- Appraised value: the worth of your home as decided by a licensed appraiser on a specific day. The appraiser visits the house during the loan process. Why? The appraised value impacts the size of the loan from your lender.
- Assessed value: the worth of your home as decided by the city on a yearly basis. This value is then used to determine what you pay in real estate taxes. Every year, the assessed value can go up or down, which can change your monthly mortgage payment.
- Closing costs: Other fees and costs associated with obtaining the loan and purchasing real estate not included in the sale price. Fees include: city and state tax recording costs, appraisal, title company/attorney fees, and lender costs (ex: origination fees, administration fees).
- Credit report: Lenders want to see the borrower has solid history of paying debt on time and in a consistent way. That’s why they refer to a credit report which provides a in-depth look at the borrower’s entire financial history. That history includes types of accounts and any derogatory activities like late payments, collections and other public judgments.
- Credit scores: A person will usually have three different scores, one from each credit bureau (Experian, Equifax, and TransUnion). The reason is that different credit accounts (ex: credit cards) may report payment activity to only one or two bureaus. That’s why your three scores may be different from each other. The credit score is determined by: payment history (35%), amount owed (30%), length of credit history (15%), new credit (10%), and types of credit (10%).
- Discount points: The fee associated with “buying down the rate,” which means you want a lower interest rate and are willing to pay a fee to obtain it. The term “discount” is misleading because, as part of your closing costs, you actually pay to receive the discount. But with a lower interest rate, you will then save on your monthly payments and over the life of the loan.
- Foreclosure: The bank takes ownership of the property, which terminates the owner’s rights to the property due to default in payments. The process is usually faster than a short sale because the bank owns the property. Usually on foreclosures, the property needs repairs.
- Mortgage insurance: Protects the lender for any losses suffered if the borrower defaults on the payment. Mortgage insurance is typically included in a monthly mortgage payment. Conventional and FHA loans have mortgage insurance, but they are structured differently.
Mortgage Insurance Premium (FHA loans): FHA loans have a 0.85% (of the loan amount) monthly mortgage insurance. However, unlike conventional loans, MIP remains for the life of the loan. To cancel the premium, the borrower must refinance the loan and have 20% equity in the property.
Private Mortgage Insurance (conventional loans): The lender automatically cancels PMI when LTV (loan to value) reaches 78% or 22% equity in the property. Loan to value means the amount borrowed in proportion to the current market value (based on appraisal) of the property.
Lender Paid Mortgage Insurance (conventional loans):Also known as LPMI, it’s when the lender pays your mortgage insurance but charges you in a form of higher interest rate (usually an additional .25-.5%).
- Origination fee: The fee the lender may charge the borrower to do the loan. Usually the origination fee is quoted in points of the loan amount (1 point=1%). The fee is part of the borrower’s closing costs. It is important to compare this fee when shopping for a mortgage and comparing lenders.
- Pre-approval: The lender has verified several pieces of information provided by the borrower. Here is a list of documents a client needs based on loan type. Pre-approval also matters because you can catch a lot of issues if the lender receives the documents up front.
- Pre-paids: At the closing table the lender usually collects funds for both property taxes and hazard insurance for an escrow account, so when the funds come due they can be paid on behalf of the borrower. Pre-paids also include daily interest incurred based on when the loan closes in the month.
- Pre-qualification: can be issued after the lender has spoken to the client to understand their financial picture and run their credit report.The credit report allows the lender to see some of the financial history. This is why a strong credit score is important.
- Short Sale: The lender agrees to sell the property for less than the amount owned on the mortgage. The process may take a long time because the bank has to agree to the amount offered by the buyer.