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Homebuyer Guide
Terms You'll Need to Know
A
B
C D E
F G H
I J K L
M N O
P Q R
S T U
V W X Y Z
Adjustment Interval - the period of time between changes in your interest rate and/or monthly payment with an adjustable rate loan. These intervals will vary depending on the lending institution and the type of loan your are applying for.
Adjustable Rate Mortgage (ARM) - a loan where the rate of interest is tied to a specific financial index, with both the rate of interest and the monthly payments subject to change at established adjustment intervals.
Amortization - the means by which a home loan is scheduled to be paid off, including interest and principal, by a series of regular installment payments. Loans are typically amortized over 30 years.
Application Fee - a fee, often non-refundable, charges by the lender to cover costs of processing your application.
Annual Percentage Rate (APR) - the cost of your credit expressed as a yearly rate. It takes into account interest, points and loan origination fee. Since all lenders are required to use the same guidelines in determining APR, this is a good basis for comparing the cost of various loan programs.
Assumability - a feature of the loan which permits you to transfer your mortgage and its specified terms to the person(s) purchasing your home. Having an assumable loan could make it easier for you to sell your home, since assumption of a loan usually involves lower fees and/or qualifying standards for the new borrower than a new loan. Assumability on fixed or adjustable rate loans varies from lender to lender.
Bi-weekly Mortgage - typically, a fixed rate mortgage on which payments are due and payable every two weeks. Since a total of 26 bi-weekly payments (equivalent to 13 monthly payments) are made annually, loans of this type are paid off more quickly than loans requiring 12 monthly payments per year.
Casualty Loss - a loss from theft, fire, storm, or other similar and unexpected occurrences.
Clear Title - a title that is free of liens or legal questions as to ownership of property.
Closing Costs - one-time costs that must be paid before the loan can be "closed" or funded. These costs may include such things as property taxes, insurance, broker’s fees, escrow fees, title insurance premium, deed recording fee, title transfer tax, etc. Escrow instructions will stipulate which portion of the fees are to be paid by buyer or seller. An estimate of closing costs will be given to you by the lender within a few days after receiving your loan application. (All or a portion of your closing costs may be financed. Ask your lender.)
Contingency - a condition that must be met before a contract is legally binding.
Conventional Financing - home loans made by a lender other than VA or FHA.
Deed - the legal document conveying title to a property.
Depreciation - a deductible expense for wear and tear of tangible property that has a useful life of more than one year and is used for business or income-producing purposes.
Down Payment Assistance (DPA) - the DPA is a 10-year fixed rate second mortgage loan with a maximum loan amount of 3% of your full loan amount. The maximum sales price for property with down payment assistance is $114,551. There are no origination fees and no prepayment penalty on the DPA loan.
Escrow Account - an account for accumulating that portion of a borrower’s monthly payments designated for future payment of taxes, insurance fees, assessments, etc. Required by certain lenders or with certain types of financing. Can also be used in conjunction with buydown loans.
Equity - the difference between fair market value and current indebtness, usually referred to as the owner’s interest.
Federal Housing Administration (FHA) - A government agency which insures repayment of a loan to the lender, with the result that the borrower is able to obtain a home loan with a 3% down payment and often at a lower rate of interest.
Fixed Rate Loan- a loan where the rate of interest is fixed over the life of the loan. Payments on a fully-amortized, fixed rate will not change.
HUD-1 - a two-page financial disclosure statement detailing the closing costs of a home purchase for the buyer and seller.
Index - used by lenders to calculate the interest adjustments on adjustable rate loans. Some indexes are more volatile than others; this can affect adjustments in your interest rate and, subsequently, your monthly payment. Because these indexes reflect the general movement of interest rates, they tend to keep the rate on your adjustable rate loan in line with market conditions.
Initial Rate - an interest rate changes for the first six (6) or twelve (12) months of an adjustable rate loan. Normally, this rate will be lower than prevailing fixed market rates.
Interest Rate Cap - a safeguard into an adjustable rate loan to protect the consumer against dramatic increases in the rate of interest and, consequently, in the monthly payment. Fox example, an adjustable rate loan may have a two percentage point limit per year on the amount of increase or decrease, as well as a five percentage point limit (increase or decrease) over the life of the loan.
Late Charges - Typically five percent (5%) of principal and interest paid after the 15th day of the month.
Margin (Spread) - an amount expressed as a percentage which is added to an index to determine the interest rate on an adjustable rate loan( e.g. index rate + 2.5% margin). Different lenders and loan programs may use different margins and indexes. With an adjustable rate loan, this margin (spread) generally does not change once it is established in your documents.
Mortgage Credit Certificate (MCC) - the MCC is twenty-five percent (25%) on conventional housing and forty percent (40%) on manufactured housing tax credit on your tax liability. This is a dollar for dollar reduction of your federal tax liability. The remaining seventy-five percent (75%) for conventional and sixty percent (60%) for manufactured of your mortgage interest will continue to qualify as an itemized tax deduction.
Mortgage Insurance Premium (MIP) - FHA required mortgage insurance to protect the lender in the case of buyer default.
Mortgage Revenue Bond (MRB) - the MRB is a 30-year fixed rate loan at a below market interest rate. The MRB can be on FHA insured, VA, Rural Development and FannieMae Community Home Buyer loans. The MRB has a 3% cash advance (based on full loan amount) for origination fees, closing costs and down payment.
Negative Amortization - a situation which may occur on adjustable rate loans which have the "payment cap" feature. (See "Payment Cap") Because your monthly payment is capped, your adjusted payment amount may, at times, be insufficient to pay the actual amount of interest due. The unpaid (deferred) interest would then be added to your balance. This increase in your loan balance is known as "negative amortization". A borrower usually has the option of increasing the monthly payment in any given month to avoid negative amortization or making a lump sum payment to pay off any accrued negative amortization.
Payment Cap - the limited amount by which the payment on an adjustable rate loan can increase or decrease at each payment adjustment interval (typically one year). A Payment Cap ensures that payment changes occur at a gradual pace. If your adjusted payment isn’t sufficient to cover the amount of interest due on the loan, due to the Payment Cap, the unpaid (deferred) interest is added to your loan balance. This is known as "negative amortization". Since most adjustable rate loans have a maximum amount of allowable negative amortization, once this maximum has been reached, the payment will have to be adjusted beyond the Payment Cap to ensure that the loan will be paid off in the allotted number of years. Provisions for these special adjustments will be in the loan documents.
PITI - refers to "Principal-Interest-Taxes-Insurance." The total of your monthly home loan payment, including taxes and insurance.
PMI (Private Mortgage Insurance) - insurance coverage for the lender of a certain portion of the loan balance in the event of default and foreclosure. PMI may be required on FannieMae conventional loans and will be included as part of your monthly payment.
Points and Fees - a point is a charge equal to one percent of the principal amount of the loan. Points are payable at the close of escrow and may be paid by the buyer or seller, or split between them (e.g. two points charged on a $100,000 loan would equal $2,000). In addition, a flat dollar amount fee may also be charged. Under some lending programs, a buyer may be allowed to include these points and fees as part of the total amount financed.
Prepayment Penalty - an additional fee which may be charged by the lender if the loan is paid off prior to the end of the loan term. Generally associated with fixed rate loans. No penalty applies to MHC’s DPA loan.
Processing (turnaround) Time - the amount of time required from the day you submit your loan application documents in full to the day the loan closes and loan funds are disbursed. This is the total processing time for your home loan.
Rate Guarantee - a guaranteed rate lock, at the lender’s option, that the rate in effect on the date you submit your application, or at the time of final approval, will be the final rate on your loan when funded. This guarantee usually expires after a specified period of time.
Real Property - physical property that is permanent and nonmovable (ie: land and buildings).
Refinance - Negotiation of a new loan in order to pay off an existing loan. Homes are usually refinanced in order to (a) take advantage of lower interest rates, (b) switch from one loan type to another (e.g. from adjustable to fixed), or (c) to generate cash from built-up equity. Since refinancing generally involves new loan costs, these costs must be weighed against benefits to be gained.
Term - the number of years before your loan is scheduled to be paid off. Fifteen (15) year and thirty (30) year terms are most common.
Title - a legal document evidencing a person’s right to or ownership of a property.
Title Insurance - a required policy, usually purchased by the seller of a home, ensuring that title will be held free of any liens other than that obtained by the buyer.
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.
Underwriting - standards used by a lender to determine whether a borrower qualifies for a loan. Underwriting criteria is established by agencies such as FHA, VA, Rural Development and FannieMae.
Veterans Administration (VA) - A government agency providing guarantees for lenders on approved loans to qualifying veterans.
Vesting - name(s) in which title to property is held.