Real Estate Glossary

Abstract of Title. A book containing copies of all documents pertaining to a piece of property (or it’s owners) located in the county courthouse. The abstract is certified by the abstract company which is a quasi-governmental company authorized to verify the contents of the abstract are complete and accurate. The abstract is provided to an attorney for their opinion of good title and is needed before most loan companies will fund loans.

Acceleration clause. A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

Adjustable rate mortgage (ARM). A mortgage whose interest rate changes over time based on an index.

Amortization. The gradual repayment of a mortgage by installments.

Amortization schedule. A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance.

Annual percentage rate (APR). The total yearly cost of a mortgage stated as a percentage of the loan amount; includes the base interest rate, primary mortgage insurance, and loan origination fee (points).

Appraisal. A professional opinion of the market value of a property.

Appreciation. An increase in the value of a house due to changes in market conditions or other causes.

Assessed value. The valuation placed upon property by a public tax assessor for purposes of taxation.

Assumable mortgage. A mortgage that can be taken over (assumed) by the buyer when a home is sold.

Assumption. The transfer of the seller’s existing mortgage to the buyer.

Binder. A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.

Cap. A provision of an ARM limiting how much the interest rate or mortgage payments may increase.

Cash reserve. A requirement of some lenders that buyers have cash remaining after closing. Traditionally lenders have required borrowers to have reserves equal to two mortgage payments.

Clear title. A title that is free of liens and legal questions as to ownership of the property.

Closing. The occasion where a sale is finalized; the buyer signs the mortgage, and closing costs are paid. Also called settlement.

Closing costs
. Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called settlement costs.

Commitment letter. A formal offer by a lender stating the terms under which it agrees to lend money to a homebuyer.

Community property. Property acquired by husband and wife during a marriage when not acquired as separate property by either spouse. Each spouse has equal rights, including the rights of survivorship.

Condominium
. A form of property ownership in which the homeowner holds title to an individual dwelling unit plus an interest in common areas of a multi-unit project.

Contingency. A condition that must be met before a contract is legally binding.

Conventional mortgage. Any mortgage that is not insured or guaranteed by the federal government.

Cooperative. A form of common property ownership in which the residents of an
apartment building do not own their own units, but rather own shares in the corporation that owns the property.

Covenant. A clause in a mortgage that obligates or restricts the borrower and which, if violated, can result in foreclosure.

Credit report. A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.

Deed. The legal document conveying title to a property.

Deed of trust. The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.  Not used in Oklahoma.

Default. Failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage.

Delinquency. A loan in which a payment is overdue.

Depreciation. A decline in the value of property; the opposite of appreciation.

Discount points. See Points.

Down payment. The part of the purchase price which the buyer pays and does not finance with a mortgage.

Due-on-sale clause. A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

Earnest money
. A deposit given to the seller to show that a prospective buyer is serious about buying the property.

Easement. A right of way giving persons other than the owner access to or over a property.

Equal Credit Opportunity Act (ECOA)
. A federal law that prohibits lenders from denying mortgages on the basis of the borrower’s race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity. The difference between the market value of a property and the homeowner’s outstanding mortgage balance.

Equity loan. A loan based on the borrower’s equity in his or her home.

Escrow
. The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a homeowner pays money for taxes and insurance.

Fair Credit Reporting Act. A consumer protection law that sets up a procedure for correcting mistakes on one’s credit record.

FHA loan. A mortgage that is insured by the Federal Housing Administration.

First mortgage. The mortgage that has first claim in the event of default.

Fixed rate mortgage. A mortgage in which the interest rate does not change during the entire term of the loan.

Flood insurance. Insurance required for properties in federally designated flood areas.

Forbearance
. The lender’s postponement of foreclosure to give the borrower time to catch up on overdue payments.

Foreclosure. The process by which a mortgaged property may be sold when a mortgage is in default.

Hazard insurance
. Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism, or other hazards.

Homeowners insurance. An insurance policy that combines liability coverage and hazard insurance.

Homeowners warranty. A type of insurance that covers repairs to specified parts of a house for a specific period of time.

Impound account. Also called Tax and Insurance Reserve (TIR). Accounts required if lender will pay the property taxes, mortgage insurance, and hazard insurance.

Interest. The fee charged for borrowing money.

Interest rate cap
. A provision of an ARM limiting how much interest rates may increase per adjustment period. See also Lifetime cap.

Joint tenancy. A form of co-ownership giving each tenant equal interest and equal rights in the property, including the right of survivorship.

Late charge
. The penalty a borrower must pay when a payment is made after the due date.

Lease-purchase mortgage loan. An alternative financing option that allows low- and moderate-income homebuyers to lease a home from a nonprofit organization with an option to buy, and with each month’s rent payments consisting of PITI payments on the first mortgage, plus an extra amount that is earmarked for a savings account in which money for a down payment accumulates.

Lien. A legal claim against a property that must be paid when the property is sold.

Lifetime cap
. A provision of an ARM that limits the total increase in interest rates over the life of the loan.

Loan commitment
. See Commitment letter.

Loan servicing
. The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.

Loan-to-value ratio (LTV)
. The relationship between the amount of a mortgage and the total value of the property.

Lock-in. A written agreement guaranteeing the homebuyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.

Margin. The set percentage the lender adds to the index rate to determine the interest rate of an ARM.

Mortgage. A legal document that pledges a property to the lender as security for
payment of a debt.

Mortgage banker
. A company that originates mortgages exclusively for resale in the secondary market.

Mortgage broker. A company that for a fee matches borrowers with lenders.

Mortgage insurance. See Private mortgage insurance.

Mortgage insurance premium (MIP). The fee paid by a borrower to the FHA or a private insurer for mortgage insurance.

Mortgage note. A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the agreement is secured by a mortgage.

Mortgagee. The lender in a mortgage agreement.

Mortgagor
. The borrower in a mortgage agreement.

Negative amortization
. Payment terms under which the borrower’s monthly payments do not cover the interest due; as a result, the loan balance increases.

Notice of default
. A formal written notice to a borrower that a default has occurred and that legal action may be taken.

Origination fee. A fee paid to a loan broker for processing a loan application to offset overhead costs; it is stated as a percentage of the mortgage amount, or points.

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

Payment cap. A provision of some ARMs limiting how much a borrower’s payments may increase regardless of how much the interest rate increases; may result in negative
amortization.

PITI. Stands for principal, interest, taxes, and insurance — the components of a monthly mortgage payment.

Points. A one-time charge by the lender to increase the yield of the loan to the investor; a point is one percent of the amount of the mortgage.  Paying points reduces the rate of the mortgage.

Prepayment penalty. A fee charged to a borrower who pays off a loan before it is due.

Pre-qualification. The process of determining how much money a prospective homebuyer will be eligible to borrow before a loan is applied for.

Principal
. The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

Private mortgage insurance (PMI). Insurance provided by non-government insurers that protects lenders against loss if a borrower defaults.

Purchase and sale agreement. A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Qualifying ratios. Guidelines applied by lenders to determine how large a loan to grant a homebuyer.

Radon. A radioactive gas found in some homes that in sufficient concentrations can cause health problems.

Rate lock. See Lock-in.

Real estate agent. A person licensed to negotiate and transact the sale of real estate on behalf of the owner.

Real Estate Settlement Procedures Act
. A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Refinancing. The process of paying off one loan with the proceeds from a new loan secured by the same property.

Rent with option to buy. See Lease-purchase mortgage loan.

Second mortgage. A mortgage that has rights that are subordinate to the rights of the first mortgage holder.

Secondary mortgage market. The buying and selling of existing mortgages.

Seller carryback. An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

Settlement. See Closing.

Settlement sheet
. The computation of costs payable at closing which determines the seller’s net proceeds and the buyer’s net payment.

Subsidized second mortgage
. An alternative financing option for low- and moderate-income households that also includes a down payment and a first mortgage, with funds for the second mortgage provided by city, county, or state housing agencies, foundations, or nonprofit corporations. Payment on the second mortgage is often deferred, carries no or low interest rates, and part of the debt may be forgiven for each year the family remains in the home.

Survey. A drawing showing the legal boundaries of a property.

Tax and Insurance Reserve (TIR). See Impound account.

Tenancy by entirety. A type of joint ownership of property available only to a husband and wife.

Tenancy in common. A type of joint ownership in a property without right of survivorship.

Three/two (3/2) option. An alternative financing plan that enables households whose earnings are no more than 100 percent of the median income in their regional area to make a 3 percent down payment with their own funds, coupled with a 2 percent gift from a relative or a 2 percent grant or unsecured loan from a nonprofit or state or local government program.

Title. A legal document establishing the right of ownership.

Title company. A company that specialized in insuring title to property.

Title insurance. Insurance to protect the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of a property.

Title search. A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Transfer tax. State or local tax payable when title passes from one owner to another.

Truth-in-Lending Act. A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

Underwriting. The process of evaluating a loan application to determine the risk involved for the lender.

VA loan. A loan that is guaranteed by the Veterans Administration.

Yield Spread Premium
.  The fee or bonus expressed in terms of points or percentage of the loan rincipal that is paid by the national mortgage company to the local loan broker.

Steps to Selling

Decide to Sell

So you’ve decided to sell your house. Before anything else it’s a good idea to sit down and clarify your motivations and draw up a basic time frame for the selling process.

1.1 Why Sell? Why do you want to sell your house?Why do you want to sell your house? Do you intend to simply find a larger home, or do you plan on moving to another neighborhood, school district, city or state? You might think your reasons are obvious, but it would do well to consider the implications of each option for your family’s lifestyle, opportunities and finances. Being clear about your intentions for selling will make it easier for an agent to determine the most appropriate option for your specified financial, lifestyle and real estate goals.

1.2 When Should I Sell? You should immediately establish your time frame for selling. If you need to sell quickly, you can speed up the process by hiring an experienced agent as opposed to selling it yourself. If there’s no pressing need to sell immediately, you can sit down with an expert real estate agent to thoroughly review the current market conditions and find the most favorable time to sell.

1.3 What’s The Market Like? When you work with our agents, you can be sure that you’ll have agent knowledge, expertise and negotiating skills at work for you to arrive at the best market prices and terms. We’ll keep you up-to-date on what is happening in the marketplace and the price, financing, terms and conditions of competing properties. With us, you’ll know exactly how to price and when to sell your home.

1.4 How Do I Optimize My Finances? Deciding to sell your home demands a serious consideration of your current financial situation and future possibilities. With the help of a qualified agent, you’ll be able to effectively assess the cumulative impact of these changes, estimate potential proceeds of selling your home, and plan effective tax savings and estate planning strategies. We will ensure that you not only take control of your finances, but use them to their fullest potential.


Select an Agent

2.1 What To Look For In An Agent. Here are a couple of factors to keep in mind when looking for a listing agent:

    1. Experience and Expertise. You want a full-time agent who’s familiar with your area in and with the type of property you intend to sell. Does he or she employ a diverse range of marketing and advertising strategies? How tech-savvy is your agent? How many similar properties has he been able to sell in the past?
    1. Availability and Commitment. Your agent should be capable of prompt and decisive action during the course of selling your home. Do they make it a point to keep in touch with you constantly? Can they easily be contacted in case of emergencies or even for the simplest questions?
  1. Rapport. Do they take the time out to listen to your goals and clarify your needs? Can they understand your unique situation and be genuinely concerned about the outcome of the process? Your listing agent will be your guide and partner in this crucial decision, so it’s important to find one you can get along with.

2.2 What Is Your Home Worth? Without a professional agent, most independent home sellers tend to overestimate the value of their home. You can avoid this pitfall by consulting with an experienced Real Estate listing agent.


Prepare to Sell


Accepting An Offer

4.1 The Price Isn’t Always Right. “The higher the price, the better the offer.” Don’t let yourself be fooled by this popular misconception. Price isn’t always the determining factor in choosing among multiple offers, for several important reasons: the initial offer is never final, and there are a number of terms and conditions that may influence the final outcome of a price. You can trust your listing agent to help you thoroughly evaluate every proposal without compromising your marketing position.

4.2 Negotiating The Right Way. We take the ethical responsibility of fairly negotiating contractual terms very seriously. It’s our job to find a win-win agreement that’s beneficial to all parties involved. Oftentimes you will have to deal with multiple offers before ratifying the one you judge to be the most suitable for you – and as your agents we’ll guarantee a thorough and objective assessment of these offers to help you make the right choice.

4.3 The Initial Agreement and Deposit. Once an offer is ratified, the home seller and buyer will agree upon the amount for the good faith deposit and set up an escrow account. This reflects the buyer’s intention to purchase your property and ensures that no funds or property will change hands until all instructions in the transaction are followed.

4.4 Keep these tips in mind to streamline the process even further:

    • Keep written records of everything. For the sake of clarity, it will be extremely useful to transcribe all verbal agreements of everything from counter-offers and addendums, and convert them to written agreements to be signed by both parties. We will assist you in drafting addendums in your contract to ensure you’ve got all the bases covered.
  • Stick to the schedule. Now that you’ve chosen your offer, you and the buyer will be given a timetable to mark every stage in the process of closing the real estate contract. Meeting the requirements on time ensures a smoother flow of negotiations. During the process We’ll keep you constantly updated so you’ll always be prepared for the next step.

Escrow, Inspections, & Appraisal

5.1 The Title Company. The buyer selects a title company, whose job it is to examine and insure title to real estate. After researching the complete recorded history of your property, they’ll certify that 1) your title is free and clear of encumbrances (eg. mortgages, leases, or restrictions) by the date of closing, and 2) all new encumbrances are duly included in the title. They’ll draw up a preliminary report at the end of the process, which your listing agent will go over with you in detail.

5.2 Contingencies. A contingency is a condition that must be met before a contract becomes legally binding. For instance, a home buyer will usually include a contingency stating that their contract is binding only when there is a satisfactory home inspection report from a qualified inspector.

Before completing his or her purchase of your property, the home buyer goes over every aspect of the property, as provided for by purchase agreements. These include:

    • • Obtaining financing and insurance
    • • Reviewing all pertinent documents, such as preliminary title reports and disclosure documents
  • • Inspecting the property. The buyer has the right to determine the condition of your property by subjecting it to a wide range of inspections, such as roof, termite/pest, chimney/fireplace, property boundary survey, well, septic, pool/spa, arborist or mold.

Depending on the outcome of these inspections, one of two things may happen:

    1. • Either each milestone is successfully closed and the contingencies will be removed, bring you one step closer to the close, or
  1. • The buyer, after reviewing the property and the papers, requests a renegotiation of the terms of contract (usually the price).

How do you respond objectively and fairly to the buyer when a renegotiation is demanded, while acting in your best interests? This is when a professional listing agent can make a real difference in the outcome of the transaction. Having dealt with various property sales in the past, we guarantee our expertise and total commitment to every client, no matter what their situation.

5.3 Loan Approval and Appraisal. We suggest that you accept buyers who have a lender’s pre-approval letter, which is a better guarantee of loan approval than a pre-qualification. Expect an appraiser from the lender’s company to review your property and verify that the sales price is appropriate.

5.4 Ready To Go? Don’t pack your bags just yet. Something unexpected might happen – a buyer’s offer fails to push through,or new buyers come by to visit right when your house is in chaos. There’s a proper time to start preparations for moving, and given our previous experience with these transactions, we’ll help you determine when that time will be.

Having dealt with various property sales in the past, We guarantee our expertise and total commitment to every client, no matter what their situation.


Buying Your Next Home

6.1 Buying your next home. Now that your transaction on your home is well on your way to a successful close, it’s time to start preparing for your next home.

As your trusted real estate partner, we’re ready to help you articulate and prioritize your goals for this next project. We’ll get you off to a good start by finding the best interim arrangement for you while you’re in between homes or help with finding your next dream home.


Close of Escrow

If you’ve come this far, then this means only one thing: congratulations, you’ve successfully sold your home! Don’t forget to tie up these loose ends:

7.1 Final Walk-Through Inspection. More of a formality than anything else, the final inspection takes place a few days before the transaction is closed. The buyer visits your property to verify that all is in working order. You’ll be signing the papers certifying that the property was sold in satisfactory condition.

7.2 Cancel Home Services and Utilities. We can provide a list of useful numbers for the termination of home services and utilities as of the date of the closing.

7.3 Be Prepared. Your agent is ready to assist you should an unforeseen glitch pop up, even at this last stage. Something at the house breaks down, the buyer’s loan doesn’t pull through on time – no need to worry. We’ve encountered these problems before so we know how to handle these problems efficiently.

7.4 Closing. The title company furnishes the principals with a closing statement, which summarizes all the financial transactions enacted in the process. At closing you and the buyer will sign the final documents for the Title Company. They’ll record the transaction for you and the buyer at the County Recorder’s Office. At closing you’ll then receive your proceeds, and the buyer will become the new owner.


The Buying Process

Decide to Buy

Purchasing a home is probably the biggest financial decision you will ever make. Whether this is your first purchase or you are moving on to a different home that better meets your needs, this decision must be made carefully

1.1 Why Do You Want To Buy? Are you tired of paying rent? Have you outgrown your current home? Would you like a larger yard? Would you rather live in a different area? Do you want to shorten your commute? Having a clear sense of your reasons for buying will help you choose the right home.

1.2 Has Your Income Grown Home ownership can be a very good investment. As you pay down the principal part of your loan, you are building equity over time in addition to any market appreciation on your property.

1.3 Can You Afford To Buy? Experts recommend spending between 33-40% of your income on housing. The tax benefits of home ownership can provide a considerable advantage over renting.


Preparation

2.1 Build your ‘Green File’. A green file contains all your important financial documents. You’ll need it to secure financing for your home. The typical green file should contain:

  • Bank accounts two months
  • Investments
  • Credit card
  • Auto loans
  • Recent pay stubs/LES  two months
  • Tax returns for two years

2.2 Check your credit rating. Your credit score will have a huge impact on what type of home you can buy, and at what price. Anything above 620 is considered good. A premium interest rate may mean a lower interest rate on your mortgage. Check your credit rating with a credit reporting agency such as Equifax , Experian or Trans Union.

2.3 Be Careful With Your Finances. Now is not a good time to make sudden career changes or large purchases. You want to approach home buying from a position of financial stability.


Choosing A Real Estate Agent

3.1 Buying a home. This process requires making many important financial decisions, understanding complex issues and completing a lot of paperwork. It helps to have an expert in your corner when undertaking such a large purchase. Our real estate agents can guide you through the process, and they also can get you access to listings before they hit the general market.

3.2 Choosing an agent. Here are some factors to consider when choosing a real estate agent:

  • Look for a full-time agent who has experience completing transactions similar to yours.
  • Interview a few agents: Are they familiar with the area you are interested in?
  • Ask how much time the agent will have for you, and if they have a licensed assistant.
  • Ask about their credentials and education: A good agent will continually strive to improve and gain knowledge of the latest real estate trends.
  • Does the agent return your calls promptly? Time is money when attempting to buy a home.
  • Ask for a list of homes they’ve sold or a list of references.
  • Choose an agent who listens attentively to your needs and concerns. Pick an agent with whom you feel comfortable.

Go Shopping

Once you’ve got those preparations out of the way, it’s time to find the home of your dreams.

4.1 Take a Drive. Get to know the neighborhoods you are interested in. Drive around and get a feel for what it would be like to live in the area. Start getting a sense of the homes available in those neighborhoods.

4.2Narrow your search. Select a few homes that interest you the most and have your real estate agent make appointments to visit them. Ask your real estate agent about the potential long term re-sale value of the homes you are considering.

4.3 Time to Buy. Once you’ve picked out the house you want to buy, your real estate agent can help you make an offer that the seller will accept. A good agent will investigate the potential costs of maintenance and repairs on the house.


Escrow, Inspections, & Appraisal

The hard part is behind you, but there are a few more steps before you can move in to your new dream home.

6.1 Final Inspection. A few days before you take over the property, we’ll do one last inspection to make sure everything is in order.

6.2 Utilities and Services. You will have to change the utilities and services of the house over to your name. Your real estate agent will assist in this process.

6.2 Closing Escrow. When your transaction is nearly completed, the title company will provide you with a “closing statement” that details all of the financial details of your home purchase. We will go over this with you to ensure its accuracy. At the last step in the buying process, the title company will have you sign the final documents, including loan documents (“deeds of trust”). When everything is complete, the title company will record the transaction for you at the County Assessor’s Office, and you will become the official new owner.


Moving In

The hard part is behind you, but there are a few more steps before you can move in to your new dream home.

6.1 Final Inspection. A few days before you take over the property, we’ll do one last inspection to make sure everything is in order.

6.2 Utilities and Services. You will have to change the utilities and services of the house over to your name. Your real estate agent will assist in this process.

6.2 Closing Escrow. When your transaction is nearly completed, the title company will provide you with a “closing statement” that details all of the financial details of your home purchase. We will go over this with you to ensure its accuracy. At the last step in the buying process, the title company will have you sign the final documents, including loan documents (“deeds of trust”). When everything is complete, the title company will record the transaction for you at the County Assessor’s Office, and you will become the official new owner.

Financing Roadmap

Financing-Road-Map

Preparation

Where do you begin to secure finances for purchasing a new home, refinancing an existing home, purchasing your dream ranch, or obtaining a real estate equity line of credit? Obtaining a real estate loan can be confusing. You can simplify the process and avoid a lot of potential headaches by getting off to a good start. Here are a couple of ways to do so:

1.1 Build your ‘Green File’. Organizing and compiling all your pertinent financial documents into a ‘green file’ (think ‘green’ for money) is an absolute must for any potential borrower. Your green file is a resume or profile that will give lenders an idea of what kind of debtor you might be. The typical green file should contain:

  • Financial statements
  • Bank accounts
  • Investment records
  • Credit card information
  • Auto loans
  • Other indebtedness
  • Recent pay stubs
  • Tax returns for two years

1.2 Consider your Credit Rating. Another means by which lenders gauge your trustworthiness as a borrower is through your credit rating. Credit ratings tracks your credit history , which includes such crucial information as the number of your open loans and the punctuality of your payments.

Treat your credit like gold. Credit ratings are important because they determine whether or not you will be approved for a loan and what your interest rate wll be. Thus, you cannot take your credit rating seriously enough! We suggest checking your credit reports at least once a year or before making any major purchase to ensure the accuracy of the information.

What the scores mean. Ratings usually vary between 400 and 800. Anything above 620 is good. If you exceed 680, you are considered premium and may even get a lower interest rate.

Determine your credit rating. You can do this by contacting a credit reporting agency such as Equifax, Experian or Trans Union. Above all, don’t hesitate to consult with your lender if you need to improve your rating.

1.3 Prioritize your Costs and Savings. Buying real estate wisely is all about credit and interest terms.

Prioritize your costs. Down payments, closing costs and additional expenses (such as surveys and inspections) should be at the top of your list. On the other hand, be sure to pay down on your current revolving and high-interest rate debts, such as credit cards, because this will influence your credit rating and interest rate.

Remember: lenders like stability. Instill confidence in your potential lender by avoiding any big, sudden moves both in your career and your finances. If that job change or big budget purchase absolutely cannot be postponed, check with your lender first and consider the consequences.

 

 


Selection

2.1 Choose a Mortgage Company. Securing finances requires a decision that you may have to live with for many years-so spend time comparing the terms and conditions of different lenders, before making your choice. There are a number of ways to find a willing lender, whether through traditional print ads, Realtor referrals or Internet sources. There are also several considerations to keep in mind when shopping for the right lender and program:

  • Price: Consider the competitiveness of a lender’s terms with that of others, especially for mortgage rates, interest rates, and additional closing costs and points.
  • Diversity of products: Price is important but by no means should it be your only determining factor. How extensive is the lender’s range of offered loan programs? Check the availability of the loan program most appropriate to your credit profile and property.
  • Rapport: Do your lenders and brokers communicate effectively and thoroughly? Are they attentive and prompt? You aren’t looking for just a guide but a partner -someone you can work with and trust every step of the way.
  • Connections: Check whether the lender has access to local loan approval committees that understand your goals as a borrower.

2.2 Choose a Loan. Though there are many different kinds of loans available today, these three are the most commonly used:

  • Fixed loan: This long-term option requires monthly payments that will remain the same (fixed) throughout the duration of the loan. The loan term may vary from fifteen to thirty years.
  • Adjustable rate mortgage (ARM): The loan rate here will be determined by factors such as the Federal Funds rate index, readjustment intervals, and capitalization rate. The initial interest rate can be as much as 2 to 3 percent lower than a comparable fixed rate mortgage. This can make homeownership more affordable. However you should first examine all factors and consider the downside risks before selecting this option.
  • Hybrid loan: Also known as an intermediate or convertable ARM, it offers a fixed interest rate for a specified initial period before it ‘switches’ to an ARM and adjusts with the market every six months or every year thereafter.

Consult with your lender to determine which loan type and program would best correspond with your resources and needs.

 


Understanding Financing

3.1 Don’t be intimidated by the jargon used in financing. Here are a number of key terms you’ll see frequently in your loan application process.

  • Credit report: Request your lender to order one from a third party credit agency such as Equifax, Experian or Trans Union. A credit report should contain information on all your outstanding loans and repayment history, and will typically cost under fifty dollars.
  • Application/processing fee: This is the lender’s fee for determining your capacity as a borrower and will usually be charged upon closing of the loan. Expect a price tag of a couple of hundred dollars.
  • Annual percentage rate (APR): The APR expresses the sum total of all your borrowing costs as a interest rate percentage charged on the loan balance.
  • Indexes: Changes in indexes such as the Federal Funds Rate and the Treasury Bill are used to periodically readjust the interest rates in adjustable rate mortgages (ARMs).
  • Points: When mortgage companies are competing by offering lower interest rates, they may charge you a “point”, a one-time pre-paid interest fee, calculated as a percentage of the loan. Points are considered part of the cost of credit to the borrower, and part of the investment return to the lender. They may range from 0.25% to 2% of the loan balance, and are usually paid up front. One point equals 1%.
  • Appraisal cost: This is the fee charged by an independent appraiser who may be hired by your lender to evaluate the property’s purchase price, condition and size in relation to similar recent neighborhood sales. This information is necessary to the lender because it ensures repayment in case the borrower defaults, forcing the lender to sell the property.
  • Miscellaneous fees: Various costs will be incurred during the processing of your loan request, such as notary, courier, county recording fees and title company escrow fee.
  • Pre-payment penalties: A prepayment penalty is a provision of your contract with the lender that states that in the event you pay off the loan early, you will pay a penalty. Penalties are usually expressed as a percent of the outstanding balance at time of prepayment, or a specified number of months of interest. They often decline or disappear altogether with the passage of time.

Pre-Approval

How is pre-approval different from pre-qualification? What are the advantages of each and which option would be the best for you?

4.1 Pre-Qualification. This is an assessment by the lender, based on certain basic information given by the borrower (e.g. employment, income, asset information, current monthly debt, and credit worthiness). Based on this quick evaluation the lender makes a tentative decision to pre-qualify the borrower for a certain loan amount. This does not commit the lender to a loan, rather it is only an opinion of the lender.

4.2 Pre-Approval. Like a pre-qualification, a pre-approval involves a lender making an assessment of a borrower’s buying capacity based on her or his income. But unlike a pre-qualification, a pre-approval letter also checks the applicant’s credit and is a surer verification of a borrower’s income. It takes longer to process and will require more comprehensive documentation, but gives a clearer and more definitive guarantee of the loan amount a borrower is entitled to.

4.3 Why Choose Pre-Approval? It’s advisable to go straight to a pre-approval for several reasons. A pre-approval can strengthen your purchasing power as a far more accurate evaluation of how much house or real estate you are capable of buying. The pre-approval will be more appealing and thus perform better than a pre-qualification in a competitive sellers market. It’s also more time-effective since it reduces the time your lender will need to process and fund your loan.

 


Application & Processing

5.1 Brokers and Lenders: Telling the Difference. The lender or creditor is the party who 1) disburses or provides funds to the borrower at the end of a successful loan application process, and 2) receives the note attesting the borrower’s obligation to repay. The broker, meanwhile, acts as an intermediary between the borrower and the lender and serves as the applicant’s main contact throughout the process. The mortgage broker usually receives a service fee from the lender for customer services rendered.

5.2 Loan application forms: Where to Find Them. Most forms can be downloaded from a lender’s website. Fill out all forms accurately and completely, and contact your lender for any questions or clarifications.

5.3 Documentation: Keeping your Papers in Order. It is highly recommended to keep an organized file containing both originals and copies of all documents accumulated throughout the entire application process. These will include:

  • 2 years of W-2 forms from your employer, or 2 years of tax returns for those who are self-employed
  • Recent pay stubs
  • 3 months of bank and money market statements
  • Brokerage, mutual fund and retirement account statements
  • Proof of other income sources (alimony, trusts, rental income, etc.)
  • Credit card statements
  • Auto /boat / student / miscellaneous loans
  • Drivers’ license or form of ID
  • Copies of visa or green card (for non-US citizens)
  • Copies of existing mortgage debts (for those applying for a home equity line of credit or another mortgage)

5.4 Underwriting: keeping in touch. Underwriters, hired by lenders, are analysts who examine all the data from a borrower’s property and transaction, and ultimately determine whether or not mortgages should be issued to the applicant. Loan approval committees will use underwriters’ reports during their deliberations to evaluate the property and the applicants’ creditworthiness. Your broker may contact you frequently in the course of the loan application process, so prompt communication is necessary to keep the process running smoothly.

 


Funding

 



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