Definitions

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

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.

Fixed Rate Loan

— A loan which has an interest rate that remains constant throughout the life of the loan.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.)

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.

Points

— See "Loan Discount Fee"

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).

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.

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.

VA Loan

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