N
Negative Amortization
A gradual increase in mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the remaining balance to create “negative” amortization.
Net Cash Flow
The income that remains for an investment property after the monthly operating income is reduced by the monthly housing expense, which includes principal, interest, taxes, and insurance (PITI) for the mortgage, homeowners’ association dues, leasehold payments, and subordinate financing payments.
No Cash-Out Refinance
A refinance transaction in which the new mortgage amount is limited to the sum of the remaining balance of the existing first mortgage, closing costs (including prepaid items), points, the amount required to satisfy any mortgage liens that are more than one year old (if the borrower chooses to satisfy them), and other funds for the borrower’s use (as long as the amount does not exceed 1 percent of the principal amount of the new mortgage).
Non-Liquid Asset
An asset that cannot easily be converted into cash.
Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
One way to think of the mortgage note is that it is a legal “IOU.” Often called the promissory note, it represents your promise to pay the lender according to the agreed upon terms of the loan, including when and where to send your payment.
The note lists any penalties that will be assessed if you don’t make your monthly mortgage payments. It also warns you that the lender can “call” the loan - demand repayment of the entire loan before the end of the term - if you violate the terms of your mortgage.
Note Rate
The interest rate stated on a mortgage note.
Notice of Default
A formal written notice to a borrower that a default has occurred and that legal action may be taken.
O
Occupancy Date
This provision is a good way to help ensure that your home will be ready for occupancy after the closing takes place. As part of your formal purchase offer, consider including a provision that holds the seller responsible for paying you rent should they not move out on or prior to the agreed-upon date. This allows you, for example, to use the money you receive to pay your own rent if you are leasing your current residence.
Offer
When you make an offer on a house, it means you are making a formal bid to buy a home. You can work with your real estate sales professional to put together a written bid that abides by the laws in your state. Your offer should include such aspects as the address of the home, the sales price, the type of mortgage financing you will use to purchase the home, any personal property that might be included as part of the sale, and a target date for closing and occupancy. An earnest money deposit typically accompanies the offer. Your real estate sales professional can provide guidance on other elements of the offer.
Once you have made an offer, the seller has the opportunity to accept, decline, or make a counter-offer. If your offer is accepted, you have a ratified sales contract. This contract is the starting point for working with an approved lender to get the mortgage that’s right for you.
One-Year Adjustable-Rate Mortgage
This adjustable-rate mortgage (ARM) offers a low initial interest rate with an interest rate that adjusts annually after the first year. The rate cap per annual adjustment is usually 2 percent; the lifetime adjustment caps can be 5 percent or 6 percent. This type of mortgage may be right for you if you anticipate a rapid increase in income over the first few years of your mortgage. That’s because it lets you maximize your purchasing power immediately. It may also be the right mortgage for you if you plan to live in your home for only a few years.
Advantages:
Maximizes your buying power immediately, especially if you expect your income to rise quickly in the next few years.
A low first-year interest rate and a 2 percent annual rate cap.
Some one-year ARMs let you convert to a fixed-rate loan at certain adjustment intervals.
Ask your approved lender which of their one-year ARMs include this option. Generally, conversions to fixed-rate mortgages are allowed at the third, fourth, or fifth interest rate adjustment dates.
Details:
You can get a one-year ARM with a term from 10 to 30 years. The most typical ones are 10, 15, or 30 years.
The one-year ARM is most often indexed to the weekly average yield of U.S. Treasury securities adjusted to a constant maturity of one year.
Can be used to buy one-family, principal residences, including condos, and planned unit developments.
Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
Ongoing Costs
Home buyers should not forget that there are on-going costs associated with owning a home. They include, but are not limited to:
Monthly mortgage payment
Mortgage insurance
Homeowner’s insurance
Property taxes
Utilities, such as gas, oil, water and electricity
Another cost home buyers should consider is how much it will cost to maintain their home. These costs include everything from cleaning and minor repairs to yard work and painting.
Condominium owners and people living in planned unit developments should factor in any homeowners’ association fees or similar costs.
Original Principal Balance
The total amount of principal owed on a mortgage before any payments are made.
Origination Fee
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.
The loan origination fee covers the administrative costs of processing the loan. It is often expressed in points. One point is 1 percent of the mortgage amount. For example, a $100,000 mortgage with a loan origination fee of 1 point would mean you pay $1,000.
Other Buyer Costs
There are other costs associated with the closing that are typically paid by the buyer. They often include:
Fees paid to the lender: Loan discount points, loan origination fee, credit report fee, appraisal fee, and assumption fee.
Advance payments or prepaid fees: Interest, mortgage insurance premium, and hazard insurance premium.
Escrow accounts or reserves: State and local law and lenders’ policies vary but these reserves may have to be set up if the lender will be paying property taxes, mortgage insurance, and hazard insurance.
Title charges: Closing (or settlement) fee, title insurance premium, title search, document preparation fees, and attorney fees. The fees the buyer pays for a real estate attorney are not part of settlement procedures.
Recording and transfer fees: States often impose a tax on the transfer of property. The payment of a fee for recording the purchasing documents may be required.
Additional charges: Surveyor’s fees, termite and other pet infestation inspection fees, and the cost of other inspections required by the lender.
Adjustments: Items paid by the seller in advance and items yet to be paid for which the seller is responsible. The most common expense is property taxes, but others may have to be addressed.
Other Contingencies
A contingency in a contract states that if a certain requirement is not met, the deal can be canceled. Some of the most common contingencies related to home purchases include:
Professional home inspection: This states that your sales contract is contingent on a satisfactory report by a professional home inspector. You have the right not to proceed with the purchase of the home, or to re-negotiate the terms of purchase, if any major problems are uncovered.
Termite inspection: This states that the property is free of both visible termite infestation and termite damage.
Asbestos: You may choose to hire a qualified professional to inspect the home, take samples for asbestos, and offer solutions to correct any problems.
Formaldehyde: This colorless, gas chemical was used in foam insulation for homes until the early 1980s and is emitted by some construction materials. It is suspected of causing cancer, and it can also irritate the throat, nose, and eyes. A qualified inspector can let you know if the gas is present in the home you wish to purchase.
Radon: Most home buyers require that the house be tested for radon, a naturally occurring, odorless gas that can cause health problems.
Hazardous waste sites: The Environmental Protection Agency has identified contaminated hazardous waste sites across the country. You can contact your EPA regional office for more information.
Lead-based paint: You should also have the house inspected for lead-based paint, which can lead to very serious health problems. If the house was built before 1950, you can be fairly certain lead-based paint was used. For houses built between 1950 and 1978, there is also a chance lead-based paint was used. Lead disclosure regulations can vary from state to state. Health officials in the state where the home you want to buy is located may be able to provide further guidance.
The seller or real estate professional must give you a pamphlet that explains lead hazards and tell you about any lead-based paint of which the seller is aware before a sales contract on a home built before 1978 can be finalized. The seller must also allow 10 days during which you can hire a professional to conduct an inspection for lead-based paint hazards.
Other Financial Companies
Other financial companies include credit unions, mortgage brokers, insurance companies, investment bankers, and housing finance agencies.
Credit unions are cooperative, not-for-profit institutions organized to promote savings and to provide credit, including mortgage loans, to their members. Credit unions either service the mortgages they originate or sell them to other investors.
Mortgage brokers are independent real estate financing professionals who specialize in the origination of residential and/or commercial mortgages. Mortgage brokers originate loans on behalf of other lenders -- including banks, thrifts and mortgage banking companies, but do not service loans.
Insurance companies and investment bankers are large institutional investors in mortgages that do not receive deposits from consumers. They use premiums from their clients’ insurance polices and investment packages to fund their mortgage lending activities.
Housing finance agencies are typically associated with state or local governments. They are generally geared toward assisting first-time and low- to moderate-income borrowers. They use tax exempt bonds to fund mortgage lending and as a result are often able to provide interest rates that are below current market rates.
Owner Financing
A property purchase transaction in which the property seller provides all or part of the financing.
P
Partial Payment
A payment that is not sufficient to cover the scheduled monthly payment on a mortgage loan.
Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the interest rate adjustment date.
Periodic Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease during any one adjustment period.
Periodic Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
Permits
With most major home improvement projects, work permits may be required. Permits provide legal permission to undertake a project and are usually given by local governments agencies.
Some of the most common permits are for general projects or permits that require you to meet specific local building codes.
You may want to check with your local government to determine if there are building restrictions in historic areas or in environmentally-sensitive areas.
Personal Property
Any property that is not real property.
PITI
Principle, interests, taxes and insurance (PITI) are the four components of a monthly mortgage payment.
The four components of a monthly mortgage payment.
Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage.
Interest is the fee charged for borrowing money.
Taxes and insurance refer to the amounts that are paid into an escrow account each month for property taxes and hazard insurance.
PITI Reserves
A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months.
Planned Unit Development (PUD)
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.
Point
A one-time charge by the lender for originating a loan. A point is 1 percent of the amount of the mortgage.
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.
Pre-Approval
When you work with your lender to get pre-approved, you are getting an indication of how much money you will be eligible to borrow when you apply for a mortgage. This process occurs before you complete an application for a loan.
Pre-approval includes a screening of a borrower’s credit history, and all information you give to your lender will be verified when you apply for your mortgage.
Pre-Qualification
The process of determining how much money a prospective home buyer will be eligible to borrow before he or she applies for a loan.
Prearranged Refinancing Agreement
A formal or informal arrangement between a lender and a borrower wherein the lender agrees to offer special terms (such as a reduction in the costs) for a future refinancing of a mortgage being originated as an inducement for the borrower to enter into the original mortgage transaction.
Preforeclosure Sale
A procedure in which the investor allows a mortgagor to avoid foreclosure by selling the property for less than the amount that is owed to the investor.
Prepayment
Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner’s decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized.
Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.
If you pay off your mortgage before it is due, you may be charged a fee -- this is referred to as a prepayment penalty.
Any amount that is paid to reduce the principal balance of a loan before the due date - such as the sale of the property, the owner’s decision to pay the loan in full, the owner’s decision to pay additional money every month to lower the principle or interest - is considered prepayment.
You may want to consider discussing the specifics of this fee as you negotiate the terms of your loan with your lender.
Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.
Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
One of the terms you’re likely to hear when you talk about a mortgage with your lender is principal. The principal is the amount originally borrowed or the amount that remains to be paid once you have started making payments. It is also the part of the monthly mortgage payment that reduces the remaining balance of a mortgage.
The principal balance is the outstanding amount of principal on a mortgage; it does not include interest or any other charges.
Principal Balance
The outstanding balance of principal on a mortgage. The principal balance does not include interest or any other charges.
Private Mortgage Insurance (PMI)
Also known as Mortgage Insurance, PMI is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
Promissory Note
A written promise to repay a specified amount over a specified period of time.
Public Auction
A meeting in an announced public location to sell property to repay a mortgage that is in default.
Purchase and Sale Agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
The Purchase and Sale Agreement is a written contract that is signed by the buyer and seller. It states the terms and conditions under which a property will be sold. It includes:
description of property
price offered
down payment
earnest money deposit
financing
personal items to be included
closing date
occupancy date
length of time the offer is valid
special contingencies
inspection
Purchase Money Transaction
The acquisition of property through the payment of money or its equivalent.
Q
Qualifying Guidelines
There are two main elements lenders consider when determining whether you and any co-borrowers qualify for a specific mortgage.
The first is your monthly mortgage costs, including mortgage payments, property taxes and insurance. If you’re considering buying a condominium or cooperative, any associated fees are also considered. Your mortgage costs should not exceed 28 percent of your gross monthly (pre-tax) income.
The second qualifying guideline relates to your total monthly housing costs and other debts you and any co-borrowers have. These costs should not exceed 36 percent of your gross monthly income.
Lenders follow these guidelines because they believe these percentages allow homeowners to pay off their mortgages fairly comfortably without the worry of loan defaults and foreclosures.
However, these guidelines can be exceeded in certain cases, such as borrowers with a good credit history or with a larger down payment.
Qualifying Ratios
Calculations that are used in determining whether a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
Quitclaim Deed
A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.
R
Radon
A radioactive gas found in some homes that in sufficient concentrations can cause health problems.
Rate Caps
Lenders offer caps with their adjustable rate mortgages (ARMs) so you can have more control over your monthly mortgage payment. Usually, there are two types of rate caps:
A per-adjustment cap, which specifies the most your interest rate can rise from one adjustment period to the next
A lifetime adjustment cap, which specifies how much your interest rate can rise over the life of your loan
Ask your lender about both caps when evaluating any ARM product.
Rate Lock
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time.
Rate-Improvement Mortgage
A fixed-rate mortgage that includes a provision that gives the borrower a one-time option to reduce the interest rate (without refinancing) during the early years of the mortgage term.
Ratified Sales Contract
A ratified sales contract means both the buyer and the seller have signed off on the final offer. It also acts as a starting point for the loan application interview.
The ratified sales contract specifies the amount of your down payment, the price you will pay for the house, the type of mortgage financing you will seek, your proposed closing and occupancy dates, and other contingencies.
You will give all this information to your loan officer when you meet to discuss your financing options.
Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
Real Estate Attorney
Many homeowners hire a real estate attorney to represent them during the loan application process. If you do so, your attorney will review the sales contract and represent you at closing.
There are many questions you can ask a personal attorney before deciding whether to have the attorney represent you at closing. They can include:
What is the attorney’s fee for representing you at closing?
What is the attorney’s experience with real estate transactions?
Are there fees for reading documents relating to the closing?
Are there fees for giving advice?
Remember that your personal attorney’s fee is not part of your closing costs. You must pay for this expense separately.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Real Property
Land and appurtenances, including anything of a permanent nature such as structures, trees, minerals, and the interest, benefits, and inherent rights thereof.
REALTOR®
A real estate agent, broker or an associate who holds active membership in a local real estate board that is affiliated with the National Association of REALTORS®.
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.”
Recording
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.
Refinance Transaction
The process of paying off one loan with the proceeds from a new loan using the same property as security.
Rehabilitation Escrow Account
A contingency reserve will be set up that contains funds borrowed to finance your home improvements. These will be placed into an escrow account upon the closing of your mortgage. Payments to the contractor will be periodically made from this fund as construction occurs.
You will be paid interest on the funds that are in the escrow account that have not been paid to the contractor.
Rehabilitation Mortgage
A mortgage created to cover the costs of repairing, improving, and sometimes acquiring an existing property.
Remaining Balance
The amount of principal that has not yet been repaid.
Remaining Term
The original amortization term minus the number of payments that have been applied.
Rent Loss Insurance
Insurance that protects a landlord against loss of rent or rental value due to fire or other casualty that renders the leased premises unavailable for use and as a result of which the tenant is excused from paying rent.
Rent with Option to Buy
There are two different Rent With Option to Buy options:
Lease-Purchase Mortgage Loan: An alternative financing option that allows low- and moderate-income home buyers to lease a home from a nonprofit organization with an option to buy. Each month’s rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that is earmarked for deposit to a savings account in which money for a downpayment will accumulate.
Lease-Purchase Option: Nonprofit organizations may use the lease-purchase option to purchase a home that they then rent to a consumer, or “leaseholder.” The leaseholder has the option to buy the home after a designated period of time (usually three or five years). Part of each rent payment is put aside toward savings for the purpose of accumulating the down payment and closing costs.
REO (Real Estate Owned)
This is Real Estate that is owned by the lender. This status indicates the property is owned by a lender or bank as a result of a foreclosure.
Repayment Plan
An arrangement made to repay delinquent installments or advances. Lenders’ formal repayment plans are called “relief provisions.”
Replacement Reserve Fund
A fund set aside for replacement of common property in a condominium, PUD, or cooperative project - particularly that which has a short life expectancy, such as carpeting, furniture, etc.
Rescission
The cancellation or annulment of a transaction or contract by the operation of a law or by mutual consent. Borrowers usually have the option to cancel a refinance transaction within three business days after it has closed.
Reverse Mortgage Counseling
In order to get a Home Keeper® reverse mortgage or a Home Equity Conversion Mortgage (HECM), you must receive counseling that explains how the financing option works.
During your counseling, you will receive an estimate of your loan advances and an explanation of your responsibilities as a borrower. Other sources of unbiased information education may also be provided. A non-profit agency or a local lender typically conducts the counseling.
Revolving Liability
A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods and services. The borrower is billed for the amount that is actually borrowed plus any interest due.
RHS Loans
The Rural Housing Service (RHS), a branch of the U.S. Department of Agriculture, offers low-interest-rate homeownership loans with no down payment requirements to low- and moderate-income persons who live in rural areas or small towns. Check with your local RHS office or a local lender for eligibility requirements. For the location of RHS State Offices and details on RHS loans, see the RHS home page.
Right of First Refusal
A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others.
Right of Ingress or Engress
The right to enter or leave designated premises.
Right of Survivorship
In joint tenancy, the right of survivors to acquire the interest of a deceased joint tenant.
Rural Housing Service (RHS)
An agency within the Department of Agriculture, which operates principally under the Consolidated Farm and Rural Development Act of 1921 and Title V of the Housing Act of 1949. This agency provides financing to farmers and other qualified borrowers buying property in rural areas who are unable to obtain loans elsewhere. Funds are borrowed from the U.S. Treasury.
S
Sale-Leaseback
A technique in which a seller deeds property to a buyer for a consideration, and the buyer simultaneously leases the property back to the seller.
Savings and Loans
Among the customers of Savings and Loans (S&Ls) are individual savers and residential and commercial property mortgage borrowers. Their traditional role for savings and loans is to accept deposits and make mortgage loans, but it has expanded recently to a focus on one- to four-family residential mortgages, multifamily mortgages and commercial mortgages.
These institutions are growing bigger, and the lines between S&Ls and commercial banks are not as defined as in the past.
Deposit insurance is provided through the Savings Association Insurance Fund, a subsidiary of the Federal Deposit Insurance Corporation.
Second Mortgage
A mortgage that has a lien position subordinate to the first mortgage.
Secondary Mortgage Market
The buying and selling of existing mortgages.
Secured Loan
A loan that is backed by collateral.
Security
The property that will be pledged as collateral for a loan.
Seller Take-Back
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage.
Seller Versus Buyer Closing Costs
Buyers and sellers often negotiate who will pay certain closing costs, and the results vary depending on the negotiated deal. In fact, it’s not uncommon for a sales agreement to state that either the buyer or seller pays all closing costs. The agreement that you and the seller reach must be specified in the sales contract.
Your negotiations could depend on a variety of factors, including the quality of the home, how long the home has been on the market, whether there are any other interested buyers, and how motivated the seller is to sell the home.
Servicer
An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
Servicing
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Settlement
The final step before you get the keys to your home is a formal meeting called the closing. It is at this meeting in which ownership of the home is transferred from the seller to the buyer.
Also called a settlement in some parts of the country, the meeting is typically attended by the buyer(s), the seller(s), their attorneys if they have them, both real estate sales professionals, a representative of the lender, and the closing agent. The purpose is to make sure the property is physically and legally ready to be transferred to you.
Several closing costs will be paid at this meeting. These expenses are over and above the price of the property and are incurred when ownership of a property is transferred. Closing costs generally include a loan origination fee, an attorney’s fee, taxes, an amount placed in escrow, and charges for obtaining title insurance, and a survey. Closing costs vary according to the area of the country.
Settlement Sheet
The HUD-1 Settlement Statement itemizes the amounts to be paid by the buyer and the seller at closing. The (blank) form is published by the U.S. Department of Housing and Urban Development (HUD).
Items on the statement include:
real estate commissions
loan fees
points
escrow amounts
The form is filled out by your closing agent and must be signed by the buyer and the seller. The buyer should be allowed to review the HUD-1 Settlement Statement on the business day before the closing meeting to know the closing costs in advance.
The HUD-1 Settlement Statement is also known as the “closing statement” or “settlement sheet.”
Short Sale
A property sale negotiated with a mortgage company in which a lender takes less than the total amount due.
Single-Family Properties
One- to four-unit properties including detached homes, townhomes, condominiums, and cooperatives.
Six-Month Adjustable-Rate Mortgage
This adjustable-rate mortgage (ARM) offers a low initial interest rate for the first six months with an interest rate that adjusts every six months thereafter. The rate caps per adjustment can be 1 percent or 2 percent; the lifetime adjustment caps can be 4 percent, 5 percent, or 6 percent. This type of mortgage may be right for you if you anticipate a rapid increase in income over the first few years of your mortgage. That’s because it lets you maximize your purchasing power immediately. It may also be the right mortgage for you if you plan to live in your home for only a few years.
The interest rate is tied to a published financial index. When comparing ARMs that have different indexes, look at how the index has performed recently. Your an approved lender can provide information on how to track a specific index and how to review a 15-year history of the index.
Advantages:
Maximizes your buying power immediately, especially if you expect your income to rise quickly in the next few years.
Lets you select an index that meets your financial needs.
Easier to qualify for due to a low interest rate and a 1 or 2 percent annual rate cap.
Some six-month ARMs let you convert to a fixed-rate loan at certain adjustment intervals. Ask your Fannie Mae approved lender which of their six-month ARMs include this option. Your lender can also provide further specifics about this mortgage option.
Details:
You can get a six-month ARM with a term of 10 to 30 years. Typically, they are 10, 15, or 30 years.
Can be used to buy one- to four-family, owner-occupied principal residences including second homes, investment properties, and condos, co-ops and planned unit developments.
Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
Special Deposit Account
An account that is established for rehabilitation mortgages to hold the funds needed for the rehabilitation work so they can be disbursed from time to time as particular portions of the work are completed.
Standard Payment Calculation
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
Step-Rate Mortgage
A mortgage that allows for the interest rate to increase according to a specified schedule (i.e. seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.
Subdivision
A housing development that is created by dividing a tract of land into individual lots for sale or lease.
Subordinate Financing
Any mortgage or other lien that has a priority that is lower than that of the first mortgage.
Subprime
Designating a loan (typically at a greater than usual rate of interest) offered to a borrower who is not qualified for other loans (e.g. because of poor credit history).
Subsidized Second Mortgage
An alternative financing option known as the Community Seconds® mortgage for low- and moderate-income households. An investor purchases a first mortgage that has a subsidized second mortgage behind it. The second mortgage may be issued by a state, county, or local housing agency, foundation, or nonprofit corporation. Payment on the second mortgage is often deferred and carries a very low interest rate (or no interest rate). Part of the debt may be forgiven incrementally for each year the buyer remains in the home.
Survey
A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.
Your lender may require you to have a survey of the property performed. This process confirms that the property’s boundaries are correctly described in the purchase and sale agreement.
Also called a plot plan, the survey may show a neighbor’s fence is located on the seller’s property or more serious violations may be discovered. These violations must be addressed before the lender will proceed.
The buyer usually pays to have the survey done, but some cost savings may be found by requesting an “update” from the company that previously surveyed the property.
Sweat Equity
Contribution to the construction or rehabilitation of a property in the form of labor or services rather than cash.
T
Taxes and Insurance
You’ll hear many terms as you work with your mortgage lender, and one of the most frequently mentioned is “PITI.” This abbreviation stands for principal, interest, taxes and insurance.
The tax and insurance components of a mortgage payment are generally held by the lender in an escrow account. The lender pays any property tax and homeowner’s insurance bills as they are due, ensuring they are paid on time.
A home buyer’s monthly mortgage payment generally covers expenses through the escrow account. If you don’t have your homeowner’s insurance and property taxes paid out of a lender escrow account, your local government and your property insurance company will send payment notices directly to you. It is your responsibility to make sure you pay these bills on time.
If you’re planning to purchase a condominium or cooperative, talk to your lender about how they view condo and co-op fees. Most likely, they are considered housing costs and not a part of PITI. However, this can vary from lender to lender.
Tenancy by the Entirety
A type of joint tenancy of property that provides right of survivorship and is available only to a husband and wife. Contrast with tenancy in common.
Tenancy in Common
A type of joint tenancy in a property without right of survivorship. Contrast with tenancy by the entirety and with joint tenacy.
Tenant-Stockholder
The obligee for a cooperative share loan, who is both a stockholder in a cooperative corporation and a tenant of the unit under a proprietary lease or occupancy agreement.
Termite Inspection
Homes in many parts of the country must be inspected for termites before they can be sold. You should receive a certificate from a termite inspection firm stating that the property is free of both visible termite infestation and termite damage.
The cost of the termite inspection is usually paid by the seller, and the seller’s real estate sales professional orders the inspection. You need to make sure that the original certificate is delivered to your lender at least three days before closing.
This allows the lender to review the certificate and address any potential problems.
Third-Party Origination
A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.
Thrifts
Thrifts are depository institutions that primarily serve consumers and include both savings banks and savings and loan (S&L) institutions. These institutions originate and service mortgage loans. A thrift may choose to hold a loan in its own portfolio or sell the loan to an investor.
Title
A legal document evidencing a person’s right to or ownership of a property.
Title Company
A company that specializes in examining and insuring titles to real estate.
Title Insurance
Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of a property.
Your lender will require that you buy title insurance to ensure that you are receiving a “marketable title”. There are two types of title insurance policies:
Lender’s policy (mandatory): This protects the lender should a flaw in the title be detected after the property has been purchased.
Owner’s policy (optional, but recommended): This protects you should a flaw in the title be detected after the property has been purchased.
Generally, the buyer pays the cost of both policies. Check with your insurer, because you may receive a price break if you seek a combined lender/owner policy or if you purchase a “reissue” policy from the company that previously insured the title.
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 outstanding.
In order to make sure the borrower will receive clear title to the property, lenders require a title search. It attempts to uncover any “encumbrances” on the title and makes sure the seller is the actual owner of the property.
Encumbrances include any liens - legal claims against a property filed by creditors as a means to collect unpaid bills. Liens can also be filed by the Internal Revenue Service for nonpayment of taxes. Any such claims must be paid by the seller - this often occurs either before or at the closing.
Total Expense Ratio
Total obligations as a percentage of gross monthly income. The total expense ratio includes monthly housing expenses plus other monthly debts.
Townhouse
A townhouse is similar to a condominium in that it’s a type of joint real estate where each housing unit is individually owned. However, it has two or more stories, rather than the typical one floor found in a condominium.
Townhouses are available in many shapes and sizes, and most may have yards or common spaces that can be used by the owners.
Trade Equity
Equity that results from a property purchaser giving his or her existing property (or an asset other than real estate) as trade as all or part of the down payment for the property that is being purchased.
Transfer of Ownership
Any means by which the ownership of a property changes hands. Lenders consider all of the following situations to be a transfer of ownership: the purchase of a property “subject to” the mortgage, the assumption of the mortgage debt by the property purchaser, and any exchange of possession of the property under a land sales contract or any other land trust device. In cases in which an inter vivos revocable trust is the borrower, lenders also consider any transfer of a beneficial interest in the trust to be a transfer of ownership.
Transfer Tax
State or local tax payable when title passes from one owner to another.
Treasury Index
An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. 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.
Trustee
A fiduciary who holds or controls property for the benefit of another.
Truth-In-Lending
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
Your lender should provide you with the Truth-in-Lending (TIL) Statement within three business days of your loan application. This document outlines the costs of your loan, and it is given to you so you can compare the costs with those of other lenders. Among the costs listed:
The annual percentage rate (APR), which is the cost of your mortgage compiled as a yearly rate. It may be higher than the interest rate stated in your mortgage because it includes points and other costs of credit.
The finance charge.
The amount financed.
The payment amount.
The total payments required.
The lender is required to give you the final version of your TIL Statement at or prior to the closing meeting because it is possible that the APR calculated at your loan application will change at closing.
Two-Step Mortgage
The Two-Step Mortgage is a special type of adjustable-rate mortgage (ARM) that adjusts only once. Depending on whether you select a five-year or seven-year Two-Step Mortgage, your interest rate will adjust once at the end of either five or seven years. Then, your interest rate stays the same for the remaining 25 or 23 years of your 30-year loan.
Advantages:
You can qualify with a low starting interest rate. Your initial interest rate is only slightly higher than a balloon loan and is often lower than a 30-year fixed rate loan.
You get stable, predictable payments for five or seven years and, after adjustment, for the remaining 25 or 23 years of the loan.
You are protected from rising interest rates during the early years of homeownership.
You do not have to re-qualify or pay refinance costs at the time the interest rate adjusts.
You have time to increase your earnings or accumulate additional assets before the interest rate adjusts at the end of five or seven years.
Details:
Your interest rate cap can be no more than 6 percent above your initial interest rate.
You can use this mortgage to buy one- to four-family residences including second homes and condos, co-ops and planned unit developments.
Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
Two-to Four-Family Property
A property that consists of a structure that provides living space (dwelling units) for two to four families, although ownership of the structure is evidenced by a single deed.
U
Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.
Unsecured Loan
A loan that is not backed by collateral.
V
VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA).
Vested
Having the right to use a portion of a fund such as an individual retirement fund. For example, individuals who are 100 percent vested can withdraw all of the funds that are set aside for them in a retirement fund. However, taxes may be due on any funds that are actually withdrawn.
Veterans Administration (VA)
The Veterans Administration is a federal government agency authorized to guarantee loans made to eligible veterans under certain conditions. To obtain more information, you can contact the U.S. Department of Veterans Affairs.
VA loans are more flexible than those for either the Federal Housing Administration (FHA) or conventional loans.
If you are a qualified veteran, this can be an attractive mortgage program. To determine whether you are eligible, check with your nearest VA regional office.
W
Ways of Obtaining a Loan
You have several ways to get a mortgage. Your loan interview can take place, in whole or in part, over the telephone, over the Internet, or in person.
Approved lenders have a variety of options when it comes to helping you get the mortgage that’s right for you. Many lenders have Web sites that let you fill out an application online, which can save you time. Other lenders may work with you over the telephone.
Review our approved lenders list in the Find a Lender section to locate the lender that provides the services you prefer.
What-If Analysis
An affordability analysis that is based on a what-if scenario. A what-if analysis is useful if you do not have complete data or if you want to explore the effect of various changes to your income, liabilities, or available funds or to the qualifying ratios or down payment expenses that are used in the analysis.
What-If Scenario
A change in the amounts that is used as the basis of an affordability analysis. A what-if scenario can include changes to monthly income, debts, or down payment funds or to the qualifying ratios or down payment expenses that are used in the analysis. You can use a what-if scenario to explore different ways to improve your ability to afford a house.
Wraparound Mortgage
A mortgage that includes the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the wraparound mortgagee, who then forwards the payments on the first mortgage to the first mortgagee.