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A provision in a mortgage that gives the lender the right to demand payment of the entire principal balance if a monthly payment is missed.
An offeree’s consent to enter into a contract and be bound by the terms of the offer.
Additional Principal Payment
A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining balance on the loan.
Adjustable-Rate Mortgage (ARM)
A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.
The original cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
The date on which the interest rate changes for an adjustable-rate mortgage (ARM).
The period that elapses between the adjustment dates for an adjustable-rate mortgage (ARM).
A person appointed by a probate court to administer the estate of a person who died intestate.
As part of the closing process, you’re likely to sign numerous affidavits. You may be required, for example, to sign an affidavit of occupancy. It states that you will use the property as a principal residence. Or, you and the seller may have to sign an affidavit stating all of the improvements to the property required in the sales contract were completed before closing. Your lender can provide additional information regarding any of these documents you will sign.
A detailed analysis of your ability to afford the purchase of a home. An affordability analysis takes into consideration your income, liabilities, and available funds, along with the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that you might expect to pay.
A feature of real property that enhances its attractiveness and increases the occupant’s or user’s satisfaction although the feature is not essential to the property’s use. Natural amenities include a pleasant or desirable location near water, scenic views of the surrounding area, etc. Human-made amenities include swimming pools, tennis courts, community buildings, and other recreational facilities.
The gradual repayment of a mortgage loan by installments.
A timetable for payment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made.
The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months.
To repay a mortgage with regular payments that cover both principal and interest.
Annual Mortgagor Statement
A report sent to the mortgagor each year. The report shows how much was paid in taxes and interest during the year, as well as the remaining mortgage loan balance at the end of the year.
Annual Percentage Rate (APR)
The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance, and loan origination fee (points).
An amount paid yearly or at other regular intervals, often on a guaranteed dollar basis.
A form used to apply for a mortgage loan and to record pertinent information concerning a prospective mortgagor and the proposed security. * Also see “Loan Application” entry
A written analysis of the estimated value of a property prepared by a qualified appraiser. Contrast with home inspection.
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
A person qualified by education, training, and experience to estimate the value of real property and personal property.
An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.
The valuation placed on property by a public tax assessor for purposes of taxation.
The process of placing a value on property for the strict purpose of taxation. May also refer to a levy against property for a special purpose, such as a sewer assessment.
The public record of taxable property.
A public official who establishes the value of a property for taxation purposes.
Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).
The transfer of a mortgage from one person to another.
A mortgage that can be taken over (“assumed”) by the buyer when a home is sold. A provision in an assumable mortgage allows a buyer to assume responsibility for the mortgage from the seller. The loan does not need to be paid in full by the original borrower upon the sale or transfer of the property.
The transfer of the seller’s existing mortgage to the buyer. * See also “Assumable Mortgage” entry
A financial statement that shows assets, liabilities, and net worth as of a specific date.
A mortgage that has level monthly payments that will amortize it over a stated term but that provides for a lump sum payment to be due at the end of an earlier specified term.
The final lump sum payment that is made at the maturity date of a balloon mortgage.
A person, firm, or corporation that, through a court proceeding, is relieved from the payment of all debts after the surrender of all assets to a court-appointed trustee.
A proceeding in a federal court in which a debtor who owes more than his or her assets can relieve the debts by transferring his or her assets to a trustee.
Income before taxes are deducted.
The person designated to receive the income from a trust, estate, or a deed of trust.
To transfer personal property through a will.
An improvement that increases property value as distinguished from repairs or replacements that simply maintain value.
Bill of Sale
A written document that transfers title to personal property.
A preliminary agreement, secured by the payment of an earnest money deposit, under which a buyer offers to purchase real estate.
Your lender will probably tell you that a biweekly mortgage is structured just like a traditional fixed-rate, level-payment, fully amortizing mortgage. However, you make your payments every 14 days instead of once a month. The monthly payment is split in half, resulting in the same total monthly mortgage, but the resulting 26 and sometimes 27 biweekly payments a year translate into 13 monthly payments, or one extra monthly payment per year. Borrowers can qualify for a 30-year monthly payment amount, but get a loan that pays off in approximately 22 years at current interest rates. At higher rates, the actual term declines. If you are looking to build up equity in your home faster without the higher mortgage payments that come with a shorter-term mortgage, you may want to consider the biweekly mortgage. Payments can be deducted from your bank account and scheduled to coincide with your payroll deposits to simplify budgeting. Lenders may charge an initial set-up fee to automatically debit your checking account.
Biweekly Payment Mortgage
A mortgage that requires payments to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment that would be required if the loan were a standard 30-year fixed-rate mortgage, and they are usually drafted from the borrower’s bank account. The result for the borrower is substantial savings in interest.
Blanket Insurance Policy
A single policy that covers more than one piece of property (or more than one person).
The mortgage that is secured by a cooperative project, as opposed to the share loans on individual units within the project.
In good faith, without fraud.
An interest-bearing certificate of debt with a maturity date. An obligation of a government or business corporation. A real estate bond is a written obligation usually secured by a mortgage or a deed of trust.
A violation of any legal obligation.
A form of second trust that is collateralized by the borrower’s present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as “swing loan.”
A person who, for a commission or a fee, brings parties together and assists in negotiating contracts between them.
A detailed plan of income and expenses expected over a certain period of time. A budget can provide guidelines for managing future investments and expenses.
A category of income or expense data that you can use in a budget. You can also define your own budget categories and add them to some or all of the budgets you create. “Rent” is an example of an expense category. “Salary” is a typical income category.
Local regulations that control the design, construction, and materials used in construction. Building codes are based on safety and health standards.
An account in which funds are held so that they can be applied as part of the monthly mortgage payment as each payment comes due during the period that an interest rate buydown plan is in effect.
A temporary buydown is a mortgage on which an initial lump sum payment is made by any party to reduce a borrower’s monthly payments during the first few years of a mortgage. A permanent buydown reduces the interest rate over the entire life of a mortgage.
A provision in the mortgage that gives the mortgagee the right to call the mortgage due and payable at the end of a specified period for whatever reason.
A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease. See lifetime payment cap, lifetime rate cap, periodic payment cap, and periodic rate cap.
Lenders will want to know if you can repay the mortgage debt you incur — this is known as your capacity. Lenders will base their evaluation on employment information, how long you’ve worked, and how much you are paid. Lenders will also review your expenses and any other debt obligations you have. This means they’ll want to know how many dependents you have and whether you pay any alimony or child support, for example.
The cost of an improvement made to extend the useful life of a property or to add to its value.
Any structure or component erected as a permanent improvement to real property that adds to its value and useful life.
A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.
CD-Indexed (Certificate of Deposit) ARMs
The Certificate of Deposit index represents the weekly average of secondary market interest rates on six-month negotiable CDs. The initial interest rate and payments adjust every six months after an initial six-month period. ARMs with this index typically come with a per-adjustment cap of 1 percent and a lifetime rate cap of 6 percent.
Certificate of Deposit
A document written by a bank or other financial institution that is evidence of a deposit, with the issuer’s promise to return the deposit plus earnings at a specified interest rate within a specified time period. * Also see “Adjustable-Rate Mortgage” entry
Certificate of Deposit Index
An index that is used to determine interest rate changes for certain ARM plans. It represents the weekly average of secondary market interest rates on six-month negotiable certificates of deposit. * Also see “Adjustable-Rate Mortgage” entry
Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
Certificate of Title
A statement provided by an abstract company, title company, or attorney stating that the title to real estate is legally held by the current owner.
Chain of Title
The history of all of the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent.
The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).
After construction begins, you may discover that you need to make unplanned and necessary changes to the work. The contingency reserve covers unforeseen repairs or deficiencies found during renovation. Unnecessary additions or changes are treated differently. These change orders are considered discretionary and must first be approved by your lender. You must deposit additional funds to pay for the work in the escrow account before work on the changes begins. These change orders — as well as any that result from unforeseen repairs — must be added as amendments to your construction contract.
Another name for personal property.
A title that is free of liens or legal questions as to ownership of the property.
A meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called “settlement.” * Also see “Settlement” entry
As a potential home buyer, you will need a closing (or “settlement”) agent to coordinate the various closing activities. These can include but are not limited to preparing and recording the closing documents and disbursing funds. The types of services provided by a closing agent depend on the person you hire, but typically the closing is conducted by title companies, escrow companies or attorneys. It is usually held at the lender’s or real estate sales professional’s office.
Closing Cost Item
A fee or amount that a home buyer must pay at closing for a single service, tax, or product. Closing costs are made up of individual closing cost items such as origination fees and attorney’s fees. Many closing cost items are included as numbered items on the HUD-1 statement.
Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney’s fee, taxes, an amount placed in escrow, and charges for obtaining title insurance and a survey. Closing costs percentage will vary according to the area of the country; lenders or REALTORS® often provide estimates of closing costs to prospective homebuyers.
After your lender has approved your mortgage and you accept the commitment letter, the next step is to set a closing date. Many times, your real estate sales professional coordinates the setting of this date with you, the seller, the closing agent, and your lender. You may be able to move up the time frame for your closing by working with a lender who uses Desktop Underwriter® — our advanced automated underwriting system — because it can cut the time it takes to process your mortgage. Remember, you need to ensure that the closing occurs before your lender’s commitment letter — and the rate lock-in, if there is one — expire. You can now finalize your moving plans.
See “HUD-1 Settlement Statement” entry.
Cloud on Title
Any conditions revealed by a title search that adversely affect the title to real estate. Usually clouds on title cannot be removed except by a quitclaim deed, release, or court action.
A person who signs a promissory note along with the borrower. A co-maker’s signature guarantees that the loan will be repaid, because the borrower and the co-maker are equally responsible for the repayment. * see also “Endorser” entry.
A sharing of insurance risk between the insurer and the insured. Coinsurance depends on the relationship between the amount of the policy and a specified percentage of the actual value of the property insured at the time of the loss.
A provision in a hazard insurance policy that states the amount of coverage that must be maintained — as a percentage of the total value of the property — for the insured to collect the full amount of a loss.
An asset (such as a car or a home) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.
The efforts used to bring a delinquent mortgage current and to file the necessary notices to proceed with foreclosure when necessary.
Commercial banks, like thrifts, originate and service mortgage loans. In some cases, commercial banks may have mortgage banking subsidiaries that perform this function. Banks may choose to hold a loan in their own portfolio or sell the loan to an investor.
The fee charged by a broker or agent for negotiating a real estate or loan transaction. A commission is generally a percentage of the price of the property or loan.
A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer. Also known as a “loan commitment.” * see also “Loan Committment” entry.
Common Area Assessments
Levies against individual unit owners in a condominium or planned unit development (PUD) project for additional capital to defray homeowners’ association costs and expenses and to repair, replace, maintain, improve, or operate the common areas of the project.
Those portions of a building, land, and amenities owned (or managed) by a planned unit development (PUD) or condominium project’s homeowners’ association (or a cooperative project’s cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and other recreational facilities, as well as common corridors of buildings, parking areas, means of ingress and egress, etc.
An unwritten body of law based on general custom in England and used to an extent in the United States.
Community Land Trust Mortgage Option
An alternative financing option that enables low- and moderate-income home buyers to purchase housing that has been improved by a nonprofit Community Land Trust and to lease the land on which the property stands.
In some western and southwestern states, a form of ownership under which property acquired during a marriage is presumed to be owned jointly unless acquired as separate property of either spouse.
An abbreviation for “comparable properties”; used for comparative purposes in the appraisal process. Comparables are properties like the property under consideration; they have reasonably the same size, location, and amenities and have recently been sold. Comparables help the appraiser determine the approximate fair market value of the subject property.
Interest paid on the original principal balance and on the accrued and unpaid interest.
The determination that a building is not fit for use or is dangerous and must be destroyed; the taking of private property for a public purpose through an exercise of the right of eminent domain.
Condition of the Home
Potential homeowners should know of major problems in a home before they make an offer. As a potential buyer, you should carefully examine all elements of the home. Ask questions to the seller and the real estate sales professional about any concerns you may have. Both the seller and the real estate agent can be held liable if they do not disclose any defects they know about in the home.
A real estate project in which each unit owner has title to a unit in a building, an undivided interest in the common areas of the project, and sometimes the exclusive use of certain limited common areas.
Changing the ownership of an existing building (usually a rental project) to the condominium form of ownership.
A condominium project that has rental or registration desks, short-term occupancy, food and telephone services, and daily cleaning services and that is operated as a commercial hotel even though the units are individually owned.
The terms and conditions of any major renovation job should be part of a formal, legally binding contract between you and your contractor — this is called the construction contract. The lender you choose will likely want to review this contract before you sign it.
A short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses.
Contingencies for Repairs
In your purchase offer, you may consider stating that the seller must make sure the electrical systems, heating and cooling, plumbing, and mechanical systems are functioning properly at the closing. You may also state that your purchase is contingent upon the satisfactory completion of a professional home inspection, which will check these systems and other elements more completely. These are both ways to ensure that surprises don’t arise when your moving day arrives. If you do not include this clause in your contract, you are essentially accepting the house “as is.”
A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.
Contingency for Clear Title
Your purchase contract should include a contingency that the purchase is subject to your receiving clear title to the property. This process includes a title search and title insurance.
Contingency for Financing
When you make a formal offer on a house, your contract should include a financing contingency. It specifies if you don’t get the money you need to purchase the house at the terms you want, the offer is void and you will be refunded your deposit. Don’t be surprised if the seller includes a clause in the contract that states you must make a “good-faith effort” to get the mortgage. This is the seller’s way to ensure that you explore all options to get a mortgage loan.
Contingency for Personal Property
Your purchase contract should specify appliances, fixtures, and other personal property that must remain in the home. You can avoid any surprises by listing in your contract everything that is to be left behind when the seller moves out.
Most mortgages for purchase-renovation require an additional 10 percent of the total cost of the project to be put aside into a reserve account. This contingency reserve is only used when unforeseen repairs or deficiencies are found during renovation.
An oral or written agreement to do or not to do a certain thing.
A general contractor is a person who oversees a construction project and handles aspects such as scheduling workers and ordering supplies.
A mortgage that is not insured or guaranteed by the federal government. Contrast with government mortgage.
A provision in some adjustable-rate mortgages (ARMs) that allows the borrower to change the ARM to a fixed-rate mortgage at specified timeframes after loan origination.
An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under specified conditions.
A type of multiple ownership in which the residents of a multiunit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.
A business trust entity that holds title to a cooperative project and grants occupancy rights to particular apartments or units to shareholders through proprietary leases or similar arrangements.
Mortgages related to a cooperative project. This usually refers to the multifamily mortgage covering the entire project but occasionally describes the share loans on the individual units.
A residential or mixed-use building wherein a corporation or trust holds title to the property and sells shares of stock representing the value of a single apartment unit to individuals who, in turn, receive a proprietary lease as evidence of title.
Arrangements under which an employer moves an employee to another area as part of the employer’s normal course of business or under which it transfers a substantial part or all of its operations and employees to another area because it is relocating its headquarters or expanding its office capacity.
Cost of Funds Index (COFI)
An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It represents the weighted-average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco. See adjustable-rate mortgage (ARM).
Costs for Settling Into Your Home
When figuring out how much home you can afford, you need to account for the costs associated with getting into your home. These can include the cost for repairs that need to be made before you can occupy your residence. There may also be the cost of purchasing appliances, such as a washer and dryer, refrigerator, or stove. The bottom line is you do not want to spend all your money on purchasing the home and not have any left to pay these types of costs.
A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.
An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.
The three main credit reporting agencies, or credit bureaus, are Equifax, Experian, and Trans Union. You can order a copy of your credit report (a nominal fee may apply) via telephone at:
A record of an individual’s open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.
Credit Life Insurance
A type of insurance often bought by mortgagors because it will pay off the mortgage debt if the mortgagor dies while the policy is in force.
There are several ways to ensure you have a good credit report and credit score. One of the most effective is to manage your existing credit in a positive way. Ask your lender for suggestions about ways to control the amount of money you owe. Or, you can choose a credit counselor from the list provided on this site. Some lenders may view consumers as a greater risk if they have used most or all of their available credit. Consumers who are considered “overextended” may be viewed this way even if they have made all their debt payments on time. Missing a payment on a bill should be avoided, as should late payments on any of your credit obligations. Experiencing a mortgage foreclosure, filing for bankruptcy, or having your vehicle repossessed can also affect your credit score and credit report, limiting your ability to get new credit at a reasonable rate.
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.
Credit Report Fee
The credit report fee covers the lender’s cost for ordering your credit report from a credit bureau. This report will verify some of the information you provided on your loan application as well as additional information from the credit agency’s files and from public records. When a credit report is received, your lender will check it against your application and look for any discrepancies. You may be asked to explain information in your credit report.
Credit Reporting Agency (or bureau)
An organization that prepares reports that are used by lenders to determine a potential borrower’s credit history. The agency obtains data for these reports from a credit repository as well as from other sources. The three main credit reporting agencies, or credit bureaus, are Equifax, Experian, and Trans Union. You can order a copy of your credit report (a nominal fee may apply) via telephone at:
An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit.
Your credit score is based on all the information in your credit report. This information is converted into a number — a credit score — that the lender uses to determine whether you are likely to repay your loan in a timely manner. The scores used in mortgage lending are typically in the 300 to 900 range. A general guide is that the higher your score the better. But you should keep in mind that your credit score is just one of several factors that will be used to evaluate your mortgage loan application.
A credit union is a financial institution that is owned and run by its members. It is a nonprofit, cooperative institution that offers members a place to save and borrow. A credit union often works by having its members pool their funds so additional loans can be made to other members.
A person to whom money is owed.
An amount owed to another. See installment loan and revolving liability
The legal document conveying title to a property. The deed is the document that transfers ownership from the seller to you. Only the seller signs the deed at closing, and you’ll receive a copy of it. The closing agent will record the deed with you listed as the new property owner. Your name and the names of any other buyers appear on the deed, and it will be sent to you after it is recorded.
A deed given by a mortgagor to the mortgagee to satisfy a debt and avoid foreclosure. Also called a “voluntary conveyance.”
Deed of Trust
The document used in some states instead of a mortgage; title is conveyed to a trustee. In some states, a “deed of trust” is used instead of a mortgage. When homeowners sign a deed of trust, they receive title to the property but convey title to a neutral third party — called a trustee — until the loan balance is paid in full.
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Failure to make mortgage payments when mortgage payments are due.
Department of Veterans Affairs (VA)
An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans. The Veterans Administration is a federal government agency authorized to guarantee loans made to eligible veterans under certain conditions. To obtain more information, you can contact the U.S. Department of Veterans Affairs. The VA guarantee allows qualified veterans to buy a house costing up to $203,000 with no down payment. Moreover, the qualification guidelines for VA loans are more flexible than those for either the Federal Housing Administration (FHA) or conventional loans. If you are a qualified veteran, this can be an attractive mortgage program. To determine whether you are eligible, check with your nearest VA regional office.
A sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan. See earnest money deposit.
A decline in the value of property; the opposite of appreciation.
Detached Single-Family Home
The most traditional type of single-family home is one that is “detached.” This type of home stands separate from any other housing structure and serves as a place of residence for the occupants.
Discount points are often used to describe a type of fee that lenders charge. Discount points are additional funds you pay the lender at closing to get a lower interest rate on your mortgage. A point equals 1 percent of the loan amount. So, if you and your lender agree to a mortgage of $100,000, one point would equal $1,000. Typically, each point you pay for a 30-year loan lowers your interest rate by .125 of a percentage point. If the current interest rate on a 30-year mortgage is 7.75 percent, paying one point would lower the interest rate to 7.625. Ask your lender if you have the option of paying 1, 2, or 3 discount points — or you can choose not to pay any discount points. It often makes more sense to pay discount points if you plan to stay in your home for a long time.
The rights of a widow in the property of her husband at his death.
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage. Saving for a down payment is usually one of the most difficult parts of preparing to buy a home. If you believe you have the needed funds, you are in a better position to seek pre-qualification from a lender to get the mortgage that is right for you. Most homeowners rely on a mortgage from a financial institution, and most mortgage products require buyers to include a portion of their own funds towards the purchase of the home. This is called the down payment. Lenders feel more secure when buyers include a down payment, indicating they are less likely to walk away from their investment if their finances take a downturn. Historically, buyers usually made a down payment that totaled 20 percent of the home’s purchase price. Under this scenario, a down payment for a $100,000 home is $20,000. But today, new mortgage products allow buyers to put down as little as 3 percent to 5 percent, provided private mortgage insurance is obtained. The down payment for a $100,000 home with 5 percent down payment is just $5,000. Sources for down payments may come from buyers’ savings accounts, checking accounts, stocks and bonds, life insurance policies, and gifts. When you select your lender, ask about Fannie Mae’s low down payment mortgages.
A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.
This terminology is usually used for second mortgages. See due-on-sale provision.
Earnest Money Deposit
A deposit made by the potential home buyer to show that he or she is serious about buying the house. The earnest money deposit is a “good-faith” payment you submit with your offer on a home to show the seller you are serious about proceeding. The earnest money is deposited in an escrow account and will be applied to your closing costs. Sometimes, your lender will want you to bring a receipt for the earnest money deposit along with your sales contract to the initial loan application meeting.
A right of way giving persons other than the owner access to or over a property.
An appraiser’s estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age.
Effective Gross Income
Normal annual income including overtime that is regular or guaranteed. The income may be from more than one source. Salary is generally the principal source, but other income may qualify if it is significant and stable.
The right of a government to take private property for public use upon payment of its fair market value. Eminent domain is the basis for condemnation proceedings.
An improvement that intrudes illegally on another’s property.
Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions.
A person who signs ownership interest over to another party. Contrast with co-maker.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
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. A lender determines how much equity you have in your home by taking the appraised value of the home and subtracting any mortgage debt. For example, if your house is valued at $150,000 and your mortgage balance is $80,000, you have $70,000 equity in the house.
Errors in Credit Report
Your credit report may contain inaccuracies. The best way to ensure there are no errors in your credit report is to request copies and review the information. Since each of the main credit bureaus keeps its own records, you may want to request copies from all three: Trans Union, Equifax, and Experian. If you have been turned down for credit because of the information in your credit report, you are entitled to receive a free copy of your report within 60 days of the denial. If you haven’t been denied credit, you can still request a copy of your credit report, usually for a nominal fee. If you find errors in your report, follow the directions in the credit report and contact the agencies to have the errors corrected. They will investigate the targeted items and remove incorrect information. You don’t have to delay applying for a mortgage while errors in your report are being corrected. Explain the discrepancies in the report to your lender and state that the credit agency is correcting them.
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.
The account in which a mortgage servicer holds the borrower’s escrow payments prior to paying property expenses. An escrow account is money that is deposited with a third party — outside the buyer and the seller — to be used to pay various fees. A borrower typically provides funds that will pay taxes, mortgage insurance, lease payments, hazard insurance premiums, and other payments when they are due. An escrow payment by the holder of a mortgage is also known as “impounds” or “reserves” in some states. When escrow funds are used to pay taxes, hazard insurance, and other fees, it is called an escrow disbursement. Periodically, an escrow analysis will be performed to determine if current monthly deposits provide sufficient funds to pay bills when they are due.
The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.
Funds collected by the servicer and set aside in an escrow account to pay the borrower’s property taxes, mortgage insurance, and hazard insurance.
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
The portion of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Known as “impounds” or “reserves” in some states.
Establishing a Credit Record
It is possible to establish a credit history even if you do not have a traditional credit record that shows credit card payments or payments on a student or car loan. You can build a nontraditional credit history, for example, by documenting your monthly payments to previous and current landlords; to utility companies for your gas, water and telephone services; and to insurance companies for medical, life, and automobile coverage. Your lender can provide further details on how you can effectively establish a credit record.
The ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death.
The lawful expulsion of an occupant from real property.
Examination of Title
The report on the title of a property from the public records or an abstract of the title.
A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time, but reserving the owner’s right to sell the property alone without the payment of a commission.
A person named in a will to administer an estate. The court will appoint an administrator if no executor is named. “Executrix” is the feminine form.
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one’s credit record.
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.
Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.
The greatest possible interest a person can have in real estate. Fee simple ownership provides the owner with unrestricted powers to dispose of the owned property as the owner sees fit. Of all types of ownership a person can have in real estate, fee simple provides the greatest amount of personal control.
Fee Simple Estate
An unconditional, unlimited estate of inheritance that represents the greatest estate and most extensive interest in land that can be enjoyed. It is of perpetual duration. When the real estate is in a condominium project, the unit owner is the exclusive owner only of the air space within his or her portion of the building (the unit) and is an owner in common with respect to the land and other common portions of the property.
FHA Coinsured Mortgage
A mortgage (under FHA Section 244) for which the Federal Housing Administration (FHA) and the originating lender share the risk of loss in the event of the mortgagor’s default.
With FHA insurance, you can purchase a home with a low down payment from 3 percent to 5 percent of the FHA appraised value or the purchase price, whichever is lower. FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a given region. In general, the loan limit is less than what is available with a conventional mortgage through a lender.
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage. With FHA insurance, you can purchase a home with a low down payment from 3 percent to 5 percent of the FHA appraised value or the purchase price, whichever is lower. FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a given region. In general, the loan limit is less than what is available with a mortgage through a lender.
Final Walk-Through Inspection
Your sales contract should include a clause that allows you to examine the property you want to purchase within the 24 hours before closing. This walk-through, during which you will be accompanied by the real estate sales professional, is your chance to ensure that the seller has vacated the house and left behind whatever property was agreed upon. Make sure to check that all lights, appliances, and plumbing fixtures are in working order. You will also want to make sure that all conditions of the sales contract have been met. If they aren’t, or you observe major problems, you have the right to delay the closing until the problems are corrected. One other option is to make sure money to correct the problems is placed in an escrow account at closing to cover the cost of repairs.
An index is a number to which the interest rate on an adjustable rate mortgage (ARM) is tied. It is generally a published number expressed as a percentage, such as the average interest rate or yield on U.S. Treasury bills. A margin is added to the index to determine the interest rate that will be charged on ARMs. This interest rate is subject to any caps associated with the mortgage. The interest rate changes on an ARM are tied to some type of financial index. Some of the most common type of indexed ARMs are:
When comparing ARMs, look at how the index to which it is tied has performed recently. Your lender can provide information on how to track the index and a history of the index they use.
A fee or commission paid to a mortgage broker for finding a mortgage loan for a prospective borrower.
A lender’s agreement to make a loan to a specific borrower on a specific property.
First and Second Mortgages
A “first mortgage” is the primary lien against a property. The term is usually coined “first mortgage” only when a “second mortgage” is obtained on a property. A “second mortgage” is a lien that is subordinate to the first mortgage. Usually, the interest rates on second mortgages are slightly higher than the interest rates on a first mortgage. The amount of a second mortgage you can take out will depend on the equity you have built up in your home, the appraised value of your property, your credit history, and any other liens you may have against your property, such as a home equity line of credit. Borrowers will typically get a second mortgage to tap into the equity they’ve built in their home — and use that for home improvements, debt consolidation, medical bills, or other purposes. You apply for a second mortgage with the same process you follow for a first mortgage. However, some of your closing costs may be less. When you have a first and second mortgage, you theoretically have two loans, both requiring interest and principal payments.
A mortgage that is the primary lien against a property. A “first mortgage” is the primary lien against a property. The term is usually coined “first mortgage” only when a “second mortgage” is obtained on a property. A “second mortgage” is a lien that is subordinate to the first mortgage. Usually, the interest rates on second mortgages are slightly higher than the interest rates on a first mortgage. The amount of a second mortgage you can take out will depend on the equity you have built up in your home, the appraised value of your property, your credit history, and any other liens you may have against your property, such as a home equity line of credit. Borrowers will typically get a second mortgage to tap into the equity they’ve built in their home — and use that for home improvements, debt consolidation, medical bills, or other purposes. You apply for a second mortgage with the same process you follow for a first mortgage. However, some of your closing costs may be less. When you have a first and second mortgage, you theoretically have two loans, both requiring interest and principal payments.
The monthly payment due on a mortgage loan. The fixed installment includes payment of both principal and interest.
Fixed-Period Adjustable-Rate Mortgages
This type of adjustable-rate mortgage (ARM) maintains the same initial interest rate for the first three, five, seven, or 10 years of your loan, depending on the term you choose. Your interest rate then adjusts annually, and can move up or down as market conditions change. Be sure to ask your lender about the interest rate caps for both the annual adjustments and for the life of the loan.
Fixed-Rate Mortgage (FRM)
A mortgage in which the interest rate does not change during the entire term of the loan. Fixed-rate mortgages, the most popular type of mortgage, offer the peace of mind that your interest rate will remain the same for as long as you have your loan. If you expect to live in your home for many years, having the same interest rate may be your key concern. If you decide that you like the stable, predictable payments of a fixed-rate loan, you have the option of choosing from a variety of repayment terms: 15, 20, and 30 years are the most common. Typically, the longer the term of the mortgage, the more interest you pay over the life of your loan. However, stretching out your repayment term means your monthly mortgage payments will be less than they would be with a comparable shorter-term mortgage. Lenders offer a wide array of fixed-rate mortgages:
Personal property that becomes real property when attached in a permanent manner to real estate.
Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.
The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt. If you repeatedly do not make your mortgage payments on time, your lender could sell your home and evict you from it in a legal procedure called foreclosure. A foreclosure on your property can result in the loss of your home and your good credit rating. Foreclosure is most often a last resort effort that lenders will take if you repeatedly don’t make your mortgage payments. Before going to foreclosure, lenders will work with you if you are facing financial hardships to come up with repayment plans that will let you get back on track and remain in your home.
The loss of money, property, rights, or privileges due to a breach of legal obligation.
Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
A general contractor is someone whom you may work closely with during your home improvement project. The general contractor is the person who oversees the construction project and handles various aspects such as scheduling workers and ordering supplies. If you are borrowing mortgage funds to renovate a home, your lender may need to review whether your contractor meets all federal, state, and local registration, licensing and certification standards.
Good Faith Estimate
The good-faith estimate is a report from your lender that outlines the costs you will incur to get your mortgage. It is based on the lender’s typical loan origination costs for the area where your home is located. The estimate usually changes between application and closing, so you’ll want to review your settlement form before the closing meeting. The settlement form will list the actual amount of money you’ll need to bring to closing. You’ll need to pay your closing costs in the form of a certified or cashier’s check because personal checks usually are not accepted.
A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Contrast with conventional mortage.
Government National Mortgage Association
A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD). Created by Congress on September 1, 1968, GNMA assumed responsibility for the special assistance loan program formerly administered by Fannie Mae.
The person to whom an interest in real property is conveyed.
The person conveying an interest in real property.
The amount of money that is paid for the use of land when title to a property is held as a leasehold estate rather than as a fee simple estate.
A single-family residential structure designed or adapted for occupancy by unrelated developmentally disabled persons. The structure provides long-term housing and support services that are residential in nature.
Growing-Equity Mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment increases over an established period of time, with the increased amount of the monthly payment applied directly toward reducing the remaining balance of the mortgage.
A mortgage that is guaranteed by a third party.
Also known as a government mortgage.
Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.
Home Equity Conversion Mortgage (HECM)
A special type of mortgage that enables older home owners to convert the equity they have in their homes into cash, using a variety of payment options to address their specific financial needs. Unlike traditional home equity loans, a borrower does not qualify on the basis of income but on the value of his or her home. In addition, the loan does not have to be repaid until the borrower no longer occupies the property. Sometimes called a reverse mortgage. A Home Equity Conversion Mortgage (HECM) is a type of home loan that lets homeowners aged 62 or over with little or no remaining balance on their mortgage convert their equity into cash. The equity can be paid to the homeowner in a lump sum, in a stream of payments, draws from a line of credit, or a combination of monthly payments and line of credit. Whatever payment plan you select, you do not have to repay any part of this reverse mortgage until you sell the home or vacate it for another reason. At that time, you pay the loan balance, plus any accrued interest. Any proceeds above that amount go to you or to your estate. Developed by the Federal Housing Administration (FHA), the HECM mortgage provides a cash growth feature not found with some other reverse mortgages — check with your lender to see how this works based on your personal needs and your payment plan.
Home Equity Line of Credit
A mortgage loan, which is usually in a subordinate position, that allows the borrower to obtain multiple advances of the loan proceeds at his or her own discretion, up to an amount that represents a specified percentage of the borrower’s equity in a property.
A thorough inspection that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser. Contrast with appraisal. The home inspection reviews the structural and mechanical condition of the property. This is not an evaluation of the market value of the home or a determination of whether the home complies with applicable building and safety codes. The inspection does not include a recommendation on whether you should or should not buy the house. The inspector bases the findings on observable structural elements of the home. Potential home buyers are urged to be present during the inspection — this will allow you to ask questions and be in a better position to learn more about any problems that arise. You should expect to see an evaluation of:
You should view the home inspection report as a way to identify problems before you buy the home, to help negotiate adjustments in the purchase price if problems exist, and to help get the buyer to make any needed improvements before you buy the home. Lastly — and for some buyers most importantly — the home inspection report is a way to make you feel confident that the home you are buying includes systems that are in good working condition.
Homeowner’s insurance — also called “hazard insurance” — should be equal to at least the replacement cost of the property you want to purchase. Replacement cost coverage ensures that your home will be fully rebuilt in case of a total loss. Most home buyers purchase a homeowner’s insurance policy that includes personal liability insurance in case someone is injured on their property; personal property coverage for loss and damage to personal property due to theft or other events; and dwelling coverage to protect the house against fire, theft, weather damage, and other hazards. If the home you want to buy is located near water, you may be able to get flood insurance as part of your homeowner’s protection. In fact, it may be required in some areas, so check with your real estate professional or an approved lender for further information. Seek out and compare rates from several insurance companies before making your final decision. Lenders often want the first year’s premium to be paid at or before closing. Your lender may add the insurance cost to your monthly mortgage payments and keep this portion of your payments in an escrow account. The lender then pays your insurance bill out of escrow when it receives premium notices from your insurance company.
Homeowner’s Insurance for Reverse Mortgages
Homeowner’s insurance (also called “hazard insurance”) is required and should be equal to at least the replacement cost of the home you want to purchase. Replacement cost coverage ensures that your home will be fully rebuilt in case of a total loss. Most home buyers purchase a homeowner’s insurance policy that includes personal liability insurance (though this personal liability insurance is not required) in case someone is injured on their property; personal property coverage for loss and damage to property due to theft or other events; and dwelling coverage to protect the house against fire, theft, weather damage, and other hazards. If the home is near water, you may be able to get flood insurance as part of your homeowner’s protection. In fact, it may be required in some areas, so check with your real estate professional or an approved lender for further information. Seek out and compare rates from several insurance companies before making your final decision.
A nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to the common elements.
Homeowner’s Warranty (HOW)
A type of insurance that covers repairs to specified parts of a house for a specific period of time. It is provided by the builder or property seller as a condition of the sale.
Housing Expense Ratio
The percentage of gross monthly income that goes toward paying housing expenses.
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing. The blank form for the statement is published by the Department of Housing and Urban Development (HUD). The HUD-1 statement is also known as the “closing statement” or “settlement sheet.” The HUD-1 Settlement Statement itemizes the amounts to be paid by the buyer and the seller at closing. The (blank) form is published by the U.S. Department of Housing and Urban Development (HUD). Items on the statement include:
The form is filled out by your closing agent and must be signed by the buyer and the seller. The buyer should be allowed to review the HUD-1 Settlement Statement on the business day before the closing meeting to know the closing costs in advance. The HUD-1 Settlement Statement is also known as the “closing statement” or “settlement sheet.”
HUD median income
Median family income for a particular county or metropolitan statistical area (MSA), as estimated by the Department of Housing and Urban Development (HUD).
In-File Credit Report
An objective account, normally computer-generated, of credit and legal information obtained from a credit repository.
Real estate developed or improved to produce income.
A number used to compute the interest rate for an adjustable-rate mortgage (ARM). The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. A margin is added to the index to determine the interest rate that will be charged on the ARM. This interest rate is subject to any caps that are associated with the mortgage.
An increase in the amount of money or credit available in relation to the amount of goods or services available, which causes an increase in the general price level of goods and services. Over time, inflation reduces the purchasing power of a dollar, making it worth less.
Initial Interest Rate
The original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). Sometimes known as “start rate” or “teaser.”
The regular periodic payment that a borrower agrees to make to a lender. The regular periodic payment that a borrower agrees to make to a lender. The installment is more often referred to as your monthly mortgage payment. Installments, or monthly payments, can be made either monthly or biweekly, depending on your mortgage type. Your approved lender may also offer additional payment plans tailored to fit your needs.
Borrowed money that is repaid in equal payments, known as installments. A furniture loan is often paid for as an installment loan.
A property title that a title insurance company agrees to insure against defects and disputes.
A contract that provides compensation for specific losses in exchange for a periodic payment. An individual contract is known as an insurance policy, and the periodic payment is known as an insurance premium.
A document that states that insurance is temporarily in effect. Because the coverage will expire by a specified date, a permanent policy must be obtained before the expiration date.
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI). If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount.
The fee charged for borrowing money. Simply put, this is the fee that is charged for borrowing money from lenders. The interest rate is the rate of interest that is in effect when the monthly payment is due. An interest rate ceiling — for an adjustable-rate mortgage (ARM) — is the maximum interest rate, as specified in the mortgage note; the interest rate floor is the minimum interest rate, as specified in the mortgage note.
Interest Accrual Rate
The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments, although it is not used for an adjustable-rate mortgage (ARM) with payment change limitations.
The rate of interest in effect for the monthly payment due.
Interest Rate Buydown Plan
An arrangement wherein the property seller (or any other party) deposits money to an account so that it can be released each month to reduce the mortgagor’s monthly payments during the early years of a mortgage. During the specified period, the mortgagor’s effective interest rate is “bought down” below the actual interest rate.
Interest Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.
Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.
Interest Rate for HECMs
The interest rate on a Home Equity Conversion Mortgage (HECM) adjusts monthly or yearly. It is tied to the weekly average yield of U.S. Treasury securities adjusted to a constant maturity of one year. The interest charged on the HECM loan will be payable to your lender when the loan terminates.
A property that is not occupied by the owner.
IRA (Individual Retirement Account)
A retirement account that allows individuals to make tax-deferred contributions to a personal retirement fund. Individuals can place IRA funds in bank accounts or in other forms of investment such as stocks, bonds, or mutual funds.
A form of co-ownership that gives each tenant equal interest and equal rights in the property, including the right of survivorship.
A decision made by a court of law. In judgments that require the repayment of a debt, the court may place a lien against the debtor’s real property as collateral for the judgment’s creditor.
A lien on the property of a debtor resulting from the decree of a court.
A type of foreclosure proceeding used in some states that is handled as a civil lawsuit and conducted entirely under the auspices of a court.
A loan that exceeds mortgage amount limits. Also called a nonconforming loan.
The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
A written agreement between the property owner and a tenant that stipulates the conditions under which the tenant may possess the real estate for a specified period of time and rent.
Lease-purchase Mortgage Loan
An alternative financing option that allows low- and moderate-income home buyers to lease a home from a nonprofit organization with an option to buy. Each month’s rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that is earmarked for deposit to a savings account in which money for a downpayment will accumulate. Nonprofit organizations may use the lease-purchase option to purchase a home that they then rent to a consumer, or “leaseholder.” The leaseholder has the option to buy the home after a designated period of time (usually three or five years). Part of each rent payment is put aside toward savings for the purpose of accumulating the down payment and closing costs.
Nonprofit organizations may use the lease-purchase option to purchase a home that they then rent to a consumer, or “leaseholder.” The leaseholder has the option to buy the home after a designated period of time (usually three or five years). Part of each rent payment is put aside toward savings for the purpose of accumulating the down payment and closing costs.
A way of holding title to a property wherein the mortgagor does not actually own the property but rather has a recorded long-term lease on it.
A property description, recognized by law, that is sufficient to locate and identify the property without oral testimony.
A person’s financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others.
Insurance coverage that offers protection against claims alleging that a property owner’s negligence or inappropriate action resulted in bodily injury or property damage to another party.
The London Interbank Offered Rate (LIBOR) is based on the interest rate that major international banks are willing to lend and borrow funds for a specified period of time in the London interbank market. The LIBOR is similar to the prime-lending rate posted by major U.S. banks. You can select an adjustable rate mortgage (ARM) that adjusts to the LIBOR at specified periods, usually every six months. This type of ARM typically has a per-adjustment period cap of 1 percent and is offered with either a 5 percent or a 6 percent lifetime rate cap.
A legal claim against a property that must be paid off when the property is sold.
Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage. * Also see “cap” entry
Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan.
Line of Credit
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time to a specified borrower. See home equity line of credit.
A cash asset or an asset that is easily converted into cash.
A sum of borrowed money (principal) that is generally repaid with interest.
The loan application is a detailed form designed to provide information from you that your lender will need. Lenders use the application to evaluate whether or not they can give you a loan, and if so, the amount of money they can lend you. The “four Cs” of credit come into play when filling out an application – they are capacity, credit history, capital and collateral. The loan application form requests information such as:
Information needed for the loan application may vary from lender to lender, so prior to filling out the application it’s important to discuss with your lender what items your lender will need. If your an approved lender uses Desktop Underwriter, an automated underwriting system, they will not have to ask you for as much information regarding your employment, credit, or residence history. As a result, you won’t need to provide as much documentation to back-up the information. Ask your lender if the lender uses this time-saving system.
The commitment letter states the dollar amount of the loan being offered, the number of years you have to repay the loan, the loan origination fee, the points, the annual percentage rate, and the monthly charges. The letter also states the time you have to accept the loan offer and to close the loan. Make sure you understand all aspects of the commitment letter because by signing it, you indicate your acceptance of its terms and conditions.
The process by which a mortgage lender brings into existence a mortgage secured by real property.
Loan Origination Fee
The loan origination fee covers the administrative costs of processing the loan. It is often expressed in points. One point is 1 percent of the mortgage amount. For example, a $100,000 mortgage with a loan origination fee of 1 point would mean you pay $1,000.
Loan Terms and Conditions
With a reverse mortgage, a lender can call in your loan under certain conditions. But, if you occupy the property as your primary residence, are not absent from the property for 12 consecutive months. You may instruct the lender to pay the taxes and insurance on your behalf from your reverse mortgage funds. The lender will set aside funds from your reverse mortgage to pay for future taxes and insurance, as long as funds are available. Furthermore, as long as you comply with the terms noted above, you can’t be forced to sell your home to pay off the reverse mortgage, even if the loan balance grows to exceed the value of your property.
Loan-To-Value (LTV) Percentage
The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has a LTV percentage of 80 percent.
A written agreement in which the lender guarantees a specified interest rate if a mortgage goes to closing within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.
The time period during which the lender has guaranteed an interest rate to a borrower. * See also “Lock-In” entry
Homes and dwellings that are not built at the home site and are moved to the location are considered manufactured housing. Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation. All manufactured homes must be built to meet standards set forth by the U.S. Department of Housing and Urban Development (HUD). The standards focus on such aspects as design, strength, energy efficiency, and fire resistance. Manufactured housing represents one of the fastest-growing housing markets in the United States. Nearly all of the mortgage products are available for owners of manufactured housing.
For an adjustable-rate mortgage (ARM), the amount that is added to the index to establish the interest rate on each adjustment date, subject to any limitations on the interest rate change.
You can get a good feel for the market value of a home by asking whether the listing agent compiled a “comparative market analysis” (CMA). This written report on the property examines comparable homes in the area that have recently been sold, are currently on the market, or are currently under contract. The CMA will help you figure out whether the asking price is in line with other comparable houses in the neighborhood.
A homeowners’ association in a large condominium or planned unit development (PUD) project that is made up of representatives from associations covering specific areas within the project. In effect, it is a “second-level” association that handles matters affecting the entire development, while the “first-level” associations handle matters affecting their particular portions of the project.
The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable.
Maximum Claim Amount
Your maximum claim amount is the lesser of two figures:
The HUD 203(b) limit is the maximum loan amount that FHA will insure for residences in your geographical area. Check with your lender to get the latest figures for your area.
A mortgage amount that is within 5 percent of the highest loan-to-value (LTV) percentage allowed for a specific product. Thus, maximum financing on a fixed-rate mortgage would be 90 percent or higher, because 95 percent is the maximum allowable LTV percentage for that product.
Merged Credit Report
A credit report that contains information from three credit repositories. When the report is created, the information is compared for duplicate entries. Any duplicates are combined to provide a summary of a your credit.
The act of changing any of the terms of the mortgage.
Money Market Account
A savings account that provides bank depositors with many of the advantages of a money market fund. Certain regulatory restrictions apply to the withdrawal of funds from a money market account.
Money Market Fund
A mutual fund that allows individuals to participate in managed investments in short-term debt securities, such as certificates of deposit and Treasury bills.
Monthly Fixed Installment
That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction.
Monthly Payment Mortgage
A mortgage that requires payments to reduce the debt once a month. Your monthly mortgage payment is composed of four components. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance. All four of these elements are often referred to as PITI. Your monthly mortgage payment due may be mailed to you in a book of coupons each year, or in a separate coupon every month. Ask your lender if the automated underwriting system is used, which may reduce costs associated with your mortgage.
A legal document that pledges a property to the lender as security for payment of a debt. Simply put, the mortgage is the legal document that gives the lender a legal claim against your house should you default on your loan payments. The mortgage indicates that a specific amount of money will be loaned at a specific interest rate so that you can buy your home. Another way of thinking of the mortgage is that you have possession of the property but the lender has ownership until you have repaid your loan. The items stated in the mortgage include the homeowner’s responsibility to:
The mortgage also includes the basic information found in the note. Should you consistently fail to meet these requirements, your lender can seek full repayment of the balance of the loan, foreclose on the property, or sell the property and use the proceeds to pay off the loan balance and foreclosure costs. A deed of trust is used instead of a mortgage in some states.
A company that originates mortgages exclusively for resale in the secondary mortgage market. Mortgage companies originate and service mortgages. In other words, they make loans to consumers. Mortgage companies then typically sell these loans to other lenders and investors. Some mortgage companies may be subsidiaries of depository institutions or their holding companies but do not receive money from individual depositors.
Mortgage Banking Companies
Mortgage companies originate and service mortgages. In other words, they make loans to consumers. Mortgage companies then typically sell these loans to other lenders and investors. Some mortgage companies may be subsidiaries of depository institutions or their holding companies but do not receive money from individual depositors.
An individual or company that brings borrowers and lenders together for the purpose of loan origination. Mortgage brokers typically require a fee or a commission for their services. The National Association of Mortgage Brokers defines a mortgage broker as “an independent real estate financing professional who specializes in the origination of residential and/or commercial mortgages.” There are an estimated 20,000 mortgage brokerage operations from coast to coast. They originate more than half of the residential loans in the U.S. A mortgage broker has professional expertise that can assist mortgage seekers in finding the best loan for them. The mortgage broker is also experienced in offering many applicable financing options for a consumer’s specific needs.
A contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency such as the Federal Housing Administration (FHA). Depending on the type of mortgage insurance, the insurance may cover a percentage of or virtually all of the mortgage loan.
Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company.
Mortgage Life Insurance
A type of term life insurance often bought by mortgagors. The amount of coverage decreases as the principal balance declines. In the event that the borrower dies while the policy is in force, the debt is automatically satisfied by insurance proceeds.
Mortgage-Related Closing Costs
Mortgage-related closing costs generally are costs associated with your loan application. They vary, but here are some of the most common ones:
The lender in a mortgage agreement.
The borrower in a mortgage agreement.
Properties that provide separate housing units for more than one family, although they secure only a single mortgage.
We provide financing for multifamily (buildings with five or more units) rental properties through a nationwide network of mortgage lenders.
A residential mortgage on a dwelling that is designed to house more than four families, such as a high-rise apartment complex.
We provide financing for multifamily (buildings with five or more units) rental properties through a nationwide network of mortgage lenders.
A gradual increase in mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the remaining balance to create “negative” amortization.
Net Cash Flow
The income that remains for an investment property after the monthly operating income is reduced by the monthly housing expense, which includes principal, interest, taxes, and insurance (PITI) for the mortgage, homeowners’ association dues, leasehold payments, and subordinate financing payments.
The value of all of a person’s assets, including cash, minus all liabilities.
No Cash-Out Refinance
A refinance transaction in which the new mortgage amount is limited to the sum of the remaining balance of the existing first mortgage, closing costs (including prepaid items), points, the amount required to satisfy any mortgage liens that are more than one year old (if the borrower chooses to satisfy them), and other funds for the borrower’s use (as long as the amount does not exceed 1 percent of the principal amount of the new mortgage).
An asset that cannot easily be converted into cash.
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time. One way to think of the mortgage note is that it is a legal “IOU.” Often called the promissory note, it represents your promise to pay the lender according to the agreed upon terms of the loan, including when and where to send your payment. The note lists any penalties that will be assessed if you don’t make your monthly mortgage payments. It also warns you that the lender can “call” the loan — demand repayment of the entire loan before the end of the term — if you violate the terms of your mortgage.
The interest rate stated on a mortgage note.
Notice of Default
A formal written notice to a borrower that a default has occurred and that legal action may be taken.
This provision is a good way to help ensure that your home will be ready for occupancy after the closing takes place. As part of your formal purchase offer, consider including a provision that holds the seller responsible for paying you rent should they not move out on or prior to the agreed-upon date. This allows you, for example, to use the money you receive to pay your own rent if you are leasing your current residence.
When you make an offer on a house, it means you are making a formal bid to buy a home. You can work with your real estate sales professional to put together a written bid that abides by the laws in your state. Your offer should include such aspects as the address of the home, the sales price, the type of mortgage financing you will use to purchase the home, any personal property that might be included as part of the sale, and a target date for closing and occupancy. An earnest money deposit typically accompanies the offer. Your real estate sales professional can provide guidance on other elements of the offer. Once you have made an offer, the seller has the opportunity to accept, decline, or make a counter-offer. If your offer is accepted, you have a ratified sales contract. This contract is the starting point for working with an approved lender to get the mortgage that’s right for you.
Home buyers should not forget that there are on-going costs associated with owning a home. They include, but are not limited to:
Another cost home buyers should consider is how much it will cost to maintain their home. These costs include everything from cleaning and minor repairs to yard work and painting. Condominium owners and people living in planned unit developments should factor in any homeowners’ association fees or similar costs.
One-Year Adjustable-Rate Mortgage
This adjustable-rate mortgage (ARM) offers a low initial interest rate with an interest rate that adjusts annually after the first year. The rate cap per annual adjustment is usually 2 percent; the lifetime adjustment caps can be 5 percent or 6 percent. This type of mortgage may be right for you if you anticipate a rapid increase in income over the first few years of your mortgage. That’s because it lets you maximize your purchasing power immediately. It may also be the right mortgage for you if you plan to live in your home for only a few years.
Ask your approved lender which of their one-year ARMs include this option. Generally, conversions to fixed-rate mortgages are allowed at the third, fourth, or fifth interest rate adjustment dates.
Original Principal Balance
The total amount of principal owed on a mortgage before any payments are made.
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount. The loan origination fee covers the administrative costs of processing the loan. It is often expressed in points. One point is 1 percent of the mortgage amount. For example, a $100,000 mortgage with a loan origination fee of 1 point would mean you pay $1,000.
Other Buyer Costs
There are other costs associated with the closing that are typically paid by the buyer. They often include:
A contingency in a contract states that if a certain requirement is not met, the deal can be canceled. Some of the most common contingencies related to home purchases include:
The seller or real estate professional must give you a pamphlet that explains lead hazards and tell you about any lead-based paint of which the seller is aware before a sales contract on a home built before 1978 can be finalized. The seller must also allow 10 days during which you can hire a professional to conduct an inspection for lead-based paint hazards.
Other Financial Companies
Other financial companies include credit unions, mortgage brokers, insurance companies, investment bankers, and housing finance agencies. Credit unions are cooperative, not-for-profit institutions organized to promote savings and to provide credit, including mortgage loans, to their members. Credit unions either service the mortgages they originate or sell them to other investors. Mortgage brokers are independent real estate financing professionals who specialize in the origination of residential and/or commercial mortgages. Mortgage brokers originate loans on behalf of other lenders — including banks, thrifts and mortgage banking companies, but do not service loans. Insurance companies and investment bankers are large institutional investors in mortgages that do not receive deposits from consumers. They use premiums from their clients’ insurance polices and investment packages to fund their mortgage lending activities. Housing finance agencies are typically associated with state or local governments. They are generally geared toward assisting first-time and low- to moderate-income borrowers. They use tax exempt bonds to fund mortgage lending and as a result are often able to provide interest rates that are below current market rates.
A property purchase transaction in which the property seller provides all or part of the financing.
A payment that is not sufficient to cover the scheduled monthly payment on a mortgage loan.
Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment adjustable-rate mortgage (GPARM). Generally, the payment change date occurs in the month immediately after the adjustment date.
Periodic Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease during any one adjustment period.
Periodic Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
With most major home improvement projects, work permits may be required. Permits provide legal permission to undertake a project and are usually given by local governments agencies. Some of the most common permits are for general projects or permits that require you to meet specific local building codes. You may want to check with your local government to determine if there are building restrictions in historic areas or in environmentally-sensitive areas.
Any property that is not real property.
Principle, interests, taxes and insurance (PITI) are the four components of a monthly mortgage payment. The four components of a monthly mortgage payment.
A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months.
Planned Unit Development (PUD)
A project or subdivision that includes common property that is owned and maintained by a homeowners’ association for the benefit and use of the individual PUD unit owners.
A one-time charge by the lender for originating a loan. A point is 1 percent of the amount of the mortgage.
Power of Attorney
A legal document that authorizes another person to act on one’s behalf. A power of attorney can grant complete authority or can be limited to certain acts and/or certain periods of time.
When you work with your lender to get pre-approved, you are getting an indication of how much money you will be eligible to borrow when you apply for a mortgage. This process occurs before you complete an application for a loan. Pre-approval includes a screening of a borrower’s credit history, and all information you give to your lender will be verified when you apply for your mortgage.
The process of determining how much money a prospective home buyer will be eligible to borrow before he or she applies for a loan.
Prearranged Refinancing Agreement
A formal or informal arrangement between a lender and a borrower wherein the lender agrees to offer special terms (such as a reduction in the costs) for a future refinancing of a mortgage being originated as an inducement for the borrower to enter into the original mortgage transaction.
A procedure in which the investor allows a mortgagor to avoid foreclosure by selling the property for less than the amount that is owed to the investor.
Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner’s decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized.
A fee that may be charged to a borrower who pays off a loan before it is due. If you pay off your mortgage before it is due, you may be charged a fee — this is referred to as a prepayment penalty. Any amount that is paid to reduce the principal balance of a loan before the due date — such as the sale of the property, the owner’s decision to pay the loan in full, the owner’s decision to pay additional money every month to lower the principle or interest — is considered prepayment. You may want to consider discussing the specifics of this fee as you negotiate the terms of your loan with your lender.
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage. One of the terms you’re likely to hear when you talk about a mortgage with your lender is principal. The principal is the amount originally borrowed or the amount that remains to be paid once you have started making payments. It is also the part of the monthly mortgage payment that reduces the remaining balance of a mortgage. The principal balance is the outstanding amount of principal on a mortgage; it does not include interest or any other charges.
The outstanding balance of principal on a mortgage. The principal balance does not include interest or any other charges. * Also see “Remaining Balance”
Private Mortgage Insurance (PMI)
Also known as Mortgage Insurance, PMI is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
A written promise to repay a specified amount over a specified period of time.
A meeting in an announced public location to sell property to repay a mortgage that is in default.
Purchase and Sale Agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold. The Purchase and Sale Agreement is a written contract that is signed by the buyer and seller. It states the terms and conditions under which a property will be sold. It includes:
Purchase Money Transaction
The acquisition of property through the payment of money or its equivalent.
There are two main elements lenders consider when determining whether you and any co-borrowers qualify for a specific mortgage. The first is your monthly mortgage costs, including mortgage payments, property taxes and insurance. If you’re considering buying a condominium or cooperative, any associated fees are also considered. Your mortgage costs should not exceed 28 percent of your gross monthly (pre-tax) income. The second qualifying guideline relates to your total monthly housing costs and other debts you and any co-borrowers have. These costs should not exceed 36 percent of your gross monthly income. Lenders follow these guidelines because they believe these percentages allow homeowners to pay off their mortgages fairly comfortably without the worry of loan defaults and foreclosures. However, these guidelines can be exceeded in certain cases, such as borrowers with a good credit history or with a larger down payment. Also, certain types of mortgages let you use a greater amount of your income towards your housing costs. Typically, you can spend up to 33 percent of your income on housing costs each month for these mortgages that are available through most approved lenders.
Calculations that are used in determining whether a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.
A radioactive gas found in some homes that in sufficient concentrations can cause health problems.
Lenders offer caps with their adjustable rate mortgages (ARMs) so you can have more control over your monthly mortgage payment. Usually, there are two types of rate caps:
Ask your lender about both caps when evaluating any ARM product.
A fixed-rate mortgage that includes a provision that gives the borrower a one-time option to reduce the interest rate (without refinancing) during the early years of the mortgage term.
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time. * See “Lock-in”
Ratified Sales Contract
A ratified sales contract means both the buyer and the seller have signed off on the final offer. It also acts as a starting point for the loan application interview. The ratified sales contract specifies the amount of your down payment, the price you will pay for the house, the type of mortgage financing you will seek, your proposed closing and occupancy dates, and other contingencies. You will give all this information to your loan officer when you meet to discuss your financing options.
Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
Real Estate Attorney
Many homeowners hire a real estate attorney to represent them during the loan application process. If you do so, your attorney will review the sales contract and represent you at closing. There are many questions you can ask a personal attorney before deciding whether to have the attorney represent you at closing. They can include:
Remember that your personal attorney’s fee is not part of your closing costs. You must pay for this expense separately.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Land and appurtenances, including anything of a permanent nature such as structures, trees, minerals, and the interest, benefits, and inherent rights thereof.
A real estate broker or an associate who holds active membership in a local real estate board that is affiliated with the National Association of REALTORS®.
The cancellation or annulment of a transaction or contract by the operation of a law or by mutual consent. Borrowers usually have the option to cancel a refinance transaction within three business days after it has closed.
The public official who keeps records of transactions that affect real property in the area. Sometimes known as a “Registrar of Deeds” or “County Clerk.”
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.
The process of paying off one loan with the proceeds from a new loan using the same property as security.
Rehabilitation Escrow Account
A contingency reserve will be set up that contains funds borrowed to finance your home improvements. These will be placed into an escrow account upon the closing of your mortgage. Payments to the contractor will be periodically made from this fund as construction occurs. You will be paid interest on the funds that are in the escrow account that have not been paid to the contractor.
A mortgage created to cover the costs of repairing, improving, and sometimes acquiring an existing property.
The amount of principal that has not yet been repaid. * Also see “Principal Balance” entry
The original amortization term minus the number of payments that have been applied.
Rent Loss Insurance
Insurance that protects a landlord against loss of rent or rental value due to fire or other casualty that renders the leased premises unavailable for use and as a result of which the tenant is excused from paying rent.
Rent with Option to Buy
There are two different Rent With Option to Buy options:
An arrangement made to repay delinquent installments or advances. Lenders’ formal repayment plans are called “relief provisions.”
Replacement Reserve Fund
A fund set aside for replacement of common property in a condominium, PUD, or cooperative project — particularly that which has a short life expectancy, such as carpeting, furniture, etc.
A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods and services. The borrower is billed for the amount that is actually borrowed plus any interest due.
The Rural Housing Service (RHS), a branch of the U.S. Department of Agriculture, offers low-interest-rate homeownership loans with no down payment requirements to low- and moderate-income persons who live in rural areas or small towns. Check with your local RHS office or a local lender for eligibility requirements. For the location of RHS State Offices and details on RHS loans, see the RHS home page.
Right of First Refusal
A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others.
Right of Ingress or Egress
The right to enter or leave designated premises.
Right of Survivorship
In joint tenancy, the right of survivors to acquire the interest of a deceased joint tenant.
Rural Housing Service (RHS)
An agency within the Department of Agriculture, which operates principally under the Consolidated Farm and Rural Development Act of 1921 and Title V of the Housing Act of 1949. This agency provides financing to farmers and other qualified borrowers buying property in rural areas who are unable to obtain loans elsewhere. Funds are borrowed from the U.S. Treasury.
A technique in which a seller deeds property to a buyer for a consideration, and the buyer simultaneously leases the property back to the seller.
Savings and Loans
Among the customers of Savings and Loans (S&Ls) are individual savers and residential and commercial property mortgage borrowers. Their traditional role for savings and loans is to accept deposits and make mortgage loans, but it has expanded recently to a focus on one- to four-family residential mortgages, multifamily mortgages and commercial mortgages. These institutions are growing bigger, and the lines between S&Ls and commercial banks are not as defined as in the past. Deposit insurance is provided through the Savings Association Insurance Fund, a subsidiary of the Federal Deposit Insurance Corporation.
A mortgage that has a lien position subordinate to the first mortgage.
Secondary Mortgage Market
The buying and selling of existing mortgages.
A loan that is backed by collateral.
The property that will be pledged as collateral for a loan.
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. * Also see “Owner Financing”
Seller Versus Buyer Closing Costs
Buyers and sellers often negotiate who will pay certain closing costs, and the results vary depending on the negotiated deal. In fact, it’s not uncommon for a sales agreement to state that either the buyer or seller pays all closing costs. The agreement that you and the seller reach must be specified in the sales contract. Your negotiations could depend on a variety of factors, including the quality of the home, how long the home has been on the market, whether there are any other interested buyers, and how motivated the seller is to sell the home.
An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
The final step before you get the keys to your home is a formal meeting called the closing. It is at this meeting in which ownership of the home is transferred from the seller to the buyer. Also called a settlement in some parts of the country, the meeting is typically attended by the buyer(s), the seller(s), their attorneys if they have them, both real estate sales professionals, a representative of the lender, and the closing agent. The purpose is to make sure the property is physically and legally ready to be transferred to you. Several closing costs will be paid at this meeting. These expenses are over and above the price of the property and are incurred when ownership of a property is transferred. Closing costs generally include a loan origination fee, an attorney’s fee, taxes, an amount placed in escrow, and charges for obtaining title insurance, and a survey. Closing costs vary according to the area of the country. When working with an approved lender who uses Desktop Underwriter® — our advanced automated underwriting system — a number of costs associated with your closing may be reduced, including mortgage insurance, appraisal fees, and credit report fees. * Also see “Closing” entry
The HUD-1 Settlement Statement itemizes the amounts to be paid by the buyer and the seller at closing. The (blank) form is published by the U.S. Department of Housing and Urban Development (HUD).
Items on the statement include:
The form is filled out by your closing agent and must be signed by the buyer and the seller. The buyer should be allowed to review the HUD-1 Settlement Statement on the business day before the closing meeting to know the closing costs in advance. The HUD-1 Settlement Statement is also known as the “closing statement” or “settlement sheet.”
One- to four-unit properties including detached homes, townhomes, condominiums, and cooperatives.
Six-Month Adjustable-Rate Mortgage
This adjustable-rate mortgage (ARM) offers a low initial interest rate for the first six months with an interest rate that adjusts every six months thereafter. The rate caps per adjustment can be 1 percent or 2 percent; the lifetime adjustment caps can be 4 percent, 5 percent, or 6 percent. This type of mortgage may be right for you if you anticipate a rapid increase in income over the first few years of your mortgage. That’s because it lets you maximize your purchasing power immediately. It may also be the right mortgage for you if you plan to live in your home for only a few years. The interest rate is tied to a published financial index. When comparing ARMs that have different indexes, look at how the index has performed recently. Your an approved lender can provide information on how to track a specific index and how to review a 15-year history of the index.
Some six-month ARMs let you convert to a fixed-rate loan at certain adjustment intervals. Ask your lender which of their six-month ARMs include this option. Your lender can also provide further specifics about this mortgage option.
Special Deposit Account
An account that is established for rehabilitation mortgages to hold the funds needed for the rehabilitation work so they can be disbursed from time to time as particular portions of the work are completed.
Standard Payment Calculation
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.
A housing development that is created by dividing a tract of land into individual lots for sale or lease.
Any mortgage or other lien that has a priority that is lower than that of the first mortgage.
A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features. Your lender may require you to have a survey of the property performed. This process confirms that the property’s boundaries are correctly described in the purchase and sale agreement. Also called a plot plan, the survey may show a neighbor’s fence is located on the seller’s property or more serious violations may be discovered. These violations must be addressed before the lender will proceed. The buyer usually pays to have the survey done, but some cost savings may be found by requesting an “update” from the company that previously surveyed the property.
Contribution to the construction or rehabilitation of a property in the form of labor or services rather than cash.
Taxes and Insurance
You’ll hear many terms as you work with your mortgage lender, and one of the most frequently mentioned is “PITI.” This abbreviation stands for principal, interest, taxes and insurance. The tax and insurance components of a mortgage payment are generally held by the lender in an escrow account. The lender pays any property tax and homeowner’s insurance bills as they are due, ensuring they are paid on time. A home buyer’s monthly mortgage payment generally covers expenses through the escrow account. If you don’t have your homeowner’s insurance and property taxes paid out of a lender escrow account, your local government and your property insurance company will send payment notices directly to you. It is your responsibility to make sure you pay these bills on time. If you’re planning to purchase a condominium or cooperative, talk to your lender about how they view condo and co-op fees. Most likely, they are considered housing costs and not a part of PITI. However, this can vary from lender to lender.
Tenancy by the Entirety
A type of joint tenancy of property that provides right of survivorship and is available only to a husband and wife. Contrast with tenancy in common.
Tenancy in Common
A type of joint tenancy in a property without right of survivorship. Contrast with tenancy by the entirety and with joint tenacy.
The obligee for a cooperative share loan, who is both a stockholder in a cooperative corporation and a tenant of the unit under a proprietary lease or occupancy agreement.
Homes in many parts of the country must be inspected for termites before they can be sold. You should receive a certificate from a termite inspection firm stating that the property is free of both visible termite infestation and termite damage. The cost of the termite inspection is usually paid by the seller, and the seller’s real estate sales professional orders the inspection. You need to make sure that the original certificate is delivered to your lender at least three days before closing. This allows the lender to review the certificate and address any potential problems.
A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market. * Also see “Mortgage Broker” entry
Thrifts are depository institutions that primarily serve consumers and include both savings banks and savings and loan (S&L) institutions. These institutions originate and service mortgage loans. A thrift may choose to hold a loan in its own portfolio or sell the loan to an investor.
A legal document evidencing a person’s right to or 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 outstanding. In order to make sure the borrower will receive clear title to the property, lenders require a title search. It attempts to uncover any “encumbrances” on the title and makes sure the seller is the actual owner of the property. Encumbrances include any liens — legal claims against a property filed by creditors as a means to collect unpaid bills. Liens can also be filed by the Internal Revenue Service for nonpayment of taxes. Any such claims must be paid by the seller — this often occurs either before or at the closing.
A company that specializes in examining and insuring titles to real estate.
Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of a property. Your lender will require that you buy title insurance to ensure that you are receiving a “marketable title.” There are two types of title insurance policies:
Generally, the buyer pays the cost of both policies. Check with your insurer, because you may receive a price break if you seek a combined lender/owner policy or if you purchase a “reissue” policy from the company that previously insured the title.
Total Expense Ratio
Total obligations as a percentage of gross monthly income. The total expense ratio includes monthly housing expenses plus other monthly debts.
A townhouse is similar to a condominium in that it’s a type of joint real estate where each housing unit is individually owned. However, it has two or more stories, rather than the typical one floor found in a condominium. Townhouses are available in many shapes and sizes, and most may have yards or common spaces that can be used by the owners.
Equity that results from a property purchaser giving his or her existing property (or an asset other than real estate) as trade as all or part of the down payment for the property that is being purchased.
Transfer of Ownership
Any means by which the ownership of a property changes hands. Lenders consider all of the following situations to be a transfer of ownership: the purchase of a property “subject to” the mortgage, the assumption of the mortgage debt by the property purchaser, and any exchange of possession of the property under a land sales contract or any other land trust device. In cases in which an inter vivos revocable trust is the borrower, lenders also consider any transfer of a beneficial interest in the trust to be a transfer of ownership.
State or local tax payable when title passes from one owner to another.
An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or is derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. *See Also “Adjustable-Rate Mortgage (ARM)”
A fiduciary who holds or controls property for the benefit of another.
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges. Your lender should provide you with the Truth-in-Lending (TIL) Statement within three business days of your loan application. This document outlines the costs of your loan, and it is given to you so you can compare the costs with those of other lenders. Among the costs listed:
The lender is required to give you the final version of your TIL Statement at or prior to the closing meeting because it is possible that the APR calculated at your loan application will change at closing.
Two-to-Four Family Property
A property that consists of a structure that provides living space (dwelling units) for two to four families, although ownership of the structure is evidenced by a single deed.
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.
A loan that is not backed by collateral.
U.S. Department of Veterans Affairs (VA)
The Veterans Administration is a federal government agency authorized to guarantee loans made to eligible veterans under certain conditions. To obtain more information, you can contact the U.S. Department of Veterans Affairs. The VA guarantee allows qualified veterans to buy a house costing up to $203,000 with no down payment. Moreover, the qualification guidelines for VA loans are more flexible than those for either the Federal Housing Administration (FHA) or conventional loans. If you are a qualified veteran, this can be an attractive mortgage program. To determine whether you are eligible, check with your nearest VA regional office.
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.
Having the right to use a portion of a fund such as an individual retirement fund. For example, individuals who are 100 percent vested can withdraw all of the funds that are set aside for them in a retirement fund. However, taxes may be due on any funds that are actually withdrawn.
Ways of Obtaining a Loan
You have several ways to get a mortgage. Your loan interview can take place, in whole or in part, over the telephone, over the Internet, or in person. Approved lenders have a variety of options when it comes to helping you get the mortgage that’s right for you. Many lenders have Web sites that let you fill out an application online, which can save you time. Other lenders may work with you over the telephone.
An affordability analysis that is based on a what-if scenario. A what-if analysis is useful if you do not have complete data or if you want to explore the effect of various changes to your income, liabilities, or available funds or to the qualifying ratios or down payment expenses that are used in the analysis.
A change in the amounts that is used as the basis of an affordability analysis. A what-if scenario can include changes to monthly income, debts, or down payment funds or to the qualifying ratios or down payment expenses that are used in the analysis. You can use a what-if scenario to explore different ways to improve your ability to afford a house.
A mortgage that includes the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the wraparound mortgagee, who then forwards the payments on the first mortgage to the first mortgagee.