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Adjustable-rate mortgage (ARM): A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. All ARMs are tied to indexes.
Ad Valorem: Term meaning "According to Value" and refers to the value of property used in the computation of taxes.
Amortization: A loan payment consists of a portion that will be applied to pay the accruing interest on a loan, with the remainder being applied to the principal. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified time.
Application: The form used to apply for a mortgage loan, containing information about a borrower's income, savings, assets, debts, etc.
Appraisal: A written justification of the price paid for a property, primarily based on an analysis of comparable sales of similar homes nearby.
Appraised value: An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property. Since an appraisal is based primarily on comparable sales, and the most recent sale is the one on the property in question, the appraisal usually comes out at the purchase price.
Appraiser: An individual qualified by education, training, and experience to estimate the value of real property and personal property. Although some appraisers work directly for mortgage lenders, most are independent.
Appreciation: The increase in the value of a property due to changes in market conditions, inflation, or other causes.
Assessed value: The valuation placed on property by a public tax assessor for purposes of taxation.
Closing: This has different meanings in different states. In some states a real estate transaction is not considered "closed" until the documents record at the local recorders office. In others, the "closing" is a meeting where all of the documents are signed and money changes hands.
Closing costs: Closing costs are separated into what are called "non-recurring closing costs" and "pre-paid items". Non-recurring closing costs are any items which are paid just once as a result of buying the property or obtaining a loan. "Pre-paids" are items which recur over time, such as property taxes and homeowners insurance. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate which must be issued to the borrower within three days of receiving a home loan application.
Closing Statement: A statement of receipts and disbursements in a real estate property transaction. The listing broker furnishes a closing statement to the seller. The selling broker furnishes a closing statement to the buyer.
Convertible ARM: An adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-rate mortgage within a specific time.
Credit History: A record of an individual's repayment of debt. Credit histories are reviewed by mortgage lenders as one of the underwriting criteria in determining credit risk.
Credit Report: A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.
Deposit: A sum of money given in advance of a larger amount being expected in the future. Often called an "earnest money deposit" in real estate.
Down Payment: The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
Equity: A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.
Escrow: An item of value, money or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the earnest money deposit is put into escrow until delivered to the seller when the transaction is closed.
Escrow Account: Once a purchase transaction is closed, a buyer may establish an escrow account or impound account with a lender. The monthly payment in such cases includes an amount above what would be required for paying thr principal and interest. The extra money is held in the escrow account for the payment of items like property taxes and homeowner's insurance when they come due. The lender pays such items direct to the supplier.
Fair Market Value: The highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept. The price which the market would bring, over a reasonable period of time, for a property for sale or lease.
HUD-1 Settlement Statement: A document that provides an itemized listing of the funds that were paid at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow (impound) amounts. Each type of expense goes on a specific numbered line on the sheet. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing. It is called a HUD-1 because the form is printed by the Department of Housing and Urban Development (HUD). The HUD-1 statement is also known as the "closing statement" or "settlement sheet."
Lender: A term that can refer to the institution making the loan or to the individual representing the firm. Loan officers are often referred to as "lenders."
Loan: A sum of borrowed money (principal) that is generally repaid with interest.
Loan officer: Also referred to by a variety of other terms such as lender, loan representative, loan "rep," account executive, and others. The loan officer serves several functions and has various responsibilities: they solicit loans, they serve as the representative of the lending institution, and they represent the borrower to the lending institution.
Loan origination: How a lender refers to the process of obtaining new loans.
Loan-to-value: The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower).
Lock-in: An agreement in which the lender guarantees a specified interest rate for a certain amount of time at a certain cost.
Lock-In Period: The time period during which the lender has guaranteed an interest rate to a borrower.
Mortgage: A legal document that pledges a property to the lender as security for payment of a debt. Instead of mortgages, some states use First Trust Deeds.
Point: A point is one (1) percent of the amount of the mortgage.
Pre-approval: A loosely used term which is generally taken to mean that a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved. A pre-approval is usually done at a certain loan amount and makes assumptions about the interest rate that will actually be in effect at the time the loan is actually made, as well as estimates for the amount that will be paid for property taxes, insurance and others. A pre-approval applies only to the borrower. Once a property is chosen, it must also meet the underwriting guidelines of the lender. Contrast with prequalification.
Pre-Qualification: This usually refers to the loan officer's written opinion of the ability of a borrower to qualify for a home loan, after the loan officer has made inquiries about debt, income, and savings. The information provided to the loan officer may have been presented verbally or in the form of documentation, and the loan officer may or may not have reviewed a credit report on the borrower.
Principal: The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
Rate Lock: A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time at a specific cost.
1031 Exchange: A 1031 tax exchange is primarily used for investment properties. The 1031 allows a person to re-invest the money profited from a sale into another property of like kind without paying capital gains taxes.
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