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There are frequently many new
terms that clients come across when buying a home or refinancing a
property. This list will help to define many of those terms and hopefully
clarify some of the questions you might have.
Appraisal
An expert opinion on the value of a property.
Annual
Percentage Rate
This is not the note rate applied for, but rather is a government mandated
formula that shows the cost of the loan in a yearly rate by using the note
rate plus certain other upfront costs.
ARM
Loan
Adjustable Rate Mortgage. Mortgage characterized by an interest rate that
can adjust up or down at certain intervals based on a current index
(commonly the 1 year T-Bill) plus a preset margin.
Balloon
Mortgage characterized by level fixed payments for a predetermined
time frame followed by either a refinance or adjustment in interest rate.
Capital
Gains
The tax paid upon certain types of real estate transactions. Contact your
tax advisor for specifics details.
Cash
to Close
The amount needed from the borrower at closing. Consists of down payment,
closing costs and prepaid items. This amount needs to be in the form of a
cashier check made payable to the buyer.
Closing
Date
Date stated on the purchase agreement that buyer and seller agree to
finalize or close the transaction.
Closing
Costs
Various costs of setting up and funding the transaction - including
closing fee, title insurance, appraisal fees, underwriting fee, mortgage
registration tax, etc.
Condo/Town
Home
Property types that usually have the following characteristics: they are
attached, have a homeowners association and dues, the outside maintenance
is taken care of by the association, and common areas and amenities
available to all owners in the association.
Conventional
Financing
Standard, non-government financing.
Credit
Bureaus
Agencies that provide compilations of your credit history. The three main
credit bureaus are Experian, Trans Union, and Equifax.
Credit
Report
Report provided by the credit bureaus which shows the history, current
status, and profile of an individual.
Credit
Scores
The number generated by the credit bureaus which is a numerical
representation of the subjects credit profile, range is from 450 on the
low side to 900 being the highest score possible.
Debt
Ratios
Ratio of debt to pretax income, often expressed as a front (housing
payment only) or back (all debt) ratios. Ex- $5000 monthly income, $1400
housing payment, $1700 total debt would equal ratios of 28%/34%.
Discount
Points
One point equals one percent of the loan amount. Points are used to lower
the interest rate. One point does not equate into lowering the interest
rate one percent. Generally lowering the interest rate 1/8 will cost about
1/2 point, although this can vary based on daily pricing. Typically is tax
deductible. (see Links for accountant advice).
Down
Payment
Difference between loan amount and purchase price.
Earnest
Money
Deposit toward down payment submitted with a purchase agreement as
evidence of the buyers commitment.
Equifax
Information Services
PO Box 740243
Atlanta, GA 30374
(800) 685-1111
Escrows
The portion of the monthly payment that is not applied to principal or
interest, but rather is used to pay mortgage insurance, homeowners
insurance and property taxes.
Experian
Information Services
PO Box 2002,
Allen, TX 75013-3742
(888) 397-3742
Fannie
Mae
Short name for the Federal National Mortgage Association. One of the main
Government Sponsored Agencies which are the companies who sell mortgage
backed bonds to investors. They are the ultimate source of the money that
we lend. Fannie Mae protects its investors by issuing underwriting
guidelines that are to be followed to ensure quality lending; also see
schematic under "commonly asked questions".
Freddie
Mac
Short name for Federal Home Loan Mortgage Corporation - see above.
FHA
Financing
Government backed minimum down financing program which has a lower
mortgage insurance premium and greater credit leeway as compared to
conventional minimum down programs.
Fixed
Loan
Most common type of financing. Terms ranging from 10 to 30 years. Interest
rate and P&I payment remains constant throughout life of loan.
Floating
Not locking in a rate, but rather choosing to float the interest rate as
the market moves up or down.
Flood
Certification
Required document on all loans. Confirms if the property is in or out of a
FEMA designated flood zone.
Funds
held in Escrow
Generally only applies to new construction. Monies held from the seller to
provide payment for repairs or non completed items.
Good
Faith Estimate
Document prepared by lender which estimates and delineates the various
fees and closing costs associated with the home purchase.
Government
Financing
Financing provided from government agencies such as FHA, VA, etc.
HELOC
Home Equity Line of Credit. Second mortgage product, generally
characterized by interest only payments and the ability to draw, pay back,
and redraw.
Home
Inspection
Not required by lender. This is a private inspection done by the buyers
choice to confirm that the property is in acceptable condition.
Homeowners
Association Dues
Amount paid by owner of a town home or condo to cover various amenities or
services provided by the homeowners association (examples -- common areas,
hazard insurance, garbage, mowing, snow removal).
Homeowners/Hazard
Insurance
Insurance which covers damage or loss to the property. The premium is
usually paid into an escrow account held by the mortgage company, which
then pays the insurance company once a year.
HUD-I
(Settlement Statement)
Document prepared by title company at closing which shows where all of the
money in the transaction was coming from and going to.
Jumbo
Loan
Loan with an initial balance greater than $417,000.
Jumbo
Pricing
Refers to the fact that rates are generally slightly higher on jumbo
loans.
Loan-to-Value
(LTV)
Ratio of liens versus value of property or sales price. Ex. 80,000 owed on
a property worth 100,000 equals an 80% LTV.
Lock-in
Period
Time period that a rate is protected for during the loan process.
Locking
in
Choosing to protect a particular rate and program for a specific period of
time.
Mortgage
Insurance (MI)
Insurance which protects the LENDER against default. Generally the higher
the loan-to-value the higher the monthly premium.
Mortgage
-- Document
This document signed at closing is the collateralization of the property
to the note or loan.
Note
This document signed at closing is the promise by the signers to repay the
loan.
Origination
Fee
1% of the loan amount. Can be avoided by paying a higher rate; typically
is tax deductible.
Odd
Days Interest/Per Diem Interest
Collected at closing, it is money collected/refunded to borrower to
synchronize the closing to the monthly payments.
Paying
Points
Money paid upfront to lower the interest rate. Rule of thumb - breakeven
point is (where monthly savings meets/exceeds money paid upfront) usually
around 60 payments or 5 years. This means that in many cases paying points
will pay off as long as you do not sell or refinance your loan before the
breakeven point (actual breakeven point may vary, please talk to us about
your exact situation.) Some niche programs and products may require points
to be paid.
Piggy
Back
A second mortgage closed at the same time as a first mortgage. Usually
purpose is to avoid mortgage insurance, jumbo pricing, or for future
needs.
PITI
Monthly payment, stands for Principal, Interest, Taxes, Insurance (both
hazard and mortgage).
Pre-Approval
Based on documented income, assets, and credit.
Pre-Paids
Group of items paid at closing including monies to set up the escrow
account and to pay prepaid or odd days interest.
Pre-Qualification
Based on stated income, assets and debt. Information not verified, not as
useful or informative as a Pre-Approval.
Pre-Payment
Penalty
An option on certain loan types. A benefit in that the rate is lower on
these products compared to other similar products.
Property
Taxes
Amount of tax due on a property. Usually is collected as part of the
escrow portion of the monthly payment, with the lender being responsible
to forward the escrowed money as the bills come due on May 15 and Oct 15.
Purchase
Agreement
Contract between buyer and seller outlining the terms of the agreement.
Rate
vs Price
Rate refers to the interest rate. Price refers to points. It is easy to
become confused as both rate and points are usually referred to in 1/8
percent increments. A good rule of thumb is that often a 1/8% change in
interest rate reflects a 1/2% change in points (actual rate and points may
vary slightly.
Single
Family Residence
Standard, one unit home, as opposed to a Condo/Town Home with a homeowners
association.
Title
Company
Company that prepares title work and is where the closing is held.
Title
Insurance
Policy provided by the title company on their title work guaranteeing the
accuracy and completion. Lenders Policy is required and only protects the
Lender from loss, Owners Policy is available at buyers discretion and
protects the owner.
Title
Work
Document prepared by title company which outlines the ownership of the
property and other various details.
Trans
Union Information Services
PO Box 1000
Chester, PA 79022
(800) 916-8800
Underwriting
Act of approving a loan application. Underwriters are bound by guidelines
set forth by Fannie Mae, Freddie Mac, FHA or VA as applicable.
VA
Financing
Government backed financing available only for service veterans,
characterized by no down payment, no mortgage insurance, but with a
funding fee.
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An Equal Housing Lender BK-0909074