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Glossary

A

Amenity:

A feature of a home or property that benefits the buyer but that is not necessary to its use; may be natural like a great view or man-made like a fireplace

Amortization: The repayment of a mortgage loan by making monthly payments of principal and interest. The monthly payment is based on a schedule that will pay off the loan over a specific time period, for example, 15 or 30 years.

Annual Percentage Rate (APR): Is a number calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, origination fees, and other closing cost associated with the loan.

Application: The first step in the loan process. This form is used to record information about the borrower necessary to the underwriting process.

Appraisal: A report prepared by an appraiser that estimates the property’s fair market value. It’s usually required by a lender before loan approval to ensure that the mortgage loan amount does not exceed the value of the property.

Appraisal Fee: The charge paid to an appraiser for completing the appraisal.

Appraiser: A qualified individual that appraises property. Most are licensed if they are not employees of the lender.

ARM: Adjustable Rate Mortgage, a mortgage loan subject to changes in interest rates, usually the payments change when the rate adjusts.

Assessor: A government employee responsible for determining the value of a property for the purpose of taxation. Usually an elected official.

Assumable mortgage: A mortgage that can be transferred from a seller to a buyer. Many ARM’s and some government sponsored loans can be assumed. In order for the seller to be released from liability the lender must approve of the assumption and grant a release of liability to the seller.

B

Balloon Mortgage: A mortgage that may offer low rates for the initial period (usually 5, 7, or 10) years, after that time period the entire balance is due by the borrower.

Bankruptcy: A federal law whereby a person’s assets are turned over to a trustee liquidated and used to pay off outstanding debts; this usually occurs when someone owes more than they are able to repay.

Borrower: A person who has been approved to receive a loan and is then obligated to repay it according to the loan terms.

Building code: A building code is a local regulation that determines the design, construction, and materials that can be used in a building, the goal is safety.

Budget: Step 3 in our program, a detailed record of all income earned and spent during a specific period of time.

C

Cap:  The limit an interest rate can rise on an adjustable rate mortgage. Most ARM’s have two caps, one limits each adjustment the other limits the total or maximum adjustment. For example, a 1/5 cap would limit each adjustment to 1% and the rate could never exceed 5% above the original rate.

Cash reserves: An amount sometimes required in addition to the down payment and closing costs, most conventional loans usually require 2 months of PITI as a reserve.

Certificate of title: A document usually provided by a title company that shows the property legally belongs to the current owner. 

Closing: Time to celebrate, this is when the property is formally sold and transferred from the seller to the buyer. It is also when the borrower takes on the loan obligation, pays the closing costs, and

receives title from the seller.

Closing costs: Costs above and beyond the sale price of the property that must be paid at closing; these costs vary by location and must be disclosed in detail to the borrower after submission of a loan application.

Commission: Usually a percentage of the property’s sales price that is collected by a realtor as a fee for their assistance in making the transaction happen.

Collateral: Property offered to secure a loan and subject to seizure if you default.

Condominium:  A form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex, the owner also shares financial responsibility for common areas.

Conventional loan:  A loan that is not guaranteed or insured by the U.S. government. Conventional loans are insured by mortgage insurance companies, if insurance is required.

Cooperative (Co-op):  Residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit, no individual ownership, rather an undivided interest in the entire building.

Cosigner: A person who signs your loan and agrees to repay it if you do not.

Credit: The right granted by a creditor to pay in the future for a purchase made in the present.

Credit history: The history of an individual’s debt payments stored in one of three national credit repositories.

Credit report: A report that documents an individual’s credit history listing all past and present debts and the timeliness of their repayment.

Credit Bureau: An agency that keeps your credit file, also called a credit reporting agency.

Credit Score: A number representing the probability a borrower may default or repay a loan in a timely manner. It is based upon credit history and is used to determine ability to qualify credit.

Creditor: A person or business from whom you borrow or to whom you owe money.

Creditworthiness: Past, present, and future ability to repay debts.

D

Debt-to-income ratio: a comparison of the gross income to housing and non-housing expenses, the lower the ratio the more disposable income you have available.

Deed: A document that transfers ownership of a property.

Deed-in-lieu: to avoid (in-lieu of) foreclosure, a deed is given to the lender to repay the debt, requires the lender’s approval, not something automatically given.

Default: Any action or lack thereof that falls outside the terms of the mortgage. Missing or being late making payments, damaging the property, not carrying insurance, as just a few examples.

Delinquency: Late payments.

Disclosures: Information that must be given to consumers about their financial dealings with a lender.

Discount point: A fee paid at closing and usually equal to 1% of the loan amount, discount points are paid to reduce the interest rate on a loan.

Down payment: A portion of a home’s purchase price that is paid in cash and is not part of the mortgage loan.

E

Earnest money: A deposit made by a potential buyer to show they are serious about buying the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer doesn’t close.

Equity: The owner’s financial interest in a property calculated by subtracting total debt from the value of the property.

Escrow account: a separate account for expenses such as property taxes, homeowners insurance, mortgage insurance, etc.

F

Fair Housing Act: A Federal law that prohibits discrimination in the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

Fair market value: The price that a willing buyer and seller will agree upon when they are acting freely and with complete knowledge of the property.

Fannie Mae: Federal National Mortgage Association (FNMA); a federally chartered company owned by stockholders that purchases residential mortgages and converts them into securities (bonds) for sale to investors.

FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

Finance Charge: A total dollar amount that credit will cost including closing cost.

Fixed-rate mortgage: A mortgage with payments that remain the same throughout the life of the loan because the interest rate does not change.

Flood insurance: Insurance that protects homeowners against losses from a flood, required by lenders if the home is located within a flood plain.

Foreclosure: A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.

Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders with funds for new homebuyers. Direct competitor to Fannie Mae.

G

Ginnie Mae: Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment, works similar to Fannie and Freddie.

Good faith estimate: (GFE) a written estimate of all closing fees including pre-paid and escrow items as well as lender charges that must be given to the borrower within three days after submission of a loan application.

H

Home Equity Line of Credit: A form of open-end credit in which the home serves as collateral.

Home inspection: An examination of a home’s structure and mechanical systems that makes the potential homebuyer aware of any repairs that may be needed.

Home warranty: A contract that offers protection for mechanical systems and appliances against unexpected repairs not covered by homeowner’s insurance.

Homeowner’s insurance: An insurance policy that combines protection against damage to a dwelling and its contents with protection against claims of negligence.

HUD: The U.S. Department of Housing and Urban Development; established in 1965.

HUD1 Statement: Aka the “settlement sheet,” it itemizes all closing costs; must be given to the borrower at or before closing.

HVAC: Heating, Ventilation and Air Conditioning; a home’s heating and cooling system.

I

Index: An easily definable number that is published, used to determine changes to the interest rate charged on an adjustable rate mortgage.

Inflation: The increase in cost of goods and services available for purchase; inflation results in a decrease in the dollar’s value.

Interest: A fee charged for the use of money, think of it as paying rent on money borrowed.

Interest rate: The amount of interest charged on a loan payment and is usually expressed as a percentage.

Insurance: A contract with in insurance company for protection against a specific loss over a period of time.

J

Joint Account: A credit account held by two or more people so that all can use the account and all assume legal responsibility to repay. Not the same as a joint checking account.

Judgment: A legal decision requiring debt repayment.

L

Late Payment: A payment made later than agreed upon in a credit contract and on which additional charges may be imposed.

Lien: A legal claim against property that must be satisfied when the property is sold.

Loan fraud: Purposely giving incorrect information during the loan application process in order to better qualify for a loan, may result in civil liability or criminal penalties.

Loan-to-value (LTV) ratio: A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased or refinanced.

Lock-in: Interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.

M

Margin: An amount added to an index to determine the interest rate on an ARM  after the initial period.

Mortgage: A lien against a property that secures the repayment of a loan.

Mortgage banker: A company that originates loans and then sells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.

Mortgage broker: A firm that originates and processes loans for any number of lenders.

Mortgage insurance: A policy that protects lenders against losses that can occur when a borrower defaults on a mortgage loan. Mortgage insurance is required for borrowers with a down payment of less than 20% of the home’s purchase price. See PMI.

Mortgage insurance premium (MIP): A monthly payment, usually part of the mortgage payment, paid by a borrower for mortgage insurance on an FHA loan.

O

Open-End Credit: A line of credit that may be used repeatedly, including credit cards, overdraft credit accounts, and home equity lines.

Offer: Indication by a buyer of a willingness to purchase a home at a specific price; generally put forth in writing.

Origination: The process of preparing, submitting and evaluating a loan application.

Origination fee: The charge for originating a loan, usually paid at closing.

P

PITI: Principal, Interest, Taxes, and Insurance, the four parts of most monthly mortgage payments.

Points and Origination Fees: Fees paid to the lender for the loan. One point equals 1 percent of the loan amount. Points are usually paid in cash at closing. An origination fee covers the lender’s work in preparing your mortgage loan. Points buy down the rate.

 

Power of Attorney (POA): A Power of Attorney is a written document authorizing one individual, referred to as the Attorney in Fact to act on behalf of another regarding legal matters like signing a contract, deed or other instruments.  The signature of the Attorney in Fact is binding on the part of the individual that conveyed the POA.  There are different forms of POA’s, they can be general and all inclusive or specific for a single transaction.  They must be notarized to be binding.    

 

PMI: Private Mortgage Insurance, insurance companies provide mortgage insurance for borrowers with down payments of less than 20% of a purchase price. Insures the lender from loss in the event of default.

Pre-approval: Lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.

Pre-foreclosure sale: Allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.

Pre-qualify: A lender determines the maximum amount an individual is eligible to borrow. Not the same as pre-approval.

Premium: The amount paid on a regular schedule by a policyholder that maintains insurance coverage.

Prepayment: Payment of the mortgage loan before the scheduled due date and may be subject to a prepayment penalty.

Principal: The amount borrowed from a lender; does not include interest.

R

Radon: A radioactive gas found in some homes that if occurring in strong enough concentrations can cause health problems.

Real estate agent: An individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker. Not necessarily a Realtor

REALTOR: A real estate agent or broker who is a member of the National Association of Realtors and its local and state associations.

Refinancing: Paying off one loan by obtaining another.

Rehabilitation mortgage: A mortgage that covers the costs of rehabilitating a property. Some rehab loans allow a borrower to roll the costs of rehab and home purchase into one mortgage loan.

Rescission: The cancellation of a contract. Refinance loans contain a 3 day right of rescission.

RESPA: Real Estate Settlement Procedures Act, a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships

S

Security: Property pledged to the creditor in case of default on a loan; see collateral.

Security Interest: The creditor’s right in a property or a portion of property offered as security.

Settlement: Another word for closing .

Subordinate: To make one’s claim secondary to another.  An example, a second mortgage is subordinate to the first mortgage.

Survey: A property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.

Sweat equity: Using labor to build or improve a property as part of the down payment. Rarely allowed, select types of loans

T

Title insurance: Insurance that protects the lender and optionally the borrower against any claims about the ownership of the property.

Title search: A check of public records to make certain that the seller is actually the owner of the real estate and that there are no outstanding liens or other claims against the property.

Truth-in-Lending: A federal law obligating  lenders to give full written disclosure of all fees, terms, and conditions associated with a loan.

Underwriting: The process of analyzing a loan application to determine if it meets the guidelines for the loan.

VA: Department of Veterans Affairs, a federal agency which guarantees loans made to veterans, works similar to mortgage insurance.

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