First-Time Homebuyer?​

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acceleration clause: A contract provision wherein the borrower of a loan must repay their lender in full, under certain circumstances.

adjustable rate mortgage (ARM): A special type of mortgage with a variable interest rate. At first the rate is fixed, but over time it may reset periodically.

amortization: The process of paying off a mortgage with consistent monthly installments to gradually reduce the debt.

amount financed: The amount of money that borrowed from a lender, minus the prepaid finance charges.

annual percentage rate (APR): The interest rate on a loaned amount (including the origination fees) over one year.

application fee: An amount charged to cover processing and administration costs when one applies for a loan.

appraisal: A property valuation as determined by a professional specialized in estimating the market value of real estate.

assessed value: The value of a piece of real estate by a local government’s taxing authority for taxation purposes.

asset: A resource, owned by an individual, that has monetary value (e.g., a house). Assets can be used as assurance to meet any outstanding debts or financial commitments.

assumption of mortgage: The process by which one borrower takes over another borrower’s existing mortgage payments, usually with no change in terms.

balance sheet: A statement of a borrower’s assets, liabilities, and net worth at a specific point.

balloon loan: A type of short-term loan that is structured to be paid off with a final large payment rather than fully amortizing over a longer term.

binder: A temporary contract between a home buyer and their insurer that proves that the buyer has obtained insurance coverage. It contains all the policy details of the homeowner’s insurance policy and acts as proof of insurance for a potential lender.

biweekly payment: A payment period of every two weeks. Typically, payments are made every month, but with a biweekly payment plan, the payments are equal to one-half of the required monthly payment, accelerating the payoff of a loan and increasing savings in interest.

broker: A professional who acts as an intermediary between two parties and assists in negotiating their contracts.

buydown: A money advance that helps lower monthly mortgage payments.

capital: Anything that increases one’s ability to generate value.

certificate of title: A legal document that is issued by a state to certify a person’s ownership over something.

chain of title: The historical record of all documents pertaining to the ownership transfers of a specific piece of property.

closing: The final step of mortgage loan processing in which the title passes from seller to buyer.

closing costs: The fees one pays to their lender in exchange for loan services. These are typically around 3 to 6 percent of the price of the home.

closing statement: A document that records all of the details of a financial transaction.

collection: If payments are not made on time, a bank or mortgage company can “collect” either the full amount of the loan or owed payments from the borrower.

co-maker: One of two people responsible for signing an agreement to guarantee the repayment of a financial obligation. As a result, the co-maker is also responsible for payments should the borrower default.

commitment letter: A formal binding agreement between a lender and borrower that outlines the terms of their agreement.

comparables: Properties that are similar to a listed in a specific area that are used as a basis of comparison to determine a listed property’s market value.

condominium: A building or a complex of buildings that contain several individually owned apartments or houses.

contingency: A clause in a real estate purchase agreement that specifies a requirement that must be met for the contract to remain legally binding.

credit bureau: An impartial agency that collects credit history information on individuals for the purpose of determining their qualifications as borrowers. Equifax, Experian, and TransUnion are the three main credit reporting companies where anyone can view their credit score.

credit report: An organized presentation of a person’s history of obtaining and handling secured and unsecured debt. Credit reports are compiled and generated by credit bureaus for lenders to use in determining an applicant’s worthiness to borrow funds.

credit score: A numerical value between 300 to 900 that is determined based on credit history to reflect how likely a potential borrower will repay a loan. Credit score is used to qualify borrowers for overall eligibility as well as to determine what percentage rate they’ll pay. Scores are divided into ranges – e.g., excellent, very good, good, fair, and poor – to categorize potential borrowers.

debt: Money that a borrower owes to a lender.

debt-to-income ratio: The total of monthly debt payments divided by a person’s gross monthly income.

deed: A legal document possessed by a property owner that contains the title of that property.

default: The condition wherein a borrower has failed to make timely payments on their loan, or has otherwise not complied with requirements of the agreed-upon loan.

delinquency: A status in which a borrower has failed to make the required payments to a lender.

discount points: Additional funds a borrower pays to a lender at closing in return for a lower interest rate on a mortgage.

down payment: An initial dollar amount applied made when something is purchased on credit, usually expressed as a percentage of the purchase price.

earnest money deposit: A sum of money that is put down to show that an applicant is serious in their intent to take out a mortgage. Also known as a “good faith deposit.”

Equal Credit Opportunity Act (ECOA): A law enacted on October 28, 1974, that makes it unlawful for a creditor to discriminate against an applicant on the basis of race, color, religion, national origin, sex, marital status, or receipt of public assistance.

equity: The monetary value of a property, determined by taking the appraised value of a home and subtracting any outstanding mortgage debt.

escrow: Funds that are temporarily held by a trusted third party until a particular condition has been met. Escrowed funds are often held by a mortgage lender to pay real estate taxes or hazard insurance on the financed property to ensure that those bills are paid.

Fair Credit Reporting Act: Federal legislation to regulate the disclosure of consumer credit reports and monitor the accuracy of individuals’ credit records.

first mortgage: The initial loan obtained to finance a property.

flood certification: A document that is issued to certify whether a property is in a federally designated flood zone and at which degree of flood risk, as determined by the most current FEMA-generated survey. Such properties must be covered by a flood insurance policy as long as there is a mortgage balance.

good faith estimate: A form issued by a lender that details the estimated costs required to secure a mortgage. Good faith estimates provide basic information about a loan to help prospective buyers compare different offers and understand the actual cost of the loan. Lenders are required to provide applicants with a good faith estimate within three business days of receiving the application. The estimate is subject to change between application and closing, so it is important to review the settlement from before the closing meeting.

gross income: A person’s total compensation before taxes that consists of any wages or forms of income.

hazard insurance: A policy that covers a property in case of physical damage, be it from a natural disaster, fire, burst pipes, or vandalism. Damage caused by flooding is not included and must be covered under a separate flood policy.

home inspection: A thorough evaluation of a property by a licensed professional to evaluate its condition and identify potential issues with its structure and systems. An interested buyer generally arranges a home inspection early in the buying process.

homeowner’s insurance: See hazard insurance.

HUD-1 Statement: A document that outlines all charges and credits to the buyer and seller in a settlement. Items on this statement include real estate commissions, loan fees, points, and escrow totals.

income property: A residential or commercial rental property purchased for the dual purpose of generating income and building equity.

interest: A set percentage, generally expressed as an annual percentage rate (APR), paid by a borrower to a lender in exchange for the privilege of borrowing from them.

investment property: Real estate purchased to generate income either by renting or leasing to others.

jumbo loan: A special type of loan used when the amount borrowed exceeds the current conforming loan limit and is therefore not eligible for traditional financing under Fannie Mae or Freddie Mac.

lien: A claim that gives a lender rights to a certain percentage of a property if the borrower defaults on payments.

liquid asset: An asset that can be readily converted into cash.

loan-to-value (LTV) ratio: An assessment of lending risk that financial institutions and lenders look at during the mortgage application process to determine credit worthiness. Applicants with higher LTV ratios are considered higher risk, and if the mortgage is approved, it will come with a higher interest rate.

market value: The actual value of a property when it’s put up for sale. Market value is determined by the recent sale amounts of similar properties in the area (also see comparables).

mortgage: A type of long-term loan in which a creditor lends funds to a borrower to purchase real estate, wherein the creditor holds the title of that property until the debt is paid in full with interest.

mortgage insurance: See private mortgage insurance (PMI).

negative amortization: A condition in which the amount paid toward a loan is not enough to cover the interest rate, causing the total amount owed to continue to rise.

net worth: The value of a person’s total assets, minus the amount of their liabilities (or what is owed).

notice of default: A formal letter from a lender to a delinquent borrower stating that the loan is in default and legal action may follow.

offer: A conditional proposal or bid made by a buyer or seller to purchase or sell an asset. If accepted, this offer become legally binding.

origination fee: A fee paid to a lender at mortgage closing to process and execute a loan, generally as a percentage of the principal amount borrowed.

owner financing: A transaction where a property’s seller provides all or part of the financing, eliminating the costs of a bank intermediary.

payoff: The amount required to settle a loan balance in full.

PITI: An acronym that stands for principal, interests, taxes, and insurance, the four components that make up a mortgage payment.

PITI reserves: The cash left over after the borrower makes a down payment and pays the closing costs on a property. The PITI reserves need to be same as the amount that the borrower will pay in principal, interest, taxes, and insurance for a period after closing.

point: A fee equal to 1% of the borrowed amount that a borrower pays to a mortgage lender as a way to reduce their interest rate.

preapproval: The condition during an applicant’s property search where a lender clears them to borrow a certain amount under specified terms.

prequalification: A process that determines a ballpark amount that a potential buyer may be approved for. Prequalification is an estimation for a buyer to begin their property search; it is not a commitment to lend.

prime rate: The benchmark interest rate that lending institutions are willing to offer their most credit-worthy borrowers at a given time. Most borrowers will instead qualify for a rate expressed as a percentage “over prime.”

principal: The core amount of a loan that remains unpaid, not including interest, escrow, or PMI. The portion of the monthly payment marked as principal is what reduces the amount owed.

private mortgage insurance (PMI): A type of mortgage insurance provided by a private institution to protect a lessee against any losses incurred by default. PMI is generally required when a property buyer’s down payment is less than 20% of the purchase price.

purchase and sales agreement (P&S): A contract that is signed by a buyer and seller to outline the terms and conditions under which a property will be sold.

qualifying ratios: Calculations of a borrower’s creditworthiness that are used to determine whether they can qualify and pay for a mortgage.

quitclaim deed: A fast and easy way of transferring ownership of a property to a buyer. Unlike general or special warranty deeds, however, the quitclaim deed offers no protection to the buyer.

rate lock: A guarantee from a lender to a borrower that their interest rate will remain fixed for a period.

Realtor: A licensed real estate salesperson belonging to the National Association of Realtors.

recording fee: Charges made by a government agency for recording the purchase or sale of a property.

rescission: The lawful act of canceling or voiding a contract by mutual consent. In some cases, borrowers will be able to cancel a transaction within three business days of closing.

second mortgage: An additional mortgage that is taken out on a property that is already being financed.

secondary mortgage market: A market where home loans and servicing rights are purchased between lenders and investors.

secured loan: A loan that is protected by collateral.

servicer: A financial institution that is responsible for securing the principal and interest payments from borrowers and managing their escrow accounts.

servicing: The collection of a borrower’s mortgage payments.

settlement: The meeting where the ownership of a home is transferred from the seller to the buyer. It is the final step in the closing process when the closing costs are to be paid.

settlement sheet: The HUD-1 Settlement Statement is an itemized list of the amounts to be paid by the borrower to the seller upon closing.

subordinate financing: Any mortgage or liens that are lower priority than the first mortgage.

survey: A detailed map of a specific property as determined by a qualified land engineer or surveyor.

tenancy by the entirety: A type of joint ownership restricted to married couples.

tenancy in common: A flexible type of joint tenancy where two people who are not married share a property.

title: The certificate that holds the legal information regarding a piece of property.

title insurance: A type of insurance that protects lenders and homebuyers from financial loss incurred by flaws in a property title.

title search: The examination of a title to make sure the seller is the legal owner of the property and that there are no outstanding liens against the property.

total expense ratio: The entirety of expense commitments, including housing expenses and other monthly debts.

transfer tax: Taxes that are imposed when a property passes from one person to another.

truth-in-lending: A federal law that requires lenders to disclose the terms and conditions of a mortgage.

underwriting: The process by which a loan application is evaluated to determine the potential risk to a lender.

unsecured loan: A loan that does not require any collateral, such as a credit card.

VA loan: A special mortgage offered through the U.S. Department of Veterans Affairs program to help veterans finance a home.

walk-through: A part of the closing process where the buyers visually inspect the property they are about to finance to make sure that any agreed-upon terms within the P&S have been met and the property is in the expected condition.