State of Minnesota
More about
Attorney General
Lori Swanson


Minnesota Attorney General's Office

1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101

(651) 296-3353
(800) 657-3787

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Housing

Home Buyer's Handbook

GLOSSARY OF TERMS

Addenda (addendum, singular):

Supplemental documents added on to the purchase agreement that become part of the legally binding document.

Adjustable Rate Mortgage (ARM):

A loan in which the interest rate fluctuates during the term, based on an index to which the interest rate is tied.

Amortization Chart:

A chart that breaks out the principal and interest you pay on a loan each year, over the term of the loan.

Annual Percentage Rate (APR):

Expressed as an annual rate, this is really the cost of the loan. It includes the interest rate, points on a loan, the loan origination fee, and all other charges made by the lender.

Arbitration Agreement:

When a seller and buyer agree to settle all disputes about the property out of court. If both parties sign, they agree to have an independent arbitrator decide disputes.

Assessments:

City taxes homeowners must pay periodically when the city decides to make improvements to city property.

Association Dues:

The monthly payment condominium and townhouse owners must make for upkeep and management of shared property. The association is made up of condominium or townhouse owners.

Assumable:

Describes a loan that a buyer can arrange to take over from the seller.

Buyer's Broker:

An agent who works on behalf of a buyer.

Closing Costs:

Costs involved in transferring ownership of a home. (See Explanation Of Closing Costs in Appendix E.)

Commitment Letter:

The letter your lender may send you stating that your loan is approved and describing the terms of the loan.

Contingency:

A clause that is added to a purchase agreement stating that certain conditions must be met within a specified time period for the purchase agreement to be valid.

Contract for Deed:

Some owners may choose to offer you financing, consequently you make your monthly payments to the owner.

Conventional Loans:

Home loans not backed by the government.

Credit Score:

The rating a credit reporting agency gives you based on your credit report.

Default:

Failure to make loan payments when they are due.

Down Payment:

The amount of the purchase price you pay up front to the seller when you buy a home. The amount depends on the loan you are taking out, but is usually a minimum of 3 percent of the total loan amount.

Earnest money:

"Good faith" money usually given to the agent when you make a bid on a home.

Equity:

The portion of the home's value that you own, free and clear of any mortgage or lien.

Escrow:

Lenders often ask homeowners to keep up to two months of future tax and insurance payments in a bank account called an escrow account.

FHA Loans:

Home loans made by the Federal Housing Administration that have low down payments and allow you to borrow a larger amount than you would be allowed to borrow in a conventional loan.

Fair Credit Reporting Act:

A federal law that gives citizens the right to challenge the accuracy of incorrect information in their credit reports.

Fixed Rate Loan:

A loan with a constant interest rate over the term of the loan.

For Sale By Owner (“FSBO”):

FSBO, pronounced “fisbo” is a home that is offered for sale by the owner without the benefit of a real estate professional.

Good Faith Estimate:

The disclosure form on which your lender estimates all closing costs. A lender must give you this form within three days after you apply for a loan.

Gross Income:

Your income before you pay taxes.

HUD-1 Form:

A settlement statement listing all the closing costs. The U.S. Department of Housing and Urban Development requires that a closer make this statement available to a buyer one business day before the closing.

Homeowner's Insurance:

Also called hazard insurance. This is insurance home buyers must purchase to protect the investment they and their lender have in the home.

Homestead Taxes:

Property taxes paid by live-in property owners.

Interest:

A lender's charge for the loan.

Loan Origination Fee:

This is a fee you pay a lender for handling your loan application.

Loan Processing:

A lender’s analysis of your ability to qualify for a loan. The analysis involves weighing your income, credit report and financial records against the value of the home you want to buy.

Lock-In Agreement:

An agreement you can make with your lender to guarantee you the interest rate your lender quotes for your loan. You can lock in a rate when you apply for a loan or at any time before the closing.

Long-term debt:

Any debt you will continue to owe for six months or more.

Mortgage Discount Points:

Prepaid interest on a loan. One point equals 1 percent of your total loan.

Mortgage Insurance Premium (MIP):

An insurance premium the buyer is required to pay for an FHA loan. The cost is 2 or 21/4 percent of the loan, depending on the term. This can be paid as part of monthly loan payments.

Multiple Listing Service (MLS):

A service that real estate agents subscribe to that lists homes for sale and homes that have sold by neighborhood, price and features.

Non-homestead Taxes:

Taxes paid by landlords who rent their property, or by owners who do not use the property as their primary residence.

PITI:

The monthly loan payment which includes "principal, interest, taxes and insurance."

Prepayment Penalty:

The payment of a penalty due to the early payoff of the mortgage. Terms of prepayment penalties may vary.

Prime Mortgage:

A prime mortgage is the highest grade of mortgage you can qualify for — grade "A."

Principal:

The total amount you are borrowing to pay for a home. This is usually the purchase price minus the down payment.

Private Mortgage Insurance (PMI):

Insurance you pay when you take out a conventional loan. Most lenders charge this if you make less than a 20 percent down payment on a home. It protects the lender from losing money owed on a loan if a buyer defaults on the loan, and is cancelable under Minnesota state law after two years if certain requirements are met.

Property Tax Adjustment:

An adjustment made to reimburse the seller for taxes already paid for the year.

Purchase Agreement:

The legally-binding document that lists all the terms of a home sale including contingencies.

Real Estate Settlement Procedures Act (RESPA):

The federal law that regulates lenders' closing or settlement practices.

Re-issue Credit:

A savings on the cost of title insurance, when the buyer uses the same title company that the previous owner used. Because the company is “re-issuing” the insurance, it can offer a lower rate.

Sub-prime Mortgage:

A sub prime mortgage is a grade "B" or lower and has a higher rate of interest than a prime mortgage.

Subagent:

A seller's agent who may bring a potential buyer to a home, but owes his or her loyalty to the seller.

Title insurance:

The insurance you pay to protect your lender against claims on the title to your property. As a buyer, you also can take out title insurance to protect yourself against claims.

Truth-in-Housing Report:

A report the seller completes that discloses the condition of the house.

Truth-in-Lending Disclosure Statement:

A statement your lender must give you informing you of all the fees and costs of a loan using the annual percentage rate (APR).

Underwriting:

Risk analysis conducted by a lender to decide whether or not to approve you for a loan.

Veterans Administration loan (VA loan):

Low interest, no down payment loans available to those who have served in the U.S. military.

Next Page: A Buyer's Schedule