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203(b): FHA
program which provides mortgage insurance to protect lenders
from default; used to finance the purchase of new or existing
one- to four family housing; characterized by low down payment,
flexible qualifying guidelines, limited fees, and a limit on
maximum loan amount.
203(k): this FHA mortgage
insurance program enables homebuyers to finance both the
purchase of a house and the cost of its rehabilitation through a
single mortgage loan.
A
Adjustable-rate mortgage (ARM): A mortgage with an interest rate
and payment that change periodically over the life of the loan
based on changes in a specified index.
Adjustment Period: The
time between interest rate adjustments for an ARM. There is
usually an initial adjustment period, beginning from the start
date of the loan and varying from
1
to 10 years. After the first adjustment period, adjustment
periods are usually 12 months, which means that the interest
rate can change every year.
Amenity: a feature
of the home or property that serves as a benefit to the buyer
but that is not necessary to its use; may be natural (li
ke
location, Woods, water) or man-made (like
a swimming pool or garden).
Amortization: repayment of
a mortgage loan through monthly installments of principal and
interest; the monthly payment amount is based on a schedule that
will allow you to own your home at the end of a specific time
period (for example, 15 or 30 years)
Annual Percentage Rate (APR): calculated
by using a standard formula, the APR shows the cost of a loan;
expressed as a yearly interest rate, it includes the interest,
points, mortgage insurance, and other fees associated with the
loan.
Application: the first
step in the official loan approval process; this form is used to
record important information about the potential borrower
necessary to the underwriting process.
Application
Fee:
The fee that a mortgage lender charges to apply for a mortgage
to cover processing costs.
Appraisal: a document
that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before
loan approval to ensure that the mortgage loan amount is not
more than the value of the property.
Appraiser: a qualified
individual who uses his or her experience and knowledge to
prepare the appraisal estimate.
Appreciation:
An increase in the market value of a home due to changing
market conditions and/or home improvements.
ARM: Adjustable
Rate Mortgage; a mortgage loan subject to changes in interest
rates; when rates change, ARM monthly payments increase or
decrease at intervals determined by the lender; the Change in
monthly -payment amount, however, is usually subject to a Cap.
Asbestos:
A toxic material that was once used in housing insulation and
fireproofing. Because some forms of asbestos have been lin
ke
d to certain lung diseases, it is no longer used in new homes.
However, some older homes may still have asbestos in these
materials.
Assessor: a
government official who is responsible for determining the value
of a property for the purpose of taxation.
Assets:
Everything of value an individual owns.
Assumable mortgage: a mortgage
that can be transferred from a seller to a buyer; once the loan
is assumed by the buyer the seller is no longer responsible for
repaying it; there may be a fee and/or a credit package involved
in the transfer of an assumable mortgage.
B
Balloon Mortgage: a
mortgage that typically offers low rates for an initial period
of time (usually 5, 7, or 10) years; after that time period
elapses, the balance is due or is refinanced by the borrower.
Bankruptcy: a federal
law Whereby a person's assets are turned over to a trustee and
used to pay off outstanding debts; this usually occurs when
someone owes more than they have the ability to repay.
Borrower: a person
who has been approved to receive a loan and is then obligated to
repay it and any additional fees according to the loan terms.
Building code: based on
agreed upon safety standards within a specific area, a building
code is a regulation that determines the design, construction,
and materials used in building.
Budget: a detailed
record of all income earned and spent during a specific period
of time.
C
Cap: a limit,
such as that placed on an adjustable rate mortgage, on how much
a monthly payment or interest rate can increase or decrease.
Capacity:
Your ability to make
your mortgage payments on time. This depends on your income and
income stability (job history and security), your assets and
savings, and the amount of your income each month that is left
over after you've paid for your housing costs, debts and other
obligations.
Cash reserves: a cash
amount sometimes required to be held in reserve in addition to
the down payment and closing costs; the amount is determined by
the lender.
Certificate of title: a
document provided by a qualified source (such as a title
company) that shows the property legally belongs to the current
owner; before the title is transferred at closing, it should be
clear and free of all liens or other claims.
Closing: also known
as settlement, this is the time at which the property is
formally sold and transferred from the seller to the buyer; it
is at this time that the borrower ta
ke
s on the loan obligation, pays all closing costs, and receives
title from the seller.
Closing Agent: A person
who coordinates closing-related activities, such as recording
the closing documents and disbursing funds.
Closing costs: customary
costs above and beyond the sale price of the property that must
be paid to cover the transfer of ownership at closing; these
costs generally vary by geographic location and are typically
detailed to the borrower after submission of a loan application.
Collateral:
Property which is used as security for a debt. In the case of a
mortgage, the collateral would be the house and property.
Commission: an amount,
usually a percentage of the property sales price, that is
collected by a real estate professional as a fee for negotiating
the transaction.
Commitment
Letter:
A letter from your lender stating the amount of the mortgage,
the number of years to repay the mortgage (the term), the
interest rate, the loan origination fee, the annual percentage
rate and the monthly charges.
Concession: Something given up or agreed to in
negotiating the sale of the house. For example, the sellers may
agree to help pay for closing costs.
Condominium: a form of
ownership in which individuals purchase and own a unit of
housing in a multi-unit complex; the owner also shares financial
responsibility for common areas.
Contingency:
A plan for something that may occur but is not likely. For example, your offer may be contingent on the home
passing a home inspection. It the home does not pass inspection,
you're protected.
Conventional loan: a private
sector loan, one that is not guaranteed or insured by the
U.S.
government.
Cooperative (Co-op): residents
purchase stock in a cooperative corporation that owns a
structure; each stockholder is then entitled to live in a
specific unit of the structure and is responsible for paying a
portion of the loan.
Counter-offer: An offer
made in response to a previous offer. For example, after the
buyer presents their first offer, the seller may ma
ke
a counter-offer with a slightly higher sale price.
Credit
enhancement:
A method to reduce credit risk by requiring collateral, letters
of credit, mortgage insurance, corporate guarantees, or other
agreements to provide an entity with some assurance that it will
be recompensed to some degree in the event of a financial loss.
Credit history: history of
an individual's debt payment; lenders use this information to
gauge a potential borrower's ability to repay a loan.
Credit report: a record
that lists all past and present debts and the timeliness of
their repayment; it documents an individual's credit history.
Credit bureau score: a
number representing the possibility a borrower may default; it
is based upon credit history and is used to determine ability to
qualify for a mortgage loan.
D
Debt-to-income ratio: a
comparison of gross income to housing and non-housing expenses;
With the FHA, the-monthly mortgage payment should be no more
than 29% of monthly gross income (before taxes) and the mortgage
payment combined with non-housing debts should not exceed 41% of
income.
Deed: the
document that transfers ownership of a property.
Deed of Trust: A legal
document in which the borrower transfers the title to a 3rd
party (trustee) to hold as security for the lender. When the
loan is paid in full the trustee transfers title back to the
borrower. If the borrower defaults on the loan the trustee will
sell the property and pay the lender the mortgage debt.
Deed-in-lieu: to avoid
foreclosure ("in lieu" of foreclosure), a deed is
given to the lender to fulfill the obligation to repay the debt;
this process doesn't allow the borrower to remain in the house
but helps avoid the costs, time, and effort associated with
foreclosure.
Default: the
inability to pay monthly mortgage payments in a timely manner or
to otherwise meet the mortgage terms.
Delinquency: failure of a
borrower to make
timely mortgage payments under a loan agreement.
Depreciation:
A decline in the value of a house due to changing market conditions or lack of up
keep on a home.
Discount point: normally
paid at closing and generally calculated to be equivalent to 1%
of the total loan amount, discount points are paid to reduce the
interest rate on a loan.
Down payment: the portion
of a home's purchase price that is paid in cash and is not part
of the mortgage loan.
E
Earnest money: money put
down by a potential buyer to show that he or she is serious
about purchasing the home; it becomes part of the down payment
if the offer is accepted, is returned if the offer is rejected,
or is forfeited if the buyer pulls out of the deal.
EEM: Energy
Efficient Mortgage; an FHA program that helps homebuyers save
money on utility bills by enabling them to finance the cost of
adding energy efficiency features to a new or existing home as
part of the home purchase
Equity:
an owner's financial interest in a property; calculated by
subtracting the amount still owed on the mortgage loon(s) from
the fair market value of the property.
Escrow account: a separate
account into which the lender puts a portion of each monthly
mortgage payment; an escrow account provides the funds needed
for such expenses as property taxes, homeowners insurance,
mortgage insurance, etc.
F
Fair Housing Act: a law that
prohibits discrimination in all facets of the home buying process
on the basis of race, color, national origin, religion, sex,
familial status, or disability.
Fair market value: the hypothetical price that a willing buyer and
seller will agree upon when they are acting freely, carefully,
and with complete knowledge of the situation.
Fannie Mae: Federal
National Mortgage Association (FNMA); a federally-chartered
enterprise owned by private stockholders that purchases
residential mortgages and converts them into securities for sale
to investors; by purchasing mortgages, Fannie Mae supplies funds
that lenders may loan to potential homebuyers.
FHA: Federal
Housing Administration; established in 1934 to advance
homeownership opportunities for all Americans; assists
homebuyers by providing mortgage insurance to lenders to cover
most losses that may occur when a borrower defaults; this
encourages lenders to ma
ke
loans to borrowers who might not qualify for conventional
mortgages.
Fixed-rate mortgage: a mortgage
with payments that remain the same throughout the life of the
loan because the interest rate and other terms are fixed and do
not change.
Flood insurance: insurance
that protects homeowners against losses from a flood; if a home
is located in a flood plain, the lender will require flood
insurance before approving a loan.
Forbearance: The lender's postponement of legal action when a borrower is delinquent.
It is usually granted when a borrower ma
ke
s satisfactory arrangements to bring the overdue mortgage
payments up to date.
Foreclosure: a legal
process in which mortgaged property is sold to pay the loan of
the defaulting borrower.
Freddie Mac: Federal Home
Loan Mortgage Corporation (FHLM); a federally-chartered
corporation that purchases residential mortgages, securitizes
them, and sells them to investors; this provides lenders With
funds for new homebuyers.
G
Gift
Letter: A letter that a family member writes verifying
that s/he has given you a certain amount of money as a gift and
that you don't have to repay it. You can use this money towards
a portion of your down payment with some mortgages.
Ginnie Mae: Government
National Mortgage Association (GNMA); a government-owned
corporation overseen by the U.S. Department of Housing and Urban
Development, Ginnie Mae pools FHA-insured and VA-guaranteed
loans to back securities for private investment; as With Fannie
Mae and Freddie Mac, the investment income provides funding that
may then be lent to eligible borrowers by lenders.
Good faith estimate: an estimate
of all closing fees including pre-paid and escrow items as well
as lender charges; must be given to the borrower within three
days after submission of a loan application.
Gross
Monthly Income:
The income you earn in a month before taxes and other
deductions. It may also include rental income, self-employed
income, income from alimony, child support, public assistance
payments, and retirement benefits.
H
HELP: Homebuyer
Education Learning Program; an educational program from the FHA
that counsels people about the home buying process; HELP covers
topics like
budgeting, finding a home, getting a loan, and home maintenance;
in most cases, completion of the program may entitle the
homebuyer to a reduced initial FHA mortgage insurance
premium-from 2.25% to 1.75% of the home purchase price.
Home inspection: an
examination of the structure and mechanical systems to determine
a home's safety; makes the potential homebuyer aware of any repairs that may be
needed.
Home Equity:
The value of a homeowner's unencumbered
interest in their property(s). Equity is the difference between
the home's fair market value and the unpaid balance of the
mortgage and any outstanding debt over the home. Equity
increases as the mortgage is paid or as the property enjoys
appreciation.
Home Equity Loan: Sometimes
referred to as a second mortgage or borrowing against your home.
The loan allows you to tap into your home's built-up equity,
which is the difference between the amount your home could be
sold for, and the amount that you still owe. Homeowners often
use a home-equity loan for home improvements, to pay for a new
car, or to finance their child's college education. A
home-equity loan is a good way to borrow money for two main
reasons:
- The interest rate is usually one of the
lowest loan rates a borrower can get
- The interest you pay on the loan is
usually tax-deductible. But taking out a home-equity loan
also means the lender can take possession of the home if the
loan isn't repaid.
Home warranty: offers
protection for mechanical systems and attached appliances
against unexpected repairs not covered by homeowner's insurance;
,overage extends over a specific time period and does not cover
the home's structure.
Homeowner's insurance: an
insurance policy that combines protection against damage to a
dwelling and Is contents with protection against claims of
negligence )r inappropriate action that result in someone's
injury or )property damage.
Housing counseling agency- provides
counseling and assistance to individuals on a variety of issues,
including loan default, fair housing, and home buying.
Housing
Expense Ratio: The percentage of your gross monthly income that goes toward
paying for your housing expenses.
HUD: the U.S.
Department of Housing and Urban Development; established in
1965, HUD works to create a decent home and suitable living
environment for all Americans; it does this by addressing
housing needs, improving and developing American communities,
and enforcing fair housing laws.
HUD1 Statement: also known
as the "settlement sheet," it itemizes all closing
costs; must be given to the borrower at or before closing.
HVAC: Heating, Ventilation and
Air Conditioning; a home's heating and cooling system.
I
Index. a measurement used by
lenders to determine changes to the Interest rate charged on an
adjustable rate mortgage.
Inquiry:
A request for a copy of your credit report. An inquiry occurs
every time you fill out a credit application and/or request more
credit. Too many inquiries on a credit report can hurt your
credit score.
Inflation: the number
of dollars in circulation exceeds the amount of goods and
services available for purchase; inflation results in a decrease
in the dollar's value.
Interest: a fee
charged for the use of money .
Interest rate: the amount
of interest charged on a monthly loan payment; usually expressed
as a percentage.
Insurance: protection
against a specific loss over a period of time that is secured by
the payment of a regularly scheduled premium.
J
Judgment: a legal
decision; when requiring debt repayment, a judgment may include
a property lien that secures the creditor's claim by providing a
collateral source.
L
Lease purchase: assists low-
to moderate-income homebuyers in purchasing a home by allowing
them to lease a home with an option to buy; the rent payment is
made up of the monthly rental payment plus an additional amount
that is credited to an account for use as a down payment.
Liabilities:
Your debts and other financial obligations.
Lien: a legal claim against
property that must be satisfied When the property is sold
Loan: money borrowed that is usually repaid with
interest.
Loan fraud: purposely
giving incorrect information on a loan application in order to
better qualify for a loan; may result in civil liability or
criminal penalties.
Loan
Origination Fees: Fees paid to your mortgage lender for processing
the mortgage application. This fee is usually in the form of
points. One point equals 1% of the mortgage amount.
Loan-to-value (LTV) ratio.- a
percentage calculated by dividing the amount borrowed by the
price or appraised value of the home to be purchased; the higher
the LTV, the less cash a borrower is required to pay as down
payment.
Lock-in: since
interest rates can change frequently, many lenders offer an
interest rate lock-in that guarantees a specific interest rate
if the loan is closed within a specific time.
Loss mitigation: a process to
avoid foreclosure; the lender tries to help a borrower who has
been unable to make
loan payments and is in danger of defaulting on his or her loan
M
Margin: an amount
the lender adds to an index to determine the interest rate on an
adjustable rate mortgage.
Mortgage: a lien on
the property that secures the Promise to repay a loan. The term also is
used to refer to the loan itself.
Mortgage banker: a
company that originates loans and resells them to secondary
mortgage lenders like
:Fannie Mae or Freddie Mac.
Mortgage broker: a
firm that originates and processes loans for a number of
lenders.
Mortgage insurance: a policy
that protects lenders against some or most of the losses that
can occur when a borrower defaults on a mortgage loan; mortgage
insurance is required primarily for borrowers with a down
payment of less than 20% of the home's purchase price.
Mortgage insurance premium (MIP): a
monthly payment -usually part of the mortgage payment - paid by
a borrower for mortgage insurance.
Mortgage
Lender:
The lender providing funds for a mortgage. Lenders also manage
the credit and financial information review, the property and
the loan application process through closing.
Mortgage Modification: a
loss mitigation option that allows a borrower to refinance
and/or extend the term of the mortgage loan and thus reduce the
monthly payments.
Mortgage Rate: The cost or the interest rate you pay to
borrow the money to buy your house.
N
Net
Monthly Income: Your take
-home pay after taxes. It is the amount of money that you
actually receive in your paycheck.
O
Offer: indication
by a potential buyer of a willingness to purchase a home at a
specific price; generally put forth in writing.
Open House:
When the seller's real estate agent opens the seller's house to
the public. You don't need a real estate agent to attend an open
house.
Origination: the process
of preparing, submitting, and evaluating a loan application;
generally includes a credit check, verification of employment,
and a property appraisal.
Origination fee: the charge
for originating a loan; is usually calculated in the form of
points and paid at closing.
P
Partial Claim: a loss
mitigation option offered by the FHA that allows a borrower,
with help from a lender, to get an interest-free loan from HUD
to bring their mortgage payments up to date.
PITI: Principal, Interest,
Taxes, and Insurance - the four elements of a monthly mortgage
payment; payments of principal and interest go directly towards
repaying the loan while the portion that covers taxes and
insurance (homeowner's and mortgage, if applicable) goes into an
escrow account to cover the fees when they are due.
PMI: Private
Mortgage Insurance; privately-owned companies that offer
standard and special affordable mortgage insurance programs for
qualified borrowers with down payments of less than 20% of a
purchase price.
Points:
1% of the amount of the mortgage loan. For example, if a loan is
made for $50,000, one point equals $500.
Pre-approve: lender
commits to lend to a potential borrower; commitment remains as
long as the borrower still meets the qualification requirements
at the time of purchase.
Predatory
Lending:
Abusive lending practices that include making mortgage loans to
people who do not have the income to repay them or repeatedly
refinancing loans, charging high points and fees each time and
"packing" credit insurance onto a loan.
Pre-foreclosure sale:
allows a defaulting borrower to sell the mortgaged property to
satisfy the loan and avoid foreclosure.
Pre-qualify: a lender
informally determines the maximum amount an individual is
eligible to borrow.
Premium: an amount
paid on a regular schedule by a policyholder that maintains
insurance coverage.
Prepayment: payment of
the mortgage loan before the scheduled due date; may be Subject
to a prepayment penalty.
Principal: the amount
borrowed from a lender; doesn't include interest or additional
fees.
Private Mortgage Insurance:
See Mortgage Insurance
R
Radon: a
radioactive gas found in some homes that, if occurring in strong
enough concentrations, can cause health problems.
Rate Cap:
The limit on the amount an interest rate on an ARM can increase
or decrease during an adjustment period.
Real estate agent: an
individual who is licensed to negotiate and arrange real estate
sales; works for a real estate broker.
REALTOR: a real
estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and
its local and state associations.
Refinancing: paying off
one loan by obtaining another; refinancing is generally done to
secure better loan terms (like
a lower interest rate).
Rehabilitation mortgage: a
mortgage that covers the costs of rehabilitating (repairing or
Improving) a property; some rehabilitation mortgages - li
ke
the FHA's 203(k) - allow a borrower to roll the costs of
rehabilitation and home purchase into one mortgage loan.
Repayment plan: An agreement
between a lender and a borrower who is delinquent on his or her
mortgage payments, in which the borrower agrees to make
additional payments to pay down past due amounts while still
making regularly scheduled payments.
Replacement
Cost:
The cost to replace damaged personal property without a
deduction for depreciation.
RESPA: Real Estate Settlement
Procedures Act; a law protecting consumers from abuses during
the residential real estate purchase and loan process by
requiring lenders to disclose all settlement costs, practices,
and relationships.
Reverse mortgage: A financial tool
which provides seniors with funds from the equity in their
homes. Generally, no payments are made on a reverse mortgage
until the borrower moves or the property is sold. The final
repayment obligation is designed to not exceed the proceeds from
the sale of the home.
S
Secondary mortgage market: The
market in which residential mortgages or mortgage securities are
bought and sold.
Serious delinquency: A single-family mortgage that is 90 days or more
past due, or a multifamily mortgage that is two months or more
past due.
Settlement: another
name for closing.
Special Forbearance: a
loss mitigation option where the lender arranges a revised
repayment plan for the borrower that may include a temporary
reduction or suspension of monthly loan payments.
Subordinate: to place in
a rank of lesser importance or to make
one claim secondary to another.
Survey: a property
diagram that indicates legal boundaries, easements,
encroachments, rights of way, improvement locations, etc.
Sweat equity: using labor
to build or improve a property as part of the down payment
T
Title 1: an
FHA-insured loan that allows a borrower to make
non-luxury improvements (like
renovations or repairs) to their home; Title I loans less than
$7,500 don't require a property lien.
Title insurance: insurance
that protects the lender against any claims that arise from
arguments about ownership of the property; also available for
homebuyers.
Title search: a check of
public records to be sure that the seller is the recognized
owner of the real estate and that there are no unsettled liens
or other claims against the property.
Truth-in-Lending: a
federal law obligating a lender to give full written disclosure
of all fees, terms, and conditions associated with the loan
initial period and then adjusts to another rate that lasts for
the term of the loan.
U
Underwriting: the process
of analyzing a loan application to determine the amount of risk
involved in making the loan; it includes a review of the
potential borrower's credit history and a judgment of the
property value.
Uniform
Residential Loan Application: A standard mortgage
application your lender will ask you to complete. The form
requests your income, assets, liabilities, and a description of
the property you plan to buy, among other things.
V
VA: Department of Veterans
Affairs: a federal agency which guarantees loans made to
veterans; similar to mortgage insurance, a loan guarantee
protects lenders against loss that may result from a borrower
default.
W
Warranties:
Written guarantees of the quality of a product and the promise
to repair or replace defective parts free of charge.
Sources:
US Department of Housing and Urban Development; Fannie Mae,
Freddie Mac
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