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The closing process
Homebuyer's Dictionary (glossary)
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Homebuyer's Dictionary (glossary)
Acceleration Clause
Allows the lender to speed up the rate at which your loan comes due or even
to demand immediate payment of the entire outstanding balance of the loan should
you default on your loan.
Adjustable Rate Mortgage (ARM)
Is a mortgage in which the interest rate is adjusted periodically based on a
preselected index. Also sometimes known as the renegotiable rate mortgage, the
variable rate mortgage or the Canadian rollover mortgage.
Adjustment Interval
On an adjustable rate mortgage, the time between changes in the interest rate
and/or monthly payment, typically one, three or five years, depending on the
index.
Amortization
Means loan payment by equal periodic payments calculated to pay off the debt
at the end of a fixed period, including accrued interest on the outstanding
balance.
Annual Percentage Rate (APR)
An interest rate reflecting the cost of a mortgage as a yearly rate. This rate
is likely to be higher than the stated note rate or advertised rate on the mortgage,
because it takes into account points and other credit costs. The APR allows
homebuyers to compare different types of mortgages based on the annual cost
for each loan.
Appraisal
An estimate of the value of property, made by a qualified professional called
an "appraiser."
Appraisal Fee
A fee paid to the lender to cover the cost of a written report which estimates
the monetary value of a property on the open market.
Assumption
The agreement between buyer and seller where the buyer takes over the payments
on an existing mortgage from the seller. Assuming a mortgage is simply taking
the loan over from the seller and becoming liable for the repayment. Assuming
a loan can usually save the buyer money since this is an existing mortgage debt,
unlike a new mortgage where closing costs and new, possibly higher, market-rate
interest charge will apply. The lender of record should be contacted. Their
approval may be needed, and the seller may continue to have liability for the
mortgage.
Balloon (Payment) Mortgage
Usually a short-term fixed-rate loan which involves small payments for a certain
period of time and one large payment for the remaining amount of the principal
at a time specified in the contract.
Broker
An individual in the business of assisting in arranging funding or negotiating
contracts for a client but who does not loan the money himself. Brokers usually
charge a fee or receive a commission for their services.
Buydown
When the lender and/or the home builder subsidizes the mortgage by lowering
the interest rate during the first few years of the loan. While the payments
are initially low, they will increase when the subsidy expires.
Caps (Interest)
Consumer safeguards which limit the amount the interest rate on an adjustable
rate mortgage may change per year and/or the life of the loan.
Caps (Payment)
Consumer safeguards which limit the amount monthly payments on an adjustable
rate mortgage may change.
Closing
The meeting between the buyer, seller and lender or their agents where the property
and funds legally change hands. Also called settlement.
Closing Agent
A closing or settlement agent coordinates the various closing activities including
preparing and recording the closing documents and disbursing funds after settlement
or closing. Typically the closing is conducted by a title company employee.
Closing Costs
Usually include an origination fee, discount points, appraisal fee, title search
and insurance, survey, taxes, deed recording fee, credit report charge and other
costs assessed at settlement. The costs of closing usually are about 3 percent
to 6 percent of the mortgage amount.
Closing Date
The date of the final transfer of the ownership of a house from the seller to
the buyer, which occurs after both have met all the terms of their contract
and the deed has been recorded.
Commitment
An agreement, often in writing, between a lender and a borrower to loan money
at a future date subject to the completion of paperwork or compliance with stated
conditions.
Construction Loan
A short term interim loan for financing the cost of construction. The lender
advances funds to the builder at periodic intervals as the work progresses.
Contingent
A condition that must be met before a contract is legally binding. 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. A contingency for financing specifies that if you do not get
the mortgage financing you need to purchase the house at the terms you want,
the offer is void and you will be refunded your deposit.
Conventional Loan
A mortgage not insured by FHA or guaranteed by the VA or Farmers Home Administration
(FmHA).
Credit Ratio
The ratio, expressed as a percentage, which results when a borrower's monthly
payment obligation on long-term debts is divided by his or her net effective
income (FHA/VA loans) or gross monthly income (Conventional loans). See Housing
Expenses-to-Income Ratio.
Credit Rating/Credit Score
A numerical value that ranks a borrower's credit risk at a given point in time.
Your credit score is based on all the information in your credit report. This
information is converted into a number which lenders use to determine whether
you are likely to repay your loan in a timely manner.
Credit Report
A report of an individual's credit history, including open and fully repaid
debt. The credit report is prepared by a credit bureau and used by a lender
in determining a loan applicant's creditworthiness
Credit Report Fee
A fee paid for a report of an individual's credit history, including open and
fully repaid debt. The credit report is prepared by a credit bureau and used
by a lender in determining a loan applicant's creditworthiness.
Deed of Trust
In many states, this document is used in place of a mortgage to secure the payment
of a note.
Default
Failure to meet legal obligations in a contract, specifically, failure to make
the monthly payments on a mortgage.
Deferred Interest
See Negative Amortization.
Delinquency
Failure to make payments on time. This can lead to foreclosure.
Department of Veterans Affairs (VA)
An independent agency of the federal government which guarantees long-term,
low- or no-down payment loans to eligible veterans.
Discount Points
Prepaid interest assessed at closing by the lender. Each point is equal to 1
percent of the loan amount (e.g. two points on a $100,000 mortgage would cost
$2,000).
Down Payment
Money paid to make up the difference between the purchase price and mortgage
amount. Down payments usually are 0 to 20 percent of the sales price on conventional
loans, and no money down up to 5 percent on FHA and VA loans.
Due-On-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand
immediate payment of the balance of the mortgage if the mortgage holder sells
the home.
Earnest Money
Money given by a buyer to a seller as part of the purchase price to bind a transaction
or assure payment.
Equal Credit Opportunity Act (ECOA)
Is 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.
Equity
The difference between the fair market value and current indebtedness, also
referred to as the owner's interest.
Escrow
Refers to a neutral third party who carries out the instructions of both the
buyer and seller to handle all the paperwork of settlement or "closing."
Escrow may also refer to an account held by the lender into which the homebuyer
pays money for tax or insurance payments.
Fannie Mae
See Federal National Mortgage Association.
Farmers Home Administration (FmHA)
Provides financing to farmers and other qualified borrowers who are unable to
obtain loans elsewhere.
Federal Home Loan Mortgage Corporation (FHLMC)
Also called Freddie Mac. A quasi-governmental agency that purchases conventional
mortgages from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA)
A division of the Department of Housing and Urban Development. Its main activity
is the insuring of residential mortgage loans made by private lenders. FHA also
sets standards for underwriting mortgages.
Federal National Mortgage Association (FNMA)
Also known as Fannie Mae. A tax-paying corporation created by Congress that
purchases and sells conventional residential mortgages as well as those insured
by FHA or guaranteed by VA. This institution, which provides funds for one in
seven mortgages, makes mortgage money more available and more affordable.
FHA Loan
A loan insured by the Federal Housing Administration open to all qualified home
purchasers. While there are limits to the size of FHA loans, they are generous
enough to handle moderate-priced homes almost anywhere in the country.
FHA Mortgage Insurance
Requires a small fee (up to 3 percent of the loan amount) paid at closing or
a portion of this fee added to each monthly payment of an FHA loan to insure
the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this
fee would amount to either $2,250 at closing or an extra $31 a month for the
life of the loan. In addition, FHA mortgage insurance requires an annual fee
of 0.5 percent of the current loan amount, the more years the fee must be paid.
Fixed-Rate Mortgage
A loan on which the interest rate is set for the term of the loan.
Foreclosure
A legal procedure in which property securing debt is sold by the lender to pay
a defaulting borrower's debt.
Good-faith Estimate
The good-faith estimate is a report from the lender that states the costs you
will incur to obtain a 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.
Graduated Payment Mortgage (GPM)
A type of flexible-payment mortgage where the payments increase for a specified
period of time and then level off. This type of mortgage has negative amortization
built into it.
Gross Monthly Income
The total amount the borrower earns per month, before any expenses are deducted.
Guarantee
A promise by one party to pay a debt or perform an obligation contracted by
another if the original party fails to pay or perform according to a contract.
Hazard Insurance
A form of home insurance in which the insurance company protects the insured
from specified losses, such as fire, windstorm and the like.
Home Inspection
An objective examination of the physical structure and systems of a home.
Homeowner's Insurance
An insurance policy which protects homeowners from financial losses related
the ownership of real property. In addition to covering losses due to vandalism,
fire, hail, etc., most policies also provide theft and liability coverage. Flood
related damage requires a separate flood insurance policy or rider.
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's housing
expenses are divided by his/her net effective income (FHA/VA loans) or gross
monthly income (Conventional loans).
HUD-1 Settlement Statement
A document that provides an itemized listing of the funds that are payable at
closing. Items that appear on the statement include loan fees, points, and initial
escrow amounts, and other fees. 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
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
Impound
That portion of a borrower's monthly payments held by the lender or servicer
to pay for taxes, hazard insurance, mortgage insurance, lease payments, and
other items as they become due. Also known as reserves.
Index
A published interest rate against which lenders measure the difference between
the current interest rate on an adjustable rate mortgage and that earned by
other investments (such as one- three-, and five-year U.S. Treasury Security
yields, the monthly average interest rate on loans closed by savings and loan
institutions, and the monthly average Costs-of-Funds incurred by savings and
loans), which is then used to adjust the interest rate on an adjustable mortgage
up or down.
Interest Rate
The percentage rate at which interest accrues on the mortgage. It is also the
rate used to calculate the monthly payments.
Investor
Money source for a lender.
Lien
A claim upon a piece of property for the payment or satisfaction of a debt or
obligation.
Loan Closing
The final transfer of the ownership of a property from the seller to the buyer,
which occurs after both have met all the terms of their contract and the deed
has been recorded.
Loan Discount Points
A fee paid by the borrower at closing to reduce the interest rate on a mortgage.
A point equals 1 percent of the loan amount.
Loan Origination Fee
The loan origination fee covers the administrative costs of processing the loan.
It is often referred to as "points". One point is 1 percent of the
mortgage amount. An example: a 100,000 mortgage with a loan origination fee
of 1 point would be a fee of $1,000.
Loan-To-Value Ratio
The relationship between the amount of the mortgage loan and the appraised value
of the property expressed as a percentage.
Lock-in
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.
Market Value
The highest price that a buyer would pay and the lowest price a seller would
accept on a property. Market value may be different from the price a property
could actually be sold for at a given time.
Mortgage
A legal document that pledges a property to the lender as security for payment
of a debt.
Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent.
See Private Mortgage Insurance or FHA Mortgage Insurance.
Mortgage Loan Application
Lenders use the information you provide on the loan application to evaluate
whether or not they can give you a loan, and if so, the amount of money they
can lend you.
Mortgage Payment
The monthly payment to made to your lender that reduces the debt once a month.
Your monthly mortgage payment includes 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.
Mortgagee
The lender.
Mortgagor
The borrower or homeowner.
Negative Amortization
Occurs when your monthly payments are not large enough to pay all the interest
due on the loan. This unpaid interest is added to the unpaid balance of the
loan. The danger of negative amortization is that the homebuyer ends up owing
more than the original amount of the loan.
Net Effective Income
The borrower's gross income minus federal income tax.
Non-Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage
without the prior approval of the lender.
Occupancy Date
The date the purchaser may take possession of the property.
Offer
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 includes, for example, the address of the home, the sales
price, the type of financing you will use to purchase the home, 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.
Origination Fee
The fee charged by a lender to prepare loan documents, make credit checks, inspect
and sometimes appraise a property; usually computed as a percentage of face
value of the loan.
Personal Property
Any property that is not real property. An example of personal property is furniture.
Often real property is distinguished between personal property if it is fixed
or attached to the property.
PITI
Principal, interest, taxes, and insurance. Also called monthly housing expense.
Points
See Discount Points
Power of Attorney
A legal document authorizing one person to act on behalf of another.
Prepaids
Expenses necessary to create an escrow account or to adjust the seller's existing
escrow account. Can include taxes, hazard insurance, private mortgage insurance
and special assessments.
Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance
of their due date.
Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed
in some form (but not necessarily imposed) in 36 states and the District of
Columbia.
Principal
The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment, lenders will allow
a smaller down payment, and in some cases no down payment. With the smaller
down payment loans, however, borrowers are usually required to carry private
mortgage insurance. Private mortgage insurance will require an initial premium
payment of 1.0 percent to 5.0 percent of your mortgage amount and may require
an additional monthly fee depending on your loan's structure. On a $75,000 house
with a 10 percent down payment, this would mean either an initial premium payment
of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a
monthly payment of $25 to $30.
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 agreement states the terms and conditions
under which a property will be sold.
Real Estate Sales Professional
A person licensed to negotiate and transact the sale of real estate on behalf
of the either the buyer or the property owner.
Realtor®
A real estate broker or an associate holding active membership in a local real
estate board affiliated with the National Association of Realtors®.
Recision
The cancellation of a contract. With respect to mortgage refinancing, the law
that gives the homeowner three days to cancel a contract in some cases once
it is signed if the transaction uses equity in the home as security.
Recording Fees
Money paid to the lender for recording a home sale with the local authorities,
thereby making it part of the public records.
Refinance
Paying off an existing loan with the proceeds from a new loan using the same
property as security. Usually done to lower the interest payment or take cash
from the equity in the property.
Renegotiable Rate Mortgage (RRM)
A loan in which the interest rate is adjusted periodically. See Adjustable Rate
Mortgage.
Real Estate Settlement Procedures Act (RESPA)
RESPA is a federal law that allows consumers to review information on known
or estimated settlement costs once after application and once prior to or at
settlement. The law requires lenders to furnish information after application
only.
Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower
using the borrower's equity in the home as security.
Sales Contract
A written contract signed by the buyer and seller stating the terms and conditions
under which a property will be sold. The agreement states the terms and conditions
under which a property will be sold.
Servicing
All the steps and operations a lender performs to keep a loan in good standing,
such as collection of payments, payment of taxes, insurance, property inspections
and the like.
Settlement
See Closing.
Settlement Costs
See Closing Costs.
Shared Appreciation Mortgage (SAM)
A mortgage in which a borrower receives a below-market interest rate in return
for which a lender (or another investor such as a family member or other partner)
receives a portion of the future appreciation in the value of the property.
May also apply to mortgages where the borrower shares the monthly principal
and interest payments with another party in exchange for a part of the appreciation.
Survey
A measurement of land, prepared by a registered land surveyor, showing the location
of the land with reference to known points, its dimensions, and the location
and dimensions of any building.
Term Mortgage
See Balloon Payment Mortgage.
Title
A document that gives evidence of an individual's ownership of property.
Title Insurance
A policy, usually issued by a Title Insurance company, which insures a homebuyer
against errors in the title search. The cost of the policy is usually a function
of the value of the property, and is often borne by the purchaser and/or seller.
Title Search
An examination of municipal records to determine the legal ownership of property.
Usually is performed by a title company.
Truth-in-Lending (TIL)
A federal law requiring disclosure of the Annual Percentage Rate to homebuyers
shortly after they apply for the loan.
Underwriting
The decision whether to make a loan to a potential homebuyer based on credit,
employment, assets, and other factors and the matching of this risk to an appropriate
rate and term or loan amount.
Up-front Costs
Expenses paid at time of property closing.
VA Loan
A long-term, low-or no-down payment loan guaranteed by the Department of Veterans
Affairs. Restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee
A premium of up to 2 percent (depending on the size of the down payment) paid
on a VA-backed loan. On a $75,000 30-year fixed-rate mortgage with no down payment,
this would amount to $1,406 either paid at closing or added to the amount financed.
Variable Rate Mortgage (VRM)
See Adjustable Rate Mortgage.
Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status
and balance of his/her financial accounts.
Verification of Employment
A document signed by the borrower's employer verifying his/her position and
salary.
Wraparound
Results when an existing assumable loan is combined with a new loan, resulting
in an interest rate somewhere between the old rate and the current market rate.
The payments are made to a second lender or the previous homeowner, who then
forwards the payments to the first lender after taking the additional amount
off the top.
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