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FICO® Score - a Brief Explanation
FICO® Score - a Brief Explanation
When you apply for a mortgage loan, you expect your lender to pull a
credit report and look at whether you’ve made your payments on time.
What you may not expect is that they seem to be more interested in your
FICO® score.
“What’s a FICO® score?” is a common reaction.
Each time your credit report is pulled, it is run through a computer
program with a built-in scorecard. Points are awarded or deducted based
on certain items such as how long you have had credit cards, whether you
make your payments on time, if your credit balances are near maximum,
and assorted other variables. When the credit report prints in your
lender’s office, the total score is displayed. Your score can be
anywhere between the high 300’s and the low 850’s.
Lenders wanted to determine if there was any relationship between these
credit scores and whether borrowers made their payments on time, so they
did a study. The study showed that borrowers with scores above 680
almost always made their payments on time. Borrowers with scores below
600 seemed fairly certain to develop problems.
As a result, credit scoring became a more important factor in approving
mortgage loans. Credit scores also made it easier to develop artificial
intelligence computer programs that could make a “yes” decision for
loans that should obviously be approved. Nowadays, a computer and not a
person may have actually approved your mortgage.
In short, lower credit scores require a more thorough review than higher
scores. Often, mortgage lenders will not even consider a score below
600.
Some of the things that affect your FICO score are:
- Delinquencies
- Too many accounts opened within the last twelve months
- Short credit history
- Balances on revolving credit are near the maximum limits
- Public records, such as tax liens, judgments, or bankruptcies
- No recent credit card balances
- Too many recent credit inquiries
- Too few revolving accounts
- Too many revolving accounts
FICO® actually stands for Fair Isaac and Company, which is the company
used by the Experian (formerly TRW) credit bureau to calculate credit
scores. Trans-Union and Equifax are two other credit bureaus who also
provide credit scores.
FICO® Scores and Your Mortgage
FICO® Scores and Your Mortgage
Years ago, credit scoring had little to do with mortgage lending. When
reviewing the credit worthiness of a borrower, an underwriter would make
a subjective decision based on past payment history.
Then things changed.
Lenders studied the relationship between credit scores and mortgage
delinquencies. There was a definite relationship. Almost half of those
borrowers with FICO® scores below 550 became ninety days delinquent at
least once during their mortgage. On the other hand, only two out of
every 10,000 borrowers with FICO® scores above eight hundred became
delinquent.
So lenders began to take a closer look at FICO® scores and this is what
they found out. The chart below shows the likelihood of a ninety day
delinquency for specific FICO® scores.
| FICO® Score | | Odds of Delinquent Account |
| 595 | | 2 to 1 |
| 600 | | 4 to 1 |
| 615 | | 9 to 1 |
| 630 | | 18 to 1 |
| 645 | | 36 to 1 |
| 660 | | 72 to 1 |
| 680 | | 144 to 1 |
| 780 | | 576 to 1 |
If you were lending a couple hundred thousand dollars, who would you
want to lend it to?
FICO® Scores, What Affects Them, How Lenders Look At Them
Imagine a busy lending office and a loan officer has just ordered a
credit report. He hears the whir of the laser printer and he knows the
pages of the credit report are going to start spitting out in just a
second. There is a moment of tension in the air. He watches the pages
stack up in the collection tray, but he waits to pick them up until all
of the pages are finished printing. He waits because FICO® scores are
located at the end of the report.  A FICO® above 700 will evoke a smile,
then a grin, perhaps a shout and a “victory” style arm pump in the air.
A score below 600 will definitely result in a frown, a furrowed brow,
and concern.
FICO® stands for Fair Isaac & Company, and credit scores are reported by
each of the three major credit bureaus: TRW (Experian), Equifax, and
Trans-Union. The score does not come up exactly the same on each bureau
because each bureau places a slightly different emphasis on different
items. Scores range from 365 to 840.
Some of the things that affect your FICO® scores:
- Delinquencies
- Too many accounts opened within the last twelve months
- Short credit history
- Balances on revolving credit are near the maximum limits
- Public records, such as tax liens, judgments, or bankruptcies
- No recent credit card balances
- Too many recent credit inquiries
- Too few revolving accounts
- Too many revolving accounts
Sounds confusing, doesn’t it?
The credit score is actually calculated using a scorecard where you
receive points for certain things. Creditors and lenders who view your
credit report do not get to see the scorecard, so they do not know
exactly how your score was calculated. They just see the final scores.
Basic guidelines on how to view the FICO® scores vary a little from
lender to lender. Usually, a score above 680 will require a very basic
review of the entire loan package. Scores between 640 and 680 require
more thorough underwriting. Once a score gets below 640, an underwriter
will look at a loan application with a more cautious approach. Many
lenders will not even consider a loan with a FICO® score below 600, some
as high as 620.
FICO® Scores and Interest Rates
Credit scores can affect more than whether your loan gets approved or
not. They can also affect how much you pay for your loan, too. Some
lenders establish a base price and will reduce the points on a loan if
the credit score is above a certain level. For example, one major
national lender reduces the cost of a loan by a quarter point if the
FICO® score is greater than 725. If it is between 700 and 724, they will
reduce the cost by one-eighth of a point. A point is equal to one
percent of the loan amount.
There are other lenders who do it in reverse. They establish their base
price, but instead of reducing the cost for good FICO® scores, they add
on costs for lower FICO® scores. The results from either method would
work out to be approximately the same interest rate. It is just that the
second way looks better when you are quoting interest rates on a rate
sheet or in an advertisement.
FICO® Scores and Mortgage Underwriting Decisions
FICO® Scores as Guidelines
FICO® scores are only guidelines and factors other than FICO® scores
also affect underwriting decisions. Some examples of compensating
factors that will make an underwriter more lenient toward lower FICO®
scores can be a larger down payment, low debt-to-income ratios, an
excellent history of saving money, and others. There also may be a
reasonable explanation for items on the credit history report that
negatively impact your credit score.
They Don’t Always Make Sense
Even so, sometimes credit scores do not seem to make any sense at all.
One borrower with a completely flawless credit history can have a FICO®
score below 600. One borrower with a foreclosure on her credit report
can have a FICO® above 780.
Portfolio & Sub-Prime Lenders
Finally, there are a few portfolio lenders who do not even look at
credit scoring, at least on their portfolio loans. A portfolio lender is
usually a savings & loan institution that originates some adjustable
rate mortgages that they intend to keep in their own portfolio rather
than selling them in the secondary mortgage market. These lenders may
look at home loans differently. Some concentrate on the value of the
home. Some may concentrate more on the savings history of the borrower.
There are also sub-prime lenders, or “B & C paper” lenders, who will
provide a home loan, but at a higher interest rate and cost.
Running Credit Reports
One thing to remember when you are shopping for a home loan is that you
should not let numerous mortgage lenders run credit reports on you. Wait
until you have a reasonable expectation that they are the lender you are
going to use to obtain your home loan. Not only will you have to explain
any credit inquiries in the last ninety days, but also numerous
inquiries will lower your FICO® score by a small amount. This may not
matter if your FICO® is 780, but it would matter if it is 642.
Don’t Buy A Car Just Before Looking for a Home!
A word of advice not directly related to FICO® scores. When people begin
to think about the possibility of buying a home, they often think about
buying other big-ticket items, such as cars. Quite often when someone
asks a lender to pre-qualify them for a home loan there is a brand new
car payment on the credit report. Often, they would have qualified in
their anticipated price range except that the new car payment has raised
their debt-to-income ratio, lowering their maximum purchase price.
Sometimes they have bought the car so recently that the new loan doesn’t
even show up on the credit report yet, but with six to eight credit
inquiries from car dealers and automobile finance companies it is kind
of obvious.
Credit History is Important
Nowadays, credit scores are important if you want to get the best
interest rate available. Protect your FICO® score. Do not open new
revolving accounts needlessly. Do not fill out credit applications
needlessly. Do not keep your credit cards nearly maxed out. Make sure
you do use your credit occasionally. Always make sure every creditor has
their payment in their office no later than 29 days past due.
And never ever be more than thirty days late on your mortgage. Ever.
What's a FICO®?
WHAT’S A FICO®?
What is a FICO® Score?
FICO® stands for Fair Isaac & Company and is the name for the most well
known credit scoring system, used by Experian. The credit bureau’s
computer evaluates a complete credit profile and assigns a score, which
is used to estimate credit worthiness. Each of the three bureaus
(Experian, Trans Union, Equifax) employs its own scoring system, so a
given person will usually have 3 separate scores. Someone with a higher
score will be viewed as a better risk than someone with a lower score.
Typically, scores will range from about 600 to 700 or above, although
some cases will be outside this range.
What Kind of Score Do I Need for a Home Loan?
There are as many answers to this question as there are loan programs
available. Most lenders will take the average of all 3 scores to
evaluate an application. Niche loans, such as Easy Qualifier and low
down payment loans will have higher FICO® requirements.
How is My Score Determined?
The FICO® model has 5 main elements:
- Past payment history (about 35% of score) The fewer the late payments
the better. Recent late payments will have a much greater impact than a
very old Bankruptcy with perfect credit since.
Myth - paying off cards with recent late payments will fix things.
Payoffs do not affect payment history.
- Credit use (about 30% of score) Low balances across several cards is
better than the same balance concentrated on a few cards used closer to
maximums. Too many cards can bring down the score, but closing accounts
can often do more harm than good if the entire profile is not
considered. BE CAREFUL WHEN CLOSING ACCOUNTS!
- Length of credit history (15% of score) The longer accounts have been
open the better for the score. Opening new accounts and closing seasoned
accounts can bring down a score a great deal.
- Types of credit used (10% of score) Finance company accounts score lower
than bank or department store accounts.
- Inquiries (10% of score) Multiple inquiries can be a risk if several
cards are applied for or other accounts are close to maxed out. Multiple
mortgage or car inquiries within a 14 day period are counted as one
inquiry.
How Can I Raise My Score
Your score can only be changed by the way that item is reported directly
to the credit bureaus (Experian, TU, Equifax). Written confirmation from
the creditor is required. It is best to make these corrections before
you try to purchase a home, because you can never be sure the exact
impact a change will have on your score.
What Does This Mean to Me?
You should have your credit reviewed BEFORE you look for a home, and
work with a PROFESSIONAL loan officer to make sure your loan is based on
the most accurate information.
A Back to the top
Acceleration Clause
A provision in a mortgage that gives the lender the right to demand
payment of the entire principal balance if a monthly payment is missed.
Acceptance
An offeree’s consent to enter into a contract and be bound by the terms
of the offer.
Additional Principal Payment
A payment by a borrower of more than the scheduled principal amount due
in order to reduce the remaining balance on the loan.
Adjustable Rate Mortgage (ARM)
A mortgage that permits the lender to adjust its interest rate
periodically on the basis of changes in a specified index.
Adjusted Basis
The original cost of a property plus the value of any capital
expenditures for improvements to the property minus any depreciation
taken.
Adjustment Date
The date on which the interest rate changes for an adjustable-rate
mortgage (ARM).
Adjustment Period
The period that elapses between the adjustment dates for an
adjustable-rate mortgage (ARM).
Administrator
A person appointed by a probate court to administer the estate of a
person who died intestate.
Affidavits
A formal sworn statement of fact. As part of the closing process, you’re
likely to sign numerous affidavits. You may be required, for example, to
sign an affidavit of occupancy. It states that you will use the property
as a principal residence. Or, you and the seller may have to sign an
affidavit stating all of the improvements to the property required in
the sales contract were completed before closing.
Your lender can provide additional information regarding any of these
documents you will sign.
Affordability Analysis
A detailed analysis of your ability to afford the purchase of a home. An
affordability analysis takes into consideration your income,
liabilities, and available funds, along with the type of mortgage you
plan to use, the area where you want to purchase a home, and the closing
costs that you might expect to pay.
Amenity
A feature of real property that enhances its attractiveness and
increases the occupant’s or user’s satisfaction although the feature is
not essential to the property’s use. Natural amenities include a
pleasant or desirable location near water, scenic views of the
surrounding area, etc. Human-made amenities include swimming pools,
tennis courts, community buildings, and other recreational facilities.
Amortization
The gradual repayment of a mortgage loan by installments.
Amortization Term
The amount of time required to amortize the mortgage loan. The
amortization term is expressed as a number of months. For example, for a
30-year fixed-rate mortgage, the amortization term is 360 months.
Amortize
To repay a mortgage with regular payments that cover both principal and
interest.
Amotization Schedule
A timetable for payment of a mortgage loan. An amortization schedule
shows the amount of each payment applied to interest and principal and
shows the remaining balance after each payment is made.
Annual Mortgagor Statement
A report sent to the mortgagor each year. The report shows how much was
paid in taxes and interest during the year, as well as the remaining
mortgage loan balance at the end of the year.
Annual Percentage Rate (APR)
The cost of a mortgage stated as a yearly rate; includes such items as
interest, mortgage insurance, and loan origination fee (points).
Annuity
An amount paid yearly or at other regular intervals, often on a
guaranteed dollar basis.
Application
A form used to apply for a mortgage loan and to record pertinent
information concerning a prospective mortgagor and the proposed
security.
*
See also “Loan Application” entry.
Appraisal
A written analysis of the estimated value of a property prepared by a
qualified appraiser. Contrast with home inspection.
Appraised Value
An opinion of a property’s fair market value, based on an appraiser’s
knowledge, experience, and analysis of the property.
Appraiser
A person qualified by education, training, and experience to estimate
the value of real property and personal property.
Appreciation
An increase in the value of a property due to changes in market
conditions or other causes. The opposite of depreciation.
Assessed Value
The valuation placed on property by a public tax assessor for purposes
of taxation.
Assessment
The process of placing a value on property for the strict purpose of
taxation. May also refer to a levy against property for a special
purpose, such as a sewer assessment.
Assessment Rolls
The public record of taxable property.
Assessor
A public official who establishes the value of a property for taxation
purposes.
Asset
Anything of monetary value that is owned by a person. Assets include
real property, personal property, and enforceable claims against others
(including bank accounts, stocks, mutual funds, and so on).
Assignment
The transfer of a mortgage from one person to another.
Assumable Mortgage.
A mortgage that can be taken over (“assumed”) by the buyer when a home
is sold.
A provision in an assumable mortgage allows a buyer to assume
responsibility for the mortgage from the seller. The loan does not need
to be paid in full by the original borrower upon the sale or transfer of
the property.
Assumption
The transfer of the seller’s existing mortgage to the buyer.
*See also “Assumable Mortgage” entry.
Assumption Clause
A provision in an assumable mortgage that allows a buyer to assume
responsibility for the mortgage from the seller. The loan does not need
to be paid in full by the original borrower upon sale or transfer of the
property.
Assumption Fee
The fee paid to a lender (usually by the purchaser of real property)
resulting from the assumption of an existing mortgage.
Attorney-In-Fact
One who holds a power of attorney from another to execute documents on
behalf of the grantor of the power.
Automated Underwriting
After you complete your loan application with a lender, it is sent to
“underwriting” for review. In short, underwriting is the process used to
analyze how you have managed credit obligations in the past, whether you
have the ability to repay the mortgage loan you are applying for (i.e.,
your income and assets), and whether the price you are willing to pay
for the home is supported by the price of the property.
B Back to the top
Balance Sheet
A financial statement that shows assets, liabilities, and net worth as
of a specific date.
Balloon Mortgage
A mortgage that has level monthly payments that will amortize it over a
stated term but that provides for a lump sum payment to be due at the
end of an earlier specified term.
Balloon Payment
The final lump sum payment that is made at the maturity date of a
balloon mortgage.
Bankrupt
A person, firm, or corporation that, through a court proceeding, is
relieved from the payment of all debts after the surrender of all assets
to a court-appointed trustee.
Bankruptcy
A proceeding in a federal court in which a debtor who owes more than his
or her assets can relieve the debts by transferring his or her assets to
a trustee.
Before-Tax Income
Income before taxes are deducted.
Beneficiary
The person designated to receive the income from a trust, estate, or a
deed of trust.
Bequeath
To transfer personal property through a will.
Betterment
An improvement that increases property value as distinguished from
repairs or replacements that simply maintain value.
Bill of Sale
A written document that transfers title to personal property.
Binder
A preliminary agreement, secured by the payment of an earnest money
deposit, under which a buyer offers to purchase real estate.
 However, you make your payments every 14 days
instead of once a month. The monthly payment is split in half, resulting
in the same total monthly mortgage, but the resulting 26 and sometimes
27 biweekly payments a year translate into 13 monthly payments, or one
extra monthly payment per year.
Borrowers can qualify for a 30-year monthly payment amount, but get a
loan that pays off in approximately 22 years at current interest rates.
At higher rates, the actual term declines.
If you are looking to build up equity in your home faster without the
higher mortgage payments that come with a shorter-term mortgage, you may
want to consider the biweekly mortgage. Payments can be deducted from
your bank account and scheduled to coincide with your payroll deposits
to simplify budgeting. Lenders may charge an initial set-up fee to
automatically debit your checking account.
Blanket Insurance Policy
A single policy that covers more than one piece of property (or more
than one person).
Blanket Mortgage
The mortgage that is secured by a cooperative project, as opposed to the
share loans on individual units within the project.
Bona Fide
In good faith, without fraud.
Bond
An interest-bearing certificate of debt with a maturity date. An
obligation of a government or business corporation. A real estate bond
is a written obligation usually secured by a mortgage or a deed of
trust.
Breach
A violation of any legal obligation.
Bridge Loan
A form of second trust that is collateralized by the borrower’s present
home (which is usually for sale) in a manner that allows the proceeds to
be used for closing on a new house before the present home is sold. Also
known as “swing loan.”
Broker
A person who, for a commission or a fee, brings parties together and
assists in negotiating contracts between them.
Budget
A detailed plan of income and expenses expected over a certain period of
time. A budget can provide guidelines for managing future investments
and expenses.
Budget Category
A category of income or expense data that you can use in a budget. You
can also define your own budget categories and add them to some or all
of the budgets you create. “Rent” is an example of an expense category.
“Salary” is a typical income category.
Building Code
Local regulations that control design, construction, and materials used
in construction. Building codes are based on safety and health
standards.
Buydown Account
An account in which funds are held so that they can be applied as part
of the monthly mortgage payment as each payment comes due during the
period that an interest rate buydown plan is in effect.
Buydown Mortgage
A temporary buydown is a mortgage on which an initial lump sum payment
is made by any party to reduce a borrower’s monthly payments during the
first few years of a mortgage. A permanent buydown reduces the interest
rate over the entire life of a mortgage.
C Back to the top
Call Option
A provision in the mortgage that gives the mortgagee the right to call
the mortgage due and payable at the end of a specified period for
whatever reason.
Cap
A provision of an adjustable-rate mortgage (ARM) that limits how much
the interest rate or mortgage payments may increase or decrease.
*See also “lifetime payment cap”, “lifetime rate cap”, “periodic payment
cap”, and “periodic rate cap”.
Capacity
Lenders will want to know if you can repay the mortgage debt you incur
-- this is known as your capacity. Lenders will base their evaluation on
employment information, how long you’ve worked, and how much you are
paid. Lenders will also review your expenses and any other debt
obligations you have. This means they’ll want to know how many
dependents you have and whether you pay any alimony or child support,
for example.
Capital
- Money used to create income, either as an investment in a business or an
income property.
- The money or property comprising the wealth owned or used by a person or
business enterprise.
- The accumulated wealth of a person or business.
- The net worth of a business represented by the amount by which its
assets exceed liabilities.
Capital Expenditure
The cost of an improvement made to extend the useful life of a property
or to add to its value.
Capital Improvement
Any structure or component erected as a permanent improvement to real
property that adds to its value and useful life.
Cash-Out Refinance
A refinance transaction in which the amount of money received from the
new loan exceeds the total of the money needed to repay the existing
first mortgage, closing costs, points, and the amount required to
satisfy any outstanding subordinate mortgage liens. In other words, a
refinance transaction in which the borrower receives additional cash
that can be used for any purpose.
CD-Indexed (Certificate of Deposit) ARMs
The Certificate of Deposit index represents the weekly average of
secondary market interest rates on six-month negotiable CDs.
The initial interest rate and payments adjust every six months after an
initial six-month period.
ARMs with this index typically come with a per-adjustment cap of 1
percent and a lifetime rate cap of 6 percent.
Certificate of Deposit
A document written by a bank or other financial institution that is
evidence of a deposit, with the issuer’s promise to return the deposit
plus earnings at a specified interest rate within a specified time
period.
*See also “Adjustable-Rate Mortgage” entry.
Certificate of Deposit Index
An index that is used to determine interest rate changes for certain ARM
plans. It represents the weekly average of secondary market interest
rates on six-month negotiable certificates of deposit.
*See also “Adjustable-Rate Mortgage” entry.
Certificate of Eligibility
A document issued by the federal government certifying a veteran’s
eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that
establishes the maximum value and loan amount for a VA mortgage.
Certificate of Title
A statement provided by an abstract company, title company, or attorney
stating that the title to real estate is legally held by the current
owner.
Chain of Title
The history of all of the documents that transfer title to a parcel of
real property, starting with the earliest existing document and ending
with the most recent.
Change Frequency
The frequency (in months) of payment and/or interest rate changes in an
adjustable-rate mortgage (ARM).
Change Orders
After construction begins, you may discover that you need to make
unplanned and necessary changes to the work. The contingency reserve
covers unforeseen repairs or deficiencies found during renovation.
Unnecessary additions or changes are treated differently.
These change orders are considered discretionary and must first be
approved by your lender. You must deposit additional funds to pay for
the work in the escrow account before work on the changes begins. These
change orders - as well as any that result from unforeseen repairs -
must be added as amendments to your construction contract.
Chattel
Another name for personal property.
Clear Title
A title that is free of liens or legal questions as to ownership of the
property.
Closing
A meeting at which a sale of a property is finalized by the buyer
signing the mortgage documents and paying closing costs. Also called
“settlement”.
*See also “Settlement” entry.
Closing Agent
As a potential home buyer, you will need a closing (or “settlement”)
agent to coordinate the various closing activities. These can include
but are not limited to preparing and recording the closing documents and
disbursing funds.
The types of services provided by a closing agent depend on the person
you hire, but typically the closing is conducted by title companies,
escrow companies or attorneys. It is usually held at the lender’s or
real estate sales professional’s office.
Closing Cost Item
A fee or amount that a home buyer must pay at closing for a single
service, tax, or product. Closing costs are made up of individual
closing cost items such as origination fees and attorney’s fees. Many
closing cost items are included as numbered items on the HUD-1
statement.
Closing Costs
Expenses (over and above the price of the property) incurred by buyers
and sellers in transferring ownership of a property. Closing costs
normally include an origination fee, an attorney’s fee, taxes, an amount
placed in escrow, and charges for obtaining title insurance and a
survey. Closing costs percentage will vary according to the area of the
country; lenders or REALTORS® often provide estimates of closing costs
to prospective homebuyers.
Closing Date
After your lender has approved your mortgage and you accept the
commitment letter, the next step is to set a closing date. Many times,
your real estate sales professional coordinates the setting of this date
with you, the seller, the closing agent, and your lender.
Remember, you need to ensure that the closing occurs before your
lender’s commitment letter - and the rate lock-in, if there is one -
expire. You can now finalize your moving plans.
Cloud on Title
Any conditions revealed by a title search that adversely affect the
title to real estate. Usually clouds on title cannot be removed except
by a quitclaim deed, release, or court action.
Co-Maker
A person who signs a promissory note along with the borrower. A
co-maker’s signature guarantees that the loan will be repaid, because
the borrower and the co-maker are equally responsible for the repayment.
Coinsurance
A sharing of insurance risk between the insurer and the insured.
Coinsurance depends on the relationship between the amount of the policy
and a specified percentage of the actual value of the property insured
at the time of the loss.
Coinsurance Clause
A provision in a hazard insurance policy that states the amount of
coverage that must be maintained - as a percentage of the total value of
the property - for the insured to collect the full amount of a loss.
Collateral
An asset (such as a car or a home) that guarantees the repayment of a
loan. The borrower risks losing the asset if the loan is not repaid
according to the terms of the loan contract.
Collection
The efforts used to bring a delinquent mortgage current and to file the
necessary notices to proceed with foreclosure when necessary.
Commercial Banks
Commercial banks, like thrifts, originate and service mortgage loans. In
some cases, commercial banks may have mortgage banking subsidiaries that
perform this function. Banks may choose to hold a loan in their own
portfolio or sell the loan to an investor.
Commission
The fee charged by a broker or agent for negotiating a real estate or
loan transaction. A commission is generally a percentage of the price of
the property or loan.
Commitment Letter
A formal offer by a lender stating the terms under which it agrees to
lend money to a homebuyer. Also known as a “loan commitment”.
Common Area Assessments
Levies against individual unit owners in a condominium or planned unit
development (PUD) project for additional capital to defray homeowners’
association costs and expenses and to repair, replace, maintain,
improve, or operate the common areas of the project.
Common Areas
Those portions of a building, land, and amenities owned (or managed) by
a planned unit development (PUD) or condominium project’s homeowners’
association (or a cooperative project’s cooperative corporation) that
are used by all of the unit owners, who share in the common expenses of
their operation and maintenance. Common areas include swimming pools,
tennis courts, and other recreational facilities, as well as common
corridors of buildings, parking areas, means of ingress and egress, etc.
Common Law
An unwritten body of law based on general custom in England and used to
an extent in the United States.
Community Land Trust Mortgage Option
An alternative financing option that enables low- and moderate-income
home buyers to purchase housing that has been improved by a nonprofit
Community Land Trust and to lease the land on which the property stands.
Community Property
In some western and southwestern states, a form of ownership under which
property acquired during a marriage is presumed to be owned jointly
unless acquired as separate property of either spouse.
Community Seconds
An alternative financing option for low- and moderate-income households
under which 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 organization.
Payment on the second mortgage is often deferred and carries a very low
interest rate (or no interest rate at all). Part of the debt may be
forgiven incrementally for each year the buyer remains in the home.
Comparables
An abbreviation for “comparable properties”; used for comparative
purposes in the appraisal process. Comparables are properties like the
property under consideration; they have reasonably the same size,
location, and amenities and have recently been sold. Comparables help
the appraiser determine the approximate fair market value of the subject
property.
Compound Interest
Interest paid on the original principal balance and on the accrued and
unpaid interest.
Condemnation
The determination that a building is not fit for use or is dangerous and
must be destroyed; the taking of private property for a public purpose
through an exercise of the right of eminent domain.
Condition of the Home
Potential homeowners should know of major problems in a home before they
make an offer. As a potential buyer, you should carefully examine all
elements of the home. Ask questions to the seller and the real estate
sales professional about any concerns you may have. Both the seller and
the real estate agent can be held liable if they do not disclose any
defects they know about in the home.
Condominium
A real estate project in which each unit owner has title to a unit in a
building, an undivided interest in the common areas of the project, and
sometimes the exclusive use of certain limited common areas.
Condominium Conversion
Changing the ownership of an existing building (usually a rental
project) to the condominium form of ownership.
Condominium Hotel
A condominium project that has rental or registration desks, short-term
occupancy, food and telephone services, and daily cleaning services and
that is operated as a commercial hotel even though the units are
individually owned.
Construction Contract
The terms and conditions of any major renovation job should be part of a
formal, legally binding contract between you and your contractor - this
is called the construction contract. The lender you choose will likely
want to review this contract before you sign it.
Construction Loan
A short-term, interim loan for financing the cost of construction. The
lender makes payments to the builder at periodic intervals as the work
progresses.
Contingencies for Repairs
In your purchase offer, you may consider stating that the seller must
make sure the electrical systems, heating and cooling, plumbing, and
mechanical systems are functioning properly at the closing. You may also
state that your purchase is contingent upon the satisfactory completion
of a professional home inspection, which will check these systems and
other elements more completely. These are both ways to ensure that
surprises don’t arise when your moving day arrives.
If you do not include this clause in your contract, you are essentially
accepting the house “as is.”
Contingency
A condition that must be met before a contract is legally binding. For
example, home purchasers often include a contingency that specifies that
the contract is not binding until the purchaser obtains a satisfactory
home inspection report from a qualified home inspector.
Contingency for Clear Title
Your purchase contract should include a contingency that the purchase is
subject to your receiving clear title to the property. This process
includes a title search and title insurance.
Contingency for Financing
When you make a formal offer on a house, your contract should include a
financing contingency. It specifies if you don’t get the money you need
to purchase the house at the terms you want, the offer is void and you
will be refunded your deposit.
Don’t be surprised if the seller includes a clause in the contract that
states you must make a “good faith effort” to get the mortgage. This is
the seller’s way to ensure that you explore all options to get a
mortgage loan.
Contingency for Personal Property
Your purchase contract should specify appliances, fixtures, and other
personal property that must remain in the home. You can avoid any
surprises by listing in your contract everything that is to be left
behind when the seller moves out.
Contingency Reserve
Most mortgages for purchase-renovation require an additional 10 percent
of the total cost of the project to be put aside into a reserve account.
This contingency reserve is only used when unforeseen repairs or
deficiencies are found during renovation.
Contract
An oral or written agreement to do or not to do a certain thing.
Contractor
A general contractor is a person who oversees a construction project and
handles aspects such as scheduling workers and ordering supplies.
Conventional Mortgage
A mortgage that is not insured or guaranteed by the federal government.
Contrast with government mortgage.
Convertibility Clause
A provision in some adjustable-rate mortgages (ARMs) that allows the
borrower to change the ARM to a fixed-rate mortgage at specified
timeframes after loan origination.
Convertible ARM
An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate
mortgage under specified conditions.
Cooperative (co-op)
A type of multiple ownership in which the residents of a multiunit
housing complex own shares in the cooperative corporation that owns the
property, giving each resident the right to occupy a specific apartment
or unit.
Cooperative Corporation
A business trust entity that holds title to a cooperative project and
grants occupancy rights to particular apartments or units to
shareholders through proprietary leases or similar arrangements. A
business trust entity that holds title to a cooperative project and
grants occupancy rights to particular apartments or units to
shareholders through proprietary leases or similar arrangements.
Cooperative Mortgages
Mortgages related to a cooperative project. This usually refers to the
multifamily mortgage covering the entire project but occasionally
describes the share loans on the individual units.
Cooperative Project
A residential or mixed-use building wherein a corporation or trust holds
title to the property and sells shares of stock representing the value
of a single apartment unit to individuals who, in turn, receive a
proprietary lease as evidence of title.
Corporate Relocation
Arrangements under which an employer moves an employee to another area
as part of the employer’s normal course of business or under which it
transfers a substantial part or all of its operations and employees to
another area because it is relocating its headquarters or expanding its
office capacity.
Cost of Funds Index (COFI)
An index that is used to determine interest rate changes for certain
adjustable-rate mortgage (ARM) plans. It represents the weighted-average
cost of savings, borrowings, and advances of the 11th District members
of the Federal Home Loan Bank of San Francisco.
*See also “adjustable-rate mortgage (ARM)”.
Costs of Settling Into Your Home
When figuring out how much home you can afford, you need to account for
the costs associated with getting into your home.
These can include the cost for repairs that need to be made before you
can occupy your residence. There may also be the cost of purchasing
appliances, such as a washer and dryer, refrigerator, or stove.
The bottom line is you do not want to spend all your money on purchasing
the home and not have any left to pay these types of costs.
Covenant
A clause in a mortgage that obligates or restricts the borrower and
that, if violated, can result in foreclosure.
Credit
An agreement in which a borrower receives something of value in exchange
for a promise to repay the lender at a later date.
Credit Bureau
The three main credit reporting agencies, or credit bureaus, are
Equifax, Experian, and Trans Union. You can order a copy of your credit
report (a nominal fee may apply) via telephone at:
* Equifax:<PHONE_NUMBER>
* Trans Union:<PHONE_NUMBER>
* Experian:<PHONE_NUMBER>
Credit History
A record of an individual’s open and fully repaid debts. A credit
history helps a lender to determine whether a potential borrower has a
history of repaying debts in a timely manner.
Credit Life Insurance
A type of insurance often bought by mortgagors because it will pay off
the mortgage debt if the mortgagor dies while the policy is in force.
Credit Profile
There are several ways to ensure you have a good credit report and
credit score. One of the most effective is to manage your existing
credit in a positive way.
Ask your lender for suggestions about ways to control the amount of
money you owe. Or, you can choose a credit counselor from the list
provided on this site. Some lenders may view consumers as a greater risk
if they have used most or all of their available credit. Consumers who
are considered “overextended” may be viewed this way even if they have
made all their debt payments on time.
Missing a payment on a bill should be avoided, as should late payments
on any of your credit obligations. Experiencing a mortgage foreclosure,
filing for bankruptcy, or having your vehicle repossessed can also
affect your credit score and credit report, limiting your ability to get
new credit at a reasonable rate.
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 creditworthiness.
Credit Report Fee
The credit report fee covers the lender’s cost for ordering your credit
report from a credit bureau.
This report will verify some of the information you provided on your
loan application as well as additional information from the credit
agency’s files and from public records.
When a credit report is received, your lender will check it against your
application and look for any discrepancies. You may be asked to explain
information in your credit report.
Credit Reporting Agency
An organization that prepares reports that are used by lenders to
determine a potential borrower’s credit history. The agency obtains data
for these reports from a credit repository as well as from other
sources.
The three main credit reporting agencies, or credit bureaus, are
Equifax, Experian, and Trans Union. You can order a copy of your credit
report (a nominal fee may apply) via telephone at:
* Equifax:<PHONE_NUMBER>
* Trans Union:<PHONE_NUMBER>
* Experian:<PHONE_NUMBER>
Credit Repository
An organization that gathers, records, updates, and stores financial and
public records information about the payment records of individuals who
are being considered for credit.
Credit Scoring
Your credit score is based on all the information in your credit report.
This information is converted into a number - a credit score - that the
lender uses to determine whether you are likely to repay your loan in a
timely manner. The scores used in mortgage lending are typically in the
300 to 900 range. A general guide is that the higher your score the
better. But you should keep in mind that your credit score is just one
of several factors that will be used to evaluate your mortgage loan
application.
Credit Unions
A credit union is a financial institution that is owned and run by its
members. It is a nonprofit, cooperative institution that offers members
a place to save and borrow. A credit union often works by having its
members pool their funds so additional loans can be made to other
members.
Creditor
A person to whom money is owed.
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Debt
An amount owed to another. See installment loan and revolving liability.
Deed
The legal document conveying title to a property.
The deed is the document that transfers ownership from the seller to
you. Only the seller signs the deed at closing, and you’ll receive a
copy of it.
The closing agent will record the deed with you listed as the new
property owner. Your name and the names of any other buyers appear on
the deed, and it will be sent to you after it is recorded.
Deed of Trust
The document used in some states instead of a mortgage; title is
conveyed to a trustee.
In some states, a “deed of trust” is used instead of a mortgage. When
homeowners sign a deed of trust, they receive title to the property but
convey title to a neutral third party - called a trustee - until the
loan balance is paid in full.
Deed-in-Lieu
A deed given by a mortgagor to the mortgagee to satisfy a debt and avoid
foreclosure. Also called a “voluntary conveyance.”
Default
Failure to make mortgage payments on a timely basis or to comply with
other requirements of a mortgage.
Delinquency
Failure to make mortgage payments when mortgage payments are due.
Department of Veterans Affairs
An agency of the federal government that guarantees residential
mortgages made to eligible veterans of the military services. The
guarantee protects the lender against loss and thus encourages lenders
to make mortgages to veterans.
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.
The qualification guidelines for VA loans are more flexible than those
for either the Federal Housing Administration (FHA) or conventional
loans.
 To determine whether you are eligible, check with your nearest
VA regional office.
Deposit
A sum of money given to bind the sale of real estate, or a sum of money
given to ensure payment or an advance of funds in the processing of a
loan.
See earnest money deposit.
Depreciation
A decline in the value of property; the opposite of appreciation.
Detached Single-Family Home
The most traditional type of single-family home is one that is
“detached.” This type of home stands separate from any other housing
structure and serves as a place of residence for the occupants.
Direct Leveraging Loan Program
The Direct Leveraging Loan Program makes it easier and more economical
for rural residents to own a home through lower interest rates and no
down payment.
Under this program, the lender offers up to 50 percent of the mortgage
amount as a conventional 30-year, fixed-rate first mortgage and the
Rural Housing Service (RHS) offers the balance as a second mortgage at
an interest rate that is generally below market.
The RHS is part of the U.S. Department of Agriculture.
Discount points
Discount points are often used to describe a type of fee that lenders
charge. Discount points are additional funds you pay the lender at
closing to get a lower interest rate on your mortgage.
A point equals 1 percent of the loan amount. So, if you and your lender
agree to a mortgage of $100,000, one point would equal $1,000.
Typically, each point you pay for a 30-year loan lowers your interest
rate by .125 of a percentage point. If the current interest rate on a
30-year mortgage is 7.75 percent, paying one point would lower the
interest rate to 7.625.
Ask your lender if you have the option of paying 1, 2, or 3 discount
points - or you can choose not to pay any discount points. It often
makes more sense to pay discount points if you plan to stay in your home
for a long time.
Dower
The rights of a widow in the property of her husband at his death.
Down Payment
The part of the purchase price of a property that the buyer pays in cash
and does not finance with a mortgage.
Saving for a down payment is usually one of the most difficult parts of
preparing to buy a home. If you believe you have the needed funds, you
are in a better position to seek pre-qualification from a lender to get
the mortgage that is right for you.
Most homeowners rely on a mortgage from a financial institution, and
most mortgage products require buyers to include a portion of their own
funds towards the purchase of the home. This is called the down payment.
Lenders feel more secure when buyers include a down payment, indicating
they are less likely to walk away from their investment if their
finances take a downturn.
Historically, buyers usually made a down payment that totaled 20 percent
of the home’s purchase price. Under this scenario, a down payment for a
$100,000 home is $20,000. But today, new mortgage products allow buyers
to put down as little as 3 percent to 5 percent, provided private
mortgage insurance is obtained. The down payment for a $100,000 home
with 5 percent down payment is just $5,000.
Sources for down payments may come from buyers’ savings accounts,
checking accounts, stocks and bonds, life insurance policies, and gifts.
Due-on-sale Provision
A provision in a mortgage that allows the lender to demand repayment in
full if the borrower sells the property that serves as security for the
mortgage.
Due-on-transfer Provision
This terminology is usually used for second mortgages.
*See also “due-on-sale provision”.
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Earnest Money Deposit
A deposit made by the potential home buyer to show that he or she is
serious about buying the house.
The earnest money deposit is a “good-faith” payment you submit with your
offer on a home to show the seller you are serious about proceeding.
The earnest money is deposited in an escrow account and will be applied
to your closing costs.
Sometimes, your lender will want you to bring a receipt for the earnest
money deposit along with your sales contract to the initial loan
application meeting.
Easement
A right of way giving persons other than the owner access to or over a
property.
Effective Age
An appraiser’s estimate of the physical condition of a building. The
actual age of a building may be shorter or longer than its effective
age.
Effective Gross Income
Normal annual income including overtime that is regular or guaranteed.
The income may be from more than one source. Salary is generally the
principal source, but other income may qualify if it is significant and
stable.
Eminent Domain
The right of a government to take private property for public use upon
payment of its fair market value. Eminent domain is the basis for
condemnation proceedings.
Encroachment
An improvement that intrudes illegally on another’s property.
Encumbrance
Anything that affects or limits the fee simple title to a property, such
as mortgages, leases, easements, or restrictions.
Endorser
A person who signs ownership interest over to another party. Contrast
with co-maker.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit
equally available without discrimination based on race, color, religion,
national origin, age, sex, marital status, or receipt of income from
public assistance programs.
Equity
A homeowner’s financial interest in a property. Equity is the difference
between the fair market value of the property and the amount still owed
on its mortgage.
A lender determines how much equity you have in your home by taking the
appraised value of the home and subtracting any mortgage debt.
For example, if your house is valued at $150,000 and your mortgage
balance is $80,000, you have $70,000 equity in the house.
Errors in Credit Report
Your credit report may contain inaccuracies. The best way to ensure
there are no errors in your credit report is to request copies and
review the information.
Since each of the main credit bureaus keeps its own records, you may
want to request copies from all three: Trans Union, Equifax, and
Experian.
If you have been turned down for credit because of the information in
your credit report, you are entitled to receive a free copy of your
report within 60 days of the denial. If you haven’t been denied credit,
you can still request a copy of your credit report, usually for a
nominal fee.
If you find errors in your report, follow the directions in the credit
report and contact the agencies to have the errors corrected. They will
investigate the targeted items and remove incorrect information.
You don’t have to delay applying for a mortgage while errors in your
report are being corrected. Explain the discrepancies in the report to
your lender and state that the credit agency is correcting them.
Escrow
An item of value, money, or documents deposited with a third party to be
delivered upon the fulfillment of a condition. For example, the deposit
by a borrower with the lender of funds to pay taxes and insurance
premiums when they become due, or the deposit of funds or documents with
an attorney or escrow agent to be disbursed upon the closing of a sale
of real estate.
Escrow Account
The account in which a mortgage servicer holds the borrower’s escrow
payments prior to paying property expenses.
An escrow account is money that is deposited with a third party -
outside the buyer and the seller - to be used to pay various fees. A
borrower typically provides funds that will pay taxes, mortgage
insurance, lease payments, hazard insurance premiums, and other payments
when they are due.
An escrow payment by the holder of a mortgage is also known as
“impounds” or “reserves” in some states.
When escrow funds are used to pay taxes, hazard insurance, and other
fees, it is called an escrow disbursement. Periodically, an escrow
analysis will be performed to determine if current monthly deposits
provide sufficient funds to pay bills when they are due.
Escrow Analysis
The periodic examination of escrow accounts to determine if current
monthly deposits will provide sufficient funds to pay taxes, insurance,
and other bills when due.
Escrow Collections
Funds collected by the servicer and set aside in an escrow account to
pay the borrower’s property taxes, mortgage insurance, and hazard
insurance.
Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance,
mortgage insurance, and other property expenses as they become due.
Escrow Payment
The portion of a mortgagor’s monthly payment that is held by the
servicer to pay for taxes, hazard insurance, mortgage insurance, lease
payments, and other items as they become due. Known as “impounds” or
“reserves” in some states.
Establishing a Credit Report
It is possible to establish a credit history even if you do not have a
traditional credit record that shows credit card payments or payments on
a student or car loan.
You can build a nontraditional credit history, for example, by
documenting your monthly payments to previous and current landlords; to
utility companies for your gas, water and telephone services; and to
insurance companies for medical, life, and automobile coverage.
Your lender can provide further details on how you can effectively
establish a credit record.
Estate
The ownership interest of an individual in real property. The sum total
of all the real property and personal property owned by an individual at
time of death.
Eviction
The lawful expulsion of an occupant from real property.
Examination of Title
The report on the title of a property from the public records or an
abstract of the title.
Exclusive Listing
A written contract that gives a licensed real estate agent the exclusive
right to sell a property for a specified time, but reserving the owner’s
right to sell the property alone without the payment of a commission.
Executor
A person named in a will to administer an estate. The court will appoint
an administrator if no executor is named. “Executrix” is the feminine
form.
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Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer
credit reports by consumer/credit reporting agencies and establishes
procedures for correcting mistakes on one’s credit record.
Fair Market Value
The highest price that a buyer, willing but not compelled to buy, would
pay, and the lowest a seller, willing but not compelled to sell, would
accept.
Fannie Mae (FNMA)
A New York Stock Exchange company and the largest non-bank financial
services company in the world. It operates pursuant to a federal charter
and is the nation’s largest source of financing for home mortgages.
Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development (HUD).
Its main activity is the insuring of residential mortgage loans made by
private lenders. The FHA sets standards for construction and
underwriting but does not lend money or plan or construct housing.
Fee Simple
The greatest possible interest a person can have in real estate.
Fee simple ownership provides the owner with unrestricted powers to
dispose of the owned property as the owner sees fit. Of all types of
ownership a person can have in real estate, fee simple provides the
greatest amount of personal control.
Fee Simple Estate
An unconditional, unlimited estate of inheritance that represents the
greatest estate and most extensive interest in land that can be enjoyed.
It is of perpetual duration. When the real estate is in a condominium
project, the unit owner is the exclusive owner only of the air space
within his or her portion of the building (the unit) and is an owner in
common with respect to the land and other common portions of the
property.
FHA Coinsured Mortgage
A mortgage (under FHA Section 244) for which the Federal Housing
Administration (FHA) and the originating lender share the risk of loss
in the event of the mortgagor’s default.
FHA Loans
With FHA insurance, you can purchase a home with a low down payment from
3 percent to 5 percent of the FHA appraised value or the purchase price,
whichever is lower.
FHA mortgages have a maximum loan limit that varies depending on the
average cost of housing in a given region. In general, the loan limit is
less than what is available with a conventional mortgage through a
lender.
FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA).
Also known as a government mortgage.
With FHA insurance, you can purchase a home with a low down payment from
3 percent to 5 percent of the FHA appraised value or the purchase price,
whichever is lower.
FHA mortgages have a maximum loan limit that varies depending on the
average cost of housing in a given region. In general, the loan limit is
less than what is available with a mortgage through a lender.
Final Walk-Through Inspection
Your sales contract should include a clause that allows you to examine
the property you want to purchase within the 24 hours before closing.
This walk-through, during which you will be accompanied by the real
estate sales professional, is your chance to ensure that the seller has
vacated the house and left behind whatever property was agreed upon.
Make sure to check that all lights, appliances, and plumbing fixtures
are in working order.
You will also want to make sure that all conditions of the sales
contract have been met. If they aren’t, or you observe major problems,
you have the right to delay the closing until the problems are
corrected.
One other option is to make sure money to correct the problems is placed
in an escrow account at closing to cover the cost of repairs.
Financial Index
An index is a number to which the interest rate on an adjustable rate
mortgage (ARM) is tied. It is generally a published number expressed as
a percentage, such as the average interest rate or yield on U.S.
Treasury bills. A margin is added to the index to determine the interest
rate that will be charged on ARMs. This interest rate is subject to any
caps associated with the mortgage.
The interest rate changes on an ARM are tied to some type of financial
index. Some of the most common type of indexed ARMs are:
- Treasury-Indexed ARMs
- CD-Indexed ARMs (Certificate of Deposit)
- Cost of Funds-Indexed ARMs (COFI)
- LIBOR-Based ARMs
When comparing ARMs, look at how the index to which it is tied has
performed recently. Your lender can provide information on how to track
the index and a history of the index they use.
Finders Fee
A fee or commission paid to a mortgage broker for finding a mortgage
loan for a prospective borrower.
Firm Commitment
A lender’s agreement to make a loan to a specific borrower on a specific
property.
First Mortgage
A mortgage that is the primary lien against a property.
A “first mortgage” is the primary lien against a property. The term is
usually coined “first mortgage” only when a “second mortgage” is
obtained on a property. A “second mortgage” is a lien that is
subordinate to the first mortgage. Usually, the interest rates on second
mortgages are slightly higher than the interest rates on a first
mortgage. The amount of a second mortgage you can take out will depend
on the equity you have built up in your home, the appraised value of
your property, your credit history, and any other liens you may have
against your property, such as a home equity line of credit.
Borrowers will typically get a second mortgage to tap into the equity
they’ve built in their home - and use that for home improvements, debt
consolidation, medical bills, or other purposes. You apply for a second
mortgage with the same process you follow for a first mortgage. However,
some of your closing costs may be less.
When you have a first and second mortgage, you theoretically have two
loans, both requiring interest and principal payments.
Fixed Installment
The monthly payment due on a mortgage loan. The fixed installment
includes payment of both principal and interest.
Fixed-Period Adjustable-Rate Mortgages
This type of adjustable-rate mortgage (ARM) maintains the same initial
interest rate for the first three, five, seven, or 10 years of your
loan, depending on the term you choose. Your interest rate then adjusts
annually, and can move up or down as market conditions change. Be sure
to ask your lender about the interest rate caps for both the annual
adjustments and for the life of the loan.
Advantages:
- Your initial interest rate will be lower than a fixed-rate mortgage, so
you may be able to afford more home.
- You are protected against interest rate increases for the first three,
five, seven, or 10 years of the loan, depending on which type of
fixed-period ARM you choose.
- You may have the option to convert your ARM to a fixed-rate mortgage at
the first, second, or third interest rate adjustment dates.
- You have time to improve your financial position (i.e. salary increases)
or accumulate additional assets before the interest rate adjusts at the
end of the fixed period.
Details:
- The lifetime interest rate cap for fixed-period ARMs is typically 5 to 6
percentage points above your initial rate. Your annual cap during the
adjustable period is typically 1 to 2 percentage points above or below
over the current rate.
- Can be used 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.)
Fixed-Rate Mortgage
A mortgage in which the interest rate does not change during the entire
term of the loan.
Fixed-rate mortgages, the most popular type of mortgage, offer the peace
of mind that your interest rate will remain the same for as long as you
have your loan. If you expect to live in your home for many years,
having the same interest rate may be your key concern. If you decide
that you like the stable, predictable payments of a fixed-rate loan, you
have the option of choosing from a variety of repayment terms: 15, 20,
and 30 years are the most common. Typically, the longer the term of the
mortgage, the more interest you pay over the life of your loan. However,
stretching out your repayment term means your monthly mortgage payments
will be less than they would be with a comparable shorter-term mortgage.
Lenders offer a wide array of fixed-rate mortgages:
- Balloon Mortgages
- Biweekly Mortgages
Fixture
Personal property that becomes real property when attached in a
permanent manner to real estate.
Flood Insurance
Insurance that compensates for physical property damage resulting from
flooding. It is required for properties located in federally designated
flood areas.
Foreclosure
The legal process by which a borrower in default under a mortgage is
deprived of his or her interest in the mortgaged property. This usually
involves a forced sale of the property at public auction with the
proceeds of the sale being applied to the mortgage debt.
If you repeatedly do not make your mortgage payments on time, your
lender could sell your home and evict you from it in a legal procedure
called foreclosure. A foreclosure on your property can result in the
loss of your home and your good credit rating. Foreclosure is most often
a last resort effort that lenders will take if you repeatedly don’t make
your mortgage payments. Before going to foreclosure, lenders will work
with you if you are facing financial hardships to come up with repayment
plans that will let you get back on track and remain in your home.
Forfeiture
The loss of money, property, rights, or privileges due to a breach of
legal obligation.
FSBO (For Sale by Owner)
For Sale By Owner, or FSBO, is the process of marketing, buying and
selling of real estate without the representation of a real estate
broker. FSBO can refer to both the individual selling the property “They
are a FSBO,” or the property itself “that house is a FSBO.”
Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is
sufficient to amortize the remaining balance, at the interest accrual
rate, over the amortization term.
G
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General Contractor
A general contractor is someone whom you may work closely with during
your home improvement project. The general contractor is the person who
oversees the construction project and handles various aspects such as
scheduling workers and ordering supplies.
If you are borrowing mortgage funds to renovate a home, your lender may
need to review whether your contractor meets all federal, state, and
local registration, licensing and certification standards.
Good Faith Estimate
The good-faith estimate is a report from your lender that outlines the
costs you will incur to get your mortgage. It is based on the lender’s
typical loan origination costs for the area where your home is located.
The estimate usually changes between application and closing, so you’ll
want to review your settlement form before the closing meeting.
The settlement form will list the actual amount of money you’ll need to
bring to closing. You’ll need to pay your closing costs in the form of a
certified or cashier’s check because personal checks usually are not
accepted.
Government Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA)
or guaranteed by the Department of Veterans Affairs (VA) or the Rural
Housing Service (RHS). Contrast with conventional mortage.
Government National Mortgage Association
A government-owned corporation within the U.S. Department of Housing and
Urban Development (HUD). Created by Congress on September 1, 1968, GNMA
assumed responsibility for the special assistance loan program formerly
administered by Fannie Mae. Popularly known as Ginnie Mae.
Grantee
The person to whom an interest in real property is conveyed.
Grantor
The person conveying an interest in real property.
Ground Rent
The amount of money that is paid for the use of land when title to a
property is held as a leasehold estate rather than as a fee simple
estate.
Group Home
A single-family residential structure designed or adapted for occupancy
by unrelated developmentally disabled persons. The structure provides
long-term housing and support services that are residential in nature.
Growing-Equity Mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment increases over an
established period of time, with the increased amount of the monthly
payment applied directly toward reducing the remaining balance of the
mortgage.
Guarantee Mortgage
A mortgage that is guaranteed by a third party.
Guaranteed Loan
Also known as a government mortgage.
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Hazard Insurance
Insurance coverage that in the event of physical damage to a property
from fire, wind, vandalism, or other hazards.
Home Equity Conversion Mortgage (HECM)
A special type of mortgage that enables older home owners to convert the
equity they have in their homes into cash, using a variety of payment
options to address their specific financial needs. Unlike traditional
home equity loans, a borrower does not qualify on the basis of income
but on the value of his or her home. In addition, the loan does not have
to be repaid until the borrower no longer occupies the property.
Sometimes called a reverse mortgage.
A Home Equity Conversion Mortgage (HECM) is a type of home loan that
lets homeowners aged 62 or over with little or no remaining balance on
their mortgage convert their equity into cash. The equity can be paid to
the homeowner in a lump sum, in a stream of payments, draws from a line
of credit, or a combination of monthly payments and line of credit.
Whatever payment plan you select, you do not have to repay any part of
this reverse mortgage until you sell the home or vacate it for another
reason. At that time, you pay the loan balance, plus any accrued
interest. Any proceeds above that amount go to you or to your estate.
Developed by the Federal Housing Administration (FHA), the HECM mortgage
provides a cash growth feature not found with some other reverse
mortgages - check with your Fannie Mae approved lender to see how this
works based on your personal needs and your payment plan.

- There are no monthly payments with a HECM.
- Your loan funds do not affect Social Security or Medicare benefits. (If
you receive Supplemental Social Security or Medicaid, these benefits may
be affected.)
- You do not have to pay back the loan until you sell your home or no
longer use it for your primary residence. Then, you or your estate will
repay the cash you received from the HECM, plus interest and other
finance charges to the lender. This means that the remaining equity in
your home can be passed on to your heirs through the sale of the
property.
- You will never owe more than the value of the home at the time of
repayment, even if the loan balance exceeds the value of your property.
This means no debt will ever be passed along to the estate or your
heirs.
Details:
- You and any co-borrowers must be at least 62 years old.
- You must own your home outright - or carry a small mortgage balance.
- Eligible properties include a single-family home, a two- to four-unit
dwelling, a condominium or a manufactured home. All housing types must
meet Federal Housing Administration (FHA) guidelines. (Ask your lender
if your property qualifies.)
- Your home must be your principal residence, which means you must live in
it more than half the year.
- You must attend pre-application mortgage counseling before you apply for
the loan.
- You must keep applicable taxes current, as well as maintain insurance
coverage on your home.
- The amount you can borrow with a HECM depends on the age of the youngest
borrower(s), the interest rate, how much your house is worth, and the
maximum claim amount. In general, you can get between one-third and
one-half of your equity as a line of credit or as a lump sum payment.
- The balance of funds advanced against the equity in your home is due and
payable when you relinquish your home as a primary residence, or if the
borrower(s) pass away.
Home Equity Line of Credit
A mortgage loan, which is usually in a subordinate position, that allows
the borrower to obtain multiple advances of the loan proceeds at his or
her own discretion, up to an amount that represents a specified
percentage of the borrower’s equity in a property.
Home Inspection
A thorough inspection that evaluates the structural and mechanical
condition of a property. A satisfactory home inspection is often
included as a contingency by the purchaser. Contrast with appraisal.
The home inspection reviews the structural and mechanical condition of
the property. This is not an evaluation of the market value of the home
or a determination of whether the home complies with applicable building
and safety codes. The inspection does not include a recommendation on
whether you should or should not buy the house.
The inspector bases the findings on observable structural elements of
the home. Potential home buyers are urged to be present during the
inspection - this will allow you to ask questions and be in a better
position to learn more about any problems that arise.
You should expect to see an evaluation of:
- roof and siding,
- windows and doors,
- foundation,
- insulation,
- ventilation,
- heating and cooling systems,
- plumbing and electrical systems,
- walls, floors, and ceilings,
- and any common areas if you are purchasing a condominium or cooperative.
You should view the home inspection report as a way to identify problems
before you buy the home, to help negotiate adjustments in the purchase
price if problems exist, and to help get the buyer to make any needed
improvements before you buy the home.
Lastly - and for some buyers most importantly - the home inspection
report is a way to make you feel confident that the home you are buying
includes systems that are in good working condition.
Homeowners Association
A nonprofit association that manages the common areas of a planned unit
development (PUD) or condominium project. In a condominium project, it
has no ownership interest in the common elements. In a PUD project, it
holds title to the common elements.
Homeowners Insurance
Homeowner’s insurance -- also called “hazard insurance” - should be
equal to at least the replacement cost of the property you want to
purchase. Replacement cost coverage ensures that your home will be fully
rebuilt in case of a total loss.
Most home buyers purchase a homeowner’s insurance policy that includes
personal liability insurance in case someone is injured on their
property; personal property coverage for loss and damage to personal
property due to theft or other events; and dwelling coverage to protect
the house against fire, theft, weather damage, and other hazards.
If the home you want to buy is located near water, you may be able to
get flood insurance as part of your homeowner’s protection. In fact, it
may be required in some areas, so check with your real estate
professional or an approved lender for further information.
Seek out and compare rates from several insurance companies before
making your final decision.
Lenders often want the first year’s premium to be paid at or before
closing. Your lender may add the insurance cost to your monthly mortgage
payments and keep this portion of your payments in an escrow account.
The lender then pays your insurance bill out of escrow when it receives
premium notices from your insurance company.
Homeowners Warranty
A type of insurance that covers repairs to specified parts of a house
for a specific period of time. It is provided by the builder or property
seller as a condition of the sale.
HomeStyle Construction-to-Permanent Mortgage
This mortgage gives you the financial power to build your own home - you
can borrow money to build a home from the ground up or to finish
building a home that’s currently under construction. This loan provides
financing from the construction through the purchase phases of your new
home.
Advantages:
- You enjoy peace of mind by locking in fixed interest rates on both the
construction and permanent mortgage financing phases of your home
purchase in one convenient loan.
- You can borrow a minimum of 95 percent of the construction cost or the
as-completed value of the property (which means your down payment can be
as low as 5 percent).
- You can use this mortgage to purchase land upon which you build your
home.
- You save money because there is one set of closing costs, compared to
those associated with separate loans for construction and occupancy.
- You pay interest only on the funds disbursed during construction.
- This mortgage can be used for construction that’s already under way.
Details:
- A minimum down payment of 5 percent for a one-unit home and 10 percent
for two-unit homes.
- Construction phases of six, nine, or 12 months, with extensions
available up to six months, are allowed.
- This loan is available for one- and two-unit owner-occupied homes,
one-unit second homes, and one-unit investor homes.
- You can choose a 15- or 30-year fixed-rate mortgage. You can also
include the construction phase in these terms, or not, depending on your
preference.
- You can also finance with fixed-period ARMs.
HomeStyle Mortgage Loan
A mortgage that enables eligible borrowers to obtain financing to
remodel, repair, and upgrade their existing homes or homes that they are
purchasing.
Housing Expense Ratio
The percentage of gross monthly income that goes toward paying housing
expenses.
HUD Median Income
Median family income for a particular county or metropolitan statistical
area (MSA), as estimated by the Department of Housing and Urban
Development (HUD).
HUD-1 Statement
A document that provides an itemized listing of the funds that are
payable at closing. Items that appear on the statement include real
estate commissions, loan fees, points, and initial escrow amounts. Each
item on the statement is represented by a separate number within a
standardized numbering system. The totals at the bottom of the HUD-1
statement define the seller’s net proceeds and the buyer’s net payment
at closing. The blank form for the statement is published by the
Department of Housing and Urban Development (HUD). The HUD-1 statement
is also known as the “closing statement” or “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, and
- 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.
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In-File Credit Report
An objective account, normally computer-generated, of credit and legal
information obtained from a credit repository.
Income Property
Real estate developed or improved to produce income.
Index
A number used to compute the interest rate for an adjustable-rate
mortgage (ARM). The index is generally a published number or percentage,
such as the average interest rate or yield on Treasury bills. A margin
is added to the index to determine the interest rate that will be
charged on the ARM. This interest rate is subject to any caps that are
associated with the mortgage.
Inflation
An increase in the amount of money or credit available in relation to
the amount of goods or services available, which causes an increase in
the general price level of goods and services. Over time, inflation
reduces the purchasing power of a dollar, making it worth less.
Initial Interest Rate
The original interest rate of the mortgage at the time of closing. This
rate changes for an adjustable-rate mortgage (ARM). Sometimes known as
“start rate” or “teaser.”
Installment
The regular periodic payment that a borrower agrees to make to a lender.
The regular periodic payment that a borrower agrees to make to a lender.
The installment is more often referred to as your monthly mortgage
payment.
Installments, or monthly payments, can be made either monthly or
biweekly, depending on your mortgage type. Your approved lender may also
offer additional payment plans tailored to fit your needs.
Installment Loan
Borrowed money that is repaid in equal payments, known as installments.
A furniture loan is often paid for as an installment loan.
Insurable Title
A property title that a title insurance company agrees to insure against
defects and disputes.
Insurance
A contract that provides compensation for specific losses in exchange
for a periodic payment. An individual contract is known as an insurance
policy, and the periodic payment is known as an insurance premium.
Insurance Binder
A document that states that insurance is temporarily in effect. Because
the coverage will expire by a specified date, a permanent policy must be
obtained before the expiration date.
Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA)
or by private mortgage insurance (MI). If the borrower defaults on the
loan, the insurer must pay the lender the lesser of the loss incurred or
the insured amount.
Interest
The fee charged for borrowing money.
Simply put, this is the fee that is charged for borrowing money from
lenders.
The interest rate is the rate of interest that is in effect when the
monthly payment is due. An interest rate ceiling - for an
adjustable-rate mortgage (ARM) - is the maximum interest rate, as
specified in the mortgage note; the interest rate floor is the minimum
interest rate, as specified in the mortgage note.
Interest Accrual Rate
The percentage rate at which interest accrues on the mortgage. In most
cases, it is also the rate used to calculate the monthly payments,
although it is not used for an adjustable-rate mortgage (ARM) with
payment change limitations.
Interest Rate
The rate of interest in effect for the monthly payment due.
Interest Rate Buydown Plan
An arrangement wherein the property seller (or any other party) deposits
money to an account so that it can be released each month to reduce the
mortgagor’s monthly payments during the early years of a mortgage.
During the specified period, the mortgagor’s effective interest rate is
“bought down” below the actual interest rate.
Interest Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as
specified in the mortgage note.
Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as
specified in the mortgage note.
Interest Rate for HECMs
The interest rate on a Home Equity Conversion Mortgage (HECM) adjusts
monthly or yearly. It is tied to the weekly average yield of U.S.
Treasury securities adjusted to a constant maturity of one year. The
interest charged on the HECM loan will be payable to your lender when
the loan terminates.
Interest First SM Mortgage
If you’re looking to leverage your mortgage to expand purchasing power,
this mortgage offers the benefit of a low, fixed-rate monthly payment.
Advantages:
- For the first 15 years, monthly payments are lower than a comparable
30-year fixed-rate loan.
- Gain control of your cash flow.
- Ideal if you plan to stay in your home no more than 15 years and want
the lowest monthly payment for that period.
- Flexible cash flow for college costs, home improvements, IRA
contributions, consumer debt reduction, or optional principal payments.
Details:
- For the first 15 years, you pay only the interest due every month.
- Any prepayments will reduce your principal balance and reduce future
monthly payments.
- Prepayment of principal may be made without penalty.
- Payment adjusts at the start of year 16 to cover all interest and
principal due on the loan for the remaining 15 years.
- Monthly payment is fixed during years 16 through 30.
Investment Property
A property that is not occupied by the owner.
IRA (Individual Retirement Account)
A retirement account that allows individuals to make tax-deferred
contributions to a personal retirement fund. Individuals can place IRA
funds in bank accounts or in other forms of investment such as stocks,
bonds, or mutual funds.
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Joint Tenancy
A form of co-ownership that gives each tenant equal interest and equal
rights in the property, including the right of survivorship.
Judgment
A decision made by a court of law. In judgments that require the
repayment of a debt, the court may place a lien against the debtor’s
real property as collateral for the judgment’s creditor.
Judgment Lien
A lien on the property of a debtor resulting from the decree of a court.
Judicial Foreclosure
A type of foreclosure proceeding used in some states that is handled as
a civil lawsuit and conducted entirely under the auspices of a court.
Jumbo Loan
A loan that exceeds mortgage amount limits. Also called a nonconforming
loan.
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Late Charge
The penalty a borrower must pay when a payment is made a stated number
of days (usually 15) after the due date.
Lease
A written agreement between the property owner and a tenant that
stipulates the conditions under which the tenant may possess the real
estate for a specified period of time and rent.
Lease-Purchase Option
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.
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.
Leasehold Estate
A way of holding title to a property wherein the mortgagor does not
actually own the property but rather has a recorded long-term lease on
it.
Legal Description
A property description, recognized by law, that is sufficient to locate
and identify the property without oral testimony.
Liabilities
A person’s financial obligations. Liabilities include long-term and
short-term debt, as well as any other amounts that are owed to others.
Liability Insurance
Insurance coverage that offers protection against claims alleging that a
property owner’s negligence or inappropriate action resulted in bodily
injury or property damage to another party.
LIBOR-based ARMs
The London Interbank Offered Rate (LIBOR) is based on the interest rate
that major international banks are willing to lend and borrow funds for
a specified period of time in the London interbank market. The LIBOR is
similar to the prime-lending rate posted by major U.S. banks.
You can select an adjustable rate mortgage (ARM) that adjusts to the
LIBOR at specified periods, usually every six months. This type of ARM
typically has a per-adjustment period cap of 1 percent and is offered
with either a 5 percent or a 6 percent lifetime rate cap.
Lien
A legal claim against a property that must be paid off when the property
is sold.
Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the
interest rate can increase or decrease over the life of the mortgage.
Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the
interest rate can increase or decrease over the life of the loan.
Line of Credit
An agreement by a commercial bank or other financial institution to
extend credit up to a certain amount for a certain time to a specified
borrower.
Liquid Asset
A cash asset or an asset that is easily converted into cash.
Lis Pendens
A publicly recorded notice of a pending lawsuit against a property owner
that may affect the ownership of a property. Some states require lenders
to file a lis pendens to begin the foreclosure process if a borrower is
in default on loan payments.
Loan
A sum of borrowed money (principal) that is generally repaid with
interest.
Loan Application
The loan application is a detailed form designed to provide information
from you that your lender will need. Lenders use the application to
evaluate whether or not they can give you a loan, and if so, the amount
of money they can lend you. The “four Cs” of credit come into play when
filling out an application -- they are capacity, credit history, capital
and collateral.
The loan application form requests information such as:
- bank account balances and account numbers, as well as bank branch
address;
- information about where you work or what sources of income you have;
- outstanding debts (including loans and credit cards with names and
addresses of creditors).
Information needed for the loan application may vary from lender to
lender, so prior to filling out the application it’s important to
discuss with your lender what items your lender will need.
Loan Commitment
The commitment letter states the dollar amount of the loan being
offered, the number of years you have to repay the loan, the loan
origination fee, the points, the annual percentage rate, and the monthly
charges.
The letter also states the time you have to accept the loan offer and to
close the loan. Make sure you understand all aspects of the commitment
letter because by signing it, you indicate your acceptance of its terms
and conditions.
Loan Limit
The limit on the size of a mortgage which Fannie Mae and Freddie Mac
will purchase and/or guarantee. The conforming loan limit is set
annually by Fannie Mae’s and Freddie Mac’s federal regulator, The Office
of Federal Housing Enterprise Oversight (OFHEO). OFHEO uses the October
to October percentage increase/decrease in the average house price in
the monthly interest rate survey of the Federal Housing Finance Board
(FHFB) to adjust the conforming loan limits for the subsequent year.
Mortgages which exceed the conforming loan limit are known as jumbo
mortgages. The interest rate on jumbo mortgages can be higher than the
interest rate on conforming mortgages. A borrower whose mortgage amount
slightly exceeds the conforming loan limit should analyze the economics
of reducing their loan size through a larger downpayment or possibly
using secondary financing to qualify for a conforming mortgage verses a
jumbo mortgage.
Loan Origination
The process by which a mortgage lender brings into existence a mortgage
secured by real property.
Loan Origination Fee
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.
Loan Terms and Conditions
With a reverse mortgage, a lender can call in your loan under certain
conditions. But, if you occupy the property as your primary residence,
are not absent from the property for 12 consecutive months.
You may instruct the lender to pay the taxes and insurance on your
behalf from your reverse mortgage funds. The lender will set aside funds
from your reverse mortgage to pay for future taxes and insurance, as
long as funds are available.
Furthermore, as long as you comply with the terms noted above, you can’t
be forced to sell your home to pay off the reverse mortgage, even if the
loan balance grows to exceed the value of your property.
Loan-to-Value (LTV) Percentage
The relationship between the principal balance of the mortgage and the
appraised value (or sales price if it is lower) of the property. For
example, a $100,000 home with an $80,000 mortgage has a LTV percentage
of 80 percent.
Lock-In
A written agreement in which the lender guarantees a specified interest
rate if a mortgage goes to closing within a set period of time. The
lock-in also usually specifies the number of points to be paid at
closing.
Lock-In Period
The time period during which the lender has guaranteed an interest rate
to a borrower.
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Manufactured Housing
Homes and dwellings that are not built at the home site and are moved to
the location are considered manufactured housing. 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. All
manufactured homes must be built to meet standards set forth by the U.S.
Department of Housing and Urban Development (HUD). The standards focus
on such aspects as design, strength, energy efficiency, and fire
resistance.
Manufactured housing represents one of the fastest-growing housing
markets in the United States. Nearly all of the mortgage products are
available for owners of manufactured housing.
Margin
For an adjustable-rate mortgage (ARM), the amount that is added to the
index to establish the interest rate on each adjustment date, subject to
any limitations on the interest rate change.
Market Value
You can get a good feel for the market value of a home by asking whether
the listing agent compiled a “comparative market analysis (CMA)”. This
written report on the property examines comparable homes in the area
that have recently been sold, are currently on the market, or are
currently under contract.
The CMA will help you figure out whether the asking price is in line
with other comparable houses in the neighborhood.
Master Association
A homeowners’ association in a large condominium or planned unit
development (PUD) project that is made up of representatives from
associations covering specific areas within the project.
Maturity
The date on which the principal balance of a loan, bond, or other
financial instrument becomes due and payable.
Maximum Claim Amount
Your maximum claim amount is the lesser of two figures:
- Your home’s appraised value.
- HUD 203(b) limit.
The HUD 203(b) limit is the maximum loan amount that FHA will insure for
residences in your geographical area. Check with your lender to get the
latest figures for your area.
Maximum Financing
A mortgage amount that is within 5 percent of the highest loan-to-value
(LTV) percentage allowed for a specific product. Thus, maximum financing
on a fixed-rate mortgage would be 90 percent or higher, because 95
percent is the maximum allowable LTV percentage for that product.
Merged Credit Report
A credit report that contains information from three credit
repositories. When the report is created, the information is compared
for duplicate entries. Any duplicates are combined to provide a summary
of a your credit.
Modification
The act of changing any of the terms of the mortgage.
Money Market Account
A savings account that provides bank depositors with many of the
advantages of a money market fund. Certain regulatory restrictions apply
to the withdrawal of funds from a money market account.
Money Market Fund
A mutual fund that allows individuals to participate in managed
investments in short-term debt securities, such as certificates of
deposit and Treasury bills.
Monthly Fixed Installment
That portion of the total monthly payment that is applied toward
principal and interest. When a mortgage negatively amortizes, the
monthly fixed installment does not include any amount for principal
reduction.
Monthly Payment Mortgage
A mortgage that requires payments to reduce the debt once a month.
Your monthly mortgage payment is composed of four components.
- 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 mortgage and hazard insurance.
All four of these elements are often referred to as PITI.
Your monthly mortgage payment due may be mailed to you in a book of
coupons each year, or in a separate coupon every month.
Ask your lender if the automated underwriting system is used, which may
reduce costs associated with your mortgage.
Mortgage
A legal document that pledges a property to the lender as security for
payment of a debt.
Simply put, the mortgage is the legal document that gives the lender a
legal claim against your house should you default on your loan payments.
The mortgage indicates that a specific amount of money will be loaned at
a specific interest rate so that you can buy your home. Another way of
thinking of the mortgage is that you have possession of the property but
the lender has ownership until you have repaid your loan.
The items stated in the mortgage include the homeowner’s responsibility
to:
- pay principal
- pay interest
- pay taxes
- pay insurance on time
- pay to maintain hazard insurance on the property
- adequately maintain the property
The mortgage also includes the basic information found in the note.
Should you consistently fail to meet these requirements, your lender can
seek full repayment of the balance of the loan, foreclose on the
property, or sell the property and use the proceeds to pay off the loan
balance and foreclosure costs.
A deed of trust is used instead of a mortgage in some states.
Mortgage Banker
A company that originates mortgages exclusively for resale in the
secondary mortgage market.
Mortgage companies originate and service mortgages. In other words, they
make loans to consumers. Mortgage companies then typically sell these
loans to other lenders and investors.
Some mortgage companies may be subsidiaries of depository institutions
or their holding companies but do not receive money from individual
depositors.
Mortgage Broker
An individual or company that brings borrowers and lenders together for
the purpose of loan origination. Mortgage brokers typically require a
fee or a commission for their services.
The National Association of Mortgage Brokers defines a mortgage broker
as “an independent real estate financing professional who specializes in
the origination of residential and/or commercial mortgages.”
There are an estimated 20,000 mortgage brokerage operations from coast
to coast. They originate more than half of the residential loans in the
U.S.
A mortgage broker has professional expertise that can assist mortgage
seekers in finding the best loan for them. The mortgage broker is also
experienced in offering many applicable financing options for a
consumer’s specific needs.
Mortgage Insurance
A contract that insures the lender against loss caused by a mortgagor’s
default on a government mortgage or conventional mortgage. Mortgage
insurance can be issued by a private company or by a government agency
such as the Federal Housing Administration (FHA). Depending on the type
of mortgage insurance, the insurance may cover a percentage of or
virtually all of the mortgage loan.
Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either to a
government agency such as the Federal Housing Administration (FHA) or to
a private mortgage insurance (MI) company.
Mortgage Life Insurance
A type of term life insurance often bought by mortgagors. The amount of
coverage decreases as the principal balance declines. In the event that
the borrower dies while the policy is in force, the debt is
automatically satisfied by insurance proceeds.
Mortgage-Related Closing Costs
Mortgage-related closing costs generally are costs associated with your
loan application. They vary, but here are some of the most common ones:
- Loan origination fee: This fee covers the administrative costs of
processing the loan. It may be expressed as a percentage of the loan
(for example, 1 percent of the mortgage amount).
- Loan discount points: These points are additional funds you pay the
lender at closing to get a lower interest rate on your mortgage.
Typically, each point you pay for a 30-year loan lowers your interest
rate by .125 of a percentage point. If the current interest rate on a
no-point, 30-year mortgage is 7.75 percent, paying one point would lower
the interest rate to 7.625. Each point is one percent of the mortgage
(for example, if your mortgage is $200,000, one point equals $2,000).
- Appraisal fee: This fee pays for the appraisal, which the lender uses to
determine whether the value of the property secures the loan should you
default. The home buyer usually pays this fee. It may appear on the
settlement form as “POC,” or “paid outside closing.”
- Credit report fee: This covers the cost of the credit report, which the
lender uses to determine your creditworthiness.
- Assumption fee: This fee is charged if you take over the payments on the
seller’s existing loan. It may range from hundreds of dollars to one
percent of the loan amount.
- Prepaid interest: You are charged interest when you borrow money from a
lender, and you will pay interest on the mortgage amount from the date
of settlement to the beginning of the period covered by the first
monthly mortgage payment. At closing, you may be required to pay in
advance the interest for the period.
- Escrow accounts: Also called reserves, these accounts are required if
your lender will be paying your homeowner’s insurance and property
taxes. Your lender sets up the escrow account by adding the cost of the
insurance and taxes to your monthly mortgage payments. It is kept in
reserve until the bills are due. The bills are sent directly to your
lender, who makes the payments for you.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage agreement.
Multidwelling Units
Properties that provide separate housing units for more than one family,
although they secure only a single mortgage.
Multifamily Mortgage
A residential mortgage on a dwelling that is designed to house more than
four families, such as a high-rise apartment complex.
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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.
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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.
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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.
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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.
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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