A,
B or C Loans
The
term A, B or C is a rating of the loan. Generally, loans termed
as "A" paper are for borrowers with very good credit. B and
C loans indicate a higher risk and the interest rate will be
higher
Acceptance
When both parties have agreed on the price and terms related
to a transaction and communicated their agreement to each other.
Adjustable
Rate Mortgage (ARM) The rate is based on a market
index, which fluctuates with market conditions plus a margin
to determine the actual interest rate. This total interest rate
normally has both a short-term (semi-annual or annual) and lifetime
"cap," or limit.
Adjustment
Interval In an ARM, the time interval between adjustments,
typically 6 months or annually.
Agency
The law of
agency varies by state but generally the concept of agency explains
who represents whom in a real estate transaction. The listing
agent represents the seller The buyer's agent represents the
buyer. A dual agent represents both sides in the transaction,
which raises the question as to whose side the agent is on.
Agency
Disclosure Most states require that buyers and sellers
receive a Disclosure Statement setting forth the responsibilities
of the agents in a transaction.
Amortization
A mortgage payment plan whereby a portion of each payment
is applied to interest and the balance of the payment reduce
the principal, the result of which is that the loan is paid
in full at the end of the loan term.
Annual
Percentage Rate (APR) The cost of credit as a percentage
of the amount financed. Lenders must disclose their costs in
these terms according to the Truth-in-Lending Act.
Application
Fee Some lenders charge an up-front Application Fee
to cover some of the costs of processing the loan application.
Sometimes, the lender only collects the actual costs of an appraisal
and credit report.
Appraisal
When a person finances the purchase of a home, the lender
will require the buyer to pay an appraiser to make an estimate
of the fair market value (FMV) of the home. The appraiser makes
this estimate by evaluating sales of comparable homes in the
area.
Arbitration
The settlement of a dispute by a neutral third party chosen
to hear both sides and render a decision. It is an alternative
to expensive litigation.
Assumable
Loans Loans that can be transferred if a home
is sold.
Balloon
Loans A type of mortgage loan that becomes 100% due
after a specified amount of time has elapsed (usually 7-10 years).
When the loan matures, you must pay the loan off (Balloon Payment).
The advantage of this type of loan is that the initial rate
is usually lower The disadvantage is that you may have to refinance
or pay off the loan if you do not sell the home by the time
the loan matures.
Buydown
The process of paying additional points on the loan to reduce
the interest rate and monthly payment. There are typically two
types: a Permanent Buydown, and a Temporary Buydown. In a Permanent
Buydown, a sufficient amount of interest is prepaid to lowerthe
rate permanently. In a Temporary Buydown, only enough interest
is paid to lower the payment for the first three years. The
purpose of a Temporary Buydown is to lower the current payments
thereby making loan qualification easier. This usually makes
sense because income will usually continue to increase. The
most common Temporary Buydown is called 3-2-1, meaning three
percent lower the first year, two percent lower the second year
and one percent lower the third year.
Buyer's
Cost Estimate A list of the fees associated with
closing a home purchase. It also includes the estimated monthly
payments.
Cap
A limitation on the interest rate of an Adjustable Rate Mortgage
(ARM)
Closing
The end of the real estate transaction. It comes when all requirements
of the parties are met, funds transfer and the Deed is recorded
transferring title.
Closing
Costs The expenses in addition to down payment which
buyers normally incur in the settlement process. The agreement
of sale negotiated previously between the buyer and the seller
should state in writing who will pay the costs. These costs
include such items as:
Closing
Statement An accounting of funds for the buyer and
seller.
Commission
The listing agent negotiates a percentage of the sales price
with the seller as the compensation for marketing the seller's
home. In turn, the listing agent offers a percentage of the
commission, usually half, to buyer's brokers as compensation
for representing a buyer
Condominium
A development where the buyer purchases individual ownership
of a dwelling unit and a share of the common area that serves
the entire project. For example, you may own unit #25 and a
1/100th interest in the common area of a 100 unit project.
Conventional
Loan A loan without government insurance or
guarantee.
Convertible
An option available on some adjustable rate mortgages (ARMs)
that allows the loan to be converted to a fixed rate mortgage.
Conversion usually involves paying a one-time fee and is limited
to a certain time-frame.
Cooperative
Housing Also known as a Co-op and Stock Co-op. This
is a form of ownership, where the building is owned by a corporation,
the stockholders of which are the residents of the dwellings.
The resident does not own his unit; he has the right to occupy
it.
Counter-Offer
A party in a transaction can provide an alternative offer,
or "counter offer," to keep the negotiation process going.
Credit
Check An inquiry about your credit through one of
the major credit agencies. The lender will charge you a fee,
and have you fill out and sign an information document. Your
reported credit is a major factor of risk in the eyes
of the lender. If you have excellent credit, you can expect
to have a wide variety of loan programs with the best possible
rate available to you. If your credit is fair, you may lose
out on the more desirable rates and programs. If your credit
is poor, you may he unable to obtain a loan at all.
Deed
The document that conveys title to real estate.
Deed
of Trust In many states, the word mortgage
is used but the security instrument whereby the property is
given as security for the loan is actually a Deed of Trust.
There are three parties to the instrument: the Beneficiary (lender),
the Trustor (borrower) and the Trustee. The borrower transfers
the legal title for the property to the Trustee who holds the
property in trust as security for the payment of the debt.
Default
Each promissory note and mortgage (or deed of trust) will
contain provisions outlining the conditions under which the
note is in default, at which time the lender has the right to
start foreclosure. The most common of these, of course, is the
failure to make payments on time. Other events of default are
failure to pay property taxes, failure to keep adequate insurance
in force, or allowing the property to deteriorate.
Deposit
Good faith money offered at the beginning of the negotiation
as evidence of the sincerity of the offer. In most cases, this
deposit is refundable.
Discount
Points Quoted in percentage of the total loan ( 1
point = 1%). This amount of money is deducted by the lender
as a fee for making the loan. Market conditions determine if
there are any points charged and how much.
Down
Payment The part of the purchase price paid in cash.
The higher the down payment, the easier to qualify and the better
the loan terms.
Escrow
The escrow company is an impartial third party (sometimes
affiliated with a title company) that holds documents and funds
until all required elements of the transaction have been fulfilled.
When the transaction is completed, escrow is said to be "closed."
The use of escrow services varies by state.
Encumbrance
A legal right or interest that affects clear title. Usually
the Agreement of Sale will provide that the seller deliver a
preliminary title report or the results of a title search within
10 or 15 days. The purpose of obtaining a title is to reveal
the existence of encumbrances and to give the buyer the opportunity
to determine whether he wants to purchase with the encumbrance
or explore what can be done to remove it. Some encumbrances,
such as easement rights, special assessments, or restrictive
covenants of Community Associations (CC&Rs) are beneficial.
Others such as mortgages, judgment liens and unpaid taxes are
invariably extinguished through settlement process.
Equity
The difference between the current value of a home and the
debt against it.
Fair Housing Laws A number of State and Federal laws
support the concept that all persons have the right to housing
without being discriminated against.
Federal
Home Loan Mortgage Corporation (FHLMC) (Freddie Mac)
Similar to FNMA, Freddie Mac is also a purchaser of loans.
Loans that conform to FNMA/FHLMC standards are referred to as
Conforming Loans.
Federal
National Mortgage Association (FNMA) (Fannie Mae) A
quasi-governmental organization that purchases mortgage loans
from banks and mortgage bankers, groups them in pools and sells
security interest in the pools to institutional investors.
Foreclosure
A legal process in which the home is sold to pay off the
debt against it.
Government
Loans FHA or VA loan. These loans are partially backed
by the government and can help veterans and low-to-moderate
income families afford homes. The advantages of these types
of loans are lower interest rates, easier quaifyings, lower
down payment requirements, and the fact that they can be assumed
by someone else if the home is sold.
Graduated
Payment Mortgages A type of mortgage where the monthly
payments start low but increase by a fixed amount each year
for the first few years. The payment shortfall or negative amortization
is added to the principal balance. The advantage is a lower
monthly payment at the beginning of the loan term. Typically
the disadvantages are a higher rate than traditional mortgage
loans as well as lenders requiring a larger down payment. In
addition, the negative amortized amount increases the balance
due on the total loan which can be a problem if the value of
the home declines.
Home
Warranty A policy that protects the buyer against
the failure of appliances, plumbing, electrical and other components
of the home.
Housing
Ratio One of severe financial calculations performed
by your lender when applying for a loan to determine if you
can afford a particular monthly payment. The housing ratio (also
known as the income ratio) is your total monthly payment including
taxes and insurance divided by your total monthly income.
HUD
Department
of Housing and Urban Development.
Index
A measure that tracks changes in interest rates in the investment
markets. Used by lenders to determine interest rates for Adjustable
Rate Mortgages (ARM).
Interest
The price paid for borrowing money.
Insurance
Homeowner's insurance covers the owner of a property against
loss due to fire and a number of other threats. The lender will
require such a policy.
Jumbo
(or Non-Conforming) Loans A mortgage loan that exceeds
the amount that is acceptable if the loan were to be resold
on the secondary market to Fannie Mae and Freddie Mac. Usually,
loans with a face value greater than $207,000.
Lien
A claim against a property.
Loan
to Value Ratio (LTV) The ratio of the loan amount
to the appraised value of the house. A down payment of 20% leaves
a LTV of 80%.
Margin
A fixed percentage rate over a variable market index
that determines the interest rate on an Adjustable Rate Mortgage
(ARM).
Mediation
Friendly or diplomatic intervention usually by consent or
invitation, for settling differences between persons. See Arbitration.
Mortgage
A legal instrument by which property is pledged as security
for a debt. Mortgages are used in some states and a deed of
trust in others.
Mortgage
Commitment A written notice from the lender
saying it will fund the mortgage loan to enable a buyer to purchase
a house.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage agreement.
Multiple
Listing Service (MLS) The Multiple Listing Service
is a computer database of property offered for sale and sold.
This database is available to all member real estate agents.
It also allows research of sales by member agents to determine
the market value of a home you might wish to purchase.
One
(1 ) Year Treasury Note One of several market indices
used by lenders to price their Adjustable Rate Mortgage (ARM).
PITI
Principal, interest, taxes and insurance (your total housing
payment).
Preliminary
Title Report A report on the condition of title of
a property, issued by a title company, for the buyer's approval.
Prepayment
Penalty A fee charged for paying off your mortgage
early.
Prequalification
The process of determining the amount a particular
lender will let you borrow You should strive to obtain prequalification
with at least two or three separate lenders.
Principle
The original loan amount and subsequent remaining balance
at a point in time of the loan.
Private
Mortgage Insurance (PMI) If the down payment
is less than 20%, a conventional lender will require the buyer
to purchase insurance to help reduce the risk of default. There
is usually a fee at the close of escrow as well as a monthly
fee that continues as long as the loan to value ratio is greater
than 80%.
Promissory
Note The document containing the buyer's promise
to repay the lender and the terms of the loan.
Property
Taxes Taxes paid to the government, usually the County
or State, to support education, police, fire protection, etc.
Qualifying
The process whereby the lender assesses the borrowers' ability
to re-pay the loan.
Rate
Lock The period of time for which a quoted loan rate
is guaranteed against change due to market conditions
Realtors
"Realtor" is a registered trademark of the National Association
of Realtors. The term Realtor applies only to those licensed
real estate agents who are members of the Association. The agent
promises to conform to the standards and code of ethics of the
Association.
Recording
Placing certain documents in the public record of the county
where property is located (deeds, mortgages, etc.) to give notice
of rights relative to the property involved.
Refinancing
Obtaining a new mortgage loan that pays off your existing
loan.
Six
(6) Month CD One of several market indices used by
lenders to price their Adjustable Rate Mortgage (ARM).
Special
Assessments A special tax imposed on a property and
usually all other property in the immediate area, for school
or road construction, sewers, street lights and so forth.
Start
Rate The initial interest quoted on an Adjustable
Rate Mortgage (ARM). WARNING: This may not be the fully indexed
rate. That means that even if interest rates in the market are
steady, your rate may increase in the future.
Tax
Service The lender requires that the borrower pay
a tax service to verify that property taxes have been paid.
Title
Insurance Title insurance insures against encumbrances
and other items that may cloud the title. An Owner's Policy
insures the owner and an American Land Title Association Policy
(ALTA), sometimes called the lender's or extended policy, insures
the lender.
Underwriter
The underwriter is the lender or company who actually
provides the money for your loan. A mortgage broker represents
several underwriters.
VA
Loan The Veteran's Administration's Loan Guarantee
program allows military veterans to acquire homes with little
or no money down.
Vesting
The manner of taking title to real property. This choice
may have significant legal and tax consequences. Consult an
attorney for specific concerns.
