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Definitions
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1.
Adjustable Rate Mortgage (ARM) term — 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
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2.
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.
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3.
Fixed Rate Loan — A loan which has an interest
rate that remains constant throughout the life of the
loan.
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| 4.
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. |
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| 5.
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. |
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| 6.
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. |
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| 7.
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. |
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| 8.
Escrow Fee — A charge made by the escrow holder
for handling the escrow. The fee is usually based on the
purchase price and paid for by the buyer. |
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| 9.
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). |
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| 10.
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. |
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| 11.
Home Warranty — A one-year insurance policy 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. |
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12.
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 the 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.
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| 13.
Loan Discount Fee — Often called "points," this is
a one-time 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. |
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| 14.
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. |
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| 15.
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. |
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| 16.
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.) |
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| 17.
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 Ternites and Pests.
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| 18.
Points — See "Loan Discount Fee" |
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| 19.
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. |
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| 20.
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. |
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| 21.
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. |
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- 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. |
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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. |
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| 22.
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).
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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. |
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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.) |
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| 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: |
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Lots of money left over after close of escrow. |
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Verified net worth high enough to repay the entire loan. |
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Your new loan payment will be only slightly higher than
your current rent payments or existing mortgage payment. |
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Increasing earning capabilities. |
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Excellent ability to save. |
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Very large cash down payment. |
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| 23.
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). |
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| 24.
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. |
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| 25.
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 buyer. Transfer Taxes —Taxes levied
by the county when property changes hands. In Contra Costa
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.
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| 26.
VA Loan — A no down payment loan available to eligible
veterans. VA loans are insured by the Veteran's Administration.
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