Insurance coverage that in the event of 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 Fannie Mae approved lender to see how this works based on your personal needs and your payment plan.
The funds are yours to spend in any way you choose.
There are no monthly payments with a HECM.
Your loan funds do not affect Social Security or Medicare benefits. (If you receive Supplemental Social Security or Medicaid, these benefits may be affected.)
You do not have to pay back the loan until you sell your home or no longer use it for your primary residence. Then, you or your estate will repay the cash you received from the HECM, plus interest and other finance charges to the lender. This means that the remaining equity in your home can be passed on to your heirs through the sale of the property.
You will never owe more than the value of the home at the time of repayment, even if the loan balance exceeds the value of your property. This means no debt will ever be passed along to the estate or your heirs.
You and any co-borrowers must be at least 62 years old.
You must own your home outright - or carry a small mortgage balance.
Eligible properties include a single-family home, a two- to four-unit dwelling, a condominium or a manufactured home. All housing types must meet Federal Housing Administration (FHA) guidelines. (Ask your lender if your property qualifies.)
Your home must be your principal residence, which means you must live in it more than half the year.
You must attend pre-application mortgage counseling before you apply for the loan.
You must keep applicable taxes current, as well as maintain insurance coverage on your home.
The amount you can borrow with a HECM depends on the age of the youngest borrower(s), the interest rate, how much your house is worth, and the maximum claim amount. In general, you can get between one-third and one-half of your equity as a line of credit or as a lump sum payment.
The balance of funds advanced against the equity in your home is due and payable when you relinquish your home as a primary residence, or if the borrower(s) pass away. You may have to pay off the debt if you fail to pay property taxes or insurance or if you do not maintain your property.
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:
roof and siding,
windows and doors,
heating and cooling systems,
plumbing and electrical systems,
walls, floors, and ceilings,
and any common areas if you are purchasing a condominium or cooperative.
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.
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 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.
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.
HomeStyle Construction-to-Permanent Mortgage
This mortgage gives you the financial power to build your own home - you can borrow money to build a home from the ground up or to finish building a home that’s currently under construction. This loan provides financing from the construction through the purchase phases of your new home.
You enjoy peace of mind by locking in fixed interest rates on both the construction and permanent mortgage financing phases of your home purchase in one convenient loan.
You can borrow a minimum of 95 percent of the construction cost or the as-completed value of the property (which means your down payment can be as low as 5 percent).
You can use this mortgage to purchase land upon which you build your home.
You save money because there is one set of closing costs, compared to those associated with separate loans for construction and occupancy.
You pay interest only on the funds disbursed during construction.
This mortgage can be used for construction that’s already under way.
A minimum down payment of 5 percent for a one-unit home and 10 percent for two-unit homes.
Construction phases of six, nine, or 12 months, with extensions available up to six months, are allowed.
This loan is available for one- and two-unit owner-occupied homes, one-unit second homes, and one-unit investor homes.
You can choose a 15- or 30-year fixed-rate mortgage. You can also include the construction phase in these terms, or not, depending on your preference.
You can also finance with fixed-period ARMs.
HomeStyle Mortgage Loan
A mortgage that enables eligible borrowers to obtain financing to remodel, repair, and upgrade their existing homes or homes that they are purchasing.
Housing Expense Ratio
The percentage of gross monthly income that goes toward paying housing expenses.
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).
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:
real estate commissions,
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.
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.
If you’re looking to leverage your mortgage to expand purchasing power, this mortgage offers the benefit of a low, fixed-rate monthly payment.
For the first 15 years, monthly payments are lower than a comparable 30-year fixed-rate loan.
Gain control of your cash flow.
Ideal if you plan to stay in your home no more than 15 years and want the lowest monthly payment for that period.
Flexible cash flow for college costs, home improvements, IRA contributions, consumer debt reduction, or optional principal payments.
For the first 15 years, you pay only the interest due every month.
Any prepayments will reduce your principal balance and reduce future monthly payments.
Prepayment of principal may be made without penalty.
Payment adjusts at the start of year 16 to cover all interest and principal due on the loan for the remaining 15 years.
Monthly payment is fixed during years 16 through 30.
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.
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.
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 the interest rate can increase or decrease over the life of the mortgage.
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.
A cash asset or an asset that is easily converted into cash.
A publicly recorded notice of a pending lawsuit against a property owner that may affect the ownership of a property. Some states require lenders to file a lis pendens to begin the foreclosure process if a borrower is in default on loan payments.
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:
bank account balances and account numbers, as well as bank branch address;
information about where you work or what sources of income you have;
outstanding debts (including loans and credit cards with names and addresses of creditors).
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.
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 limit on the size of a mortgage which Fannie Mae and Freddie Mac will purchase and/or guarantee. The conforming loan limit is set annually by Fannie Mae’s and Freddie Mac’s federal regulator, The Office of Federal Housing Enterprise Oversight (OFHEO). OFHEO uses the October to October percentage increase/decrease in the average house price in the monthly interest rate survey of the Federal Housing Finance Board (FHFB) to adjust the conforming loan limits for the subsequent year.
Mortgages which exceed the conforming loan limit are known as jumbo mortgages. The interest rate on jumbo mortgages can be higher than the interest rate on conforming mortgages. A borrower whose mortgage amount slightly exceeds the conforming loan limit should analyze the economics of reducing their loan size through a larger downpayment or possibly using secondary financing to qualify for a conforming mortgage verses a jumbo mortgage.
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.
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:
Your home’s appraised value.
HUD 203(b) limit.
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:
pay insurance on time
pay to maintain hazard insurance on the property
adequately maintain the property
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.
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:
Loan origination fee: This fee covers the administrative costs of processing the loan. It may be expressed as a percentage of the loan (for example, 1 percent of the mortgage amount).
Loan discount points: These points are additional funds you pay the lender at closing to get a lower interest rate on your mortgage. 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 no-point, 30-year mortgage is 7.75 percent, paying one point would lower the interest rate to 7.625. Each point is one percent of the mortgage (for example, if your mortgage is $200,000, one point equals $2,000).
Appraisal fee: This fee pays for the appraisal, which the lender uses to determine whether the value of the property secures the loan should you default. The home buyer usually pays this fee. It may appear on the settlement form as “POC,” or “paid outside closing.”
Credit report fee: This covers the cost of the credit report, which the lender uses to determine your creditworthiness.
Assumption fee: This fee is charged if you take over the payments on the seller’s existing loan. It may range from hundreds of dollars to one percent of the loan amount.
Prepaid interest: You are charged interest when you borrow money from a lender, and you will pay interest on the mortgage amount from the date of settlement to the beginning of the period covered by the first monthly mortgage payment. At closing, you may be required to pay in advance the interest for the period.
Escrow accounts: Also called reserves, these accounts are required if your lender will be paying your homeowner’s insurance and property taxes. Your lender sets up the escrow account by adding the cost of the insurance and taxes to your monthly mortgage payments. It is kept in reserve until the bills are due. The bills are sent directly to your lender, who makes the payments for you.
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.
A residential mortgage on a dwelling that is designed to house more than four families, such as a high-rise apartment complex.
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.
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.
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.
Maximizes your buying power immediately, especially if you expect your income to rise quickly in the next few years.
A low first-year interest rate and a 2 percent annual rate cap.
Some one-year ARMs let you convert to a fixed-rate loan at certain adjustment intervals.
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.
You can get a one-year ARM with a term from 10 to 30 years. The most typical ones are 10, 15, or 30 years.
The one-year ARM is most often indexed to the weekly average yield of U.S. Treasury securities adjusted to a constant maturity of one year.
Can be used to buy one-family, principal residences, including condos, and planned unit developments.
Manufactured homes are also eligible. (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.)
Home buyers should not forget that there are on-going costs associated with owning a home. They include, but are not limited to:
Monthly mortgage payment
Utilities, such as gas, oil, water and electricity
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.
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:
Fees paid to the lender: Loan discount points, loan origination fee, credit report fee, appraisal fee, and assumption fee.
Advance payments or prepaid fees: Interest, mortgage insurance premium, and hazard insurance premium.
Escrow accounts or reserves: State and local law and lenders’ policies vary but these reserves may have to be set up if the lender will be paying property taxes, mortgage insurance, and hazard insurance.
Title charges: Closing (or settlement) fee, title insurance premium, title search, document preparation fees, and attorney fees. The fees the buyer pays for a real estate attorney are not part of settlement procedures.
Recording and transfer fees: States often impose a tax on the transfer of property. The payment of a fee for recording the purchasing documents may be required.
Additional charges: Surveyor’s fees, termite and other pet infestation inspection fees, and the cost of other inspections required by the lender.
Adjustments: Items paid by the seller in advance and items yet to be paid for which the seller is responsible. The most common expense is property taxes, but others may have to be addressed.
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:
Professional home inspection: This states that your sales contract is contingent on a satisfactory report by a professional home inspector. You have the right not to proceed with the purchase of the home, or to re-negotiate the terms of purchase, if any major problems are uncovered.
Termite inspection: This states that the property is free of both visible termite infestation and termite damage.
Asbestos: You may choose to hire a qualified professional to inspect the home, take samples for asbestos, and offer solutions to correct any problems.
Formaldehyde: This colorless, gas chemical was used in foam insulation for homes until the early 1980s and is emitted by some construction materials. It is suspected of causing cancer, and it can also irritate the throat, nose, and eyes. A qualified inspector can let you know if the gas is present in the home you wish to purchase.
Radon: Most home buyers require that the house be tested for radon, a naturally occurring, odorless gas that can cause health problems.
Hazardous waste sites: The Environmental Protection Agency has identified contaminated hazardous waste sites across the country. You can contact your EPA regional office for more information.
Lead-based paint: You should also have the house inspected for lead-based paint, which can lead to very serious health problems. If the house was built before 1950, you can be fairly certain lead-based paint was used. For houses built between 1950 and 1978, there is also a chance lead-based paint was used. Lead disclosure regulations can vary from state to state. Health officials in the state where the home you want to buy is located may be able to provide further guidance.
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 mortgage (GPM). Generally, the payment change date occurs in the month immediately after the interest rate 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.
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 hazard insurance.
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.
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:
description of property
earnest money deposit
personal items to be included
length of time the offer is valid
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.
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.
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:
A per-adjustment cap, which specifies the most your interest rate can rise from one adjustment period to the next
A lifetime adjustment cap, which specifies how much your interest rate can rise over the life of your loan
Ask your lender about both caps when evaluating any ARM product.
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time.
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.
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 of