Summary of public records relating to
the title to a particular piece of land. An attorney or title insurance
company searcher reviews an abstract of title to determine whether there are any
title defects which must be cleared before a buyer can purchase clear,
marketable, and insurable title.
Acceleration Clause
Standard clause in a mortgage that
requires the
balance of the loan to become due immediately, if regular mortgage
payments are not made or for breach of other conditions of the mortgage.
Adjustable-Rate Mortgage (ARM)
Interest rate is not
fixed, but changes during the life of the loan in line with movements in
an index rate. You may also see ARMs referred to as AMLs (adjustable
mortgage loans) or VRMs (variable-rate mortgages).
Adjustment Period
Length of time for which the
interest rate is fixed on an ARM. After that period
it will be adjusted. Typically once (T-Bill) or twice a year (LIBOR),
depending on the
index.
A.K.A. Purchase
Agreement or Sales Agreement. Contract in which a seller agrees to sell and a buyer
agrees to buy, under certain specific terms and conditions spelled out in
writing and signed by both parties.
Alienation Clause/Due on Sale Clause
Provision in a mortgage document stating
that the loan must be paid in full if ownership is transferred.
Amortization
A payment plan which enables the borrower to
reduce his debt gradually through monthly payments of principal.
Annual Percentage Rate (APR)
Measure of the cost of credit, expressed
as a yearly rate. It includes interest as well as other loan charges
(points, PMI, etc). Since
all lenders follow the same (complex and sometimes error prone) rules to ensure the accuracy of the annual
percentage rate, it provides consumers with a good basis for comparing the
cost of loans, including mortgage plans. Only a zero point, zero
closing cost loan would have an APR equal to the actual Note rate.
The APR is almost always greater than the Note Rate.
Appraisal
Expert's estimate of the
quality or value of real estate as of a given date.
Assessed Value
Figure in dollars determined for
tax
purposes by an assessor which reflects a property's worth and which,
unless exempt, is used to compute a tax dollar obligation by multiplying
it by a tax rate. This is often confused with the term appraisal.
Assumability
When a home is sold, the seller may be able
to transfer the mortgage to the new buyer. Lenders generally require a credit review of the new borrower
and may charge a fee for the assumption. Some mortgages contain a
due-on-sale clause, which means that the mortgage may not be transferable
to a new buyer. Instead, the lender may make you pay the entire balance
that is due when you sell the home. Assumability can help you attract
buyers if you sell your home. It is common for FHA an VA Loans.
Attached Home
A home that has one or more common walls
adjoining another home. Condominiums, townhomes and row houses are
attached homes.
Short-term fixed-rate loan which involves
smaller payments for a certain period of time and one large payment for
the entire amount of the outstanding principal. Usually they have terms of
5 and 7 years.
Biweekly Mortgage
A mortgage which requires a payment for half
the monthly amount every two weeks. As a result the loan amortizes much
faster than a loan with normal monthly payments. The result is as if one
extra monthly payment were made each year. With this, 30 year
fixed rate loan will be paid off in approximately 22.7 years. You
may achieve the same affect by making extra monthly principal payments.
Blanket Mortgage
A mortgage covering at least two pieces of
real estate as collateral.
Bridge Loan
Interim loan to finance a buyers
new residence if the buyer is unable to sell his/her current residence
first.
Broker
Real
estate broker
Building Line or Setback
Buffer distances from the ends and/or sides of the
lot beyond which construction may not extend. The building line may be
established by a filed plat of subdivision, by restrictive covenants in
deeds or leases, by building codes, or by zoning ordinances.
Buydown
The seller pays an amount to
the lender so that the lender can give you a lower rate and lower
payments, usually for an early period in an ARM. The seller may increase
the sales price to cover the cost of the buydown. Buydowns can occur in
all types of mortgages, not just ARMs.
Limit on how much the interest rate or the
monthly payment can change, either at each adjustment or during the life
of the mortgage. All ARMs have interest rate caps to protect you from enormous increases in monthly payments.
A lifetime cap limits the
interest rate increase over the life of the loan. Lifetime caps can vary
by lender, but most ARMs have caps of 5% or 6%.
A periodic or
adjustment cap limits how much your interest rate can rise at one
time. Generally, a 6 month ARM will have a cap of 1% while a 1 year ARM
will have a 2% cap.
Periodic and lifetime caps are quoted as
two numbers as in 2/6 which would mean that periodic cap is 2% and the
lifetime cap is 6%. Examples:
1. The initial interest rate is
5.5%, the
index is 8%, and the margin is 2.875%,
then the new interest rate = 8% + 2.875% = 10.875%.
If the lifetime cap is 5% then
the actual new interest rate will be 5.5% + 5% = 9.5%.
2. The initial interest rate is
6%, the
index is 7%, and the margin is 3%,
then the new interest rate = 7% + 3% = 10%.
But, If the periodic cap is 1% then
the actual new interest rate will be 6% + 1% = 7%.
ARMs which have an initial fixed period --
30/3/1, 30/5/1, 30/7/1 and 30/10/1 -- can have also first
adjustment cap. It limits the interest rate you will pay the
first time your rate is adjusted. These ARMs are quoted as three numbers
as in 5/2/5 which would mean that the first adjustment cap is 5%,
adjustment cap thereafter is 2%, and the lifetime cap is 5%.
Two-Step loans -- 5/25 and 7/23 -- have
only one adjustment after the first five or seven years of its term. They
are quoted with a single first adjustment cap.
Capital Gains
Profit earned from the sale of real estate.
The new tax code may not tax the the first $500,000 of profits from the sale of a home
(married filing jointly, $250,000 single) if you have occupied the home
for at least 2 years. Consult your tax advisor.
A refinance on a property that you
own where the loan amount will result in extra money left after paying off the
existing 1st mortgage plus any purchase money 2nd mortgages and closing costs. Usually
$2,000 can be received back at closing loan before is
it considered a cash out refinance. A borrower is
"cashing out" their equity in this type of loan and there could be
additional fees at higher LTV's.
Certificate of Eligibility
A document issued by the
U.S.
Department of Veterans Affairs. It is required when applying for VA
loans.
Certificate of Occupancy
Document which is issued by local
governments that states a property meets the local building standards for
occupancy. Required for new construction and sometimes also for the
sale of an existing property.
Certificate of Reasonable Value
An appraisal by a VA approved
appraiser which estimates the property's current market value.
Clear Title
A title/deed that free of
clouds
and disputed interests.
Closing Costs
The numerous expenses which buyers and
sellers normally incur to complete a transaction in the transfer of
ownership of real estate. These costs are in addition to price of the
property and are items prepaid at the closing day. This is a typical list:
BUYER'S EXPENSES
Recording Deed and Mortgage
Escrow Fees
Attorney's Fee (optional)
Title Insurance
Appraisal
Endorsements to Title
1% PA Transfer Tax
Pre-Paid Property tax, sewer, water, trash, adjustments
Points and other loan fees
Homeowners/Hazard Insurance Policy for 1st year
SELLER'S EXPENSES
Attorney's Fee (optional)
Real Estate Commission
1% PA Transfer Tax
Satisfaction of liens
Express mail for lien payoff(s)
The agreement of sale negotiated previously
between the buyer and the seller may state in writing who will pay each of
the above costs.
Closing Day
The day on which the formalities of a real
estate sale are concluded. The deed is generally prepared for the closing by an attorney and this cost
charged to the buyer. The buyer signs the mortgage, and closing costs are
paid. The final closing merely confirms the original agreement reached in
the agreement of sale.
An outstanding claim or encumbrance which
adversely affects the marketability of title.
Commission
Fee paid to a real estate agent or broker
by the seller as compensation for finding a buyer and completing the sale.
Usually it is a percentage of the sale price--6 to 7 percent on houses, 10
percent on land.
Commitment
A written agreement between a lender and a
borrower to loan money on specific terms or conditions.
Condominium
Individual ownership of a dwelling unit and
an individual interest in the common areas and facilities which serve the
multi-unit project.
Construction loan
A short term loan to pay for the
construction of buildings or homes. These loans usually provide periodic
disbursements to the builder as each stage of the building is completed.
Generally followed by long term financing called a "take out"
loan issued upon completion of construction.
Contingency
A condition put on an offer to buy a home;
such as the perspective buyer making an offer contingent on his or her
sale of a present home, or being approved for a mortgage.
Conventional Mortgage
Any mortgage loan not insured by HUD or
guaranteed by the Veterans' Administration. It is subject to conditions
established by the lending institution, Fannie Mae, Freddie Mac, and State
statutes
Some ARMs come with options to convert them
to a fixed rate mortgage during a given time periodwithout
having to go through a refinancing, which could cost up to 5 percent or 6
percent of the loan amount. For example popular conversion options for 1
year treasury-indexed ARMs include:
1. option to convert on the third, fourth,
or fifth adjustment date, i.e. during the 37th, 49th and 61st months of
the loan.
2. option to convert during the first five
years on the adjustment date, i.e. during the 13th, 25th, 37th, 49th and
61st months of the loan.
The interest rate or points may be somewhat
higher for a convertible ARM. Also, a convertible ARM may require a small
fee at the time of conversion.
Conveyance
The transfer of title to the property from
one party to another.
Cooperative Housing
An apartment building or a group of
dwellings owned by a corporation, the stockholders of which are the
residents of the dwellings. It is operated for their benefit by their
elected board of directors. In a cooperative, the corporation or
association owns title to the real estate. A resident purchases stock in
the corporation which entitles him to occupy a unit in the building or
property owned by the cooperative. While the resident does not own his
unit, he has an absolute right to occupy his unit for as long as he owns
the stock.
Credit Report
A report documenting the history of how you
paid back the companies you have borrowed money from, or how you have met
other financial obligations.
A formal written instrument by which title
to real property is transferred from one owner to another. The deed should
contain an accurate description of the property being conveyed, should be
signed and witnessed according to the laws of the State where the property
is located, and should be delivered to the purchaser at closing day. There
are two parties to a deed: the grantor and the grantee. (See also
Deed
of Trust,
General
Warranty Deed, Quitclaim Deed, and Special Warranty Deed)
Like a mortgage, a security instrument
whereby real property is given as security for a debt. However, in a deed
of trust there are three parties to the instrument: the borrower, the
trustee, and the lender, (or beneficiary). In such a transaction, 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 to the
lender or beneficiary. If the borrower pays the debt as agreed, the deed
of trust becomes void. If, however, he defaults in the payment of the
debt, the trustee may sell the property at a public sale, under the terms
of the deed of trust. In most jurisdictions where the deed of trust is in
force, the borrower is subject to having his property sold without benefit
of legal proceedings. A few States have begun in recent years to treat the
deed of trust like a mortgage.
Default
Failure to make mortgage payments as agreed
to in a commitment based on the terms and at the designated time set forth
in the mortgage or deed of trust. It is the mortgagor's responsibility to
remember the due date and send the payment prior to the due date, not
after. Generally, thirty days after the due date if payment is not
received, the mortgage is in default. In the event of default, the
mortgage may give the lender the right to accelerate payments, take
possession and receive rents, and start foreclosure. Defaults may also
come about by the failure to observe other conditions in the mortgage or
deed of trust.
Deferred interest
When the monthly payments do not cover all
of the interest cost, the unpaid interest is deferred by adding it to the
loan balance.
Deficiency Judgment
Personal claim against the debtor when the
sale of foreclosed property does not yield sufficient proceeds to pay off
the mortgages.
Depreciation
Decline in value of a house due to wear and
tear, adverse changes in the neighborhood, or any other reason.
Discount
In an ARM with an initial rate discount, the
lender gives up a number of percentage points in interest to give you a
lower rate and lower payments for part of the mortgage term (usually for
one year or less). After the discount period, the ARM rate will probably
go up depending on the index rate.
A State tax, in the forms of stamps,
required on deeds and mortgages when real estate title passes from one
owner to another. The amount of stamps required varies with each State.
Downpayment
The amount of money to be paid by the
purchaser to the seller upon the signing of the agreement of sale. The
agreement of sale will refer to the downpayment amount and will
acknowledge receipt of the downpayment. Downpayment is the difference
between the sales price and maximum mortgage amount. The downpayment may
not be refundable if the purchaser fails to buy the property without good
cause. If the purchaser wants the downpayment to be refundable, he should
insert a clause in the agreement of sale specifying the conditions under
which the deposit will be refunded, if the agreement does not already
contain such clause. If the seller cannot deliver good title, the
agreement of sale usually requires the seller to return the downpayment
and to pay interest and expenses incurred by the purchaser.
Due-on-Sale Clause
A clause in the Deed of Trust or Mortgage
that states that the entire loan is due upon the sale of the property.
The deposit money given to the seller or his
agent by the potential buyer upon the signing of the agreement of sale to
show that he is serious about buying the house. If the sale goes through,
the earnest money is applied against the downpayment. If the sale does not
go through, the earnest money will be forfeited or lost unless the binder
or offer to purchase expressly provides that it is refundable.
Easement Rights
A right-of-way granted to a person or
company authorizing access to or over the owner's land. An electric
company obtaining a right-of-way across private property is a common
example.
Encroachment
An obstruction, building, or part of a
building that intrudes beyond a legal boundary onto neighboring private or
public land, or a building extending beyond the building line.
Encumbrance
A legal right or interest in land that
affects a good or clear title, and diminishes the land's value. It can
take numerous forms, such as zoning ordinances, easement rights, claims,
mortgages, liens, charges, a pending legal action, unpaid taxes, or
restrictive covenants. An encumbrance does not legally prevent transfer of
the property to another. A title search is all that is usually done to
reveal the existence of such encumbrances, and it is up to the buyer to
determine whether he wants to purchase with the encumbrance, or what can
be done to remove it.
Equal Credit Opportunity Act
Prohibits discrimination in any aspect of a
credit transaction on the basis of race, religion, age, color, national
origin, receipt of public assistance funds, sex, or marital status.
Equity
The value of a homeowner's unencumbered
interest in real estate. Equity is computed by subtracting from the
property's fair market value the total of the unpaid mortgage balance and
any outstanding liens or other debts against the property. A homeowner's
equity increases as he pays off his mortgage or as the property
appreciates in value. When the mortgage and all other debts against the
property are paid in full the homeowner has 100% equity in his property.
Escrow
Funds paid by one party to another (the
escrow agent) to hold until the occurrence of a specified event, after
which the funds are released to a designated individual. In FHA mortgage
transactions an escrow account usually refers to the funds a mortgagor
pays the lender at the time of the periodic mortgage payments. The money
is held in a trust fund, provided by the lender for the buyer. Such funds
should be adequate to cover yearly anticipated expenditures for mortgage
insurance premiums, taxes, hazard insurance premiums, and special
assessments. See also Escrow Account.
Prohibits discrimination in housing sales or
loans on the basis of race, religion, color, national origin, sex,
familial status, or handicap.
Your
Rights under the Fair Housing Act.
Federal
Home Loan Mortgage Corporation (FHLMC, Freddie Mac)
A stockholder-owned corporation chartered by
Congress to create a continuous flow of funds to mortgage lenders in
support of homeownership and rental housing. Freddie
Mac purchases single-family and multifamily residential mortgages from
lenders and packages them into securities that are sold to investors.
Federal
Housing Administration (FHA)
A part of the U.S.
Department of Housing and Urban Development (HUD). FHA assists
1st-time home buyers and low to moderate income borrowers who may not be
able to meet down
payment requirements for conventional loans by providing mortgage
insurance to private lenders. It also insures loans for home improvements
and buying manufactured/mobile homes. These programs operate through FHA
approved lending institutions and their correspondents, such as Allegiance
mortgage..
Federal National Mortgage Association (FNMA, Fannie
Mae)
A stockholder-owned federally chartered
corporation. Fannie Mae purchases residential
home loans from mortgage lending institutions, packages the mortgages into
securities and sells the securities to investors. They are the largest source of
residential mortgage funds in the USA.
FHA Loan
A loan insured by the Federal Housing
Administration open to all qualified home purchasers. Interest rates on
FHA loans are generally market rates, while down payment requirements are
lower than for conventional loans. FHA loans cannot exceed the statutory
limit.
First Mortgage
A mortgage that has priority as a lien over
all other mortgages.
Flood Insurance
Insurance that compensates for physical
property damage resulting from flooding. It is required for properties
located in federally designated flood areas.
Foreclosure
A legal term applied to any of the various
methods of enforcing payment of the debt secured by a mortgage, by taking and selling the mortgaged property, and depriving the
mortgagor of possession.
A deed which conveys not only all the
grantor's interests in and title to the property to the grantee, but also
warrants that if the title is defective or has a "cloud" on it
(such as mortgage claims, tax liens, title claims, judgments, or
mechanic's liens against it) the grantee may hold the grantor liable.
Buyers have used this as an alternate to purchasing title insurance.
A government owned corporation within
the HUD that helps to finance
government-assisted housing programs. Ginnie Mae guarantees securities
backed by pools of mortgages. The mortgages are insured by FHA, or guaranteed by
VA, or by the Rural Housing Service (RHS). Ginnie Mae securities are
bought and sold through financial institutions that trade government
securities.
Graduated Payment Mortgage
A type of a mortgage that has lower payments
for up to 5 years initially and then payments increase each year until the loan is fully
amortized. Can result in negative amortization.
Grantee
That party in the deed who is the buyer or
recipient.
Grantor
That party in the deed who is the seller or
giver.
Protects against damages caused to property
by fire, windstorms, and other common hazards.
HUD
U.S. Department of Housing and Urban
Development. Office of Housing/Federal Housing Administration within HUD
insures home mortgage loans made by lenders and sets minimum standards for
such homes.
HUD-1 Settlement Statement
A standard form that shows all charges
imposed on borrowers and sellers in connection with the settlement. RESPAallows the borrower to request to see the HUD-1 Settlement Statement
one day before the actual settlement.
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.
A published measure of economic conditions
usually relative to other financial instruments such as Treasury notes or
Treasury bills. The lender uses a particular index to calculate the
interest rate on an adjustable rate mortgage (ARM) by adding a fixed
margin to the index. The most common indexes are:
Constant Maturity Treasury (CMT)
Treasury Bill (T-Bill)
12-Month Treasury Average (MTA)
11th District Cost of Funds Index (COFI)
London Inter Bank Offering Rates (LIBOR)
Certificates of Deposit (CD) Indexes
Prime Rate
Interest
A charge paid for borrowing money. See
Mortgage
Note
Joint tenancy is one of the methods
available for two or more people to hold title to real estate or personal
property. It includes a right of survivorship, meaning that on the death
of one joint tenant, his/her interests transfer to the remaining joint
tenants.
An alternative to PMI. The lender will
increase the interest rate instead of charging PMI on loans with LTV's
greater than 80%.
Read about different PMI
options.
Lien
A claim by one person on the property of
another as security for money owed. Such claims may include obligations
not met or satisfied, judgments, unpaid taxes, materials, or labor. See
also Special Lien
The relationship between the amount of the
mortgage loan and the value of the real property expressed as a
percentage. For purchase loans the value of the property is the appraised
value or the purchase price, whichever is less. For refinance loans the
value is the appraised value on seasoned properties (owned more than one
year).
A LTV of 90% means that you are borrowing 90% of the property value. If a LTV exceeds 80%,
Private
Mortgage Insurance (PMI) -- that insures the lender in the event a
borrower defaults -- is generally required.
Downpayment is the difference between the
purchase price and the mortgage amount.
A lender's promise to hold a certain
interest rate and points for you, for a given number of days, while your
loan application is processed. If not locked, the interest rates quoted to you may stay
the same, decrease, or increase from the day you apply for your mortgage.
Lock-ins on rates remove the risk of rising rates.
However, a locked-in rate could also prevent
you from taking advantage of rate decreases. If you think that rates will
remain level or even go down, you may choose to bet on interest rates
decreasing by electing to float until you go to closing. It is a
gamble.
Lock-ins of 30-60 days are common. If your
lock-in period expires before you go to closing, you might lose the
interest rate and the number of points you had locked-in. You may ask
lender for a longer lock-in period. But bear in mind that lenders may
charge you a fee for extending the lock-in period. Request information from the
lender regarding lock procedures.
A title that is free and clear of
objectionable liens, clouds, or other title defects. A title which enables
an owner to sell his property freely to others and which others will
accept without objection.
Margin
The number of percentage points the lender
adds to the index rate to calculate the ARM interest rate at each
adjustment. It is typically between 2.5 to 3% on a conforming
loan. Sub-prime loans may have margins
of 5% to 6%.
Mortgage
A lien or claim against real property given
by the buyer to the lender as security for money borrowed. Under
government-insured or loan-guarantee provisions, the payments may include
escrow amounts covering taxes, hazard insurance,
PUD
association fees, and
special assessments. Mortgages generally run from 10 to 30 years, during
which the loan is to be paid off.
Mortgage Banker
A company who is a direct lender but does
not retain loans they have made. They use a line of credit to fund
loans and immediately sell the mortgage, at closing or within a matter of
days, to another lender at which time the borrower will receive a
"Goodbye Letter" announcing who they will be sending payments
to. Mortgage Bankers do not
service
loans.
Mortgage Broker
A person (not an employee of a lender) who
brings a borrower and a lender together to obtain a federally-related
mortgage loan. A mortgage broker has access to a variety of lenders and offers the most choice in loan programs.
1999 saw Mortgage Brokers with a 70% market share of all originations.
Mortgage Commitment
A written notice from the bank or other
lending institution saying it will advance mortgage funds in a specified
amount to enable a buyer to purchase a house by a certain date.
Mortgage Insurance Premium (MIP)
The payment made by a borrower to the lender
for transmittal to HUD to help defray the cost of the FHA mortgage
insurance program and to provide a reserve fund to protect lenders against
loss in insured mortgage transactions. In FHA insured mortgages this
represents an annual rate of 1/2% paid by the mortgagor
on a monthly basis.
A written agreement to repay a loan. The
agreement is secured by a mortgage, serves as proof of an indebtedness,
and states the manner in which it shall be paid. The note states the
actual amount of the debt that the mortgage secures and renders the
mortgagor personally responsible for repayment.
Line of Credit. A mortgage with a provision that permits
borrowing additional money in the future without refinancing the loan or
paying additional financing charges. Open-end provisions often limit such
borrowing to no more than would raise the balance to the original loan
figure.
A service offered to participating real
estate brokers that lists available homes for sale. The listings are
published and distributed among the member brokers to assist in sales
efforts.
Negative amortization typically only occurs when an ARM has
a payment cap that results in monthly payments not high enough to
cover the interest due. Negative amortization occurs when the monthly payments do
not cover all of the interest cost. The interest cost that isn't
covered is added to the unpaid principal balance. This means that even
after making many payments, you could owe more than you did at the
beginning of the loan.
Non-conforming loan
Loans that do not comply with
Fannie
Mae or
Freddie Mac guidelines. These
guidelines establish the maximum loan amount, down payment, borrower
credit and income requirements, and suitable properties. Loans that
does conform to these guidelines may be sold to Fannie Mae or Freddie
Mac.
A property purchase transaction in which
the property sellers provide all or part of the financing by means of
holding a second mortgage. Minimum duration for this
"seller second" is 5 years with most lenders.
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.
Plat
A map or chart of a lot, subdivision or
community drawn by a surveyor showing boundary lines, buildings,
improvements on the land, and easements.
Points
Sometimes called "discount
points". A point is one percent of the amount of the mortgage
loan amount. (eg: For a $50,000 loan, one point is $500). Points
are interest paid in advance and allow a borrower to buy a lower
mortgage rate, which results in a lower payment. For borrowers who are
not able to cover the cost of points in addition to the other costs of
buying a home, or for those who do not plan to stay in the house for
long, 0 points are preferred. Buyers are
prohibited from paying points on HUD or VA
guaranteed loans (sellers can pay, however). On a conventional
mortgage, points may be paid by either buyer or seller or split
between them.
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.
Payment of mortgage loan, or part of it,
before due date. Mortgage agreements sometimes restrict the right of
prepayment either by limiting the amount that can be prepaid in any
one year or charging a penalty for prepayment. Lenders who impose
prepayment penalties will charge borrowers a fee if they wish to repay
part or all of their loan in advance of the regular schedule. The
Federal Housing Administration does not permit such restrictions in
FHA insured mortgages. Prepayment penalties are typically only
found on bad credit mortgage loans.
Principal
The basic element of the loan as
distinguished from interest and mortgage insurance premium. In other
words, principal is the amount upon which interest is paid.
An insurance policy the borrower buys to
protect the lender from non-payment of the loan. This is
required for loans where the borrower puts less than 20% down.
With a new law that took effect in 1999, PMI will automatically be
removed when the loan is paid down to 78% LTV, subject to the
borrowers good credit history. Read about
different PMI options.
Pro-rations
The allocation of expenses, such as
taxes between buyer and seller at closing based on the number of days
the property is owned during the month of closing. The seller
has prepaid taxes for a year, and is reimbursed for that part of the
year he will not own the house.
A deed which transfers whatever interest
the maker of the deed may have in the particular parcel of land
typically for no sales price. A
quitclaim deed is often given after a divorce to remove one person
from the deed or for family transactions. By accepting such a deed the
buyer assumes all the risks. Such a deed makes no warranties as to the
title, but simply transfers to the buyer whatever interest the grantor
has. See Deed
Lenders use certain guidelines to
determine a potential borrower's credit-worthiness. The two guidelines
used are the housing and debt ratios. They are expressed as two
numbers like 28/38 where 28 would be the housing ratio and 36 would be
the debt ratio. It means that:
1. Your housing expenses
(PITI) should not exceed 28 percent of your gross monthly income and 2. Housing expenses plus long- term debt should not
exceed 38 percent of your gross monthly income.
The housing expenses include monthly
mortgage principal, interest payments, property taxes and homeowner’s
insurance. There may be other expenses, such as condominium fees,
homeowners fees, special assessments, etc., that are included. Long-term
debt is defined as monthly expenses extending more than 10 months into
the future. The qualifying ratios may vary but 40% is common (40/40
ratio).
Please note that qualifying ratios are
only a rough guidelines and underwriters consider many variables in
their analysis. Many times, borrowers fall outside the guidelines, but
have strong compensating factors that reflect low credit risk. Some
compensating factors are history of savings, long-term job stability, a
substantial down payment or excellent credit history will influence the
decision to approve or deny a particular loan with ratios up to 30/50%
common.
A
refinance of a property whereby the loan amount covers only the existing
1st mortgage, plus any 2nd mortgage that was used to purchase the home,
plus closing costs, with up to $2,000 cash back at closing. Any
other refinance would be a cash out refinance.
A middle person or agent who buys and sells
real estate for a company, firm, or individual on a commission basis.
The broker does not have title to the property, but generally
represents the owner.
A consumer protection law designed
to help consumers be more informed with the home buying process. It
requires that borrowers receive disclosures at various times. RESPA
also prohibits referral fees and similar acts that increase the cost of settlement
services.
Recorder
The public official who keeps records of
transactions that affect real property in the area. Sometimes known as
a "Registrar of Deeds" or "County Clerk."
The process of the same mortgagor paying
off one loan with the proceeds from another loan.
Rescission
The cancellation of a contract. When you
use your home as collateral for a refinance or second mortgage, you generally have the right
to cancel the credit transaction within three business days.
The amount of money left in a borrower's
possession after settlement. Typically the guidelines call for 2
months PITI to be
left over in reserves. 401K and retirement
plans count towards reserves. The borrower needs to show they
have funds in an account in the event of an emergency (furnace
breaks). These funds can remain in vested in a 401k or stocks
and still be counted to qualify.
Restrictive Covenants
Private restrictions limiting the use of
real property. Restrictive covenants are created by deed and may
"run with the land," binding all subsequent purchasers of
the land, or may be "personal" and binding only between the
original seller and buyer. Restrictive covenants that run with the land are
encumbrances and may affect the value and marketability of title.
Restrictive covenants may limit the density of buildings per acre,
regulate size, style or price range of buildings to be erected.
Reverse Mortgage
A special type of home loan that lets
elderly homeowners convert the equity in their home into regular
payments of cash.
Right of Survivorship
In joint tenancy, the right of survivors
to acquire the interest of a deceased joint tenant.
This home is not rented and is occupied
occasionally by the owners. It is typically in a resort area not
in close proximity to the borrowers primary residence.
Second mortgage
A mortgage in addition to the first
mortgage. Home equity loans, credit lines, home improvement loans are
second mortgage loans. Second mortgages are subordinate to the first
one. Second mortgage loans are non-conforming loans, so they usually
carry a higher interest rate, and they often are for a shorter time.
Borrowing additional money toward the
down payment. If it is acceptable, usually subject to a maximum
combined
LTV. Secondary financing is
used as an alternative to obtaining Private Mortgage Insurance and to
avoid Jumbo loan rates.
The collection of
payments, handling your escrow accounts and management of operational
procedures that a lender performs.
Set Back Ordinance
Regulates the distance from the lot line
to the point where improvements may be constructed.
Settlement (Closing)
The meeting between the related parties
of the mortgage where the mortgage documents are executed. Here
the property ownership is transferred to the buyer on a purchase
transaction.
Shared Appreciation Mortgage
Residential loan in which a borrower
receives a below-market interest rate in return for which the lender
receives a specified share of the future appreciation in the value of
the property.
Special Assessments
A special tax imposed on property,
individual lots or all property in the immediate area, for road
construction, sidewalks, sewers, street lights, etc.
A lien that binds a specified piece of
property, unlike a general lien, which is levied against all one's
assets. It creates a right to retain something of value belonging to
another person as compensation for labor, material, or money expended
in that person's behalf. In some localities it is called
"particular" lien or "specific" lien. (See lien.)
A deed in which the grantor conveys
title to the grantee and agrees to protect the grantee against title
defects or claims asserted by the grantor and those persons whose
right to assert a claim against the title arose during the period the
grantor held title to the property. In a special warranty deed the
grantor guarantees to the grantee that he has done nothing during the
time he held title to the property which has, or which might in the
future, impair the grantee's title.
A mortgage for someone who does not meet
conventional guidelines. The borrower
may have damaged
credit, own too many properties, of have a debt-to-income ratio that
exceeds the conforming loan guidelines. These loans are
considered to have a higher risk of default and hence carry a higher
interest rate than conforming loans.
Survey
A map or plat made by a licensed
surveyor showing the results of measuring the land with its
elevations, improvements, boundaries, and its relationship to
surrounding tracts of land. A survey is often required by the lender
for construction loans to assure them that a building is actually sited on the land according
to its legal description.
The assessed value of a parcel against
which the tax rate is applied to compute the tax due. In case of a
partial exemption, the exempt amount is subtracted from the assessed
value in order to determine the taxable assessed value.
Teaser Rate
A low initial interest rate on a
mortgage.
Title
The rights of
ownership and possession of particular property. In real estate usage,
title may refer to the instruments or documents by which a right of
ownership is established (title documents), or it may refer to the
ownership interest one has in the real estate.
Title Insurance
Protects lenders or homeowners against
loss of their interest in property due to legal defects in title.
Insurance benefits will be paid only to the "named
insured" in the title policy, so it is important that an owner
purchase an "owner's title policy", if he desires the
protection of title insurance.
Title Insurance Binder
Written commitment of a title insurance
company to insure title to the property under the conditions stated in
the binder.
Title Search or Examination
A check of the title records, generally
at the local courthouse, to make sure the buyer is purchasing a house
from the legal owner and there are no liens, or other claims or outstanding restrictive covenants
filed in the record, which would adversely affect the marketability or
value of title.
In PA the buyer and seller each pay 1%
state tax on the sales price of the real estate, unless stated
otherwise in the sales contract. In Philadelphia County, the tax
rate is 2% for each the buyer and seller.
Trustee
A party who is given legal
responsibility to hold property in the best interest of or "for
the benefit of" another. The trustee is one placed in a position
of responsibility for another, a responsibility enforceable in a court
of law. See Deed of Trust
Truth-In-Lending Act (
TIL, also called Regulation Z)
Under this act a lender is required to
provide you with a disclosure estimating the costs of the loan you
have applied for, including your total finance charge and the Annual
Percentage Rate(APR) within three business days of your
application for a loan.
Two-Step Mortgage
With this type of loan homebuyers get a
fixed rate loan at a slightly lower interest rate for a fixed period
of time (most often for 5, 7, or 10 years) and then the interest rate
is adjusted to fit market conditions at that time. After that
adjustment, the mortgage maintains a fixed rate for the remaining
years.
A mortgage for veterans and service
persons guaranteed by the Department
of Veterans Affairs (VA), requiring very low or no downpayments
and with generous requirements for qualification.
