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Glossary of Home Buying Terms

Speak with homeowners, realtors, and mortgage professionals and you will quickly realize that there is another language devoted to the home buying process. This glossary contains a number of terms that you will hear and should probably know as you make your way through the home buying process.

Acceleration Clause: A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

Acceptance: A party's consent to enter into a contract and be bound by the terms of the offer.

Adjustable Rate Mortgage (ARM): A mortgage loan on which the interest rate changes over time based on a pre-determined economic index.

Administrative Fee: A fee charged by a lender to cover the administrative costs of processing your loan request (e.g., a lender fee).

Amenities: Features of real property that enhance its attractiveness and increase the satisfaction of the occupant or user, even though the feature is not essential to the property's use (e.g., a swimming pool).

Amortization: The gradual repayment of a mortgage by installments.

Annual Percentage Rate (APR): The total yearly cost of a mortgage stated as a percentage of the loan amount, including the base interest rate, primary mortgage insurance, and loan origination fee (points).

Application: A form used by the lender to collect information about a prospective borrower and the property being used as collateral.

Application Deposit: Funds required by a lender in advance of processing a loan request. Generally, a deposit is collected to cover the costs of an appraisal and credit report and may or may not be refundable.

Appraisal: An evaluation of the property to determine its value for purposes of the mortgage loan. An appraisal is concerned chiefly with market value, or what the home would sell for in the marketplace.

Appreciation: An increase in the value of a property.

Assessed Value: The valuation placed on a property by a public tax assessor for the purposes of taxation.

Assessment: The process of placing a value on property for the strict purpose of taxation. Assessment may also refer to a levy against a property for a special purpose (e.g., a sewer assessment).

Assumable Mortgage: A mortgage that can be transferred to another party upon the sale of such property whereas the buyer assumes all responsibility for repayment of the mortgage loan and the seller receives a written release form the lender stating that the sell has no responsibility for future payments on that loan.

Basis Point: 1/100th of one percent.

Binder: A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.

Building Code: Local or state building regulations that govern the design, construction and materials used in a building.

Buyer's Broker: A broker who represents the buyer in a fiduciary capacity.

Buyer's Market: An economic situation in which the supply of properties available exceeds demand. As a result, sellers are forced to lower their prices to attract buyers.

Cap: A provision of an ARM limiting how much the interest rate or mortgage payments may increase or decrease in any single adjustment or over the life of the loan. See also Lifetime Cap.

Documentary Stamp Tax: A tax that is required if a property changes hands or a new mortgage is obtained.

Clear Title: A title that is free of clouds, liens, disputed interests or legal questions with regard to ownership of the property.

Closing Costs: Sometimes called settlement costs, these are costs in addition to the price of the home, including mortgage service charges, title search and insurance, and transfer of ownership charges.

Closing Day: The date on which the title for property passes from the seller to the buyer, and/or the date on which the borrower signs the mortgage.

Commitment Letter: A formal offer by a lender stating the terms under which the lender agrees to loan money to a borrower.

Condominium: A type of property that includes individual ownership of one unit in a multi-unit dwelling, and an undivided interest in the common area and facilities that serve the entire multi-unit project.

Contingency: A condition that must be met before a contract is legally binding.

Cosigner: A signer on a loan in addition to the principal signer who assumes equal responsibility for it.

Credit Bureau: An agency that gathers and keeps your credit record (e.g., Experian, Equifax and TransUnion).

Credit Report: A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's credit worthiness.

Deed: A legal document that transfers ownership of a property from one person to another.

Default: Failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage.

Depreciation: A decline in the value of a home as the result of time, changes in the housing market, wear and tear, adverse changes in the neighborhood and its patterns, or any other reason.

Down payment: An initial payment on a home, usually a specific percentage of the home purchase price, that is required of a borrower at the time of loan closing.

Earnest Money: The deposit money given to the seller by the potential buyer to show that he/she is serious about buying the home. If the deal goes through, the earnest money is usually applied toward the down payment. If the deal does not go through, it may be forfeited.

Easement Rights: A right of way granted to a person or company authorizing access to or over the owner's land. Electric companies often have easement rights across your property.

Equal Credit Opportunity Act (ECOA): A federal law that prohibits lenders from denying mortgages on the basis of the borrower's race, color, religion, national origin, handicap, age, sex, marital status, or receipt of income from public assistance programs.

Equity: he amount that the market value of the property exceeds the owner's outstanding mortgage loan balance.

Escrow: The holding of documents and money by a neutral third party prior to closing; also an account held by the lender into which a homeowner pays money for taxes and insurance.

Escrow Account: The account in which funds are held by the lender for the payment of real estate taxes and/or homeowners insurance. This can also refer to the account in which funds are held for the completion of repairs or improvements to a property that cannot be completed prior to closing.

Escrow Funds: Money or papers representing transactions, that are given to a third party to hold until all conditions in a contract are fulfilled.

Fair Credit Reporting Act: A federal consumer protection law that sets up a procedure for correcting mistakes on one's credit record.

Fannie Mae (FNMA): Federal National Mortgage Association. A quasi-public corporation that purchases loans through the secondary mortgage market.

Fixed Rate Mortgage: A mortgage in which the interest rate is set at the initiation of the loan and does not change throughout the entire term of the loan.

Flood Insurance: Insurance required for properties in federally designated flood areas.

Foreclosure: The process by which a mortgaged property may be sold by the mortgage lender when the homeowner fails to pay the monthly mortgage payment and the mortgage is considered in default.

Hazard Insurance: Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism or other hazards.

Homeowner's Association Fee: A term related to a condominium associations collection of money from the owners of each condominium. The fee pays for common expenses including insurance, maintenance, and trash removal and is used to establish reserves for future major expenditures. In determining whether you can afford the property, the lender will calculate the homeowner's association fee as part of your housing-to-income ratio.

Home Inspection: A complete and detailed inspection that examines and evaluates the mechanical and structural condition of a property. A complete and satisfactory home inspection is often required by the homebuyer.

Homeowners Insurance: Insurance that protects a homeowner against the cost of damages to a property caused by fire, windstorms, and other common hazards. Also referred to as hazard insurance.

Home Mortgage Loan: A loan used to buy a home.

HUD: Also known as the U.S. Department of Housing and Urban Development; among other things, HUD ensures that home mortgage loans made by lenders meet minimum standards.

HUD-1 Statement: Also referred to as the closing statement or the settlement statement, this document that provides line-by-line information of the financial details related to a specific real estate transaction, such as the fees paid by the seller and the buyer for a purchase transaction.

Interest: The fee charged for borrowing money.

Joint Tenancy: A form of co-ownership in which two or more parties hold equal and simultaneously created interest in the same property and in which title to the entire property is to remain in the survivors upon the death of one of the parties.

Late Charge: The penalty a borrower must pay when a payment is made after the due date.

Lender: The bank, mortgage broker or financial institution providing the loan funds to a borrower.

Liabilities: A person's financial obligations, including both long-term and short-term debt, as well as any other amounts that are owed to others.

Lien: A legal claim against a property for money owed to the lien-holder, which permits the lien-holder to sell the property to pay the debt it the borrower is unable or unwilling to comply with the loan agreement. A lien against a property must be paid when the property is sold.

Lifetime Cap: A provision of an ARM that limits the total increase or decrease in the loan interest rate over the life of the loan.

Loan-to-Value Ratio (LTV): The relationship between the amount of a mortgage and the total value of the property.

Lock-In Rate: A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time.

Margin: The set percentage that the lender adds to the index rate to determine the interest rate of an ARM.

Mortgage Commitment: A written notice from the bank or other lender stating that it will advance the borrower the mortgage funds in a specified amount to enable the borrower to buy the home.

Mortgage: The legal document that pledges a property to the lender as security for payment of debt.

Mortgagee: The bank or lender who loans the money to the mortgagor.

Mortgagor: The homeowner who is obligated to repay a mortgage loan on a purchased property.

Non-Liquid Assets: Any assets that cannot easily be converted into cash (e.g., property).

Offer to Purchase Real Estate: A promise by a buyer to enter into an agreement to purchase real estate, provided certain terms and conditions are met by the property's seller.

Origination Fee: A fee charged for the work involved in preparing and processing a proposed mortgage loan. This is stated as a percentage of the mortgage amount, or points, and is usually paid at closing.

PITI: (P)rincipal, (I)nterest, (T)axes and (I)nsurance; a reference to the total monthly payment required to repay a mortgage in accordance with its term, as well as monthly escrow payments for taxes and insurance.

Points: A one-time charge by the lender to increase the yield of the loan. A point is 1% of the mortgage amount.

Prepaid Escrows: The initial deposit at the time of closing for taxes, hazard insurance, and the subsequent monthly deposits made to the lender for that purpose. Expenses may also include a prorated interest amount.

Prepaid Items/Expenses: Items and expenses paid in advance at a real estate closing.

Pre-Qualification: The process of a lender determining that, based on the information you have provided, you would qualify for a mortgage loan. Being pre-qualified does not guarantee you a loan, nor does it guarantee the rate at which the lender will lend you the money. Pre-approved, on the other hand, guarantees (typically for a period of 30 to 45 days) a mortgage loan (usually up to a maximum rate) as long as your financial situations remains the same.

Principal: The amount borrowed or remaining unpaid on a mortgage; also, that part of the monthly mortgage payment that reduces the outstanding balance of a mortgage.

Private Mortgage Insurance (PMI): Insurance provided by non-government insurers, that protects lenders against loss if a borrower defaults on his or her mortgage.

Processing/Administrative Fee: A fee charged by a lender to cover the administrative costs of processing a loan request.

Property Taxes: Taxes based on the assessed value of a home, paid by the homeowner for community services such as schools, public works and other costs of local government. Property taxes are sometimes paid as part of the monthly mortgage payment, held in escrow by the lender, and paid by the lender on behalf of the homeowner.

Qualifying Ratios: Guidelines applied by lenders to determine how large of a loan may be granted to a home buyer.

Radon: A naturally appearing radioactive gas, found in some buildings, which in sufficient concentrations may cause health problems.

Rate Lock: An agreement by a lender to guaranty the interest rate offered for a mortgage provided the loan closes within a specified period of time.

Real Estate Agent: A person licensed to negotiate and transact the sale of real estate on behalf of a buyer or a seller.

Real Estate Settlement Procedures Act (RESPA): A federal consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Recording Fees: A fee charged by the local government to record mortgage documents into the public record so that any interested party is aware that a lender has an interest in the property.

Refinancing: The process of paying off one loan with the proceeds from a new loan secured by the same property.

Repair and Maintenance: The costs incurred in replacing damaged items or maintaining household systems to prevent damage.

Second Mortgage: A mortgage with rights that are subordinate to the rights of the first mortgage holder.

Seller's Market: An economic situation in which the demand for properties exceeds the supply. As a result, sellers may raise their prices in response to the high demand.

Special Assessment: A tax for a specific purpose such as providing paved streets or new sewers. People whose properties abut the improved streets or tie into the new sewer system must pay the tax. Condominium owners may also be assessed for major repairs done in common areas of their building.

Survey: A drawing that shows the legal boundaries of a property.

Tenancy by the Entirety: A type of joint ownership of property available only to a husband and wife, in which each spouse holds an equal share of the property, but neither may sell or transfer his or her interest in the property, without the other's permission. If one spouse dies, the other Spouse acquires the deceased Spouse's share automatically by operation of law. Tenancy by the Entirety becomes a Tenancy in Common if a couple divorces.

Tenancy in Common: A type of joint ownership in a property without the right of survivorship.

Title: The evidence of a person's legal right to possession of property, normally in the form of a deed.

Title Company: A company that specializes in insuring title to property.

Title Insurance: This special insurance protects lenders against a loss of interest in a property due to unforeseen occurrences that have already occurred and might be traced to legal flaws in previous ownerships (e.g., forged deed). An owner can protect his interest by purchasing separate coverage.

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 undisclosed or unknown liens or other claims outstanding.

Total Debt Ratio: A standard calculation performed by mortgage lenders to determine if a borrower qualifies for a specific loan type. Total debt ratio is calculated by dividing the monthly housing expense (PITI plus all other monthly debt obligation) by the borrower's monthly gross income. This is also referred to as a "back-end ratio" or "bottom ratio."

Truth-in-Lending: A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

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