|Glossary of Terms|
annual percentage rate (APR)
This figure states the total yearly cost of a mortgage as expressed by the actual rate of interest paid. The APR includes the base interest rate, points and any other add-on loan fees and costs. The APR is thus invariably higher than the rate of interest that the lender quotes for the mortgage.
Mortgage lenders require an appraiser to give an opinion of the market value of a house a homeowner wants to sell or refinance. This professional opinion helps to protect the lender from lending money on a house that is worth less than the amount the buyers have agreed to pay for it or that the seller wishes to obtain when refinancing the existing loan. For typical houses, the appraisal fee is in the $200 to $300 range and is usually paid for by the borrower.
The assessed value is the value of a property for the purpose of determining property taxes. This figure depends on the methodology used by the local tax assessor and, thus, may differ from the appraised or market value of the property.
In a buydown, the builder or house seller agrees to pay part of the home buyer's mortgage for the first few years. The term also refers to the practice of a seller paying a mortgage lender a predetermined amount of money to reduce his or her mortgage interest rate, thereby creating more attractive financing for a potential buyer. Veterans with low or modest incomes may be able to get buydowns through a Veterans Administration loan plan that is available in some new housing developments.
Most mortgage lenders require that homebuyers have sufficient cash left over after closing on their home purchase in order to make the first two mortgage payments or to cover a financial emergency.
A title that is free of liens or legal questions as to ownership of the property.
A meeting at which a sale of property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called “settlement.”
These costs generally total from 2 percent to 5 percent of the home's purchase price and are completely independent of (and in addition to) the down payment. Closing costs include such things as points (that is, loan origination fee to cover lender's administrative costs), an appraisal fee, a credit report fee, mortgage interest for the period between the closing date and the first mortgage payment, homeowners insurance premium, title insurance, prorated property taxes and recording and transferring charges. So when you are finally ready to buy, you need to have enough cash to pay all these costs in order to buy your dream home.
comparable market analysis (CMA)
In order to determine the price you want to offer, you need to know how much houses like the one you are considering are selling for. Identify houses "comparable" to yours that sold within the last six months, are in the immediate vicinity of your house and are as similar as possible to your house in terms of size, age and condition. By analyzing the asking prices of houses comparable to yours that are currently on the market, you can see whether prices are rising, flat or declining. A written analysis of comparable houses currently being offered for sale and comparable houses that sold in the past six months is called a comparable market analysis (CMA).
Contingencies are conditions contained in almost all home purchase offers. The seller or buyer must meet or waive all contingencies before the deal can be closed. These conditions relate to such factors as the buyer's review and approval of property inspections or the buyer's ability to get the mortgage financing that is specified in the contract. Sellers may include contingencies as well, such as making the sale of their house contingent upon their successful purchase of another home. If a contingency cannot be met, the party for whom it was established may legitimately withdraw from a contract.
A credit report is the main report that a lender uses to determine an applicant's creditworthiness. Applicants must pay for a lender to obtain this report, which the lender uses to determine the applicant's ability to handle all forms of credit and to pay off loans in a timely fashion. The cost of a credit report is usually around $40 to $50.
The legal document conveying title to property. The deed is the document that transfers ownership from the seller to the buyer. Only the seller signs the deed at closing and you receive a copy of it. The closing agent will record the deed with you listed as the new property owner. Your name and the names of any other buyers appear on the deed and it will be sent to you after it is recorded.
Before you go out home buying, you should determine what your price range is. Lenders generally figure that you shouldn't spend more than 33 to 45 percent of your monthly income for your housing costs. The debt-to-income ratio measures your future monthly housing expenses, which include your proposed mortgage payment (debt), property tax and insurance, in relation to your monthly income.
At first you are delinquent; then you are in default. Delinquency occurs when a monthly mortgage payment is not received by the due date.
The down payment is the part of the purchase price that the buyer pays in cash, up front, and does not finance with a mortgage. Generally, the larger the down payment, the better the deal that you can get on a mortgage.
A home buyer's "good faith" deposit that accompanies a written purchase offer.
An improvement that intrudes illegally on another person’s property.
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. A lender determines how much equity you have in your home by taking the appraised value of the home and subtracting any mortgage debt. For example, if you house is valued at $150,000 and your mortgage balance is $80,000, you have $70,000 equity in the house.
final walk-through inspection
Your sales contract should include a clause that allows you to examine the property you want to purchase shortly before closing. This walk-through, during which you will be accompanied by your real estate professional is your chance to make sure the seller vacated the house and left behind whatever property was agreed upon. Make sure to check all lights, appliances and plumbing fixtures. You will also want to make sure that all conditions of the sales contract have been met. If they have not, or you observe major problems, you have the right to delay the closing until they are fixed. One other option is to make sure money to correct the problems is placed in an escrow account at closing to cover the cost of repairs.
The fixed-rate mortgage is the granddaddy of all mortgages. You lock into an interest rate (for example, 8.5 percent), and it never changes during the life (term) of your 15- or 30-year mortgage. Your mortgage payment will be the same amount each and every month. Compare fixed-rate mortgages with adjustable-rate mortgages.
A FSBO is a property that is For Sale By Owner. In other words, the property is not listed for sale through a real estate broker.
Like homeowners insurance, we think that a house inspection is a necessity. The following should be inspected: overall condition of the property, inside and out; electrical, heating, and plumbing systems; foundation; roof; pest control and dry rot. A good home inspection can save you money by locating problems. With the inspection report in hand, your agent can ask the seller to either do repairs or reduce the purchase price.
home warranty plan
Lenders usually require borrowers to pay the interest that accrues from the date of settlement to the first monthly payment.
Interest is what lenders charge you to use their money. Lenders generally charge higher rates of interest on higher-risk loans. For fixed-rate mortgages, remember that the interest rate has a seesaw relationship with the points. A high number of points is usually associated with a lower interest rate, and vice versa. For an adjustable-rate mortgage, make sure you understand the formula (the index plus the margin) that determines how the interest rate is calculated after the teaser rate expires.
legal fees/attorney fees
Costs relating to having an attorney or law firm review and prepare the needed documents for your closing. These costs may include deed preparation (this cost is paid for by the seller), title search and closing packet preparation. Costs are usually around $450 to $600.
A lock-in is a mortgage lender's commitment and written agreement to guarantee a specified interest rate to the homebuyer, provided that the loan is closed within a set period of time.
This fee is usually known as a loan origination fee but is sometimes called a “point” or “points.” It covers the lender’s administrative costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among lenders. Generally, the buyer pays the fee, unless otherwise negotiated.
Multiple Listing Service
A Multiple Listing Service (or MLS) is a real estate agents' cooperative service that contains descriptions of most of the houses that are for sale. Real estate agents use this computer-based service to keep up with properties listed for sale by members of the Multiple Listing Service in their area.
This fee is charged for the cost of having a person who is licensed as a notary public swear to the fact that the persons named in the documents did, in fact, sign them.
Also known as a loan's origination fee, points are interest charges paid up-front when you close on your loan. Points are actually a percentage of your total loan amount (one point is equal to 1 percent of the loan amount). For a $100,000 loan, one point costs you $1,000.
pre-paids/escrow account deposits
These costs are for the payment of taxes and/or insurance and other items that must be made at settlement to set up an escrow account. The lender is not allowed to collect more that a certain amount.
The principal is the amount that you borrow for a loan. If you borrow $100,000, your principal is $100,000. Each monthly mortgage payment consists of a portion of principal that must be repaid plus the interest that the lender is charging you for the use of the money. During the early years of your mortgage, your loan payment is primarily interest.
private mortgage insurance (PMI)
If the down payment is less than 20 percent of a home's purchase price, the borrower will probably need to purchase private mortgage insurance (also known as "mortgage default insurance"). Lenders feel that homeowners who can only come up with small down payments are more likely to default on their loans. Therefore, lenders make these homeowners buy PMI, which reimburses them the loan amount in case the borrower does default. Private mortgage insurance can add hundreds of dollars per year to loan costs. After the equity in the property increases to 20 percent, borrowers no longer need the insurance. Do not confuse this insurance with mortgage life insurance.
property disclosure statement
Some states require that sellers give prospective buyers a written disclosure regarding all known property defects and all known material facts that may affect the property's value or desirability.
Certain items such as property taxes and homeowners association dues are continuing expenses that must be prorated (distributed) between the buyers and sellers at closing. If the buyers, for example, owe the sellers money for property taxes that the sellers paid in advance, the prorated amount of money due the sellers at closing is shown as a debit (charge) to the buyers and a credit to the sellers.
The cost for having the new deed recorded. This will put your name in the public records as the owner of the home. Usually around $35.00.
settlement or closing fee
This fee is paid to the settlement agent or escrow holder. The cost of the fee needs to be negotiated between the buyer and the seller.
The lender may require that a surveyor conduct a property survey. This is a protection to the buyer as well. Usually the buyer pays for the surveyor’s fee, but sometimes this may be paid by the seller.
Tax deductible refers to payments that you may deduct against your federal and state taxable income. The interest portion of your mortgage payments, loan points and property taxes are tax deductible.
Title insurance covers the legal fees and expenses necessary to defend your title against claims that may be made against your ownership of the property. The extent of your coverage depends upon whether you have an owner's standard coverage or extended coverage title insurance policy. To get a mortgage, you also have to buy a lender's title insurance policy to protect your lender against title risks.
Certain city and county government bodies have the power to regulate the use of land and buildings. For example, the neighborhood where your house is located is probably zoned for residential use. It most likely also has zoning codes or ordinances to regulate building heights, yard sizes and the percentage of lot coverage by buildings.