ADJUSTABLE
RATE LOAN (ARM)
A mortgage loan in which the interest
rate may increase or decrease over the course of the loan depending on specific
economic indicators. Differs from a fixed rate loan where the interest
rate remains the same throughout the loan term.
AMORTIZATION
A process of gradually paying off a
debt by making equal periodic payments of principal and
interest on a loan at equal intervals of time. Eg. (250.00 per month for 30
years.)
APPRAISAL
An estimate of a property's valuation
by an appraiser.
APR ( Annual
Percentage Rate)
Rate of interest charged on a loan
that takes into account all up-front fees and points.
ASSESSED
VALUE
A value placed on a property by a
public officer (assessor) or a board as a basis for property taxes.
ASSUMABLE
MORTGAGE
A mortgage that is transferred to the
buyer who then becomes personally liable for the terms and conditions including
payments.
BACK RATIO
The total debt
expense (or Back Ratio) compares your total monthly obligations including your
total mortgage payment to your monthly income. Eg: Credit card debt, car
payment, etc. plus PITI. Most banks use a ratio of 36 to 40.
CLOSING
The actual transfer of title for
money or other consideration. This is the day that parties actually consummate
a deal.
CONTINGENCY
A provision in a contract that
requires that a certain act be done or a certain event occur before the contract
becomes binging. Eg. (When it is necessary for a person to sell their
existing home before they can close on a new home.)
CLOUD ON
TITLE
An outstanding claim or encumbrance
that would impair the title. Eg. (mechanics lien, judgments etc)
CONVENTIONAL
LOAN
A loan not insured or guaranteed by a
government.
DEED
A written instrument that, when
executed and delivered, conveys title to or an interest in real estate.
DISCOUNT
POINTS
An added loan fee charged by a lender
to make the yield on a lower than market value loan competitive with higher
interest rate loans. One point is equal to one percent of the loan.
DOWN
PAYMENT
The amount of cash that a purchaser
puts down to buy property. Most lenders require a minimum of 5% down
payment for an owner occupied purchase where the purchaser(s) intend to live in
the property and at least 20% down for an investor purchased property where the
investor does not intent to use the property as their primary residence.
EQUITY
The value of a property over and
above any mortgage indebtedness. Eg. ( Your house is worth 80,000 market
value and you have a current mortgage balance of 60,000 therefore, your equity
would equal 20,000.)
ESCROW
ACCOUNT
An account usually established by the
lender to make payments for hazard insurance and property taxes. You're
monthly payment will include enough money to pay principal and interest to the
bank for the loan as well as enough money to pay 1/12 of the annual taxes and
insurance which gets deposited into the escrow account. This process
protects the bank by insuring that the property remains insured and that the
property is not taken through a process known as in-rem for unpaid taxes.
FHA LOAN
A loan insured by the Federal
Housing Administration and made by an approved lender.
FRONT RATIO
The housing
payment ratio (or Front Ratio) compares your total mortgage payment to your
monthly income. Most lenders typically use a ratio of 28 but can be as
high as 32.
HUD-1
SETTLEMENT STATEMENT
A closing statement that outlines all
costs associated with a real estate transaction.
LIEN
A right given by law to certain
creditors to have their debt paid out of the property of a defaulting
debtor. Court judgments become liens against a persons real
property. Liens and judgments are recorded at the county clerk's office
and are considered public information.
LOAN
ORIGINATION FEE
Same as discount points. A
point is equal to 1% of the loan.
LOAN
PROCESSING FEE
A flat fee charged by lenders for
administration of the loan process. Some banks waive this fee.
LTV%
(LOAN TO VALUE)
Commonly referred to as loan to value
ratio, this figure tells the lender what percentage of the purchase price the
loan is going to be. Eg. (On a 100,000.00 house a 97%LTV would equal
97,000.00)
MARKET
VALUE
The actual value of property at a
specific time. Eg. (What your house would sell for today if you were to
decide to sell.)
MORTGAGE
A pledge of real estate as security
for the payment of a debt. Simply put, a mortgage is a recorded document
that tells the lender that the borrower pledged their real estate as collateral
for a loan.
PITI
An abbreviation for principal,
interest, taxes and insurance and generally referring to an all encompassing
monthly payment on a mortgage to a lender. Lenders use this figure to
pre-qualify a buyer. Lenders will traditionally allow buyers to use up to
28% of their monthly income to pay PITI. Anything higher than this is
considered risky to the lender. Coupled with other monthly debt like a car
payment or credit card payments the lender will allow up to 40% of your monthly
income to pay PITI+OTHER DEBT.
PMI
Abbreviation for private mortgage
insurance. Lenders require PMI when the LTV (loan to value) exceeds
80%. PMI insurance as a rule of thumb costs approximately 1% of the loan
amount per year. The cost is generally added to the monthly payment.
PRE-QUALIFICATION
A process where a lender or a
REALTORŪ determines how large a monthly payment a purchaser can afford.
Lenders generally allow a buyer to apply 28% of their monthly income towards PITI.
PRINCIPAL
The amount of money that a borrower
owes on a loan at a given time.
TITLE
Evidence of ownership.
TITLE
INSURANCE
Insurance that guarantees a return of
your investment should a title problem arise after you take possession.
There are two types of title insurance. 1) A fee title policy insures the
owners title. 2) A mortgagee title policy insures the lender for the
mortgaged amount. Most lenders require the purchaser to pay for a
mortgagee policy to indemnify the lender. Policies typically run anywhere
from approximately $350.00 to $750.00 depending on the mortgage amount.
TRUTH
IN LENDING DISCLOSURE (RESPA)
A federal law commonly known as the
real estate settlement and procedures act that requires certain disclosures to
consumers about mortgage loan settlements. The law also prohibits the
payment or receipt of kickbacks.
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