Glossary of Real Estate & Home Loan Terms

Adjustable Rate Mortgage (ARM) - A loan that has an interest rate which can increase or decrease at specified times during the life of the loan. The change in the interest rate is usually tied to a financial index (such as the prime rate or the 11th District Cost of Funds or the LIBOR index).term description

Amortization - If the loan is amortized, the loan reduces by regular (usually monthly) payments of principal and interest that is calculated to pay off the loan at the end of a fixed term (i.e., 30-year fixed, etc.).

Appraisal Fee term - Charge made by the lender for appraising the property to determine its value; paid by the buyer and typically paid at the time you apply for the loan. The lender requires the property to be appraised in order to make sure that the loan amount is no larger than a certain percentage of the property's value.

APR (Annual Percentage Rate) - This is the cost of credit as a yearly interest rate. The APR is listed on the Truth in Lending Disclosure, which details the finance charges imposed on the borrower to obtain a loan on an annualized basis. This includes the interest, discount and other costs.

Buy Down Loan - A fixed rate loan where you can reduce the interest rate and monthly payment amount for a specific period of time by paying a fee up front to subsidize the lower payment.

Balloon Loan - A fixed rate loan where the monthly payments are calculated as if it was a 30-year loan, but the loan actually becomes due and payable at the end of a shorter period of time (such a 5, 6, 7 or 10 years). Although the balance of the loan is due at the end of this shorter period of time, the lender may allow you to extend the loan or roll it over into another type of loan.

Closing Costs - These can include expenses such as the origination fee, discount points, appraisal fee, title search and insurance, survey taxes, deed recording fee, credit report, mortgage insurance and attorneys’ fees. Different charges apply, depending on the state in which the property is located.

Commission - Based on a percentage of the purchase price, the seller pays the commission to the seller's agent. The seller's agent, in turn, will share a portion of the commission with the buyer' agent.

DTI (Debt-to-Income Ratio). It’s the ratio (expressed as a percentage) that results when a borrower’s gross monthly debt payment obligation is divided by his or her gross monthly income.

Document Preparation Fee - The deed, mortgage or deed of trust and other papers necessary to complete the sale must be prepared by a lawyer, the lender, the title company, the escrow company or some other qualified person. This person will charge a fee for this service to the person for whom the documents were made.

Down Payment - This is the difference between the purchase price and the mortgage loan amount for home purchase transactions. 100% combo financing allows buyers to obtain two loans, with one used as the down payment, so that the buyer doesn’t have to come up with a large amount of cash up front to buy a home. Alternately, borrowers may be able to obtain 100% financing through a single lien that covers the value of the down payment and the balance of the home value in one loan instead of two.

Equity - This is calculated as the value of a home minus the outstanding balance of any debt (usually mortgage balance) secured on or by the home.

Escrow Fee - A charge made by the escrow holder for handling the escrow. The fee is based on the purchase price and usually paid “each their own” by the buyer and seller.

Graduated Payment Mortgage (GPM) - A loan which has payments starting lower than the payment on a standard fixed rate loan which then increases by a predetermined amount each year for a specified number of years (usually 5).

FHA Loan - Available as fixed rate, ARM or GPM or buy down loan, FHA loans that are insured by the Federal Housing Administration. These are often attractive to first time home buyers because they require lower down payments and have higher qualifying ratios than regular loans. On the down side, there is a maximum FHA loan limit which varies from region to region.

FICO Score - FICO is a credit score scale used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender.

First Mortgage - This is a mortgage that is in first lien position, taking priority over all other liens. In the case of a foreclosure, the first mortgage will be repaid before any other mortgages.

Fixed Rate Loan - A loan which has an interest rate that remains constant throughout the life of the loan.

Full Doc (Full Income Documentation) - Borrowers are often required to provide income documentation to qualify for a mortgage loan. Borrowers who provide full income documentation (i.e., Full Doc) with their application qualify for the best rates and mortgage programs.

Home Equity Line of Credit - This is an open-ended loan, with specific limitations on paying down and redrawing equity, which allows a borrower to borrow against the equity in a property.

Home Equity Loan - This type of loan is secured by the equity in a home and sought for a variety of purposes, including home improvements, major purchases or expenses or debt consolidation. It is a closed-end mortgage loan on a borrower’s principal residence.

Home Warranty - A one-year insurance policy of a few hundred dollars which covers the cost of repairs to things like appliances, the heater, water leaks, etc. What is covered depends on the type of policy and what optional coverages are purchased. The home warranty is negotiated in the contract but it is typically expected that the seller will buy the policy for the buyer. This is a very customary practice and protects both the buyer and seller

Impound Account - Impound accounts are paid by the buyer. Certain types of mortgages require the borrower to deposit funds into a trust fund, also called an "impound" or "escrow" account, but think of it as a savings account the lender is holding for you. The lender uses the money in this account to pay your property taxes and insurance premiums when they become due. Many buyers request such an arrangement for the sake of convenience. At closing, the buyer deposits into the impound account a sum sufficient to cover the first tax payment and the first year's insurance premium. In addition to payments towards principal and interest, the future monthly loan payments will include proportionate amounts for taxes and insurance which are deposited into the impound account. When the property is sold, the balance left in the impound account at close of escrow must be returned to the seller.

LIV (Limited Income Verification) - Limited Income Verification is another documentation type that borrowers can choose instead of Full Doc when applying for a home loan. It requires less paperwork for the borrower.

Loan Discount Fee - Often called "points," this is a onetime charge used to reduce the interest rate on the loan. In exchange for collecting this fee up front, the lender will reduce the interest rate on the loan. One point is equal to 1% of the loan amount. The buyer typically pays the points.

Loan Origination Fee - The lender's fee for covering the lender's administrative costs to process (originate) the loan. Usually expressed as a percentage of the loan amount, the buyer usually pays for this fee.

LTV (Loan to Value) - The loan amount in relationship to the appraised value or selling price expressed as a percentage (for example, a loan amount of $80,000 divided by the appraised value of $100,000 equals an 80% LTV).

Mortgage Credit Certificate (MCC) Program - A loan program for first-time homebuyers with special limitations on purchase price and buyer income. The MCC is in reality a special tax credit and assists the buyer in qualifying on almost any loan program.

Mortgage Insurance - Also known as Private Mortgage Insurance (PMI), this is a type of insurance coverage that a borrower may be required to purchase (generally if the down payment is less than 20 percent of the purchase price of the home) to protect the lender in the event the borrower fails to make timely mortgage payments or defaults on the mortgage. Whether or not a borrower is required to purchase PMI depends on the type of mortgage the borrower obtains from a lender.

Mutual Mortgage Insurance Premium (MMIP) - A charge made by the Federal Housing Administration (FHA) company for insuring the lender against loss in case the buyer defaults; paid by the buyer. (This charge applies only to FHA loans and is different from Private Mortgage Insurance Premium, described below.)

NIV (No Income Documentation) - No Income Documentation is another documentation type that borrowers can choose instead of Full Doc or LIV when applying for a home loan. Through NIV, borrowers just state their income and do not have to supply the mortgage lender with any income documentation.

Non-Conforming Loan - This is a loan that does not conform to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FMLMC) guidelines either because the loan amount is too high or FNMA/FHLMC underwriting or other criteria are not met. Non-conforming loans are offered by many lenders (including First Franklin Financial Corporation) and can be tailored to an individual borrower’s circumstances and needs. Non-prime loans fall into this category.

Non-Prime - Non-prime mortgage lending targets a credit score market that falls between Prime lending (also known as A-Paper lending) and Sub-prime lending (known as D-Paper lending). Many mortgage lenders measure potential borrowers’ loan risk by their credit score, known as a FICO score. A-Paper borrowers have the highest credit rating (750+ FICO), followed by Alt-A or A-Minus borrowers (680+ FICO), then B/C-Paper borrowers (540+ FICO) and finally D-Paper borrowers (below 540). The Nonprime FICO niche is between 540 and 700. As a Non-prime lender, First Franklin Financial offers mortgage products that are most competitive and flexible to borrowers within this credit score range.

(Higher credit scores) A-Paper -- A-Minus/Alt-A Paper -- B/C-Paper -- D-Paper (Lower credit scores)

Origination - Dollar volume (see Volume below) is often expressed as an origination total, as the amount of money generated through the sale of a mortgage loan.

Origination Fee - This is the fee charged by a lender to prepare loan documents, make credit checks, inspect and usually appraise a property. It is usually calculated as a percentage of the face value of the loan and is expressed in points.

Pest Control Inspection - Required for most property sales. This report is usually ordered for and paid by the seller. If the inspection is completed prior to escrow, it is usually paid by the seller at that time and not included in closing costs. Pest Control Repairs are negotiated in the contract but typically, the seller must complete and pay for any "Section I" repairs. Buyers assume responsibility for the Section II repairs, but they are not required to complete them or pay for these repairs before the close of escrow. For more details, click on Termites and Pests. Lenders require that there be a “Certificate” issued by a licensed pest control company that certifies that the property is currently clear of Section I issues prior to funding the loan. This Certificate is usually good for 90 days. If it does not fund within 90 days another inspection will likely be required.

Points - See "Loan Discount Fee"

Pre-qualification - This is the conditional establishment of a borrower’s qualification for a mortgage loan amount and his or her ability to make monthly payments within a specific loan scenario. Pre-qualification is based on debt-to-income ratios and is subject to debt and income verification, credit history, property appraisal and other factors. A Pre-Qual Letter is commonly supplied by the buyer’s lender in the form of a formal letter signed by the lender on his/her letterhead which accompanies an offer to purchase real estate.

Principal - This is the outstanding balance of a mortgage, exclusive of interest and any other charges.

Prepaid Interest - This charge may vary from a full month's interest on the loan to just a few days worth of interest, depending on what day of the month your loan funds. Think of this as your first monthly loan payment. When a new loan is obtained, the lender usually sets the first payment due date ahead to the first day of not the following month, but the month thereafter. For example, a loan made on June 20 will ordinarily have a first payment due date of August 1. The August payment will pay interest for the month of July. But since the loan was made on June 20, the lender must collect interest for the interim period (from June 20 through June 30). In this instance, the lender would simply debit the buyer eleven days interest (June 20 through June 30) at closing.

Private Mortgage Insurance Premium (PMI) - When you have a low down payment (typically five or ten percent), the lender may require you to purchase private mortgage insurance to cover the lender from loss in the event you default on the loan and the lender has to go through the expense of foreclosure. You may also have to put a certain amount for PMI into a special reserve account held by the lender and will also have to pay an additional PMI premium amount added to your regular loan principle and interest payment. The only way to avoid PMI is to increase the amount of your down payment. PMI, if required, is paid by the buyer.

Pro-Rations - Pro-rations typically apply to property taxes and homeowner's association dues. They're best explained by an example. Let's use property taxes: Assume the seller has prepaid the property taxes, the seller is entitled to be reimbursed by the buyer for that portion of the tax period during which the buyer will own the property. On the other hand, if the transaction is to close some time after the beginning of the tax year, but before the taxes have been paid, the buyer will need to be reimbursed by the seller for that portion of the tax period during which the seller owned the property.

Example of the first situation: Ownership changes December 15. The seller has paid taxes for the period from July 1 to December 31. The buyer must reimburse the seller for taxes for the period from December 16 to December 31.

Example of the second situation: Ownership changes on January 15. Taxes for the period from January 1 to June 30 are not due until April 10 in the State of California. Since the buyer will have to pay the full tax bill when it comes due, the seller must give the buyer up-front the money to cover taxes for the period from January 1 to January 15.

Qualifying Ratios - Lenders like numbers and the bottom line is they are most comfortable taking all the information you give them and putting it into two numbers: the first is the top ratio (housing expense ratio) and the second is the Bottom ratio (or total debt ratio).

• Top Ratio = Monthly Housing Expense / Gross Monthly Income Monthly housing expense includes your monthly payment for the loan, property taxes, insurance and (for condos or townhomes) homeowners dues.
• Bottom Ratio = Monthly Housing Expense + All Other Monthly Debts / Gross Monthly Income

(All other monthly debt includes car payments, charge cards, student loans, credit union loans, child support, alimony, etc.)

What is an acceptable ratio depends on the type of loan and the amount of your down payment. For example a loan with a 5% down payment might require your top and bottom ratios to be no more than 28/33. The same loan but with a 20% down payment may allow for your top and bottom ratios to be has high as 33/38. FHA and VA guidelines are different. The ratios aren't the final determining factors, the underwriter also likes to see what they call "compensating factors": or other facts about you that may convince them to accept the loan even if your ratios are higher than they would normally accept. Compensating factors can include:

1. Lots of money left over after close of escrow.

2. Verified net worth high enough to repay the entire loan.

3. Your new loan payment will be only slightly higher than your current rent payments or existing mortgage payment.

4. Increasing earning capabilities.

5. Excellent ability to save.

6. Very large cash down payment.

Recording Fee - The county's charge for recording documents pertaining to the sale. The recording fee is paid by the party who benefits from the recording (e.g., recording of the deed which transfers the property to the buyer is paid by the buyer).

Refinancing - This is the process of paying off one loan with the proceeds from a new loan secured by the same property. The borrower must be a vested owner at the time of the transaction. A cash-out refinance gives the borrower cash from the loan proceeds that can be used for any legal purpose.

RESPA (Real Estate Settlement Procedures Act) - A consumer protection statute to help consumers become better shoppers for settlement services.

Second Mortgage - A junior mortgage, subordinate to or subject to the first mortgage. ‘Seconds’ are commonly used with combination financing, which can help consumers to borrow larger loan amounts.

Title Insurance - When you purchase a home, you want to be sure that you really do own it - lock, stock and barrel - and that no individual, corporation or government entitity has any right, lien or claim to your property of which you are not aware at the time of the purchase. If you are using a loan to finance the purchase, your lender wants the same assurances as well. There are two types of title policies: the "owner's policy" which gives coverage to you and the "lender's policy" which gives coverage to the lending institution. Both policies are issued at the time of purchase for a one-time premium, and both are usually paid for by the buyer.

Truth-in-Lending Act - Also known as Regulation Z, this federal law requires lenders to disclose the cost of credit and other fees associated with closing a loan to consumers. It also provides a three-day right of rescission in the case of a refinance of owner-occupied primary residences.

Units - In the mortgage industry, loans are expressed as units.

Title Search - An extensive search of relevant public records to find out if anyone other than you has an interest in the property. The fee for this search is typically paid by the seller. Transfer Taxes —Taxes levied by the county when property changes hands. In Orange County, the tax is $1.10 per thousand on the full purchase price (for a cash purchase or if a new loan is obtained by the buyer). This fee is typically paid by the seller.

VA Loan - A no-down payment loan available to eligible veterans. VA loans are insured by the Veteran's Administration.

Volume - In the mortgage industry, volume is the dollar amount generated through the sale of a loan.