real estate terms glossary

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.

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.

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.

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. In effect, it is a “second-level” association that handles matters affecting the entire development, while the “first-level” associations handle matters affecting their particular portions of the project.

The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable.

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.

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.

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.

The act of changing any of the terms of the mortgage.

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.

A mutual fund that allows individuals to participate in managed investments in short-term debt securities, such as certificates of deposit and Treasury bills.

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.

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.

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.

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.

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.

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.

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.

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 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.

The lender in a mortgage agreement.

The borrower in a mortgage agreement.

Properties that provide separate housing units for more than one family, although they secure only a single mortgage.

A residential mortgage on a dwelling that is designed to house more than four families, such as a high-rise apartment complex.

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.

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.

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.)

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.

The total amount of principal owed on a mortgage before any payments are made.

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.

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.

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 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.

A property purchase transaction in which the property seller provides all or part of the financing.