Glossary

What's your buying power? Why are they charging me for an appraisal? What's a home inspection? Familiarizing yourself with the terms below will make navigating through real estate a little easier.

Adjustable Rate Mortgage

With an Adjustable Rate Mortgage (ARM), the interest rate changes periodically, and payments go up or down accordingly. Rates are tied to an index that reflects the cost of money at any given point in time. Generally speaking, lenders charge a lower initial interest rate for the ARM than for the fixed rate mortgage. If you are expecting interest rates to decrease in the future, or if you are trying to maximize your purchase power today knowing your income will rise in the future, then this loan may be right for you. Adjustable rate loans are attractive for buyers who expect to be in the home for a short period of time.

 

Appraisal Fee

This is a one-time fee that pays for an appraisal, which is a statement of property value viewed by the lender. The appraisal is made by an independent fee appraiser and can cost a standard $300 to $450, or much more, depending on the home's size and location.

 

Credit Report Fee

This one-time fee covers the cost of the credit report that is run by an independent credit reporting agency and is usually about $60-$75.

 

Document Prep Fee

There may be a separate, one-time fee that covers preparation of the final legal papers, including the note and deed of trust. These legal documents run about $150.

 

Earnest Money Deposit

It is important to have an understanding of the earnest money deposit, so you will not be placed in an uncomfortable position when you purchase a property. At the time a written offer is initiated, you will be required by the seller to include a personal check, cashier's check, or cash. The amount is normally deposited (cashed) into the designated title company's escrow account upon the offer's acceptance, and will remain in escrow until the time of closing. This amount is credited to you as a partial down payment and represents your intent to purchase the property. If the offer is not accepted, this amount is returned to you promptly. Depending on the price of the property, you should anticipate a minimum of a $1,000 earnest money deposit. Also, in the event that you do not qualify with a lender for a new loan, the earnest money is refunded to you, provided the sellers are given written notice regarding the lender's disapproval, and provided you have supplied the lender with all documentation they have requested.

 

Escrow Account

Your lender will typically have an account where your property taxes and property insurance will be held. This account will be started with taxes approximately equal to two months in excess of the number of months that have elapsed this year. (If 6 months have passed, they will collect 8 months of taxes.) Your property insurance will be collected one year in advance, plus two months will be kept in your escrow account.

 

FHA Loans

The Federal Housing Administration (FHA), offers loans for low-to-moderate-income home buyers. FHA loans have lower down payments, and have relatively easier requirements than conventional fixed-rate mortgages. FHA mortgages have no income restrictions and even those with lower credit scores may be considered. Past bankruptcy does not necessarily disqualify borrowers from using this program!

In addition, the Department of Veterans Affairs (VA) offers a zero-down mortgage program. To take advantage of this program, borrowers need to be among those listed as veterans and service personnel in the U.S. military. One of the biggest benefits of this program is that it eliminates the need for private mortgage insurance! Local Homebuying Program

There are often many state and local programs available. These programs offer down-payment assistance and programs for local home ownership. Learn more about these local programs, recommended lenders, and other finance options by contacting us today!

 

Fixed-Rate Loans

The fixed-rate mortgage is the most popular mortgage program in use today. Fixed-rate loans offer the borrow a fixed interest rate for the life of the loan, typically 15 to 30 years. Borrowers have peace of mind knowing that their monthly payment will not change over time. Conventional fixed-rate mortgages have underwriting requirements established by Freddie Mac and Fannie Mae, and require certain down-payment and debt-to-equity ratios to qualify. Fixed-rate loans are especially attractive to buyers who plan to stay in their home for more than a few years.

 

Loan Discount

Often called "points", a loan discount is a one-time charge used to adjust the yield on the loan to what market conditions demand. One point is equal to 1% of the loan amount. This fee is rare when interest rates are low.

 

Loan Origination Fee

This fee covers the lender's administrative costs in processing the loan. It is a one-time fee, often expressed as a percentage of the loan. The origination fee is typically 1% of the loan, but remember, you can obtain a loan with no origination fee and a slightly higher interest rate.

 

Pre-Qualification

Two often confused terms in the home buying process are a mortgage loan pre-qualification and a home loan pre-approval. Even some loan officers and real estate agents will use the terms incorrectly, so here's what you really need to know about each one.

A mortgage loan pre-qualification is simply an estimate of how much house you can afford and how much money a lender would be willing to loan you. The best time to get a pre-qualification is right at the beginning of your home buying process, before you even start looking at houses. This involves either sitting down with a lender or talking with one on the phone, and providing information on your income, assets, debts, and a potential down payment amount. The lender would then provide you with a ballpark figure in writing of how much he thinks you could afford to pay for a monthly mortgage. There is no cost involved and there is no commitment on either side. This estimate is just helpful in helping you figure out if buying a home is a viable option, and if so, what your price range would probably be.


Pre-Approval

Two often confused terms in the home buying process are a mortgage loan pre-qualification and a home loan pre-approval. Even some loan officers and real estate agents will use the terms incorrectly, so here's what you really need to know about each one.

Getting pre-approved means that you have a tentative commitment from a specific lender for mortgage funding. In this case, you provide a home loan lender with actual documentation of your income, assets, and debts. This process typically requires an application fee as well, since the bank will run a credit check and work to verify all your employment and financial information. Once you are approved, the lender will give you a letter of commitment, stating how much money her bank is willing to loan you for a home purchase. With a pre-approval in hand you can start your shopping - real estate agents and sellers will take you much more seriously when they see you have your mortgage funding in place. It is important to understand, however, that even a pre-approval is not a guarantee that you will be approved for a mortgage loan. The funding will only be given when the property appraisal, title search, and other verifications check out on the home you have chosen to buy. Neither is the pre-approval binding; you can still obtain a mortgage from a different lender. If you do stick with the same company that pre-approved you though, the application process will be much shorter once you find the right house.


More About the Pre-Qualification and Pre-Aprroval Process

Why you should maintain a good FICO score. Derived from your credit history report, credit scores are based on points you receive for being a good borrower. The most common scoring system used for mortgage approvals is done by the Fair Issac Corporation? (FICO?), which accesses the three main credit reporting bureaus (Equifax, TransUnion, and Experian.) Credit scores can range from a low of 300 points to a high of 850. People with average credit usually score around 620, good credit at 660, and excellent credit above 720.

Example: Someone with a credit score of 620 requesting a 30-year loan term for $215,000 may pay an APR of 7.60%. A score of 720 or higher would qualify you for a 6.00% APR (a difference of 1.60%) or a potential savings of $230 per month. Should your credit score fall below 620 then you're in the sub-prime mortgage category and your mortgage rate could go as high as 8.53%. How to get the best rate A good strategy for securing the best rate would be to clean-up your credit report at least six months prior to applying for a mortgage loan. Maintaining a debt-to-income ratio of less than 36% could boost your score by as much as 10%. Lenders like to see a history of long-term credit and ability to pay off a loan over time. The goal of any loan applicant should be to make sure their credit report is as accurate and sound as possible.

The lender should be able to provide you with a solid estimate of your closing costs and monthly payments. After you're approved, the lender will lock-in your rate for a specified period of time (usually 30 to 60 days).

 

Lender Fees

Other lender fees include an underwriting fee, a flood certification fee, an amortization schedule fee, and other miscellaneous fees that should be disclosed by your mortgage lender at loan application. These fees vary dramatically from about $450 to $900.

 

Miscellaneous Title Charges

The title company may charge fees for a title search, title examination, document preparation, notary fees, recording fees, and a settlement or closing fee. These are all one-time charges and can add up to about $200.

 

PMI (Private Mortgage Insurance) Premium

Depending on the amount of your down payment, you may have to pay an up-front fee for mortgage insurance (which protects the lender against loss due to foreclosure). You may also be required to put a certain amount into a special reserve account (an impound account) held by the lender for PMI.

 

Prepaid Interest

Depending on the time of month your loan closes, this charge may vary from a full month's interest to just a few days' interest. If your loan closes at the beginning of the month, you will probably have to pay the maximum amount. If your loan closes at the end of the month, you will only have to pay a few days' interest.

 

Title Insurance

When you purchase your home, both you and the lender need a preliminary title commitment that will indicate exactly what recorded liens, encumbrances and recorded easements are currently in effect on the property. The title commitment will also indicate the vested owner of record and any restrictions on the use of the property. Title insurance is, for all practical purposes, required on all property in most states and is normally a seller's expense. However, the buyer is required to furnish the lender with a lender's policy showing the lender as lien holder on that property. These charges will be incurred at the time of settlement as a part of your closing costs. When the purchase of the property is closed, and the title company has recorded the necessary documents, the title company will then issue a title insurance policy binder to you and the lender, showing clear title to the property.

 

Title Insurance Fee

There are two title policies: a lender's title policy (which protects the lender against loss due to defects on title) and a buyer's title policy (which protects you). These are both one-time charges, but the one you usually pay as a buyer is $200.

 

VA Loans

The Federal Housing Administration (FHA), offers loans for low-to-moderate-income home buyers. FHA loans have lower down payments, and have relatively easier requirements than conventional fixed-rate mortgages. FHA mortgages have no income restrictions and even those with lower credit scores may be considered. Past bankruptcy does not necessarily disqualify borrowers from using this program!

In addition, the Department of Veterans Affairs (VA) offers a zero-down mortgage program. To take advantage of this program, borrowers need to be among those listed as veterans and service personnel in the U.S. military. One of the biggest benefits of this program is that it eliminates the need for private mortgage insurance! Local Homebuying Program

There are often many state and local programs available. These programs offer down-payment assistance and programs for local home ownership. Learn more about these local programs, recommended lenders, and other finance options by contacting us today!

 

If there's a term you're searching for that we missed, let us know. We'll add it to our already expansive database and get back to you with an answer as soon as possible.