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A |
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Abstract of title |
A
written history of all the transactions that bear on the title to a
specific piece of land. An abstract of title covers
the time from when the property was first sold to the present. Used by
the title company to produce a title binder. |
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Acceleration clause |
The
section of a mortgage document that allows the lender to speed up the
payment date in the event of a default, making the entire principal
amount due. |
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Acre |
An
area of land that is 43,560 square feet. |
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Adjustable Rate
Mortgage, or ARM |
Mortgage in which the rate of interest is adjusted based on a standard
rate index. Most ARMs have caps on how much the
interest rate may increase. |
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Alternative mortgage
products |
7/23
and 5/25 mortgages with a one-time rate adjustment after seven years and
five years, respectively. Also known as a hybrid mortgage or two-step
mortgage. |
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Amortization schedule |
A
timetable for the gradual repayment of a mortgage loan. An amortization
schedule indicates the amount of each payment applied to interest and
principal, and also the remaining balance after each payment is made. |
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Amortization term |
The
amount of time required to amortize (repay) a mortgage loan. The
amortization term is usually expressed in months. A 30-year fixed-rate mortgage, for example, has
an amortization term of 360 months. |
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Annual Percentage Rate
(APR) |
A
standardized method of calculating the cost of a mortgage, stated as a
yearly rate which includes such items as interest, mortgage insurance,
and certain points or credit costs. |
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Appraisal |
A
written report by a qualified appraiser estimating the value of a property. |
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Appraised value |
An
opinion of a property's fair market value,
based on an appraiser's inspection and analysis
of the property. |
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Appraiser |
A
person qualified by education, training and experience to estimate the
value of real property. |
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Appreciation |
An
increase in the value of a property due to changes in market conditions
or improvements to the property. |
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ARM |
See Adjustable rate mortgage. |
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Assessed value |
The
value of a property as determined by a public tax assessor for the
purpose of taxation. |
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Assumable mortgage |
A
mortgage that a buyer can assume, or take over, from the seller of the
property. |
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Balloon mortgage |
A loan
that has regular monthly payments which amortize over a stated term but
call for a final lump sum (balloon payment) at the end of a specified
term, or maturity date, such as 10 years. |
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Basis points |
1/100th of 1 percent. If an interest rate changes 50 basis points, for
example, it has moved 1/2 of 1 percent. |
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Binder |
See title binder. |
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Biweekly mortgage |
A
mortgage that schedules payments every two weeks instead of the standard
monthly payment. The 26 biweekly payments are each equal to one-half of
the monthly payment. The result for the borrower is a substantial
reduction in interest payments because the mortgage is paid off sooner.
See also pre-payment plan. |
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Bridge loan |
A loan
that "bridges" the gap between the purchase of a new home and the sale
of the borrower's current home. The borrower's current home is used as
collateral and the money is used to close on the new home before the
current home is sold. Some are structured so they completely pay off the
old home's first mortgage at the bridge
loan's closing, while others pile the new debt on top of the old. They
usually run for a term of six months. |
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Broker |
See mortgage broker. |
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Broker premium |
Premium paid to mortgage broker as the "middleman" in the mortgage
process between the lender and the borrower. Lenders offer brokers
wholesale rates; brokers add a surcharge to cover the cost of
underwriting to arrive at the rates charged to borrowers. See underwriter. |
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Built-ins |
Cabinets, ranges, ceiling fans and other items permanently attached to a
structure, and which a buyer may assume will remain with the structure. |
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Buydown |
The
process of trading money for a lower mortgage rate. The borrower "buys
down" the interest rate on a mortgage by paying discount points up front. It can also be
a mortgage in which an initial lump-sum payment is made to temporarily
reduce a borrower's monthly payments during the first few years of a
mortgage. |
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Caps |
The
maximum amount the interest rate can change annually or cumulatively
over the life of an adjustable-rate mortgage. For example, if the caps are 2 percent
annual and 6 percent life of loan, a mortgage with a first-year rate of
10 percent could rise to no more than 12 percent the second year, and no
more than 16 percent over the entire loan term. |
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Certificate of title |
A
statement provided by a title company or
attorney stating that the title to the real estate
is legally held by the current owner. |
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Chattel |
Personal property. |
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Clear title |
A title that is free of liens or legal questions as
to ownership of a piece of property. |
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Closing |
The
meeting at which the sale of a property is finalized. The buyer signs
the lender agreement for the mortgage and pays closing costs and escrow amounts. The
buyer and seller sign documents to transfer ownership of the property.
Also known as the settlement. |
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Closing costs |
Expenses incurred by buyers and sellers in transferring ownership of a
property. Closing costs normally include an origination fee, an attorney's fee, taxes, escrow payments, and charges for title
insurance. Lenders or Realtors® provide
estimates of closing costs to prospective home buyers. |
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Closing statement |
A financial disclosure
accounting for all funds changing hands at the closing. See also HUD-1 statement. |
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Cloud on title |
Any fact or condition that
could adversely affect the title. |
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Commission |
In
real estate, the broker or salesperson's fee for assisting the
transaction, usually expressed as a percentage of the total paid by the
buyer. |
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Commitment letter |
A
formal offer by a lender stating the approved terms for lending money to
a home buyer. |
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Common area assessment |
A levy
against individual unit owners in a condominium or planned unit development to pay for upkeep, repairs and improvements to the property's common
areas, such as corridors, elevators, parking lots, swimming pools and
tennis courts. |
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Comparables or "comps" |
Refers
to "comparable properties," which are used for comparative purposes in
the appraisal process. Comps are recently sold
properties that are similar in size, location and amenities to the home
for sale. Comps help an appraiser determine the fair market value of a property. |
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Condominium |
A real
estate project in which each unit owner has title to a unit of the project, and sometimes an undivided interest in the
common areas. |
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Conforming loan |
A loan
that conforms to the standard rules for purchase by Freddie Mac or Fannie
Mae. |
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Contiguous |
Adjoining or touching. |
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Contingency |
A
condition that must be met before a contract is
legally binding. For example, home buyers often include a contingency
that specifies that the contract is not binding until after a
satisfactory report from a qualified home inspector. See home inspection. |
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Contract |
In
real estate parlance, the contract is the legal document by which buyer
and seller make offers and counter-offers. The real estate contract
describes the property, includes or excludes items in the property,
names the price, apportions the closing costs between the parties and sets forth a closing date. When buyer and seller
agree on terms and sign the same document, the property is said to be
"under contract." More formally known as agreement for sale, purchase
agreement or earnest money contract. |
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Conventional mortgage |
Usually refers to a fixed-rate, 30-year mortgage that is not insured by
the FHA, Farmers
Home Administration (FmHA) or Veterans
Administration. |
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Convertible ARM |
An adjustable rate mortgage
(ARM) that can be converted to a fixed-rate mortgage under specified conditions. |
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Cooperative, or co-op |
A type
of multiple ownership in which the residents of a multi-unit housing
complex own shares in the cooperative corporation that owns the
property, giving each resident the right to occupy a specific apartment
or unit. |
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Cost-of-funds index, or
COFI |
A
yield index based upon the cost of funds to savings & loan institutions
in the San Francisco Federal Home Loan Bank District. It is one of the
indexes commonly used to set the rate of adjustable rate mortgages. |
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Covenant |
A
written restriction on the use of land, most commonly in use today in homeowners associations. |
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Credit report |
A
report on a person's credit history prepared by a credit bureau and used
by a lender in determining a loan applicant's record for paying debts in
a timely manner. |
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Debt-to-income ratio |
The
percentage of a person's monthly earnings used to pay off all debt
obligations. Lenders consider two ratios, constructed in slightly
different ways. The first, called the front-end ratio, the ratio of the
monthly housing expenses - including principal, interest property taxes
and insurance (PITI) is compared to the borrower's
gross, pretax monthly income. In the back-end ratio, a borrower's other
debts, such as auto loans and credit cards, are also figured in. Lenders
usually take both into account and set an acceptable ratio, which might
be expressed as 33/39. Some lenders, and some lending qualifying
agencies such as FHA,
take only the back-end ratio into account. |
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Deed |
The
legal document conveying title to a property. |
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Depreciation |
A
decline in the value of property; the opposite of appreciation. |
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Discount points |
A type
of point (1 percent of a loan) paid by the
borrower to reduce the interest rate. |
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Down payment |
The
amount of a property's purchase price that the buyer pays in cash and
does not finance with a mortgage. |
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Earnest money deposit |
A
deposit made by potential home buyers during negotiations with the
seller. The sum shows a seller that a buyer is serious about purchasing
the property. |
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Easement |
The
right of another to use property. The most common easements are for
utility lines. |
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80-10-10 loan |
A
combination of an 80 percent loan-to-value first mortgage, a 10 percent down payment and a 10 percent home equity loan. It would
eliminate the need for private mortgage insurance, and for expensive homes it could
eliminate the need for a jumbo mortgage by reducing the first mortgage to the conventional $240,000 limit. |
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Encumbrance |
A lien, charge or liability against a property. |
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Equal Credit Opportunity
Act |
A
federal law that requires lenders and other creditors to make credit
equally available without discrimination based on race, color, religion,
national origin, age, sex, marital status or receipt of income from
public assistance programs. |
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Eminent domain |
The
right of public agencies to take land for public use. |
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Equity |
The value of a
homeowner's unencumbered interest in real estate. Equity is the
difference between the home's fair market
value and the unpaid balance of the mortgage and any outstanding liens. Equity increases as the mortgage is paid down
or as the property enjoys appreciation. |
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Escrow payment |
The
portion of a homeowner's monthly mortgage payment that is held by the
loan servicer to pay for taxes and insurance.
Also known as reserves. The loan servicer holds the escrow funds
separately from money meant to pay off principal and interest. |
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Fair Credit Reporting
Act |
A
consumer protection law that regulates the disclosure of consumer credit reports by credit reporting agencies
and establishes procedures for correcting mistakes on a person's credit
record. |
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Fair market value |
A fair
price for a home based on recent sales of properties of similar size and
quality in the neighborhood. |
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Fannie Mae |
Nickname for Federal National Mortgage Association. It is a
government-chartered non-bank financial services company and the
nation's largest source of financing for home mortgages. It was started
to make sure mortgage money is available in all areas of the country. |
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Federal Housing
Administration (FHA) |
An
agency of the U.S. Department of Housing and Urban Development (HUD)
that insures residential mortgage loans made by private lenders. The FHA
sets standards for construction and underwriting but does not lend money. |
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FHA mortgage |
A
mortgage insured by the Federal Housing Administration (FHA). |
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First mortgage |
A
mortgage that is the primary lien against a
property. |
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Fixed-rate mortgage |
A
mortgage in which the interest rate does not change during the entire
term of the loan, most often 15 years or 30 years. |
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Flood insurance |
Insurance that compensates for physical property damage resulting from
rising water. It is required for properties located in federally
designated flood areas. |
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Foreclosure |
The
legal process by which a homeowner in default on a mortgage is deprived
of interest in the property. This usually involves a forced sale of the
property at public auction with the proceeds of the sale being applied
to the mortgage debt. |
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Freddie Mac |
Nickname for Federal Home Loan Mortgage Corp. A financial corporation
chartered by the federal government to buy pools of mortgages from
lenders and sell securities backed by these mortgages. |
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Ginnie Mae |
Nickname for the Government
National Mortgage Association (GNMA). |
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Good Faith Estimate |
A
written estimate of closing costs that a lender must provide a
prospective home buyer within three days of submitting a mortgage loan
application. The best approach is to request this list before choosing a
loan. |
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Government National
Mortgage Association (GNMA) |
A
government-owned corporation within the U.S. Department of Housing and
Urban Development (HUD). Created by Congress in 1968, GNMA has
responsibility for the special assistance loan program known as Ginnie Mae. |
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Happy Camper |
The
satisfied feeling that one gets when they are treated well by a lender.
Making sure that you know what you are buying in a mortgage can ensure
that you get this feeling. |
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Hazard insurance |
Insurance coverage that compensates for physical damage to a property
from natural disasters such as fire or other hazards. Depending where a
piece of property is located, lenders may also require flood insurance or policies covering
windstorms (hurricanes) or earthquakes. |
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Home inspection |
An
inspection by a building professional that evaluates the structural and
mechanical condition of a property. The inspection may reveal the need
for repairs that the seller may have to complete before the sale of the
house will go through. The buyer may also make the house sale contingent
on a satisfactory inspection. |
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Homeowners association |
A
nonprofit association that manages the common areas of a condominium or planned unit development (PUD).
Unit owners pay to the association a fee to maintain areas owned
jointly. See common area assessment. |
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Homeowner's insurance |
An
insurance policy that combines personal liability insurance and hazard insurance coverage for a
residence and its contents. |
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Housing expense ratio |
The
percentage of gross monthly income that goes toward paying a mortgage or
rent on a home. |
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HUD-1 statement |
A
document with an itemized listing of closing
costs payable at the closing or settlement
meeting when buying property. The closing costs can include a commission, loan fees and points, and sums set aside for escrow
payments, taxes and insurance. It is signed by both the buyer and
the seller, who may be paying some of the closing costs. The statement form is published by the Department of
Housing and Urban Development (HUD). |
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Hybrid mortgage |
See alternative mortgage products. |
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Index |
A
published measure of the cost of money that lenders use to calculate the
rate on an adjustable rate
mortgage (ARM). The most common indexes are the one-year Treasury
Constant Maturity Yield and the FHLB 11th District Cost of Funds. |
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Indexed rate |
The
sum of the published index plus the margin. For example, if the index
were 9 percent and the margin 2.75 percent, the indexed rate would be
11.75 percent. Often, lenders charge less than the indexed rate the
first year of an adjustable
rate mortgage (ARM). |
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Interest tax deduction |
Most
mortgage holders can deduct all the interest paid on the loan in filing
income tax. The deduction applies to people with just one mortgage on a
primary residence, as well as those with a combination of loans. Within
certain limits set by the IRS, points paid up
front on a mortgage are usually deductible in the year the house was
purchased. |
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Jumbo mortgages |
Mortgages larger than the limits set by Fannie Mae and Freddie Mac
($359,650 this year). A jumbo mortgage will carry a higher interest rate
than a conventional mortgage. |
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Lease-purchase mortgage |
A
financing option that allows a potential home buyer to lease a property
with the option to buy. Often constructed so the monthly rent payment
covers the owner's first mortgage payment,
plus an additional amount as a savings deposit to accumulate cash for a
down payment. A seller may agree to a lease-purchase option if the
housing market is saturated and the seller is having difficult selling
the property. |
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Lien |
A
legal hold or claim from one person on the property of another. The lien
placed by a first mortgage is special; it
is called the first lien and takes precedence over others. |
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Lifetime rate cap |
In an adjustable rate mortgage
(ARM), it limits the amount that the interest rate can increase or
decrease over the life of the loan. See also caps. |
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Lis pendens |
A
pending lawsuit; in real estate, the constructive notice filed in public
records that a legal dispute exists over a piece of property. |
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Livery of seizin |
Under
common law, the process of transferring title |
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Loan origination |
The
process by which a mortgage lender obtains a mortgage secured by real
property. An origination fee is charged
by the lender to process all the forms involved in obtaining a mortgage. |
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Loan-to-value (LTV)
ratio |
The
ratio of the mortgage loan amount to the property's appraised value or selling price,
whichever is less. For example, if a home is sold for $100,000 and the
mortgage amount is $80,000, the house has an 80 percent LTV. |
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Lock or lock-in |
Lender's guarantee that the mortgage rate quoted will be good for a
specific amount of time. The home buyer usually wants the lock to stay
in effect until the date of the closing. |
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Lock-and-float |
Rate
programs offered by companies that allow borrowers to lock in the
current interest rate on a mortgage for a specified period of time,
while also letting them "float" the rate down if market conditions
improve before closing. |
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Low-down mortgages |
Mortgages with a low down payment, usually
less than 10 percent. Fannie Mae and Freddie Mac design loan programs that spell
out a set of standards for lenders. In recent years these
government-chartered agencies have made low-down mortgages more
available through programs such as Fannie Mae's Flexible 97 and Freddie
Mac's Alt 97. The "97" refers to the amount of the home's value a lender
will cover in a mortgage, leaving a low 3 percent down payment required. |
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Margin |
The
number of percentage points added to the index on a
one-year adjustable rate
mortgage (ARM). For example, if the index rate is 9 percent and the
margin is 3 percent, then the fully indexed rate is 12 percent. |
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Maturity |
The
date on which the principal balance of a loan becomes due and payable. |
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Mortgage |
A
legal document that uses property as collateral to secure payment of a
debt. |
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Mortgage banker |
The
lender that originates the mortgage loan; the one making the loan
directly and closing the loan. |
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Mortgage broker |
An
individual or company that brings borrowers and lenders together for the
purpose of loan origination. Unlike a mortgage banker, brokers do not fund the
loan but work on behalf of several lenders. Brokers typically require a
fee or a commission for their services. See broker premium. |
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Mortgage insurance |
A
policy that insures the lender against loss should the homeowner default
on a mortgage. Depending on the loan, the insurance can be issued by a
government agency such as the Federal Housing
Administration (FHA) or a private company. It is part of the monthly
mortgage payment. See also private mortgage insurance (PMI). |
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Negative amortization |
A
gradual increase in mortgage debt that happens when the monthly payment
does not cover the entire principal and interest due. The shortfall is
added to the remaining balance to create "negative" amortization. |
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No-doc or low-doc loan |
These
no-documentation or low-documentation loans are designed for the
entrepreneur or self-employed, for recent immigrants with money in
foreign countries or for borrowers who cannot or choose not to reveal
information about their incomes. You need a substantial down payment, excellent credit history and
will usually pay a higher interest rate. |
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Note |
The
document giving evidence of mortgage indebtedness, including the amount
and terms of repayment. |
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Origination fee |
A fee
paid to a lender for processing a loan application. |
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Owner financing |
A
transaction in which the seller of a house provides all or part of the
financing. Sellers may provide financing because they need to sell the
property right away or they are having difficulty selling the house and
want to provide financing as an incentive to a buyer. |
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Periodic rate cap |
In an adjustable-rate mortgage
(ARM), it limits how much an interest rate can increase or decrease
during any one adjustment period. See caps. |
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PITI |
Stands
for principal, interest, taxes, and insurance, which are the usual
components of a monthly mortgage payment. |
| |
PITI reserves |
A cash
amount that a home buyer must have on hand after making a down payment and paying all closing costs. The reserves required by the
lender must equal the amount a home buyer would pay for PITI for a
specified number of months. |
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Planned Unit Development
(PUD) |
A type
of real estate project that gives each unit owner title to a residential
lot and building and a nonexclusive easement allowing access to the project's common areas. See common area assessment. |
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Plat |
A map
that shows a parcel of land and how it is subdivided into individual
lots. Plat maps also show the locations of streets and easements. |
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PMI |
See private mortgage insurance. |
| |
Points |
A
point equals 1 percent of a mortgage loan. Lenders charge points as a
way to make a profit. Borrowers may pay discount points to reduce the loan interest rate. Buyers are
prohibited from paying points on HUD or VA guaranteed loans. On a conventional mortgage, points may
be paid by either buyer or seller or split between them. Within limits,
points are usually tax deductible. Also see interest tax deduction. |
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Pre-approval |
This
process goes a step further than pre-qualification. It means the lender has contacted the borrower's
employer, bank and other places to verify all claims of earnings and
assets. In return, the borrower receives a letter stating the lender is
willing to grant a mortgage for a specified amount, within a limited
period of time. |
| |
Pre-payment penalty |
A fee
imposed by certain lenders if the first
mortgage is paid off early. |
| |
Pre-payment plan |
Similar to a biweekly mortgage, but
operated by a third party. In it, the borrower pays to the third party
half the monthly mortgage payment every two weeks. At the end of the
year, the plan operators typically take the extra money that results
from the process and send lump sum payments to the participants'
lenders. Instead of 12 monthly payments of $665, or $7,980 a year, on
the 30-year mortgage, the borrower would make 26 biweekly payments of
$332.50, or pay $8,645 annually. As a result, total interest would
shrink by $34,130 and the loan term would shorten to less than 24 years. |
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Pre-qualification |
An
early evaluation by a lender of a potential home buyer's credit report plus earnings, savings and
debt information. The home buyer gets a nonbinding estimate of the
mortgage amount the borrower would qualify for, or how much house the
borrower can afford. Buyers who pre-qualify can go a step further and
seek pre-approval. |
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Private mortgage
insurance, or PMI |
Insurance that protects mortgage lenders against default on loans by
providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if the
down payment is less than 20 percent of the sale price. Home buyers pay
for the coverage in monthly installments. PMI is usually terminated when
the home buyer has built up 20 percent equity in
the property. |
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Quit claim deed |
The
formal document by which a claim in property is denied. Often used to
clear a cloud on title. |
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Radon |
A
radioactive gas found in some homes that in sufficient concentrations
can cause health problems. Many home
inspections check for radon. |
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Rate lock |
A
commitment issued by a lender to a home buyer or to the mortgage broker guaranteeing a specific
interest rate for a specified amount of time. See also lock. |
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Real estate agent |
A
person licensed to negotiate and transact the sale of real estate on
behalf of the property owner. |
| |
Real Estate Settlement
Procedures Act (RESPA) |
A
consumer protection law that requires lenders to give home buyers
advance notice of closing costs, which are
payable at the closing or settlement meeting. |
| |
Realtor® |
A real
estate broker or an associate who holds active membership in a local
real estate board that is affiliated with the National Association of
Realtors. |
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Refinancing |
Securing a new loan in order to pay off the existing mortgage or to gain
access to the existing equity in the home. |
| |
Reliction |
An
increase in the amount of land that occurs when a river or sea
permanently withdraws. |
| |
Restrictive covenant |
A
clause in a deed that restricts the use of property
for a period of time. |
| |
Roll-in loans |
A
refinance loan that rolls any closing costs or fees into the loan. These programs best serve people who have a
reasonable amount of equity, want to reduce their
overall interest expense and plan to stay in their homes. Most refinance
programs also cap the allowable LTV at 97 percent, which means some borrowers won't have the option of
rolling their costs in no matter what. |
| |
Rural Housing Service
(RHS) |
This
agency of the U.S. Department of Agriculture provides financing to
farmers and other qualified borrowers buying property in rural areas who
are unable to obtain loans elsewhere. It offers low-interest-rate loans
with no down payment to borrowers with low-to-moderate incomes who live
in rural areas or small towns. |
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Sale agreement |
A
written contract signed by the buyer and the seller of a house stating
the terms and conditions under which the property will be sold. |
| |
Second mortgage |
A
mortgage on property that has a lien position behind
the first mortgage. |
| |
Secondary mortgage
market |
The
buying and selling of existing mortgages. |
| |
Servicer |
An
organization that collects monthly mortgage principal and interest
payments from home owners and manages escrow accounts for paying taxes and homeowners' insurance premiums. The
servicer often services mortgages that have been purchased by an
investor in the secondary mortgage market. |
| |
Settlement |
See closing. |
| |
Subprime mortgage |
A
mortgage granted to a borrower considered subprime, that is, a person
with a less-than-perfect credit report.
Subprime borrowers have either missed payments on a debt or have been
late with payments. Lenders charge a higher interest rate to compensate
for potential losses from customers who may run into trouble or default. |
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Time is of the essence |
A
phrase inserted in contracts to require punctual performance. |
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Title |
A
legal document proving a person's right to claim entitlement to a
property, including the history of the property's ownership. |
| |
Title binder |
Written evidence of temporary title insurance coverage. |
| |
Title company |
A
company that specializes in examining and insuring titles to real
estate. |
| |
Title insurance |
Insurance that protects against loss from disputes over ownership of a
property. A policy may protect the mortgage lender and/or the home
buyer. |
| |
Title search |
A
check of the title records to ensure that the seller is the legal owner
of the property and that there are no liens or other
claims against the property. |
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Transfer tax |
State
or local tax levied when title passes from one owner to another. |
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Treasury index |
An
index used to determine interest rate changes for certain adjustable rate mortgages (ARMs).
It is based on the results of auctions that the U.S. Treasury holds for
its Treasury bills and securities or is derived from the U.S. Treasury's
daily yield curve, which is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market. |
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Truth-in-Lending |
A
federal law that requires lenders to disclose, in writing, the terms and
conditions of a mortgage, including the annual percentage rate (APR) and other charges. |
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Two-step mortgage |
See alternative mortgage products. |
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Underwriter |
A
company or person undertaking the responsibility for issuing a mortgage.
Underwriters analyze a borrower's credit-worthiness and set the loan
amount. |
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VA mortgage |
A loan
backed by the Veterans Administration. It requires very low or no down payments and has less stringent
requirements for qualification. Members of the U.S. armed forces are
eligible for the loans under certain qualifying conditions. Contact the
local VA office for information. |
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Warranty deed |
The
gold standard in deeds for home buyers: It proclaims
that the grantor warranties (guarantees) that the property has clear title and is being conveyed free of liens or encumbrances. |
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Wrap-around mortgage |
A new
mortgage that includes the remaining balance on an old mortgage, plus a
new amount. |
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