closing:
- Financial account held by a third party entity separate from both the buyer and the seller. It contains all funds, instructions, and paperwork necessary for the impending real estate sale, including funds for the down payment and the deed to the home.
- Fannie Mae:
- Fannie Mae is a government-sponsored enterprise (GSE) that buys loans from lenders, from large national banks to small community lenders and credit unions, allowing lenders to reinvest their assets into more lending. The goal of Fannie Mae is to make more affordable mortgages available to low- and middle-income buyers.
- Fair-Market Value:
- Amount a property is worth in the current market.
- Federal Housing Administration (FHA):
- Provides mortgage insurance on loans made by FHA-approved lenders in the U.S., as well as U.S. territories.
- Fee Simple:
- Most common type of real estate ownership, typically through a mortgage. The owner is entitled to all property rights, including the land and its buildings. The owner may sell, rent, or transfer the property, as desired, within the law.
- Fixed-Rate Mortgage:
- Most common type of home loan, a fixed-rate mortgage ensures an unchanging interest rate over the term of the loan. Learn more about fixed-rate mortgages.
- Flood Certification:
- Document that states the flood zone status of a property and informs the lender if flood insurance will be required to obtain the property. The federal government determines whether a property is in a flood zone.
- Act of taking possession of a property when a borrower falls behind on mortgage payments. This is the final action a mortgage company will take to recover its losses.
- Freddie Mac:
- Freddie Mac is a government-sponsored enterprise (GSE) that was established to further increase the availability of mortgages to home buyers. Like Fannie Mae, Freddie Mac allows for mortgages to be bundled together and sold as investments on the secondary mortgage market.
- Gift Funds:
- Money given to a homebuyer to put toward their mortgage, typically towards the down payment or closing costs. The gift must be clearly documented and cannot be a “loan in disguise”. Generally, the donor must be a relative, spouse or domestic partner. Requirements depend on the specifics of your transaction.
- Government Sponsored Enterprise (GSE):
- Created by Congress, these are quasi-governmental financial entities established to help improve the flow of and reduce the cost of credit in the housing market. Examples of GSEs are Freddie Mac, Fannie Mae, and Ginnie Mae.
- Green Mortgages:
- Also known as Energy Efficient Mortgages or EEMs, are used to make environmentally-friendly updates to a home. The cost of the upgrades can be rolled into the borrower's home loan at the time of purchase or as part of a refinance.
- Ginnie Mae:
- The Government National Mortgage Association, otherwise known as Ginnie Mae, guarantees the timely payment of mortgage bonds that include federally insured or guaranteed loans, such as FHA mortgages.
- Government-Backed Mortgage:
- A mortgage “backed” by the government to guarantee repayment of the loan to the bank if the borrower defaults on the loan. FHA and VA loans are common government-backed mortgages. Learn more about various government-backed mortgages.
- Home Equity Loan:
- This type of loan in most cases is a second mortgage on top of your current mortgage and is typically used to take out a lump sum of cash for a larger expense, such as a remodel or addition, consolidating debt or paying college tuition. If you have an existing mortgage, you will need to make a second, separate payment on the Home Equity Loan and the rate will most likely be higher than the rate on your existing mortgage.
- Home Equity Line of Credit (HELOC):
- A revolving credit line, backed by the equity in your home that allows you to borrow against your home for large purchases. The interest rate on a HELOC is variable.
- High-Risk Loan:
- When a loan falls outside the normal parameters of a risk that lenders usually take when providing a loan. This could include a borrower who has a low credit score.
- Home Affordable Modification Program (HAMP):
- This was a federal program developed to help homeowners with underwater mortgages as an easier means of obtaining a loan modification to prevent default or foreclosure. HAMP expired December 31, 2018. Although this program has expired, Pennymac still maintains robust Home Retention Programs.
- Homeowner's Association (HOA):
- Often associated with condos, townhomes, and subdivisions, an HOA is a panel that manages the upkeep of common areas, collects fees, and enforces rules on standard property appearance and maintenance.
- Homeowner's Insurance:
- Insurance policy that protects you from incurring costs related to damage to your home, such as a fire. Lenders typically require the first year to be paid in full at closing.
- Home Price Index:
- Tool that measures changes in single-family home prices across a certain market.
- Home Warranty:
- Policy that helps cover the costs of systems maintenance or malfunctions, such as plumbing or electrical. This ensures that the repair or replacement costs won't have to come completely out of the buyer's pocket. The plan is usually initiated at closing.
- House Flipping:
- Strategy for quick-profit gains by means of purchasing a property at a discount price, making repairs or updates, and then selling the property at a higher price in a short amount of time.
- Housing Expense Ratio:
- Also referred to as a Front-End Ratio, this figure compares a potential borrower's pre-tax income to projected expenses for housing, such as insurance, property taxes, and HOA fees.
- Housing and Urban Development (HUD):
- The Department of Housing and Urban Development is part of the U.S. government. It oversees many aspects of real estate at the national level, including loan insurance (via the FHA), housing subsidies, and fair housing law enforcement.
- Impound Account (see also Escrow, Impound):
- Also known as an escrow account, this is the account the mortgage company maintains to collect insurance and property taxes on your home. Learn more about impound accounts.
- An inspection is performed before the property purchase to discover any property problems, such as structural problems or basement leaks. Many lenders require a home inspection before they approve a loan.
- Interest Rate:
- Portion of a loan that is charged as interest to the borrower, typically as an annual percentage of the loan outstanding.
- Investment Property:
- Property-land or building-held to earn rental money for a return on the investment, and likely appreciation. Learn more about investing in real estate.
- Interest Rate Reduction Refinance Loan (IRRRL):
- Program available to homeowners with a VA-guaranteed home loan. Also known as “VA Streamline Refinancing,” it offers no credit qualifications and requires less documentation. A VA IRRRL loan also waives the mortgage insurance requirement, regardless of loan-to-value ratio.
- Joint Ownership:
- Two or more people co-owning a property, not necessarily in equal shares. If one dies, the other owner(s) absorb that share as opposed to the deceased's heirs taking on that share.
- Joint Tenancy:
- Two or more people co-owning a property in equal shares. If one dies, the other owner(s) absorb that share as opposed to the deceased's heirs taking on that share.
- Jumbo Mortgage:
- Non-conforming mortgage used to buy a higher-priced property. Learn more about jumbo mortgages.
- Junior Mortgage:
- Mortgage considered lower in legal priority to the senior, or first, mortgage. Sometimes referred to as a “second mortgage,” a junior mortgage could actually be the third or fourth mortgage.
- Lender Fees:
- Fees that the mortgage lender charges for funding and processing the loan. These are in addition to the loan processing and downpayment costs.
- Legal stake in the ownership of a property, often obtained by a creditor, to ensure payment of debt, taxes, or other obligations. The most common lien is the mortgage itself, placed by the lender until the loan is paid off.
- Loan Estimate (LE):
- Formerly known as “Good Faith Estimate (GFE)”, a document that includes a breakdown of the approximate payments due at the closing of a mortgage loan. It helps borrowers compare costs of loans from different lenders.
- Loan Modification:
- Permanent change in the terms of an existing loan, resulting in a more affordable monthly payment for a borrower in default or in imminent danger of default.
- Loan Officer:
- Also known as a mortgage broker, this is a professional who helps you shop for and compare loan products from different lenders. Mortgage brokers have fiduciary duties to clients and must act with your best interest in mind.
- Loan-to-Value (LTV) Ratio:
- Dollar amount of the loan as compared to the value of the property being purchased.
- Legal agreement where a bank or other creditor lends money at interest in exchange for the title of your property until the repayment of the debt.
- Mortgage Insurance Premium (MIP) (see also Private Mortgage Insurance (PMI)):
- Insurance policy, for which you pay a monthly premium, that protects your lender if you fall behind on your mortgage payments or end up in foreclosure. Typically for buyers who have less than 20% down payment on a conventional mortgage loan, or have a USDA or an FHA loan.
- Mortgage Lender (Mortgage Originator):
- Company, such as Pennymac, that loans money to a buyer to purchase a property. In exchange, the borrower must pay a certain interest amount for the term of the loan.
- Mortgage Payment:
- Monthly payment on a mortgage loan, which typically includes principal, interest, property taxes, and homeowners insurance.
- Mortgage Servicing Disclosure Statement:
- Disclosure that explains whether the lender intends to service the loan or transfer servicing to another company after the closing of the sale.
- Multiple Listing Service (MLS):
- An organization that compiles information about homes listed for sale by real estate brokers, primarily to facilitate sales agreements and appraisals.
- Multi-Family Residence:
- Property classification for any residential structure that houses more than one family. Apartment buildings, duplexes, and condominiums are all examples.
- Net Income:
- Amount of income left after taxes and deductions.New Construction
- New Construction:
- Newly built home that has not been previously lived in.
- Non-conforming Loan:
- Pool of loans that does not adhere to Fannie Mae and Freddie Mac standards, such as a jumbo loan.
- Notice of Default (NOD):
- Legal notice given to the borrower that the lender is beginning foreclosure proceedings. In most states, there is a period of time between the Notice of Default and the bank sale where the borrower is allowed to cure the default and bring the loan current.
- Notice of Sale (NOS):
- Legal notice given to the borrower that the lender is beginning foreclosure proceedings. In most states, there is a period of time between the Notice of Default and the bank sale where the borrower is allowed to cure the default and bring the loan current.
- Offer Acceptance:
- When a seller accepts a buyer's offer to purchase a home, whether verbally or in writing.
- Prime rate:
- Also known as the prime lending rate. This rate is generally determined by the federal funds rate, and is used by banks and mortgage companies as a benchmark to set their own interest rates on loans.
- Pending, Showing for Backup:
- Property owners taking backup offers in case the first offer falls through.
- Pending, Subject to Lender Approval:
- Seller accepted an offer but is waiting to see if the buyer's bank will agree to it. If it's denied, the house could return to the market.
- PITI (Principal, Interest, Taxes, Insurance):
- Components of a monthly mortgage payment.
- Lender guarantees to loan a certain amount of money, as long as certain conditions and the home meet the lender's requirements.
- Initial step in the mortgage process of the lender assessing your overall financial picture to then give you an idea of the mortgage amount for which you qualify.
- Portion of the monthly mortgage payment that goes toward paying down a loan's balance.
- Private Mortgage Insurance (PMI) (see also Mortgage Insurance Premium (MIP)):
- Insurance policy, for which you pay a monthly premium, that protects your lender if you fall behind on your mortgage payments or end up in foreclosure. Typically for buyers who have less than 20% down payment on a conventional mortgage loan.
- Property Taxes:
- Charge imposed by the local government to fund services such as police, public schools, and road maintenance.
- Purchase Agreement:
- Legal document signed by the seller and buyer stating the terms and conditions under which the property will be sold.
- Colorless, odorless, radioactive gas that seeps up from the earth and can leak into homes. Radon testing is often encouraged before purchasing a property.
- Rate Lock:
- Guarantee that the lender will lock in at a certain interest rate until closing to protect you from short-term fluctuations in the mortgage market. The rate lock has a deadline-typically 60 days or less-and usually costs a fee.
- Real Estate Agent:
- Person licensed by a state to negotiate and transact the rental, sale, or purchase of real estate property.
- Real Estate Broker:
- Person with a higher level real estate license and more training than a real estate agent. A broker is licensed by the state to operate a real estate business.
- Real estate broker or real estate agent who is a member of the National Association of Realtors® (NAR). Not all real estate agents are Realtors®, which is a term given only to members of the National Association of Realtors®.
- Real-Estate Owned (REO):
- Foreclosed property where ownership has transferred to the bank or lender after failing to sell at an auction.
- Real Estate Settlement Procedures Act (RESPA):
- A law requiring lenders to provide certain disclosures, such as a Mortgage Servicing Disclosure Statement, during the mortgage process.
- Rebate Points:
- Although this will result in a higher interest rate, borrowers can take advantage of rebate points, otherwise known as negative points, to lower their closing costs.
- Paying off one mortgage with a new loan secured by the same property, usually to obtain more favorable terms. Learn more about refinancing.
- The money lenders require you to set aside for unexpected repairs and the mortgage payment.
- Seller's Agent:
- The real estate agent or Realtor® who represents the interests of the home's seller during the sale of a home or property.
- Senior loan:
- When there are two mortgages on a property, the first lien is the primary or senior mortgage. Typically, in foreclosure situations, the repayment of the senior loan will take precedence over the subsequent, junior loans.
- Subordination clause:
- Used in a second or third mortgage, this clause protects the interest of the original lender by prioritizing the repayment of loans chronologically (i.e., the first lien first, and so on).
- Subordinate, second or junior mortgage:
- A mortgage subordinate in lien position to a first or prior (senior) mortgage. Subordinate mortgages are separate from a senior mortgage and are repaid as such. Typically if a mortgage is foreclosed, the senior mortgage will be paid down first.
- Second Mortgage:
- Mortgage that allows you to borrow against the value of your home. It's used when buyers need to set money aside for a specific purpose, such as a down payment.
- Seller's Property Disclosure:
- Form required by state law and completed by the seller. It discloses flaws or latent defects in the property that the seller is aware of that could negatively affect the property's value.
- Sheriff's Sale:
- Public auction of a property seized most often in foreclosure, but sometimes for judgment liens or tax liens.
- Short Sale:
- Lender allows the owner to sell the property for less than the amount owed on the loan.
- Streamline Refinancing:
- These programs typically let borrowers bypass many traditional mortgage requirements by offering minimal credit scoring requirements, no new appraisal, easier income and asset verification, and limited paperwork.
- Tax Deduction:
- A deduction that may help lower your tax liability. Tax deductions include certain incurred expenses throughout the year, such as the interest paid on your home loan. You typically can choose to itemize your deductions or take the standard deduction. For 2018, the standard deduction is $12,000 for single filers and $24,000 for married couples filing jointly.
- Length of time, usually in years, over which a mortgage is repaid.
- Legal document granting the right of ownership to a property.
- Title Search:
- Search of public records to ensure that the seller is the legal owner and to identify if the current title is free of liens.
- Title Insurance:
- Form of indemnity insurance that protects a lender's or owner's interest in property from unexpected or fraudulent claims of ownership.
- Total Interest Percentage (TIP):
- Total interest paid over the loan term. This is not the same as your interest rate.
- Truth in Lending Act (TILA):
- A law that requires lenders to post the annual percentage rate in a disclosure, as well as any interest rate advertisements, to increase lender transparency and make loan comparisons easier for the borrower.
- Under Contract:
- Seller has an agreed-upon contract with the potential buyer, but it does not guarantee the sale of the property.
- Process where a lender analyzes your finances to either approve or deny your loan.
- Underwater Mortgage:
- Mortgage in which the LTV ratio is greater than 100%. In other words, a mortgage in which the property value has depreciated below the original loan amount.
- Upfront Costs:
- Costs to buy your home, aside from the mortgage. These include the down payment, earnest money, and closing costs.
- U.S. Department of Agriculture (USDA) Loan:
- Zero-down-payment mortgages for rural and suburban homebuyers issued through the USDA Rural Development Guaranteed Housing Loan Program sponsored by the U.S. Department of Agriculture.
- Veteran Affairs (VA) Loan:
- U.S. Department of Veteran Affairs' loan for military service members. These loans require little down payment and no mortgage insurance, and interest rates are often below market.
- Withdrawn Property:
- Property that is removed from the realty market for reasons such as the sellers decided to not move or did not receive any appealing offers.
Need Further Definition?
We've provided definitions, but many of these terms and concepts are more complex than a few sentences allow for. If you want to better understand the entries above, don't hesitate to contact a Pennymac Loan Officer.
PennyMac Loan Services, LLC does not provide tax, legal or accounting advice. This website has been prepared for general informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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