of Home-Buying Terms and Loan Products
Following is a glossary
of commonly used terms which are used in the mortgage financing
Adjustable Rate Mortgage
A mortgage whose interest rate changes over time based on an index,
plus a margin.
The gradual repayment of a mortgage by installments.
A timetable for repayment of a mortgage showing the amount of each
payment applied to interest and principal and the remaining balance.
Annual Percentage Rate (APR)
The total yearly cost of a mortgage stated as a percentage of the
loan amount; includes the base interest rate, primary mortgage insurance
and loan origination fee (points).
A professional opinion of the market value of a property.
An increase in the value of a house due to changes in market conditions
or other causes.
The valuation placed upon property by a public tax assessor for
purposes of taxation.
A mortgage that can be taken over ("assumed") by the buyer
when a home is sold.
A requirement of some lenders that buyers have sufficient cash remaining
after closing to make the first two mortgage payments.
A title that is free of liens and legal questions as to ownership
of the property.
The occasion where a sale is finalized; the buyer signs the mortgage,
and closing costs are paid. Also called "settlement".
Expenses (over and above the price of the property) incurred by
buyers and sellers in transferring ownership of a property. Also
called "settlement costs".
Community Home Buyer's Program
An alternative financing option that allows households of modest
means to qualify for mortgages using nontraditional credit histories,
33% housing-to-income and 38% debt-to-income ratios, and the waiver
of the usual two-payment cash reserve at closing.
A form of property ownership in which the homeowner holds title
to an individual dwelling unit plus an interest in common areas
of a multi-unit project.
A condition that must be met before a contract is legally binding.
Any mortgage that is not insured or guaranteed by the Federal Government.
An adjustable-rate mortgage that can be converted to a fixed-rate
mortgage under specified conditions.
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.
The legal document conveying title to the property.
A decline in the value of a property, the opposite of appreciation.
The part of the purchase price which the buyer pays in cash and
does not finance with a mortgage.
A deposit given to the seller to show that a prospective buyer is
serious about buying the house.
The difference between the market value of a property and the homeowner's
outstanding mortgage balance.
A loan based on the borrower's equity in his or her home.
The holding of documents and money by a neutral third party prior
to closing; also, an account held by the lender into which a homeowner
pays money for taxes and insurance.
A mortgage that is insured by the Federal Housing Administration.
The mortgage that has first claim in the event if a default.
A mortgage in which the interest rate does not change during the
entire term of the loan.
The process by which a mortgaged property may be sold when a mortgage
is in default.
Graduated Payment Mortgage
A mortgage that starts with low monthly payments that increase at
a predetermined rate.
Insurance to protect the homeowner and the lender against physical
damage to a property from fire, wind, vandalism or other hazards.
An insurance policy that combines liability coverage and hazard
The fee charged for borrowing money.
Interest Rate Cap
A provision of an ARM limiting how much interest rates may increase
per adjustment period. See also Lifetime Cap.
A provision of an ARM that limits the total increase in interest
rates over the life of the loan.
Loan-to-Value Ratio (LTV)
The relationship between the amount of a mortgage and the total
value of the property.
A written agreement guaranteeing the home buyer a specified interest
rate provided the loan is closed within a set period of time. The
lock-in also usually specifies the number if points to be paid at
The set percentage the lender adds to the index rate to determine
the interest rate of an ARM.
A legal document that pledges a property to the lender as security
for payment of a debt.
A company that originates mortgages exclusively for resale in the
A company that for a fee matches borrowers with lenders.
Mortgage Insurance Premium (MIP)
The fee paid by a borrower to FHA or a private insurer for mortgage
A legal document obligating a borrower to repay a loan at a stated
interest rate during a specified period of time; the agreement is
secured by a mortgage.
Payment terms under which the borrower's monthly payments do not
cover the interest due; as a result, the loan balance increases.
Notice of Default
A formal written notice to a borrower that a default has occurred
and that legal action may be taken.
A fee paid to the lender for processing a loan application; it is
stated as a percentage of the mortgage amount, or points.
A purchase in which the seller provides all or part of the financing.
A provision of some ARMs limiting how much a borrower's payment
may increase regardless of how much the interest rate increases;
may result in a negative amortization.
Stands for principal, interest, taxes and insurance - the components
of a monthly mortgage payment.
A one-time charge by the lender to increase the yield of the loan;
a point is one percent (1%) of the amount of the mortgage.
A fee charged to a borrower who pays off a loan before it is due.
The process of determining how much money a prospective home buyer
will be eligible to borrow before a loan is applied for.
The amount borrowed or remaining unpaid; also, that part of the
monthly payment that reduces the outstanding balance of the mortgage.
Private Mortgage Insurance (PMI)
Insurance provided by nongovernmental insurers that protects lenders
against loss if a borrower defaults.
Guidelines applied by lenders to determine how large a loan to grant
Real Estate Settlement Procedures Act
A consumer protection law that requires lenders to give borrowers
advance notice of closing costs.
The process of paying off one loan with the proceeds from a new
loan secured by the same property.
A mortgage that has rights that are subordinate to the rights of
the first mortgage holder.
A loan that is guaranteed by the State Veterans Administration.
It is typically well below market interest rates. Veterans fall
into two categories, disenfranchised or qualified. Each category
has its own qualifying guidelines.
A drawing showing the legal boundaries of a property.
Three/Two (3/2) Option
An alternative financing plan that enables households whose earnings
are no more than 115% of the median income in their regional area
to make a three percent down payment with their own funds, coupled
with a two percent gift from a relative or a two percent grant or
unsecured loan from a nonprofit or state or local government program.
A legal document establishing the right of ownership.
A company that specializes in insuring title to property.
Insurance to protect the lender (lender's policy) or the buyer (owner's
policy) against loss arising from disputes over ownership of a property.
A check of the title records to ensure that the seller is the legal
owner of the property and that there are no liens or other claims
A Federal law that requires lenders to fully disclose, in writing,
the terms and conditions of a mortgage, including the APR and other
The process of evaluating a loan application to determine the risk
involved for the lender.
A loan that is guaranteed by the Veterans Administration.
Wisconsin Housing and Economic Development Authority grants below-market
interest rates to qualified borrowers who make below county median