Key Words and Terms
Closing Costs - This is a broad term used to describe the cumulative costs of purchasing a home. This can include Title Insurance, Attorney Fees, Origination Fees Etc. This term is usually referred to seperately from your down payment. For a detailed lsit of closing costs click HERE.
Down Payment - A Down Payment is the amount of money used to pay down the value of a home in order to get a mortgage. This down payment, along with your closing costs is what you would be expected to come to the table with at closing. This completely depends on your lender, type of mortgage and terms. In general, VA loans and USDA Loans require 0% down, FHA products require 3.5% down, Conventional products can range from 5%-25% and more. For a complete list of mortgage options, click HERE.
Appraisal - An appraisal is the professional valuation of a home by a third party. This is normally required by a lender, paid for by the borrower and used to make sure that the value of the home constitutes the sales price in order to complete the loan. For tips on overcoming a low appraisal click HERE. For a list fo local professionals click HERE.
Adjustable-rate mortgage (ARM) - A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index.
Annual percentage rate (APR) - This is not the note rate on your loan. It is a value created according to a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. It works sort of like this, but not exactly, so only use this as a guideline: deduct the closing costs from your loan amount, then using your actual loan payment, calculate what the interest rate would be on this amount instead of your actual loan amount. You will come up with a number close to the APR. Because you are using the same payment on a smaller amount, the APR is always higher than the actual note rate on your loan.
Appraised value - An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property. Since an appraisal is based primarily on comparable sales, and the most recent sale is the one on the property in question, the appraisal usually comes out at the purchase price.
Assessed value - The valuation placed on property by a public tax assessor for purposes of taxation.
Balloon mortgage - A mortgage loan that requires the remaining principal balance be paid at a specific point in time. For example, a loan may be amortized as if it would be paid over a thirty year period, but requires that at the end of the tenth year the entire remaining balance must be paid.
Bill of sale - A written document that transfers title to personal property. For example, when selling an automobile to acquire funds which will be used as a source of down payment or for closing costs, the lender will usually require the bill of sale (in addition to other items) to help document this source of funds.
Cap – Adjustable Rate Mortgages have fluctuating interest rates, but those fluctuations are usually limited to a certain amount. Those limitations may apply to how much the loan may adjust over a six month period, an annual period, and over the life of the loan, and are referred to as "caps." Some ARMs, although they may have a life cap, allow the interest rate to fluctuate freely, but require a certain minimum payment which can change once a year. There is a limit on how much that payment can change each year, and that limit is also referred to as a cap.
Closing - This has different meanings in different states. In some states a real estate transaction is not consider "closed" until the documents record at the local recorders office. In others, the "closing" is a meeting where all of the documents are signed and money changes hands.
Closing costs - Closing costs are separated into what are called "non-recurring closing costs" and "pre-paid items." Non-recurring closing costs are any items which are paid just once as a result of buying the property or obtaining a loan. "Pre-paids" are items which recur over time, such as property taxes and homeowners insurance. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate which they must issue to the borrower within three days of receiving a home loan application.
Common area assessments - In some areas they are called Homeowners Association Fees. They are charges paid to the Homeowners Association by the owners of the individual units in a condominium or planned unit development (PUD) and are generally used to maintain the property and common areas.
Contingency - A condition that must be met before a contract is legally binding. For example, 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
Conventional mortgage - Refers to home loans other than government loans (VA and FHA).
Debt to Income Ratio - This one of many calculations used by mortage companies during the pre-qualification process to ensure that a buyer can handle the additional debt of a mortgage. This is calculated by dividing the sum of your monthly debt payments like car and credit card payments by your monthly gross income. Also called a DTI, this is an extremley important factor in the decision making prcess for a bank. Most lenders are looking for a DTI of 43% or below.
Down payment - The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
Due-on-sale provision – A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.
Duplex - A single structure divded into to units with seperate entrances and living quarters. Make sure that any duplex you are looking at is zoned as a legal duplex and not a condo or single family. Just because a single family home has an apartment in it, doens't mean that it legaly qualifies as a duplex.
Earnest money deposit - A deposit made by the potential home buyer to show that he or she is serious about buying the house.
Equity - A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.
Escrow - An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the earnest money deposit is put into escrow until delivered to the seller when the transaction is closed.
Escrow account - Once you close your purchase transaction, you may have an escrow account or impound account with your lender. This means the amount you pay each month includes an amount above what would be required if you were only paying your principal and interest. The extra money is held in your impound account (escrow account) for the payment of items like property taxes and homeowner's insurance when they come due. The lender pays them with your money instead of you paying them yourself.
Fair market value - The highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.
Federal Housing Administration (FHA) - An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.
Fixed-rate mortgage - A mortgage in which the interest rate does not change during the entire term of the loan
Home equity line of credit - A mortgage loan, usually in second position, that allows the borrower to obtain cash drawn against the equity of his home, up to a predetermined amount.
Lender - A term which can refer to the institution making the loan or to the individual representing the firm. For example, loan officers are often referred to as "lenders."
Lien - A legal claim against a property that must be paid off when the property is sold. A mortgage or first trust deed is considered a lien.
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.
Liquid asset - A cash asset or an asset that is easily converted into cash.
Loan - A sum of borrowed money (principal) that is generally repaid with interest.