This Glossary contains terms you should know to make your home buying experience easier.

We'd like to thank the Mortgage Bankers Association for their valuable assistance in providing the definitions for these terms.

Adjustable-Rate Mortgage (ARM)

An ARM will have interest rates and payments that change from time-to-time over the life of the loan. Depending on the type of ARM you have, your interest rate may increase gradually every few years until it reaches a preset ceiling. When you apply for an ARM, you'll be told how, when, and why the rates may change.

Agent

An agent is a person who legally represents another, called a principal, and from whom they derive express or implied authority. In other words, an agent is someone who acts on behalf of another person such as a real estate agent.

Amortization

Amortization is the process of paying off a loan through a series of periodic payments to a lender. The payments include two items: interest, which is what it costs you to borrow the money, and principal, which is the amount of money you borrowed.

Annual Percentage Rate (APR)

The APR, shown on your mortgage papers, is a standardized way of showing you the total cost of borrowing money. The APR is a combination of the interest rate charged by the creditor along with any fees they might charge. The fees are expressed in percentages and added to the actual interest rate to come up with the total APR.

Appraisal

An appraisal is a written estimate of the value of something. In real estate, it is a professional opinion of the market value of property (such as a home) as of a given date.

Back-End Debt-to-Income Ratio

Your debt-to-income ratio compares your monthly debt payments to your monthly income, and is a widely used measure of your creditworthiness. You compute your debt-to-income ratio by dividing your monthly minimum debt payments, excluding your rent or mortgage, by your monthly take-home pay.

Balloon Mortgage

This is a mortgage with a low interest rate that stays level for a short time (typically five to seven years), with a large, final "balloon payment" that you will either refinance or pay off in full.

Balloon Payment

This is a scheduled payment (usually the last payment) on a secured loan that is larger than any of the previous payments. Lenders do this to make the regular monthly payments more affordable. Carefully check any lending agreement to ensure you can afford to pay any balloon payments.

Buyer's Agent

A buyer's agent is someone who acts on behalf of, and represents a buyer is a real estate transaction. If you plan to buy a house, it may be wise for you to contact a real estate agent to act as your buyer's agent who will have your best interests in mind and to ensure you are treated fairly throughout the home buying process.

Cash Reserve

A lender's requirement that the borrower have, after settlement, at least two month's mortgage payment saved.

Closing

In real estate, closing is the delivery of a deed, financial adjustments, the signing of a note, and the disbursement of the funds necessary to consummate, or close, the sale or loan transaction. "Settlement" is another term for closing.

Closing Costs

These are costs outside a property's sales price that must be paid to cover the cost of the transaction, such as a loan origination fee, discount points, insurance fees, survey fees, and attorney's fees. Closing costs vary from location to location, but must be described to you when you submit your mortgage loan application.

Closing (Settlement) Statement

See: HUD-1 Statement.

Condominium

A form of homeownership in which the home buyer receives exclusive title to the interior space of a multi-unit structure (usually an apartment building or a townhouse), and shares title to the common areas of the residential property (for example, parking lots or a swimming pool).

Contract of Sale

A contract of sale is a contract between a buyer and seller of real property to convey title after certain conditions have been met and payments have been made.

Conventional Loan

A loan that is not guaranteed or insured by a government agency.

Co-operative Housing

In real estate, co-operative housing is a form of multiple ownership where a corporation or business trust entity holds title to a property (usually an apartment complex) and grants occupancy rights to shareholder tenants through proprietary leases.

Credit Bureau

A credit bureau or credit reporting agency is an organization that compiles the data contained in a consumer's credit report based on information provided by creditors, financial institutions, public records, and businesses.

Credit Bureau Scoring/Credit Rating

Your credit rating is a numerical index used by credit grantors to decide if you are a good credit risk. The information is based solely on your past credit performance and not on your race, gender, or other factors. When you get your credit report, you won't receive this rating. Remember, the credit bureaus don't extend credit; they provide credit information to prospective lenders.

Credit Limit

Your credit limit is the maximum amount of money that can be loaned to you or the maximum amount of credit you can use in an open-ended credit account.

Credit Report

A credit report is a record of your personal credit history. It is compiled by credit bureaus/credit reporting agencies based on information submitted by lenders and contained in public records. It contains very extensive information on your credit history and is probably the single most important document creditors use when deciding whether to grant you credit.