Home Buying Terms
When beginning the home buying process there are a number of terms you want to familiarize yourself with. Review the list to ensure you have a basic understanding of what they mean.
Closing costs: All settlement or transaction charges (above and beyond the actual cost of the property) that home buyers (or sellers, depending on tradition in your area and what you negotiate with the seller) need to pay at the close of escrow when the property is transferred. These typically include lender’s fees and points or prepaid interest, a prorated share of the property taxes, transfer taxes, credit check fees, homeowners’ and title insurance premiums, deed filing fees, real estate agent commissions, inspection and appraisal fees, and attorneys’ fees. Some closing costs are tax-deductible.
Closing Disclosure (CD): A document which sets forth an itemized listing of whatever costs must be paid at closing, such as real estate commissions, loan fees, points, and initial escrow amounts. It’s also known as the “closing statement” or “settlement sheet.”
Conditions: is additional documentation your lender will require, even after your loan has been approved.
Counteroffer: The rejection of an offer to enter into a contract, where the rejecting party includes a different offer that changes the terms of the original offer in some way. For example, if you offer $350,000 for a house, and the seller replies that he wants $375,000, the seller has rejected your offer and has made a counteroffer. The legal significance of a counteroffer is that it completely voids the original offer.
Debt-to-Income Ratio: The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (conventional loans). See housing expenses-to-income ratio.
Deed of trust: In many states, this document is used in place of a mortgage to secure the payment of a note.
Down payment: The amount of money to be paid by the purchaser to the seller upon signing of the agreement of sale. The agreement of sale will refer to the down payment amount and will acknowledge receipt of the down payment. Down payment is the difference between the required amount down and the sales price.
Down payment assistance: is assistance from a government or non-profit agency to assist first time and some current homeowners with covering their funds needed for their down payment. If money is leftover the remaining funds are rolled over to cover closing costs.
Earnest Money: A partial payment (deposit) demonstrating commitment in a contractual relationship, and commonly made in real estate transactions at the time of making the purchase offer. The remainder of the payment is due on the closing date. The seller keeps the earnest money if the buyer fails to make timely payment in full (or if there is a similar breach of the agreement).
Escrow: The holding of funds or documents by a neutral third party prior to closing your home sale.
Escrow officer: A person (often an attorney) or a company that handles escrow arrangements for a fee usually paid as part of the closing costs. Also, sometimes called a title agent.
Execution date: the date the sales contract was signed by the last party, which is usually the sellers. This date also serves as the effective date of the contract.
FHA loan: a loan insured by the Federal Housing Administration, open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately priced homes almost anywhere in the country.
FHA mortgage insurance (MI): a way of insuring an FHA loan, this insurance requires a small fee (up to 3.8 percent of the loan amount) paid at closing, or a portion of this fee added to each monthly payment of an FHA loan.
Fixed interest rate: A mortgage loan that has an interest rate that remains constant throughout the life of the loan, usually 15 or 30 years.
Front-end ratio: Your prospective monthly mortgage payments divided by your gross monthly income. This comes out to a percentage, and a lender uses this percentage to get an idea of how much of your income will be going to pay your loan. If they like the number (say, below 29%) then they will be more inclined to sell you the loan.
Funds to close: the remaining balance due from the borrower needed to cover any fees associated with the loan. The borrower must provide a recent account statement documenting sufficient funds to close the loan transaction.
Hazard insurance: A type of insurance found in homeowners’ policies, which protects against physical damage to the property caused by unexpected and sudden events such as fires, storms, and vandalism. Your mortgage lender will no doubt require you to purchase hazard insurance, in order to protect its collateral from decreases in value.
Homeowner Association: An organization made up of neighbors concerned with managing the common areas of a subdivision or condominium complex. These associations collect monthly dues and take on issues such as garden, pool, and fence maintenance, noise abatement, snow removal, parking area upkeep, repairs, and dues. The homeowners’ association is also responsible for enforcing any covenants, conditions, and restrictions (CC&Rs) that apply to the property.
Homeowner Association transfer fee: are fees charged to cover the expenses and paperwork associated with the transfer and setup of ownership from the seller to the buyer. An HOA transfer fee is customary and is just part of doing business
Home inspector: A person who visually inspects a home to tell you if something is not working properly, or is unsafe. He or she will also tell you if repairs are needed, and maybe even where there were problems in the past.
Home Warranty: A warranty which will cover repairs to specified parts of a house for a specific period of time. It is provided by the seller (or, if the place is new, the builder) as a condition of the sale.
Impound: That portion of a borrower’s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
Home inspection: A complete and thorough inspection of the physical condition of a property, including all major systems and structural elements. It’s conducted by someone who knows what to look for, and who will inform you of what he finds. If he turns up something you don’t like and which the seller refuses to repair, you don’t proceed with the purchase of the home.
Homeowners Insurance: Insurance: Insurance provides coverage to ensure a loan is paid. See also Mortgage Loan Insurance and Mortgage Life Insurance for more details.
Lender: A lender is a financial institution or agency that loans you money.
Lender credit: the option of the loan originator to get paid for handling the loan, and provides the borrower with a credit toward their closing costs.
Lien: A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
List Price: The price at which the house is listed; the asking price.
List Price: The price at which the house is listed; the asking price.
Loan application: A form used to apply for a loan, on which you’ll put relevant information about yourself. Also refers to the whole process of applying for a loan. Or, for that matter, of applying to college (but that’s a different story entirely)
Loan discount (Points): Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).
Loan Originator (aka Loan Officer): is an individual that works with a borrower to complete a mortgage transaction. It can be either a mortgage broker or a mortgage banker, and is the original mortgage lender.
Loan-to-Value Ratio: The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
Legal Description: A sufficient legal description is one that either identifies the location of the land on the ground to the exclusion of all other land, or furnishes some means by which such location can be obtained from other sources. Also, described by lot, block and section.
Lock-In Period: The number of days during which a lender guarantees a borrower a specific interest rate and terms on a mortgage.
Market Value: The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
Mortgage Broker: A firm or individual who, for a commission, matches borrowers and lenders. A mortgage broker takes applications and sometimes processes loans, but generally doesn’t use its own funds for closing.
Multiple listing service (MLS): A computer-based service which provides real estate professionals and consumers access to detailed listings of homes currently on the market.
Option Fee: A small, optional fee you can pay to the seller when you sign the contract which gives you the right to back out of the contract for any reason within a certain period of time.
Origination Fee: The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property, usually computed as a percentage of the face value of the loan.
PITI: Abbreviation for the major expenses that make up a mortgage payment: principal (the amount borrowed), interest, (property) taxes, and (homeowners’) insurance.
Pre-approval: A written agreement from a mortgage lender to grant a loan for a home purchase. The pre-qualification is based on the lender’s careful investigation and evaluation of the potential homebuyer’s income, credit history, employment history, personal assets, and debts. Pre-approval assures the seller that a buyer’s offer is valid. It also speeds up the buying process because, once an offer is made, there is no need to wait while the buyer finds a loan.
Prepayment penalty: A fee imposed on a borrower who pays off a loan (usually a mortgage) before its due date. Lenders impose this kind of fee to encourage borrowers to hold a debt — and keep paying interest on it — for the whole term of the loan. Such penalties have become rare, however.
Private Mortgage Insurance (PMI): in the event that you do not have a 20 percent down payment, lenders will allow a smaller one – as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on your loan’s structure.
Property Taxes: Taxes charged by the municipality where the home is located, usually based on the value of the home. In some cases, the lender will collect a monthly amount as part of the mortgage payment to cover your property taxes, which is then paid by the lender to the municipality on your behalf.
Public records: Another terrific source of information tapped into on a regular basis by the debt collection community, in an attempt to gain insight into a debtor’s activities or current location. Favorite records to be studied by the debt collectors: Divorce records, property records, tax information and motor vehicle records.
Rate lock: A written agreement from the lender to offer a specified interest rate if the mortgage goes to closing within a set period of time
Recording Fees: Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
If you’re in the recording studio singing your heart out, then ‘recording fees’ no doubt refers to something else entirely.
Seller disclosure: Prior to closing, the seller is required to give you a form detailing all the physical problems with the house that they’re aware of.
Survey: A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to know points, its dimensions, and the location and dimensions of any buildings.
Termination Option: is a specified time frame in a real estate contract which allows a buyer to terminate the contract for any reason. It creates the right to terminate within the specified number of days for a specified price.
Third party financing addendum: authorization to furnish to Seller or their representative information relating to the status of the approval for the financing.
Title: Ownership of real estate or personal property. With real estate, title is evidenced by a deed (or other document) recorded in the county land records office.
Title: Ownership of real estate or personal property. With real estate, title is evidenced by a deed (or other document) recorded in the county land records office.
Title Insurance: A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is us ally a function of the value of the property, and is often borne by the purchaser and/or seller.
Title Search: An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Title Report: The written analysis of a real estate title search, including a property description, names of titleholders and how title is held (joint tenancy, for example), tax rate, encumbrances (mortgages, liens, deeds of trust, recorded judgments), and real estate taxes due. A title report is needed before a lender will agree to finance purchase of the property. A title report is prepared by a title company, an abstracter, an attorney, or an escrow company, depending on local practice.
Title Policy: A contract by which the insurer agrees to pay the insured a specific amount for any loss caused by defects of title to real estate, wherein the insured has an interest. Homebuyers usually must purchase lender’s title insurance to protect the lender’s interest and may choose to purchase buyer’s title insurance to protect their own interest.
Truth-In-Lending: A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan.
Underwriting: The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
Upfront Costs: Upfront costs are fees and other costs that a buyer must pay before closing on a home. These fees can include an appraisal fee, credit report fee, hazard insurance, flood insurance, and other inspection fees.
