Appraisal: An appraisal is the estimation of a home’s market value by a licensed appraiser based on comparable recent sales of homes in the neighborhood. Appraisals are ordered on behalf of a home buyer’s lender to protect the interests of the lender. If the home appraises lower than the final sale price, the home buyer may be able to renegotiate a lower price with the seller. If the seller won’t lower the price, the buyer’s lender may ask that the buyer put more money toward their down payment in order to make up the difference.
Closing Costs: Expenses incurred by buyers and sellers when transferring ownership of property. Closing costs normally include an origination fee, attorney’s fee, taxes, escrow payments, title insurance and sometimes discount points.
Closing Disclosure: A five page form completed by the lender and lists the loan terms, projected monthly payments, and closing costs. To avoid surprises, lenders are required to provide the borrower with a copy of the Closing Disclosure three days before closing.
Conforming loans: Any type of mortgage loan that adheres to loan amount limits set by Fannie Mae or Freddie Mac. These conforming limits allow lenders to fund loans with interest rates 0.25 – 1.5% lower than what a buyer would otherwise pay.
Jumbo Loans: Loans that are too big to conform to Fannie Mae and Freddie Mac limits. Most types of conventional loans conform, but jumbo mortgages are nonconforming and have higher interest rates because they rely on the investment backing from outside investors as opposed to the government sponsored institutions Fannie Mae or Freddie Mac.
Conventional Mortgage Loan: Any mortgage loan not guaranteed or insured by the government. FHA and VA programs are government loans.
Debt to Income Ratio: The percentage of your gross monthly income (what you earn before taxes) that goes towards paying off debts. When figuring out how much money you can afford to borrow, your lender will factor in the total percentage of your income that you pay toward debt every month.
Discount Point: A type of mortgage loan fee that enables a borrower to lower monthly interest rate payments by paying more upfront. A discount point typically costs 1% of the loan amount and can lower a borrower’s interest rate by 0.25%–0.5%.
Down Payment: The amount of a property’s purchase price that the buyer pays in cash and does not finance with a mortgage
Earnest Money: This “good faith deposit” shows the seller you have the intention of completing the deal. It is typically 1% of the sales price. The check is made out ot the Title Company where it will sit in an escrow account. When you close, the earnest money will be applied toward your closing costs. If you back out of the sale due to a failed contingency (option period, financing period etc), you can recover your earnest money in full. If you back out of the sale for reasons not covered by contingencies, you will forfeit your earnest money.
Escrow: An account in which a neutral third party (Title Company) holds the documents and money in a real estate transaction until all conditions of a sale are met. Also, an account in which money for property taxes and insurance is held until paid; money is added to the account every time a mortgage payment is made.
FHA Loan: One of two types of alternatives to a conventional loan (the other is a Veterans Affairs (VA) loan), FHA loans are insured by the Federal Housing Administration.
Fixed Rate Mortgage (FRM): A mortgage loan with an interest rate that does not change over the term of the loan.
Good Faith Estimate: A GFE is a line-by-line estimate of mortgage costs. You’ll most likely have several different scenarios depending on the loan program, sales priceand the amount of cash you put down. Request as many different scenarios as you’d like so you can weigh the pros and cons of your loan options.
Interest Rate: Interest is the cost of borrowing money.
Mortgage: Funds borrowed from a mortgage lender or broker to finance the purchase of a home. Conventional loans, FHA loans, and VA loans are different types of mortgage loans available.
Option Fee: This is the $100-$300 you pay for the unrestricted right to terminate the contract.
Option Period: Also referred to as the due diligence period. It is typically the first 7 days of the contract where the buyer has the unrestricted right to terminate the contract and get his or her earnest money back. The buyer will want to do their inspections in this time frame.
Preapproval: A letter from a lender or broker that confirms they’ve reviewed a buyer’s finances and are willing to lend a specific amount of money to buy a home. It tells the buyer how much he or she can afford. Getting preapproved does not a guarantee a loan. To process a preapproval application, a lender will check the buyer’s credit report and verify employment history, income, and downpayment amount. Full review of the preapproval application can take 12–24 hours. In markets with multiple offers, it’s important to be preapproved during the touring process so buyers can act quickly and put in a competitive offer when they find the right place. Home sellers expect buyers to be preapproved since there’s less risk that the deal will fall through due to financing.
Principle, Interest, Taxes, Insurance (PITI): These four items make up a total monthly mortgage payment. Principal is the amount borrowed from a lender not including interest or additional fees.
Private Mortgage Insurance (PMI): Mortgage insurance protects the mortgage lender against loss if a borrower defaults on their loan. Private mortgage insurance is required for borrowers of conventional loans with a down payment of less than 20%.
Refinance: The process of paying off one loan to get another with a better interest rate and terms. There are many reasons borrowers look to refinance: lower interest rates, improved credit, debt consolidation or to decrease home equity to free up cash. Loan refinancing will include fees for appraisals and title insurance, so it’s important to calculate how long it will take to pay off these closing costs resulting from refinancing.
Seller’s Disclosure: A document provided by a home seller to a homebuyer that outlines known issues with a property and other historical details. A seller disclosure often includes details about defective appliances or systems, known repair issues or history of leaks or environmental contamination.
Underwriting: The determination of the risk a lender would assume if a particular mortgage loan application is approved.
Underwriter: An underwriter is an individual working for mortgage lenders who determines whether or not a borrower’s loan is approved. The underwriter evaluates the entire loan application including the appraisal of the home, and then decides whether to approve or decline the loan application. Underwriters often request additional information while evaluating the loan application. For example, underwriters often ask for additional pay stubs and documentation of the origins of funds used for the down payment.
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