What is an appraisal?
An appraisal is a written report by a qualified professional (appraiser) estimating the value of a property. During the appraisal process, appraisers generally evaluate the condition of a house’s interior, roof, siding, and foundation. They may also examine windows, doors, flooring, plumbing, electrical work, and fixtures.
In some instances an appraiser may perform a “drive-by appraisal” as an alternative. In these cases, they examine the exterior of a home only, often from their car. Property records and information on comparable homes in the area help determine a final value.
What are cash reserves?
Cash reserves, or mortgage reserves, are funds a borrower has easy access to in addition to their down payment and closing costs. These funds can be liquid—like cash in a checking account—or easily turned into cash—such as stocks and bonds. Many lenders require proof of cash reserves to confirm a borrower can afford a certain number of mortgage payments, usually two to six, in the event of a financial emergency. If additional costs like HOA dues will be charged, the cash reserves will need to cover them, too.
Standards vary by lender, but commonly accepted cash reserves include funds in:
- Checking or savings accounts
- Trust accounts
- Stocks and bonds
- Retirement savings accounts, based on vested amounts
- Certificates of deposit (CDs), money market funds, mutual funds
- Life insurance policies, based on their vested cash value
What is a comparative market analysis (CMA)?
A comparative market analysis (CMA) is an estimation of a home’s value that is usually conducted by a real estate agent before listing a home. The analysis compares the home to other recently sold, comparable properties (known as “comps”) in the same area. A CMA is most commonly used to help sellers set a fair listing price for their home and buyers submit competitive offers.
CMA reports will typically include:
- The address of the home and comparable properties that are nearby.
- A description of each property. This can include the number of bedrooms and bathrooms, square footage, age, condition, lot size, and other features.
- The sales price of each comp.
- When each comp was sold. These dates should be as current as possible.
- Price adjustments made for differences between properties.
- The fair market value of the subject property.
- The home’s dollar value per square-foot.
A comparative market analysis should be used only to give an estimate of a home’s value. It does not reflect the appraised value of a home which can only be determined by a professional appraiser.
What is a contingency?
A contingency is a section in a real estate contract, set by either the homebuyer or seller, that outlines a condition that must be met before the contract can be fulfilled. Many contingencies are built into standard home purchase contracts to protect both parties from unknown factors. They typically allow one party to cancel the contract without penalty if a condition is not met. In the event there is a penalty, it often involves buyers forfeiting their earnest money deposit or sellers refunding it, though other losses may apply.
Common contingencies include:
- Financing or mortgage contingency: Allows a buyer to terminate the contract if the buyer is unable to obtain financing for the purchase.
- Home inspection contingency: Protects homebuyers from unknown issues and repairs by allowing them time to conduct an inspection. This contingency is often written so the buyer can exit the contract if the inspection is unsatisfactory.
- Home sale and settlement contingency: Grants buyers time to sell their current home before closing on the seller’s home. These contingencies typically allow sellers to continue accepting offers from other buyers, however. In the event buyers can’t sell home or remove the contingency by an agreed deadline, the contingency generally allows sellers to move forward with the second offer.
- Appraisal contingency: Enables the buyer to cancel the contract of their lender’s appraisal (actual assessed value) comes back lower than the agreed selling price.
- Title contingency: Ensures that a buyer will be able to get out of the contract without penalty if a problem is discovered with the property’s title history such as an unsettled lien from a previous owner or unpaid taxes.
See also earnest money deposit
What is a deferral?
See P for “What is a payment deferral?”
What is a Deed in Lieu of Foreclosure?
If there isn’t a financially feasible way to keep your home, and you’ve decided to move on, a Deed in Lieu of Foreclosure (DIL) may be an alternative to foreclosure. DIL means that you voluntarily transfer ownership of your home to your lender, the lender terminates the loan, and the remaining balance due is forgiven. However, it may have tax consequences and/or impact your credit, so you’ll want to contact your tax advisor to discuss these potential impacts.
With a Deed in Lieu, you’ll have plenty of time to plan your move and transition out of your home. You may be eligible for relocation assistance. If there are other liens and judgments against your property, those must be paid off or removed prior to finalizing the DIL. You may also be eligible for assistance in removing some or all of these liens or judgments.
See also forbearance
See also loan modification
See also short sale
What are discount points?
Discount points*, or mortgage points, are a type of prepaid interest or fee borrowers pay mortgage lenders in return for a lower interest rate. This also lowers the borrower’s resulting mortgage payments, so by spending more up front you pay less later. One point typically costs 1% of a loan, meaning one point on a $100,000 loan would equal $1,000.
Each lender has their own pricing structure for points and can calculate discounts differently, but each point usually saves borrowers 0.25% or more. For example, one discount point may reduce a 3.75% rate to 3.5% or less (3.75 – 0.25 = 3.5). Depending on your needs, you can also buy a precise number of points such as 0.5 or 1.375 points—they don’t have to be round numbers.
Discount points can be paid for in different ways. When buying a new home, discount points are paid up front at closing. When refinancing, they can either be rolled into a loan or paid at closing, if your lender allows. Homeowners who have a mortgage for the long-term typically get the most benefit from discount points as their monthly savings build over time.
To estimate how much discount points could save you over the life of your loan, try our mortgage calculator where you can plug in different interest rates. (Enter your loan details then choose the “Amortization” option to see cumulative interest.)
*Note: Some lenders use the term “points” to refer to things that don’t relate to discounting interest rates. It may apply to other fees that are based on a percentage of your loan.
What is an earnest money deposit?
An earnest money deposit, often just called earnest money, is an amount of cash that a potential buyer agrees to pay soon after their offer on a home is accepted. It’s provided as a sign of “good faith” that the homebuyer plans to follow through with the home’s purchase. It’s often paid by check (personal, cashier’s, or certified) or an electronic transfer (wire transfer), and held by a third party for the escrow period until closing.
Once the deal goes to closing, the earnest money is typically applied toward the home’s down payment or the buyer’s closing costs. A buyer’s earnest money deposit may be forfeited if they break the contract without a valid, permissible reason.
See also contingency
See also escrow period
What is an escrow account?
Once a borrower has a mortgage, a separate escrow account is used to service a mortgage and held by a mortgage’s servicer (the company you send your payment to). This account, also known as an impound account, holds money that is deposited from each payment the borrower makes. Funds are held until they pay for property taxes and insurances (hazard, flood, wind, or mortgage insurance).
Money in this escrow account generally cannot be used toward monthly mortgage payments, fees, or corporate advances. But escrow funds may be used to pay off an entire mortgage account balance.
Many times, escrow accounts are a required part of a loan agreement or loan modification within a loan’s documentation. When required, an escrow account will be set up at the loan closing, upon application of loan modification terms to the account, or shortly after.
See also earnest money deposit
What is an escrow period?
For home purchasing purposes, escrow generally refers to a period of time where funds are held by a neutral third party. It holds funds that will transfer between the parties involved in the transaction while the buyers and sellers prepare to close. These can include funds such as earnest money deposits, down payments, monies for closing costs, and even a home’s purchase price. Once a real estate agreement is fulfilled or cancelled, the funds are distributed to the appropriate parties. When refinancing, your lender will create an escrow account for this purpose.
An escrow period should not be confused with an escrow account that is created after the loan is funded. That escrow account is used during the life of the loan for paying property taxes and insurances (hazard, flood, wind, or mortgage insurance).
See also escrow account
What is Fannie Mae?
The Federal National Mortgage Association (FNMA), known as Fannie Mae, is a government-sponsored enterprise set up to make mortgages available to low- and moderate-income borrowers. It was first established in 1938 during the Great Depression as part of President Franklin D. Roosevelt’s New Deal program and became a publicly traded company thirty years later.
Fannie Mae purchases mortgages from lenders in order to provide the lenders with liquidity so they can offer more mortgages. Its brother organization is the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac.
This entity guarantees millions of mortgages throughout the country, helping to reduce the down payment and credit requirements for low- and middle-income families. Rather than providing loans, it backs or guarantees them in the secondary mortgage market.
In what is called “securitization,” Fannie Mae, as well as Freddie Mac, bundles the mortgages it owns and sells them to investors.
What is a FICO® score?
A FICO score is a type of credit score created by the Fair Isaac Corporation. Lenders use borrowers’ FICO scores along with other details on borrowers’ credit reports to assess credit risk and determine whether to extend credit. FICO scores range from 300 to 850 and can vary depending on the type of loan you apply for, e.g. an auto loan versus a mortgage. These scores consider factors in five areas to determine credit worthiness, including a borrower’s:
- Payment history.
- Current level of indebtedness.
- Types of credit used.
- Length of credit history.
- New credit accounts.
See also Middle FICO score
What is forbearance?
Forbearance is an agreement between a servicer, such as Mr. Cooper, and a borrower to temporarily pause mortgage payments for a set period of time. It is not a waived payment or payment forgiveness, and all payments will need to be repaid at the end of the forbearance period (if that sounds out-of-the-question, don’t panic; there are several ways to do this, and Mr. Cooper is here to help you find a solution that works for you).
During the forbearance plan period, late fees will not be assessed and negative credit reporting will be suppressed.
Eligibility and terms for forbearance plans vary based on guidelines set by the owner of the loan.
What is Freddie Mac?
The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, was chartered by Congress in 1970 to expand the secondary market for mortgages in the United States to support homeownership for middle-income Americans. As a government-sponsored enterprise, Freddie Mac’s mortgages are backed by the federal government and it is one of the largest purchasers of mortgages.
Along with its sister organization Fannie Mae, Freddie Mac buys mortgages on the secondary market, bundles them, and sells them as a mortgage-backed security to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases.
What is a loan modification?
A loan modification changes the terms of your loan. This might be necessary if your circumstances change and you are unable to keep up with the agreed payments.
If you’re facing long-term hardship, Mr. Cooper may be able to modify your loan so it has more manageable terms. However, borrowers eligible for a loan modification must meet certain criteria and abide by the terms and conditions outlined by the investor of their loan.
While refinancing means replacing your existing loan with a new one, a loan modification keeps your existing loan and changes its terms. If you qualify for a loan modification, we’ll look for a way to reduce your monthly payments.
There are several ways to do this. We may be able to lower your interest rate or maybe extend the loan’s term length so that each month’s payment is a little lower.
What is a middle FICO® score?
A middle FICO score is a borrower’s second highest FICO score among what the three major credit reporting agencies (Experian®, Equifax®, and TransUnion®) report. This is the score mortgage lenders generally use when they qualify homebuyers for home loans. If there is more than one borrower on a loan, lenders typically use the score reported for the borrower with the lowest middle FICO score.
See also FICO score
What is mortgage insurance (also PMI or MIP)?
Mortgage insurance protects the investor if the borrower defaults on the loan. It lowers the investor’s risk when funding a home loan.
In most cases, if you pay at least 20% down on your home, you’re not required to carry mortgage insurance.
- If you are required to carry mortgage insurance, removal of the insurance may occur when the equity in your home reaches a certain percentage.
Note: Depending on the type of loan you have, your mortgage insurance may go by different names. It can be called Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP).
What is a payment deferral?
A payment deferral allows a lender or servicer to push a set number of paused or missed monthly mortgage payments to the end of the loan. The deferred payments can typically be paid back by making one lump sum payment when the loan matures or is otherwise paid off.
There are a few different types of payment deferrals, which are determined by the guidelines set by the owner of the loan. One type of deferral pushes the full amount of the paused or missed monthly payments (principal, interest, taxes and insurance) to the end of the loan. Another type of deferral pushes only the principal and interest portion of the paused or missed payments to the end of the loan. In the second case, if the loan is escrowed, any missed tax and insurance payments are not deferred but arrangements can be made to pay them back over a specified period of time.
What is a repayment plan?
With a repayment plan, an extra amount is simply tacked on to your regular monthly payment until the missed amount owed is paid back. This usually happens over 3 to 6 months but could vary depending on your circumstances.
If you qualify for a repayment plan, we’ll spread the sum of the missed amount due over a manageable timeframe. Instead of owing it all at once, and potentially incurring late fees, you’ll have a smaller increase to your future monthly payments until you’re all caught up.
What is a short sale?
Sometimes there just isn’t a financially feasible way to keep your home or you may simply decide you want to move on. One option for doing this quickly and effectively, without the difficulties of the foreclosure process, is a short sale. A short sale means that the net proceeds from your sale of the property are not enough to pay off your mortgage; however, the investor is agreeing to accept less than the full amount owed.
With investor approval, a short sale may allow you to sell your home for less than you owe on the mortgage.
If your investor agrees to a short sale, you can work with a real estate agent to list the property. They’ll execute a sales contract as normal—but this contract is subject to the investor’s approval and is not final until they agree, even if both the seller and the buyer agree on the terms.
A short sale may have tax consequences and/or impact your credit, so you’ll want to contact your tax advisor to discuss these potential impacts.
See also forbearance
See also loan modification
See also Deed in Lieu of Foreclosure
Tradenames and trademarks used in this blog post are the property of their respective owners. Nationstar Mortgage LLC d/b/a Mr. Cooper is not affiliated, associated, or sponsored by any of these owners. Use of these names and trademarks is not intended to and does not imply endorsement but is for identification purposes only. Information provided does not necessarily represent the views of Mr. Cooper. Information is subject to change without notice.