The Real Estate Dictionary
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An online dictionary of real estate terms by Craig Buck, attorney at law.
Glossary
of Terms
(Bankers Foreign Language)
Adjustable rate mortgages change their interest rates at predetermined time
intervals (6 month or 1 year is typical). This change in rate may or may not
change the monthly payment, depending on what was agreed to prior to accepting
signing up for the Mortgage. The interest rate is usually tied to the banks
source of funds, often called the one year treasury index. The better mortgages
have caps on how much the interest rate can go up in any one year and/or over
its lifetime. These caps also apply to the payment. Monthly payments are
calculated as if the loan were to last 30 years (amortization), doing so keeps
the loan payments lower. Typically interest rates and monthly payments are
lower than 30 year fixed rate mortgages for the first couple of years. If
interest rates stay low, you can be a winner, if interest rates increase, your
monthly payments can increase higher than a 30 year fixed rate mortgage.
Mortgages (loans) that are calculated to be paid off over a long period of time
(usually 30 years), however, at some point prior to payoff a large sum of money
is due. The amount and time depend on what is negotiated between the parties.
This Balloon Payment could pay off the entire mortgage or just a portion. There
is no standard term or amount or time period.
These terms apply to variations on Balloon Mortgages. Some banks offer
mortgages that are calculated to be paid off over 30 years but
have a provision that requires the balance to be paid off after 5 or 7
years. Calculating a loan to be paid off over 30 years, lowers the monthly
payment to a reasonable amount. However, Banks hate lending fixed rate money
out for a 30 year time period, so they came up with a way to limit the time
period, a mortgage called "30 due in 5." This gives the bank the option of
calling the entire balance due in 5 years or setting a new interest rate. These
mortgages come with interest rates that are slightly below 30 year fixed. If
interest rates are stable, these are ok or if you're going to live in a home
for less than 5 years, this type of mortgage might fit into your time schedule.
A mortgage the is calculated to be paid off over 15 or 30 years however, instead
of making monthly payments, ½ of the monthly payment is made every other week.
Over a one month period the same payment is made, its just made at two
different times. By making Bi-Weekly payments the mortgage gets paid off
sooner, thus saving interest. Several of the Banks set up automatic withdrawal
from your checking account, so there is less hassle. Now a sneaky way to create
your own Bi-Weekly Mortgage; Set up a standard 15 or 30 year mortgage that
requires monthly payments, then simply make Bi-Weekly payments. Using this
method you can make or not make the Bi-Weekly payment (as long as the full
payment is made each month) at your option. I have never seen a bank that will
not allow this, they might not like it because they have to process more
payments and paperwork - but that's their problem not yours.
Simply stated, a mortgage placed against a home for a short period. From their
creation everybody understands that this Mortgage is for a short time, usually
due when a home is sold or somebody cashes in their stock options. Loans of
this type offer a way for people to buy one home before selling their current
home. The Bank understands that you are not able to make two monthly payments
forever, but they make allowances for a short term to help people buy homes or
when there is a job transfer involved.
The largest lenders in the United States are Fannie Mae (FNMA) and Freddie Mac
(FHLMaC). These two lenders supply money to local banks who in turn lend the
money to people like you and me. Approximately 90% of all loans are purchased
by, or created for, these two Mega Lenders. Because they are the biggest, they
set the rules that every other bank and lender follow. If you, your house and
the amount of money you want to borrow conforms to their standards, then the
loan you get is called Conforming. Conforming loans have the best interest
rates, terms and lowest costs. If your credit or house is unusual or you want
to borrow more than $235,000 then you fall into a Non-Conforming category and
are stuck with higher interest rates and different terms.
The requirements for Mortgage terms, costs and interest rates together with the
types of homes a bank will lend money on are set by the private segment of the
industry (local lenders, FNMA or FHLMaC) and do not involve the Government's
FHA or VA guidelines. Conventional Mortgages do not have a maximum dollar
amount like Conforming Mortgages mentioned above.
This is a FNMA loan program that offers 97% financing of single family, owner
occupied homes, to borrowers who earn 115% or less of the area's median income.
Unlike normal financing, the borrower only needs to produce 3% of the sales
price prior to closing. This program allows people with a minimal down payment
to buy a home. Borrowers must complete a six hour seminar on home ownership in
or der to qualify for the loan.
Conforming Mortgages will not be granted to people with a home under
construction (because they don't conform to guidelines), therefore, a method of
financing a home during the construction phase was created, Custom Construction
Loans. These loans last approximately 18 months and carry interest rates higher
than Conforming Mortgages, because of the higher risk. Good Custom
Construction Loans roll over into Conforming Loans when the home is completed.
Less desirable Construction Loans must be paid off at the end of construction.
The less desirable versions require double the loan fees with no guarantee of
obtaining a Conforming Loan.
The difference between the loan amount and the purchase price of a home is the
Down Payment. Depending on your credit and the type of home you are buying the
Down Payment can range from 0 to 50%. The Bank sets the requirements depending
on many factors. The typical minimum Down Payments are:
VA Loans, owner occupied - 0%
FHA Loans, owner occupied - 3%
Conventional, owner occupied homes - 5%.
Non owner occupied homes - 20%
Once you own a home, your equity is the difference between the loan amount and
the current value of the home. A ratio can be applied to the
dollar amount of your equity, its called the LTV or Loan to Value Ratio.
The process of taking ownership away, from a homeowner who isn't making monthly
payments on time (defaulted on loan payments). The process varies from state to
state but the end result is the same - if you don't make the payments on time,
you lose the property. Most banks will grant a 30-60 day grace period prior to
starting the process. The entire process can take an additional 60days to one
year.
FHA is a department within the Government agency called HUD (Housing and Urban
Development), whose main purpose is to promote ownership of inexpensive homes.
They do this by setting up special loan programs for people who are buying
homes with a sales price below the area average. FHA encourages the granting of
loans, by local lenders, to people with lower incomes. They do
this by guaranteeing that the local lender will be paid back if the borrower
fails to make payments. FHA does not lend money, they guarantee the repayment
to the bank if a borrower fails. Because the Government is involved they have
restrictions on the type of home and borrowers income. The nice thing about FHA
is it allows people the ability to qualify for a loan that normally wouldn't be
available to them.
This is a loan that is specifically designed for homes that are in need of
repair or improvement. If you are planning on buying or remodeling your current
home this program will lend you the money necessary to buy the home then fix it
up. There are all sorts of hoops that must be jumped through but on the whole,
it's a nice program.
Fees that a lender charges at the time of obtaining a mortgage. This fee is in
addition to the yearly interest rate charged on the loan balance. Typical fees
range between 1-3% for a normal loan, but I have heard of fees as high as 10%
for borrowers with credit problems. These fees can change depending on the
interest rate a lender charges, so you must add the fees together with the
interest rate to find out the complete cost of a loan.
This is a ratio between the amount borrowed and the value of the home (often
called the equity). When Banks lend money for a refinance on a home, they want
to maintain a certain LTV.
Example:
Loan amount \ Homes value = LTV.
$90,000 loan divided by the homes value $100,000 = 90% LTV
When banks lend money on homes they set the LTV according to the borrower's
qualification and the type of home being purchased. Typical LTV's are:
90% for owner occupied
80% for non-owner occupied homes
50% for vacant land
This is going to sound silly so please bear with me. Mortgage Insurance is a
policy that lenders require if a refinance loan has a LTV between 80% - 100%,
OR if you are buying a home and are placing less than 20% down. In instances
like this, lenders want protection if you should fail to make your monthly
payments and they have to foreclose on the property. They want an insurance
policy that will protect the Bank from loss associated with foreclosing on the
property. Mortgage Insurance is not Life or Homeowners Insurance. Now the funny
thing with this policy is, you the borrower have to pay for it, and if there is
a loss it pays the bank not you for that loss.
A few of the ARM loans periodically adjust interest rates but do not adjust the
monthly payment. If interest rates increase too much the fixed payment is not
enough to pay off the mortgage. When this happens the mortgage balance can
increase instead of decrease. Amortization is the paying down of a loan while
Negative Amortization is the increasing of a loan amount.
Some lenders do not require written verification of income. The lender accepts
the borrower's statement of income. These loans are normally have a slightly
higher interest rate and have a LTV of 80% or less.
Points is another name for a percentage of interest. One point equals One
percent of interest. So if a lender says that he will charge you 2 points for
the loan, he is saying that you will be charged 2% up front for a loan fee.
Most of the time loans obtained at the local neighborhood bank are sold to the
Secondary Market. In these instances who you send your monthly payments to can
change. However, when the neighborhood bank keeps possession of the loan and
the monthly payments are made to that bank, the loan is called a Portfolio
Loan.
This is another name for a No Income Qualifier Loan. Some lenders do not require
written verification of income. The lender accepts the borrower's statement of
income. These loans are normally have a slightly higher interest rate and have
a LTV of 80% or less.
A government agency that helps veterans obtain loans at favorable terms. The
operations are similar to the FHA but is limited to Veterans of the military
service. The VA offers 0% down loans to any Veteran. The down side of these
loans is that they cost more up front and they are picky about what type of
home they will lend money on. If you are a Veteran then talk to your lender
about the requirements. However, please note that there are loan limits and
many sellers do not like making their home conform to the VA's requirements.