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A, B or C Loans The term A, B or C is a rating of the loan. Generally, loans termed as "A" paper are for borrowers with very good credit. B and C loans indicate a higher risk and the interest rate will be higher

Acceptance When both parties have agreed on the price and terms related to a transaction and communicated their agreement to each other.

Adjustable Rate Mortgage (ARM) The rate is based on a market index, which fluctuates with market conditions plus a margin to determine the actual interest rate. This total interest rate normally has both a short-term (semi-annual or annual) and lifetime "cap," or limit.

Adjustment Interval In an ARM, the time interval between adjustments, typically 6 months or annually.

Agency The law of agency varies by state but generally the concept of agency explains who represents whom in a real estate transaction. The listing agent represents the seller The buyer's agent represents the buyer. A dual agent represents both sides in the transaction, which raises the question as to whose side the agent is on.

Agency Disclosure Most states require that buyers and sellers receive a Disclosure Statement setting forth the responsibilities of the agents in a transaction.

Amortization A mortgage payment plan whereby a portion of each payment is applied to interest and the balance of the payment reduce the principal, the result of which is that the loan is paid in full at the end of the loan term.

Annual Percentage Rate (APR) The cost of credit as a percentage of the amount financed. Lenders must disclose their costs in these terms according to the Truth-in-Lending Act.

Application Fee Some lenders charge an up-front Application Fee to cover some of the costs of processing the loan application. Sometimes, the lender only collects the actual costs of an appraisal and credit report.

Appraisal When a person finances the purchase of a home, the lender will require the buyer to pay an appraiser to make an estimate of the fair market value (FMV) of the home. The appraiser makes this estimate by evaluating sales of comparable homes in the area.

Arbitration The settlement of a dispute by a neutral third party chosen to hear both sides and render a decision. It is an alternative to expensive litigation.

Assumable Loans Loans that can be transferred if a home is sold.

Balloon Loans A type of mortgage loan that becomes 100% due after a specified amount of time has elapsed (usually 7-10 years). When the loan matures, you must pay the loan off (Balloon Payment). The advantage of this type of loan is that the initial rate is usually lower The disadvantage is that you may have to refinance or pay off the loan if you do not sell the home by the time the loan matures.

Buydown The process of paying additional points on the loan to reduce the interest rate and monthly payment. There are typically two types: a Permanent Buydown, and a Temporary Buydown. In a Permanent Buydown, a sufficient amount of interest is prepaid to lowerthe rate permanently. In a Temporary Buydown, only enough interest is paid to lower the payment for the first three years. The purpose of a Temporary Buydown is to lower the current payments thereby making loan qualification easier. This usually makes sense because income will usually continue to increase. The most common Temporary Buydown is called 3-2-1, meaning three percent lower the first year, two percent lower the second year and one percent lower the third year.

Buyer's Cost Estimate A list of the fees associated with closing a home purchase. It also includes the estimated monthly payments.

Cap A limitation on the interest rate of an Adjustable Rate Mortgage (ARM)

Closing The end of the real estate transaction. It comes when all requirements of the parties are met, funds transfer and the Deed is recorded transferring title.

Closing Costs The expenses in addition to down payment which buyers normally incur in the settlement process. The agreement of sale negotiated previously between the buyer and the seller should state in writing who will pay the costs. These costs include such items as:

    • Lender's fees
    • Loan Origination Fee
    • Discount Points
    • Processing, Underwriting and Document Fees
    • (also called Garbage Fees)
    • Tax Service
    • Flood Certification
    • Fees to others
    • Recording Deed and Mortgage
    • Escrow Fees
    • Attorneys Fee
    • Lender's Title Insurance Premium
    • Deposits and Expenses not related to the loan
    • Properly Taxes
    • Homeowner's Insurance Premium
    • Condominium Association Transfer Fee and Dues

Closing Statement An accounting of funds for the buyer and seller.

Commission The listing agent negotiates a percentage of the sales price with the seller as the compensation for marketing the seller's home. In turn, the listing agent offers a percentage of the commission, usually half, to buyer's brokers as compensation for representing a buyer

Condominium A development where the buyer purchases individual ownership of a dwelling unit and a share of the common area that serves the entire project. For example, you may own unit #25 and a 1/100th interest in the common area of a 100 unit project.

Conventional Loan A loan without government insurance or guarantee.

Convertible An option available on some adjustable rate mortgages (ARMs) that allows the loan to be converted to a fixed rate mortgage. Conversion usually involves paying a one-time fee and is limited to a certain time-frame.

Cooperative Housing Also known as a Co-op and Stock Co-op. This is a form of ownership, where the building is owned by a corporation, the stockholders of which are the residents of the dwellings. The resident does not own his unit; he has the right to occupy it.

Counter-Offer A party in a transaction can provide an alternative offer, or "counter offer," to keep the negotiation process going.

Credit Check An inquiry about your credit through one of the major credit agencies. The lender will charge you a fee, and have you fill out and sign an information document. Your reported credit is a major factor of risk in the eyes of the lender. If you have excellent credit, you can expect to have a wide variety of loan programs with the best possible rate available to you. If your credit is fair, you may lose out on the more desirable rates and programs. If your credit is poor, you may he unable to obtain a loan at all.

Deed The document that conveys title to real estate.

Deed of Trust In many states, the word mortgage is used but the security instrument whereby the property is given as security for the loan is actually a Deed of Trust. There are three parties to the instrument: the Beneficiary (lender), the Trustor (borrower) and the Trustee. The borrower transfers the legal title for the property to the Trustee who holds the property in trust as security for the payment of the debt.

Default Each promissory note and mortgage (or deed of trust) will contain provisions outlining the conditions under which the note is in default, at which time the lender has the right to start foreclosure. The most common of these, of course, is the failure to make payments on time. Other events of default are failure to pay property taxes, failure to keep adequate insurance in force, or allowing the property to deteriorate.

Deposit Good faith money offered at the beginning of the negotiation as evidence of the sincerity of the offer. In most cases, this deposit is refundable.

Discount Points Quoted in percentage of the total loan ( 1 point = 1%). This amount of money is deducted by the lender as a fee for making the loan. Market conditions determine if there are any points charged and how much.

Down Payment The part of the purchase price paid in cash. The higher the down payment, the easier to qualify and the better the loan terms.

Escrow The escrow company is an impartial third party (sometimes affiliated with a title company) that holds documents and funds until all required elements of the transaction have been fulfilled. When the transaction is completed, escrow is said to be "closed." The use of escrow services varies by state.

Encumbrance A legal right or interest that affects clear title. Usually the Agreement of Sale will provide that the seller deliver a preliminary title report or the results of a title search within 10 or 15 days. The purpose of obtaining a title is to reveal the existence of encumbrances and to give the buyer the opportunity to determine whether he wants to purchase with the encumbrance or explore what can be done to remove it. Some encumbrances, such as easement rights, special assessments, or restrictive covenants of Community Associations (CC&Rs) are beneficial. Others such as mortgages, judgment liens and unpaid taxes are invariably extinguished through settlement process.

Equity The difference between the current value of a home and the debt against it.

Fair Housing Laws A number of State and Federal laws support the concept that all persons have the right to housing without being discriminated against.

Federal Home Loan Mortgage Corporation (FHLMC) (Freddie Mac) Similar to FNMA, Freddie Mac is also a purchaser of loans. Loans that conform to FNMA/FHLMC standards are referred to as Conforming Loans.

Federal National Mortgage Association (FNMA) (Fannie Mae) A quasi-governmental organization that purchases mortgage loans from banks and mortgage bankers, groups them in pools and sells security interest in the pools to institutional investors.

Foreclosure A legal process in which the home is sold to pay off the debt against it.

Government Loans FHA or VA loan. These loans are partially backed by the government and can help veterans and low-to-moderate income families afford homes. The advantages of these types of loans are lower interest rates, easier quaifyings, lower down payment requirements, and the fact that they can be assumed by someone else if the home is sold.

Graduated Payment Mortgages A type of mortgage where the monthly payments start low but increase by a fixed amount each year for the first few years. The payment shortfall or negative amortization is added to the principal balance. The advantage is a lower monthly payment at the beginning of the loan term. Typically the disadvantages are a higher rate than traditional mortgage loans as well as lenders requiring a larger down payment. In addition, the negative amortized amount increases the balance due on the total loan which can be a problem if the value of the home declines.

Home Warranty A policy that protects the buyer against the failure of appliances, plumbing, electrical and other components of the home.

Housing Ratio One of severe financial calculations performed by your lender when applying for a loan to determine if you can afford a particular monthly payment. The housing ratio (also known as the income ratio) is your total monthly payment including taxes and insurance divided by your total monthly income.

HUD Department of Housing and Urban Development.

Index A measure that tracks changes in interest rates in the investment markets. Used by lenders to determine interest rates for Adjustable Rate Mortgages (ARM).

Interest The price paid for borrowing money.

Insurance Homeowner's insurance covers the owner of a property against loss due to fire and a number of other threats. The lender will require such a policy.

Jumbo (or Non-Conforming) Loans A mortgage loan that exceeds the amount that is acceptable if the loan were to be resold on the secondary market to Fannie Mae and Freddie Mac. Usually, loans with a face value greater than $207,000.

Lien A claim against a property.

Loan to Value Ratio (LTV) The ratio of the loan amount to the appraised value of the house. A down payment of 20% leaves a LTV of 80%.

Margin A fixed percentage rate over a variable market index that determines the interest rate on an Adjustable Rate Mortgage (ARM).

Mediation Friendly or diplomatic intervention usually by consent or invitation, for settling differences between persons. See Arbitration.

Mortgage A legal instrument by which property is pledged as security for a debt. Mortgages are used in some states and a deed of trust in others.

Mortgage Commitment A written notice from the lender saying it will fund the mortgage loan to enable a buyer to purchase a house.

Mortgagee The lender in a mortgage agreement.

Mortgagor The borrower in a mortgage agreement.

Multiple Listing Service (MLS) The Multiple Listing Service is a computer database of property offered for sale and sold. This database is available to all member real estate agents. It also allows research of sales by member agents to determine the market value of a home you might wish to purchase.

One (1 ) Year Treasury Note One of several market indices used by lenders to price their Adjustable Rate Mortgage (ARM).

PITI Principal, interest, taxes and insurance (your total housing payment).

Preliminary Title Report A report on the condition of title of a property, issued by a title company, for the buyer's approval.

Prepayment Penalty A fee charged for paying off your mortgage early.

Prequalification The process of determining the amount a particular lender will let you borrow You should strive to obtain prequalification with at least two or three separate lenders.

Principle The original loan amount and subsequent remaining balance at a point in time of the loan.

Private Mortgage Insurance (PMI) If the down payment is less than 20%, a conventional lender will require the buyer to purchase insurance to help reduce the risk of default. There is usually a fee at the close of escrow as well as a monthly fee that continues as long as the loan to value ratio is greater than 80%.

Promissory Note The document containing the buyer's promise to repay the lender and the terms of the loan.

Property Taxes Taxes paid to the government, usually the County or State, to support education, police, fire protection, etc.

Qualifying The process whereby the lender assesses the borrowers' ability to re-pay the loan.

Rate Lock The period of time for which a quoted loan rate is guaranteed against change due to market conditions

Realtors "Realtor" is a registered trademark of the National Association of Realtors. The term Realtor applies only to those licensed real estate agents who are members of the Association. The agent promises to conform to the standards and code of ethics of the Association.

Recording Placing certain documents in the public record of the county where property is located (deeds, mortgages, etc.) to give notice of rights relative to the property involved.

Refinancing Obtaining a new mortgage loan that pays off your existing loan.

Six (6) Month CD One of several market indices used by lenders to price their Adjustable Rate Mortgage (ARM).

Special Assessments A special tax imposed on a property and usually all other property in the immediate area, for school or road construction, sewers, street lights and so forth.

Start Rate The initial interest quoted on an Adjustable Rate Mortgage (ARM). WARNING: This may not be the fully indexed rate. That means that even if interest rates in the market are steady, your rate may increase in the future.

Tax Service The lender requires that the borrower pay a tax service to verify that property taxes have been paid.

Title Insurance Title insurance insures against encumbrances and other items that may cloud the title. An Owner's Policy insures the owner and an American Land Title Association Policy (ALTA), sometimes called the lender's or extended policy, insures the lender.

Underwriter The underwriter is the lender or company who actually provides the money for your loan. A mortgage broker represents several underwriters.

VA Loan The Veteran's Administration's Loan Guarantee program allows military veterans to acquire homes with little or no money down.

Vesting The manner of taking title to real property. This choice may have significant legal and tax consequences. Consult an attorney for specific concerns.


HOME BUYERS HELPLINE is the Non-Profit Information Center for Home Buyers