Home Buying Guide Contents 1 Your step-by-step home buying guide 2-3 The loan process at Third Federal 4 How much home can you afford? 5-9 Mortgage worksheets 10 , You re on your way to owning a home 11-13 What to check when house hunting 14-20 Glossary Your step-by-step home buying guide Who is Third Federal? Since 1938, Third Federal has helped people become homeowners. At Third Federal, we believe that home buying is a solid investment in our communities. That is why we offer highly competitive mortgage products at the best rates possible. We specialize in mortgage lending. Our goal is to help people achieve the American Dream of homeownership and financial stability. Third Federal can do more than other banks can, especially if you’re buying your first home. In fact, for the last 16 years, we’ve earned the highest rating from Bauer Financial, the nation’s bank rating authority. And now we’d like to help you. We hope you find this guide useful. If you have any questions, feel free to call us toll-free at 1-800-THIRD-FED (800-844-7333). Bank Smart. Live Better.® What’s important? Third Federal can offer you a wide selection of mortgage loans, along with the expert advice to help you decide which is best for you. A non-commissioned Loan Counselor will take you through the entire mortgage process, keeping it simple and hassle-free. Here are some important items to consider when shopping for your mortgage: • Getting a low rate • Closing costs • Pre-approval • Servicing of the loan • Keeping the mortgage process simple • No prepayment penalties • Finding the right loan for you • Experience/reputation of lender • Rate locks Helpful learning tools online Third Federal’s website, www.thirdfederal.com, is available to you 24 hours a day, 7 days a week. You can check mortgage rates, see how much house you can afford, get pre-approved and even apply for your mortgage. Also, online calculators make it easy to figure monthly payments, amortize loans and more. Simple graphics and big, bold headings make everything easy to find. 1 The loan process at Third Federal Buying a new home can be exciting, but sometimes confusing and stressful as well. At Third Federal, we strive to be helpful, responsive and, above all, to KEEP IT SIMPLE. Your Loan Counselor will assist you through the entire process, answering all your questions and keeping you informed. Pre-approval We recommend that every buyer get pre-approved even before shopping for a home. A pre-approval gives you the peace of mind of knowing the mortgage amount you qualify for and can be a great negotiating tool when you find that perfect home. Loan application When you find a home, you and the seller will negotiate terms for the sale of the house. Items generally negotiated will be: purchase price, closing date and date of possession. These terms will be stated in a purchase agreement and signed by both parties. Once you have a signed purchase agreement, present it to your Loan Counselor. Your Counselor will help you select the mortgage that best meets your needs. You will then complete a loan application. Appraisal An appraisal of the property will be ordered to determine the value of the property for the benefit of the lender. The appraiser will visit the house and consider sale prices of comparable houses in determining the value. 2 The loan process at Third Federal Loan approval Once the appraisal is received, the loan file is submitted to our loan committee. This committee will review the file and make a determination on approval. Loan approval is usually obtained within three weeks of application. Escrow – title work and document preparation Escrow is often one of those confusing terms for home buyers. Escrow is the holding of funds and documents by a third party until all terms and conditions of a contract have been met. In a real estate transaction, a title company will hold the funds and documents until the terms of your purchase agreement have been met. An escrow account will be established and title work will be ordered. This will include a title exam to ensure that you are receiving clear title to the property. Loan documents such as the mortgage note and deed will be prepared. Signing The documents will be sent to an outside title company acting as the escrow agent, for both you and the seller(s) to sign. At this time, you will also bring any remaining funds that are due, such as the down payment, closing costs and evidence of homeowner’s insurance. Title transfer Once all documents are signed and funds are collected, the escrow agent verifies that all conditions of the contract have been met and the title is transferred. The loan generally closes the day after the title transfers, and funds are then disbursed to the seller. The entire process, from purchase application through closing, usually takes 30 days. Welcome home! Possession of the property is generally negotiated and stated in the purchase agreement, and your real estate agent usually turns the keys over to you. Congratulations! You are now a homeowner! 3 How much home can you afford? Now that you have learned about the types of loans and how a loan is processed, it will be helpful to know how to get a loan. Your ability to obtain a loan will be determined to a large extent by your willingness to pay and your ability to pay. • Your willingness to pay is reflected in your credit history. We will review your credit report with you when you apply for a loan. • Your ability to pay will be reflected by the funds you have available to cover costs, including down payment, closing costs, points, prorated interest, title insurance and, if necessary, Private Mortgage Insurance (PMI). In addition, your source(s) of income, as well as any additional ongoing debts, will be analyzed in order to determine how much home you can afford. The mortgage worksheet (on the next page) will help you estimate how much you can afford to spend on a monthly house payment. Keep in mind that meeting debt/income ratios is not the only indication of whether a loan will be approved or declined. A review of the entire application including an appraisal of the property is necessary for an accurate evaluation. Mortgage worksheets Section 1 — your gross monthly income If you will be applying jointly, include income from all sources for all applicants. You need not include income from alimony, child support or separate maintenance if the applicant who receives this income does not wish to have it considered as a potential source of repayment. “Gross monthly pay” is your pay before any deductions, such as taxes, 401K contributions, insurance premiums or charitable contributions are withdrawn. At the time of application, you will need to provide us with your pay stub(s) for the most recent month and your W-2(s) or signed tax returns for the previous year. Assuming that your total annual household income is $42,000, you can use any of the following formulas to calculate your monthly employment income: Method of payment Method of calculation Monthly income $ 42,000.00 annually Divide by 12 $ 3,500.00 $ 3,500.00 monthly No calculation necessary $ 3,500.00 $ 1,750.00 twice a month Multiply by 2 $ 3,500.00 $ 1,615.38 every 2 weeks Multiply by 26 & divide by 12 $ 3,500.00 $ 807.69 weekly Multiply by 52 & divide by 12 $ 3,500.00 4 Mortgage Worksheets Section 1 — worksheet List monthly income (before taxes) for yourself and your co-borrower(s). Include all sources of income that are likely to continue for at least three years. Average monthly amount Monthly pay $ ______________ Overtime/commissions/bonuses/tips $ ______________ Dividends/interest earnings $ ______________ Business or investment earnings $ ______________ Pension/Social Security benefits $ ______________ Veterans Administration benefits $ ______________ Unemployment compensation $ ______________ Public Assistance $ ______________ Alimony, child support, separate maintenance* $ __________________ *Does not need to be included if applicant receiving income does not wish to have it considered as a potential source of repayment. Other $ ______________ Total monthly income $ ______________ x 12 = Total yearly income $ ______________ Notes: 5 Mortgage Worksheets Section 2 — your monthly debt payments Do not include your housing costs for your current residence. When calculating your “Installment Loan Payments,” do not include debts that will be paid in 10 months or less. (If you are not sure if the debt will be paid off in 10 months or less, multiply the “Minimum Monthly Payment” by 10. If the result is less than the outstanding balance, include the debt.) If you have a balance on a credit card, enter the “Minimum Monthly Credit Card Payment” for that card (if the balance will not be paid in 10 months or less). Also, you must include the monthly payment for any loan for which you have co-signed since you are legally obligated to make this payment if the maker of the loan fails to do so. Section 2 — worksheet List the monthly debt payments of your household (other than your current housing costs) that you won’t be paying off in the next 10 months. Average monthly amount Installment loan payments (i.e., auto loan/lease) $ ______________ Minimum monthly credit card payment $ ______________ Student loan payment $ ______________ Personal loan payment $ ______________ Alimony, child support payment $ ______________ Other $ ______________ Total monthly debt payments $ ______________ Notes: 6 Mortgage Worksheets Section 3 — your available cash and assets While you may have “cash gifts,” Third Federal will require that you have at least 5% of the purchase price in your own funds. You may list your balances in IRA or Keogh accounts if you are prepared to use the funds for your purchase, even though you will pay an IRS penalty for early withdrawal. Contact your accountant to verify this information. You may also be permitted to borrow funds from your 401K account, if you have one. For information, contact your employer’s human resources department or benefits administrator. Section 3 — worksheet List here all the money you have available for the down payment and closing costs. Checking account(s) $ ______________ Savings account(s) or Certificate(s) of Deposit (CD) $ ______________ Mutual funds, stocks and bonds $ ______________ Other assets (cash on hand, IRA or 401k) $ ______________ Total cash and assets $ ______________ Notes: 7 Mortgage Worksheets Section 4 — affordability analysis Meeting debt/income ratios is not the only indication that a loan will be approved or declined. A review of the entire application, including an appraisal of the property, is necessary for an accurate evaluation. Section 4 — worksheet Housing ratio Monthly Income (from Section 1) $ _____________ Multiply by 28%* X .28 = $ _____________ (A) Debt ratio Monthly Income (from Section 1) $ _____________ Multiply by 36%* X .36 = $ _____________ (B) Total of regular monthly debt payments (from Section 2) $ _____________ (C) (B) – (C) = $ _____________ (D) * Maximum monthly payment (the lesser of A or D) $ _____________ Payment includes principal and interest, real estate taxes, PMI and condominium fee (if applicable). *Assumes a down payment of 5% – 29%. Notes: 8 Mortgage Worksheets Monthly mortgage payment calculator Loan amount 6% 6.5% 7% 7.5% 8% 8.5% 9% 9.5% 10% $ 25,000 $ 150 $ 158 $ 166 $ 175 $ 183 $ 192 $ 201 $ 210 $ 219 $ 30,000 $ 180 $ 190 $ 200 $ 210 $ 220 $ 231 $ 241 $ 252 $ 263 $ 40,000 $ 240 $ 253 $ 266 $ 280 $ 293 $ 308 $ 322 $ 336 $ 351 $ 50,000 $ 300 $ 316 $ 333 $ 350 $ 367 $ 384 $ 402 $ 420 $ 439 $ 60,000 $ 360 $ 379 $ 399 $ 420 $ 440 $ 461 $ 483 $ 505 $ 527 $ 70,000 $ 420 $ 442 $ 466 $ 489 $ 514 $ 538 $ 563 $ 589 $ 614 $ 80,000 $ 480 $ 506 $ 532 $ 559 $ 587 $ 615 $ 644 $ 673 $ 702 $ 90,000 $ 540 $ 569 $ 599 $ 629 $ 660 $ 692 $ 724 $ 757 $ 790 $ 100,000 $ 600 $ 632 $ 665 $ 699 $ 734 $ 769 $ 805 $ 841 $ 878 $ 110,000 $ 660 $ 695 $ 732 $ 769 $ 807 $ 846 $ 885 $ 925 $ 965 $ 120,000 $ 719 $ 758 $ 798 $ 839 $ 880 $ 923 $ 966 $ ,009 1 $ ,053 1 $ 130,000 $ 780 $ 822 $ 865 $ 909 $ 954 $ 1,000 $ 1,046 1 $ ,093 1 $ ,141 $ 140,000 $ 839 $ 885 $ 931 $ 979 $ ,027 1 $ 1,076 $ 1,126 1 $ ,177 1 $ ,229 $ 150,000 $ 899 $ 948 $ 998 1 $ ,049 1 $ ,101 $ 1,153 $ 1,207 $ ,261 1 1 $ ,316 $ 160,000 $ 959 1 $ ,011 1 $ ,064 1 $ ,119 1 $ ,174 $ 1,230 $ 1,287 1 $ ,345 1 $ ,404 $ 170,000 1 $ ,019 1 $ ,075 1 $ ,131 $ ,189 1 1 $ ,247 $ 1,307 $ 1,368 1 $ ,429 1 $ ,492 Note: Based on a 30-year, fixed rate mortgage. Monthly payment includes principal and interest only. Property taxes, homeowner’s insurance and other fees are not included. When using this chart, remember that you may need to add PMI, condo fees, etc. to the total. 9 , You re on your way to owning a home As you can see, there are a number of things you need to consider whether you’re buying your first home or your next home such as affordability, mortgage options and costs. It may seem very complex. But Third Federal’s experienced Loan Counselors are available to help you analyze your individual financial situation and to guide you through the loan process and into your home. A pre-approval is available to you at no cost and may help you speed up the home-buying process. Just call one of our convenient branch offices to schedule an appointment or to apply by phone. You can also apply online at www.thirdfederal.com. For more information or to apply, call Third Federal’s Customer Service Center toll-free at 1-800-THIRD-FED (800-844-7333). What to bring for a pre-approval: • One month’s pay stubs • Last year’s W-2 In addition, you should have a knowledge of your assets and debts. If self-employed, you will also need the previous two years’ tax returns (signed) and all schedules. What to bring at loan application: Provided you have completed a pre-approval application, once you have found your home, all you need to do is bring in your purchase agreement with all disclosures/addenda and your application fee (not required for a no-cost loan). What to ask: • How much will I need for a down payment? • What loan amount will I qualify for? • What is the current interest rate and annual percentage rate (APR)? • Can I lock in an interest rate? • Would a fixed or an adjustable rate be better for me? • What options do I have for the term of the loan? • What are your fees? • What will my monthly payment be? • Will you include homeowner’s insurance in my monthly payment? • Will you include real estate taxes in my monthly payment? • How long will it take to process and approve the loan? • Do you need any additional information? 10 What to check when house hunting Here are some helpful tips on what to look for in a house that you may be considering. Roof • How old is the roof – is it the original or a replacement? • Are any roof tiles (slate or asphalt) missing? What is the overall condition? • If asphalt, how many layers of tiles are on the roof? (Two is the maximum before you need to take off and totally replace.) • If slate, have any tiles been replaced? • Look for signs of leakage in roofing or flashing. Chimney • Check flashing for cracks or wear. • Are any bricks missing? • Is the mortar in good condition? • Is there a screen on top of the chimney? Attic • Check roof from inside for leaks; look for water or smoke marks on the chimney to determine if there are leaks. • Is the attic properly ventilated? (Vents under gables should not be closed.) • Check depth of insulation. • If attic is unfinished, check the wiring, as it will indicate the general condition and age of the wiring in the house. • Look for frayed or old wiring, deterioration in the casing or slack in the lines. Rooms • Count number of outlets per wall, per room (should have at least one outlet per wall). This is very important in the kitchen! • Are the outlets grounded (3-way) plugs? This can be tested with a simple device available at hardware stores. Once again, check for grounded plugs in the kitchen – very important! • Get the room dimensions from the real estate sheet – it will be handy to have later. • Any cracks or chips on the walls? Corner cracks can indicate settling of the house. • What is the condition of the wallpaper or paint? • Are walls plaster or drywall? Major appliances • How old are the appliances? • Are they included in the purchase price of the house? 11 What to check when house hunting Carpeting • How old is it? • Any worn spots or stains? • Any extra pieces left from installation for replacement pieces? Windows • Any cracked or broken panes? Specify replacement before you take possession of the house. • Check for insulated glass (energy-saving). • Will all windows open, or are any painted shut? • Are screens and storms (if applicable) for all windows included? Try to get the most maintenance-free type possible. Bathrooms • Look for leaky faucets, water spots under the sink or toilet, any stained tile. • Flush ALL toilets. • Check tile and grouting in shower/tub area – cracks may indicate leaking to the ceiling of the room below. • Look for an exhaust fan in the shower/tub area (older homes usually have a window instead). Fireplace • Has it been used recently? Has it been cleaned and/or inspected recently? • Does the flue work? • Is it equipped for a gas jet? Has it been properly capped off if not in use? (The gas company will check this.) Basement • Look carefully for water problems. If the basement smells musty, it most likely has a water problem. If the basement looks too clean and freshly painted, the owner could be trying to hide a problem. • Look for major cracks around the foundation and in the corners which would indicate that the house has settled. • Ask about water problems – the owner must disclose this information. The best waterproofing is done from the outside of the house – interior waterproofing is generally not satisfactory. • How old is the furnace? When was it last serviced? • How old is the water heater? (Usual life is 8–10 years.) • Is the wiring sufficient for the washer and dryer? • Are there any broken windowpanes? Do all the windows lock? If glass block, are the windows ventilated? 12 What to check when house hunting Exterior • Look over general appearance from across the street. • Are gutters in good shape and properly pitched? • Wall surface – if brick, look for cracks and missing mortar. If wood or siding, look for maintenance problems (repairs, major painting required, etc.). • Doors – any gaps, warpage, or broken glass panes? • Are screen doors included? • Do all the locks work? Are there deadbolt locks? Yard • It is best to check the yard after a rain to see if there are drainage problems. • Look for any low spots near the house which could cause leakage into the basement. • Check grass for any burned-out spots. Driveway/Garage • Look for cracks in driveway or garage pad. • Driveway or garage pad should have drain (older driveways or garage pads may not). • Do garage door(s) open easily? • Is there a light in the garage? • Is there an electrical outlet in the garage? • Are curbs, sidewalks and tree lawn in good condition? Other suggestions • Ask for the average monthly utility costs (many people will show you their bill stubs). • How long have the current owners been in the house? How many previous owners were there? • What are the neighbors like? Any problems? • What is the school system like? How close are schools? • How accessible is public transportation? • Have the real estate agent pull the “comps” for the street for the past year – it will help you to determine the offering price. • Also check the rise in property values for the neighborhood for the past five years. 13 Glossary A ADDITIONAL SECURITY: Security offered to a lender that would be different from the primary security property. This might include an additional piece of real property or a savings account, in addition to the down payment, in order to convince a lender to grant a mortgage loan. ADJUSTABLE RATE MORTGAGE (ARM): A mortgage loan in which the interest rate periodically changes according to terms and conditions specified in a mortgage note. The changing interest rate is based upon the upward and downward movement of an index, such as the current U.S. Treasury Securities, and a fixed margin above that index. An adjustable rate mortgage is also called an adjustable mortgage loan (AML). A.L.T.A. POLICY: An acronym for American Land Title Association. It is a title insurance policy insuring the lender against losses sustained due to lien priority. This policy protects the lender from claims which might have been recorded but may not have been identified by title search and examination. It also protects the lender from defects which might not have been recorded at the time the search was completed. The borrower may pay all, a part, or none of this cost, depending on the terms of the sales contract or local custom. AMORTIZATION: The reduction of a mortgage debt, according to a set schedule spelled out in the mortgage note, to a zero balance over a certain number of years. APPLICATION FEE: A fee charged by a lender for initiating a loan application. APPRAISAL: The valuation of real property, based upon current market conditions, by a certified, independent appraiser to determine if the value of the property is sufficient to secure the loan. The appraiser inspects the house and the neighborhood, and considers the selling prices of comparable houses and other factors in determining the value. The appraisal will provide the factual data upon which the appraiser bases the appraised value. APPRECIATION: An increase in property value beyond the original purchase price. ASSESSED VALUATION: The dollar value assigned to real property by a local government for the purpose of assessing taxes. B BORROWER: A person who obtains a loan in order to take ownership of real property. The borrower is responsible for the repayment of that loan according to the terms and conditions of the mortgage note. BUY DOWN: A provision granted by a lender that allows the borrower to pay additional points to lower a given interest rate. BUY UP: A provision granted by a lender that allows the borrower to pay fewer points, which results in a higher interest rate. Note: This glossary is provided specifically to assist the home buyer in understanding mortgage loan terms as used in this guide. These terms may vary in definition from one financial institution to another. 14 Glossary C CAPS: Limits, set by the lender, on the upward (ceiling) or downward (floor) rate changes permitted on an adjustable rate mortgage at each adjustment period. CITY INSPECTION: An inspection of the property required by some cities. The seller is required to meet specific property standards established by the city. Properties that meet these standards may be issued a certificate of occupancy. CLOSING COSTS: Costs paid by a buyer, or seller, or both in order to purchase, sell or transfer real property. COLLATERAL: Real property and/or other security pledged to a lender as an inducement for granting a loan. If the borrower defaults, the lender has the legal right to seize and sell the collateral in order to collect repayment of the debt. COMMITMENT FEE: A fee charged by a lender for extending the period of time to which the lender will commit to approval of a specific interest rate and/or loan amount. CONVENTIONAL MORTGAGE: A residential mortgage loan that is not insured or guaranteed by an agency of the government, payable in monthly installments over a specified period of time. CONVERSION CLAUSE: An arrangement within an adjustable rate mortgage note that permits the borrower to change an adjustable rate loan to a fixed rate loan within a certain period of time and under certain specified conditions. CONVEYANCE: A transfer of ownership in real property from one party to another party. CONVEYANCE FEE: This is the fee paid to a county recorder to log the transfer of title from the seller to the buyer. This fee is set by the local government and is based on the selling price of the property. CO-SIGNER: One who signs for another, thereby accepting full responsibility for repayment of a debt in the event of default. CREDIT REPORT: A detailed summary of an individual’s credit history prepared by a credit-reporting agency. 15 Glossary D DEBT-TO-INCOME RATIO: A way of evaluating a borrower’s ability to repay a loan based upon current debt and income levels. DEED: An instrument used to transfer ownership of real property. There are three types of deeds: A general warranty deed is a guarantee from the seller that good title is being conveyed. A joint tenancy or joint survivorship deed allows two or more persons to hold real estate jointly for life, with the survivor(s) taking the interest of the one who dies. A tenancy in common deed allows ownership of real property to be granted to two or more persons, each holding separate title in the same estate. There is no right of survivorship with tenancy in common, so if one tenant dies, his or her undivided interest in the estate passes to his or her heirs rather than the remaining tenants in common. DOWER: The interest in the real property of a homeowner allowed to the non-title holding spouse. DOWN PAYMENT: The cash that a buyer pays toward the purchase of a house. The down payment/equity represents the difference between the mortgage amount and the purchase price, and includes the earnest money (escrow deposit) and secondary financing. E EARNEST MONEY (ESCROW DEPOSIT): Money given by a buyer, to a seller or a seller’s agent, in order to secure the purchase of real property and to show that the buyer’s offer is being made in good faith. EQUITY: The difference between the current value of the real property and the outstanding balances on any mortgages attached to the property. ESCROW: The holding of funds and documents of buyers and sellers by a disinterested third party until contractual conditions, specified by a purchase agreement, are satisfied. ESCROW ACCOUNT: Funds included in the monthly real estate loan payment to accumulate the amounts necessary for the future payment of county taxes and any of the following, when applicable: Private Mortgage Insurance (PMI), homeowner’s insurance, flood insurance, mortgage life insurance and disability insurance. Using the funds in the escrow account, the lender makes these payments as they become due. ESCROW AGENT: An impartial third party responsible for overseeing the transfer of real property according to conditions set forth in the purchase agreement and any attached addenda. ESCROW DELETION LETTER: A letter, signed by both buyer and seller, which deletes the escrow agent listed in the purchase agreement and names a new escrow agent. ESCROW FEE: A fee paid to the escrow agent for overseeing the transfer of real property. 16 Glossary F FINANCE CHARGE: The cost of interest and other charges involved in borrowing money to build or purchase real estate. FLOOD INSURANCE: A federal insurance plan required for any property purchased in a certain flood hazard area identified by FEMA (Federal Emergency Management Agency). If your property is within such an area, you may be required by federal law to carry flood insurance on your home. Such insurance may be purchased in participating communities under the National Flood Insurance Act. G GOOD-FAITH ESTIMATE: A calculation offered by a lender, usually at the time of application, that provides a breakdown of estimated closing costs. GROSS INCOME: Total income from all sources for all borrowers on a loan. This is the income before any deductions, including taxes, 401k contributions, insurance premiums or charitable deductions. H HOMEOWNER’S (HAZARD) INSURANCE: Insurance protecting a house against certain hazards including loss from fire, certain natural causes and vandalism, and guaranteeing payment to the insured in cases of such loss. I INDEX: A base indicator for the interest rate of an adjustable rate mortgage. A typical index is the 1-year Treasury Bill averaged to a constant maturity, plus the margin. Another typical index would be the Prime Interest Rate. INTEREST: The cost of borrowing money from a lender. INTEREST RATE: The rate used to perform interest calculations and establish the monthly mortgage payment. J JUDGMENT: The decree of a court which produces a lien against the real property of a debtor as a result of the court’s award of money to a creditor. L LIEN: A security claim on property until a debt is satisfied. A mortgage lien is evidenced by an executed mortgage which the lender files with the county recorder. A tax lien is a lien filed by a tax agency for non-payment of taxes. A mechanic’s lien is a lien filed by a contractor, laborer or material supplier for non-payment for work that has been performed or for materials supplied. LOAN COMMITMENT: A guarantee by a lending institution to a borrower to lock in an interest rate for a certain number of days. LOAN-TO-VALUE (LTV): A percentage representing the mortgage amount divided by the appraised property value or selling price of the property (whichever is less). For example, if the market value of a house is $100,000, and the amount of the loan is $80,000, the LTV is 80%. LONG-TERM COMMITMENT: A rate and/or loan amount guarantee by a lending institution which is longer than its basic commitment period. 17 Glossary M MARGIN: The percentage that a lender adds to a base index to create adjustments on adjustable rate products. MARKET VALUE: The most likely price at which a property will sell in a competitive and open market. MORTGAGE: A debt instrument by which a borrower (mortgagor) gives a lender (mortgagee) security interest in real property in return for a loan. When the debt is paid in full, the mortgage is cancelled and the lien on the secured property is released. MORTGAGE DISABILITY INSURANCE: Optional insurance which, under circumstances spelled out in the insurance policy, makes payments on a mortgage loan when the borrower is injured, ill or disabled. MORTGAGE LIFE INSURANCE: Optional insurance which pays off a mortgage loan or a significant part of a mortgage loan in the event of the death of the insured. The coverage decreases as the mortgage balance declines. MORTGAGEE: A lender that accepts a debt instrument as a security interest in real property in return for granting a loan. MORTGAGOR: The person (borrower) providing a debt instrument to the lender. N NET WORTH: The value of all assets minus the amount of all liabilities. It is often used as a measure of financial strength. O ORIGINATION FEE: A fee charged by a lender or loan originator to offset the costs involved in processing a loan request. OWNER’S FEE POLICY: A title insurance policy guaranteeing that the buyer of a property enjoys free and clear title at the time the deed is filed for record. This policy goes beyond the title guarantee by protecting the buyer against defects which might not have been of record at the time the title search was performed. In some areas, it is customary for the seller to provide the buyer with an owner’s policy and for the seller to pay for this policy. In other areas, if the buyer desires an owner’s policy, he or she must pay for it. It shows the location of the land, its dimensions and any improvements on the land. It also checks for easements of record, encroachments and building line violations. P PITI: An acronym for the components of a monthly mortgage payment. It stands for Principal, Interest, Taxes and Insurance. POINT FORM: A form signed by whoever is paying the purchaser’s points and/or costs. 18 Glossary P POINTS: A one-time charge used to “buy down” the interest rate on a loan. Each point is equal to 1% of the mortgage amount. For example, if a lender charges one point on an $80,000 loan, this amounts to a charge of $800. PRE-APPROVAL: An approval for a certain loan amount granted to an applicant who has not signed a purchase agreement at time of application. PREPAID INTEREST: Interest due on the full amount of the principal for the period from the date of settlement to the beginning of the period covered by the first monthly payment. PREPAYMENT: The payment of a mortgage loan before it is due. PREPAYMENT PENALTY: A penalty charged by a lender to a borrower for paying off a mortgage loan before maturity. PRIME RATE: The interest rate charged by commercial banks to their best, most secure corporate customers. It is regarded as a yardstick for general trends in interest rates. PRINCIPAL: The amount of money borrowed from the lender. PRINCIPAL PAYMENT: The portion of a loan payment which goes to reduce the outstanding balance of the loan. PRIVATE MORTGAGE INSURANCE (PMI): A generic name for mortgage insurance granted to a lender. The insurance is written by a private company, and it protects the lender against loss if the borrower defaults on the mortgage. PURCHASE AGREEMENT (CONTRACT): A written document in which the purchaser agrees to buy certain real estate and the seller agrees to sell under stated terms and conditions. R REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA): A federal law requiring lenders to send an estimate of settlement costs to the borrower within three business days after accepting a completed loan application. This act also places limits on the amount lenders may hold in an escrow account and further requires a disclosure of settlement costs to buyers and sellers within a reasonable period of time after settlement. RECORDING FEES: The charges for recording documents with public agencies. 19 Glossary S SECONDARY FINANCING: Financing provided by a second lender that will accept a second lien position. This includes seller financing or financing provided by communities or organizations to further community housing goals. SETTLEMENT: The final closing in which real property is transferred and proceeds are disbursed. SETTLEMENT STATEMENT: The financial disclosure, often called the HUD-1 Settlement Statement, which includes an itemized list of the services provided to you and the fees charged to you. This form (developed by the U.S. Department of Housing and Urban Development) is filled out by the settlement agent who will conduct the settlement. In parts of the country where the settlement agent does not require a meeting, the statement will be mailed or delivered as soon as practical after settlement. No advance inspection is required. SURVEY (LOCATION SERVICE): A lot drawing performed by a surveyor which locates the house and other buildings on the lot described in the legal description of the property. It shows the location of the land, its dimensions and any improvements on the land. It also checks for easements of record, encroachments and building line violations. T TAX PRORATION: The distribution of seller’s proceeds to the buyer to cover county taxes which are owed but not payable at the time of the title transfer. TAX RESERVES: Funds, collected as part of the monthly mortgage payment, which are held by the lender on behalf of the borrower. These funds are used by the lender to pay the borrower’s semi-annual real estate taxes. TERM: The amount of time between the start date and the termination date of a note, mortgage or other legal document. TITLE: The right of ownership, control and possession of property. TITLE GUARANTEE: The guarantee to a purchaser by an independent title company performing a title search that there are no liens of record which would cloud the title to a newly acquired real property. TITLE INSURANCE: A policy that protects the purchaser, mortgagee or other party against losses due to defects in title. TITLE SEARCH: A search by an independent title company for liens or encumbrances which could affect passing clear title from the seller to the buyer. 20 Notes Notes
"Home Buying Guide"