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What is a purchase agreement?
A fully executed purchase agreement is when all parties involved with the purchase have signed the contract. All pages of the signed agreement will be required – including addendums.
What is personal bankruptcy?
Chapter 7, 11, and 13 bankruptcies are all considered personal bankruptcies. A self-employed business bankruptcy follows the same guidelines as personal bankruptcy. When considering whether it was within the last 4 years, please refer to the discharge date. Capital One will consider the situation that led to the bankruptcy and evaluate tradelines opened after the bankruptcy to determine whether or not we can proceed with the requested transaction.
What is a Deed in Lieu?
It is an option in which a mortgagor (the borrower) voluntarily deeds collateral property back to the mortgagee (Capital One 360) in exchange for a release of all obligations under the mortgage terms.
What is self-employment?
Self-Employment means you own 25% or more of a business.
Tax deductible means that you can subtract some, or all, of the dollar amount you pay for certain expenses from your annual gross income to reduce the total income on which you owe taxes. For instance, the mortgage interest you pay is usually deductible, as are the contributions you make to a traditional IRA if you satisfy the requirements for taking the deduction. You may also be able to deduct other expenses as well, such as qualified charitable donations, student loan interest, and certain out-of-pocket medical expenses.
Taking advantage of tax deductions can help you lower your tax bill, but you’ll want to discuss the deductions you qualify for — and how to make the most of them — with your tax adviser.
Title insurance protects your lender’s interest in your home and real property in case its ownership is contested in court. Before you close on any property purchase, your lender will require a title search — an examination of all the property records by an attorney or title company, to ensure that the seller owns the property and has the right to sell it. But just in case something is not revealed in the title search, your lender will usually require you to obtain title insurance as added protection until you have paid off your mortgage. You may also choose to purchase additional insurance to protect your own title and claim to the property.
A title search is an examination of property records by a title company or attorney to ensure that the person from whom you are buying a piece of property is its legal owner, and that there are no outstanding legal claims against the property. Your lender will require you to pay for a title search before the closing, or settlement, on your new home.
Home Equity Loan
A home equity loan is a way of using the equity you have built in your home to get cash. You can usually borrow up to 70% of the equity in your home, so if your house is worth $200,000 and you have a $100,000 mortgage, you may be able to borrow up to $40,000 against your home. You generally must make monthly payments to repay the loan over its term.
Low interest rates and the ability, in many cases, to deduct the loan interest on your tax return make home equity loans an attractive option for financing major expenses, such as home renovations or tuition costs. But because your home serves as collateral for the loan, you want to make sure you can comfortably manage your monthly payments, or you could risk losing your home.
You might also consider a home equity line of credit, sometimes referred to as a HELOC, which is a revolving credit arrangement similar to a credit card. Your credit line, or limit, is fixed, but you can draw against it at your convenience rather than receive the entire loan amount as a lump sum. Whatever amount you pay off you can use again. Because you pay interest only on the amount you borrow, you may save money with a line of credit. Unlike home equity loans, which often have fixed interest rates, home equity lines of credit have variable interest rates. With some lenders, you may be able convert your HELOC to a loan and lock the rate at any time to suit your needs.
Good Faith Estimate (GFE)
A good faith estimate (GFE) is a written estimate your mortgage lender must provide that lists the closing costs you can expect to pay - usually 5% to 10% of the amount you are borrowing - when you finalize the purchase of your home at closing.
The lender must send you the GFE within three days of receiving your loan application. This will help you anticipate what your total purchase costs will be.
A closing statement is the legal document, also called a HUD1, that you receive at a real estate closing. It itemizes the closing costs you will have to pay to complete the transaction. The total costs should be similar to the amounts listed in the good faith estimate (GFE) you were given before the closing.
Collateral is an asset, such as real estate or an automobile, which you use to guarantee repayment of the loan you take to purchase the asset. If you default on the loan, the lender can take the asset you used as collateral and sell it to recover the amount you owe. For example, if you fall behind on your mortgage payments, under the terms of your loan the lender may foreclose, which means the bank will repossess your home and sell it. But once you pay off the loan, the lender no longer has a claim on your collateral.
The good news is that a loan secured with collateral is likely to have a lower interest rate than an unsecured loan. That’s why mortgages and home equity loans usually have lower interest rates than credit cards, which are unsecured.
A mortgage is the legal agreement you make with a lender when you borrow money to buy a home or other real estate. In exchange for advancing you money, the lender has a claim on the property as security against the amount you owe. That’s why mortgages are considered secured loans.
Leverage is a strategy that lets you use a small amount of your own money to make a larger investment. For example, when you take a mortgage to buy a home, you’re using leverage because you pay only a fraction of the price up front to purchase a piece of property. If the home increases in value and you sell, you repay the loan and keep the remaining profit.
Leverage gives you financial power, but it’s not without risk. If you default on your mortgage, which might happen if you make a larger financial commitment than you can actually afford, or if you become ill or lose your job, the lender can repossess your home and sell it to recover the amount you owe. In addition to losing your home, you would forfeit all the money you had invested up to the time you defaulted.
Refinancing is arranging to pay off an existing loan with a new loan at a lower interest rate or for a different term. For instance, you may decide to refinance your mortgage if interest rates have dropped or you want to build equity in your home faster by reducing the term of your loan. You might also refinance if your home has increased in value and you want to take out some of your equity. Or, if you’re struggling to keep up with your payments, you may refinance to reduce the amount you owe monthly.
Keep in mind you’ll pay fees and closing costs to refinance, just as you did with your original mortgage - although you may pay less if you go back to the same lender within a relatively short period.
Equity is the difference, often figured as a percentage, between the current value of your house, or what you could sell it for today, and the amount you still owe on your mortgage. For example, if your house is now worth $300,000 and you still have $200,000 to pay on your mortgage, your equity is $100,000, or 33%.
Your equity in your home can increase in two ways. First, it increases as you pay off the principal of your mortgage. So when your mortgage is fully paid, your equity is 100%. But your equity also increases if your home’s value rises. So let’s say you buy a house for $250,000 with a $50,000 down payment and a $200,000 mortgage. Then your equity is 20%. But if the house is reappraised at $300,000, your equity rises to $100,000, or 33%. However, if your house is reappraised at a lower price, your equity decreases even if you have paid off part of your mortgage.
Principal is the amount you owe on a loan, not including interest charges or other fees. Conversely, principal is the amount you invest or put in the bank, not including interest or capital gains the account earns.
A balloon mortgage offers lower monthly payments than a fixed-rate mortgage on the same principal, but for a substantially shorter term - typically 5, 7, or 10 years. Unlike a fixed-rate mortgage, where the monthly payments remain the same for the term of the loan, the final payment on a balloon mortgage is a lump sum, or balloon payment, significantly larger than the usual monthly payments. In some cases, the low monthly payments cover only the interest, and you must pay the entire principal in the last payment. Some balloon mortgages offer a conversion option that lets you extend the loan at a new interest rate.
A balloon mortgage can be a smart choice if you anticipate being able to refinance at an attractive rate at the end of the term, or if you are confident you will have enough money to pay off the loan. But if you lose your job or your house depreciates in value, you may be unable to refinance if you have to and risk losing your home.
A prepayment penalty is a fee you may owe, depending on the terms of your mortgage, if you refinance or pay off your mortgage early.
Closing costs are the expenses (not including the price of the property) you pay to finalize a real estate transaction. There are two types of closing costs - prepaid and non-recurring. Prepaid costs are those expenses that you will have to pay again periodically, such as real estate taxes and home insurance premiums. Non-recurring costs pay for the property transfer from the seller to the buyer, and may include a filing fee to record the transfer of ownership, the mortgage tax, attorneys’ fees, title search and title insurance expenses, home inspection fees, appraisal fee, and any costs paid to the lender to reduce rates.
Before you close, you will be given a good faith estimate (GFE) of what the closing costs will be, so you know approximately how much you need to have in your bank account to write the checks at closing. Some but not all closing costs are tax deductible, so be sure to consult with your tax adviser.
Preapproval means a lender guarantees in advance that you can borrow up to a specific amount to buy a home, provided your financial situation does not change before you’re ready to buy. Some lenders charge a fee for preapproval, but others don’t.
Preapproval may increase your chances of getting the home you want, since you know in advance how much you can afford, and sellers may be more likely to accept your bid because you can guarantee you won’t be turned down for a mortgage.
Prequalify for a mortgage means that a lender confirms the approximate loan amount you’ll be able to qualify for, given your income and debt. Unlike preapproval, prequalification is not a guarantee, since you don’t go through an application process or provide financial details. Many lenders offer free mortgage calculators on their websites to prequalify you - or help you determine approximately how much you’ll be able to borrow. That helps you know what’s in your range and what’s not, but you’ll still have to complete a mortgage application before you’re approved for a loan.
Interest rate is the percentage you earn annually on a savings account, CD, or bond. In the case of bonds, the interest rate is figured as a percentage of the face value.
If the interest on your deposit account compounds, your annual percentage yield (APY) is higher than the interest rate you earn. But if the account pays simple interest, the APY will be the same as the interest rate.
Similarly, when you borrow money, the interest rate is the percentage you pay over a fixed period of time, typically a year. For instance, the interest rate on a mortgage is figured as an annual rate, such as 6.75% per year. If there are no fees or other charges associated with borrowing money, the interest rate is the same as the annual percentage rate (APR).
A credit report is a summary of your credit history and is used by banks, mortgage lenders, credit card companies, landlords, employers, and other businesses to assess your creditworthiness. The three major credit bureaus, Equifax, Experian, and TransUnion, collect information about how you use credit - how much you owe and your pattern of payments - as well as other records, including your Social Security number, employment history, credit history, records of businesses that have accessed your credit report, and information in the public record, including bankruptcies, liens, and wage garnishments. However, by law, your credit report says nothing about your age, race, religion, political affiliation, or medical records, among other things.
It’s smart to check each of your credit reports for accuracy and possible signs of fraud at least once a year. Under the Fair and Accurate Credit Transactions Act (FACT Act), which was enacted to help consumers safeguard against identity theft, you can request a free annual credit report from each of the three major credit bureaus at www.annualcreditreport.com Opens a new window.
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is required by some, though not all, lenders if your mortgage loan is more than 70% of the purchase price of your home. It’s designed to insure against the risk that you’ll default.
Lenders are legally required to tell you when you will pay off enough of your mortgage to have 20% equity in your home. When you reach that point, you usually have the right to cancel the PMI, although there may be an exception if you are considered a high-risk borrower.
An origination fee is an amount a lender may charge for processing your mortgage application. When the fee is due, it is typically about 1% of the amount you borrow and is one of your closing costs. For example, if you are borrowing $200,000, you may pay a $2,000 origination fee, sometimes also called origination points.
A down payment is the amount of cash you put toward buying your home or the difference between the total cost of your home and the amount you need to borrow with a mortgage. In order to get the best deal, banks often require a down payment of at least 20% of the total cost of a home. For example, if your home costs $250,000, then you’ll need a down payment of $50,000.
Interest can mean a lot of different things when it comes to your money. Interest is what it costs to borrow money - whether you are paying off a loan or mortgage, a line of credit, or a credit card balance. Interest is usually figured as a percentage of the amount you borrow over a specified period of time, usually a year. For example, interest on your mortgage might be 6.75% annually. Interest also refers to the income you earn on certain investments and bank products, like bonds, savings and money market accounts, and certificates of deposit (CDs). The share you own, or the right you have, in a real estate property or other asset is also your interest. For instance, the equity you own in your home is your interest in the property.
Line of Credit
A line of credit is the maximum amount you can borrow under a revolving credit arrangement with a bank, mortgage lender, or credit card issuer. When you activate the line, or borrow against it, you pay interest on the amount of money you actually borrow, not on the full amount.
So, for example, if you have a home equity line of credit for $50,000, you may borrow up to $50,000 at any time, in as many different increments as you like, and you pay interest only on the amount you have actually borrowed. If you have used $15,000, you only pay interest on that amount, and there is still $35,000 at your disposal to borrow if you need more money. Once you repay the amount you borrow, you can use it again.
A line of credit may be secured with collateral, or it can be unsecured. For example, if you have a home equity line of credit, your home serves as collateral against the amount you borrow. A line of credit on a credit card, in contrast, is unsecured.
Property insurance provides compensation to the insured in case of property loss or damage. Such types of property insurance are flood, hazard, wind and earthquake insurance.
Loss Draft or Insurance Claim check
A Loss Draft or Insurance Claim Check is a check that has been issued by an insurance company for the repair of a property that has been damaged during a hurricane, fire, vandalism, flood, etc. When the homeowner files a claim with their insurance company for a loss that is covered by the homeowner’s insurance policy, a check will be issued for repairs.
Full Prepayment vs. Partial Prepayment
A full prepayment is when the entire principal balance is paid off.
A partial prepayment is when the amount paid in a month is greater than the interest only payment required.
When you make a loan payment that is less than the amount of interest owed for a given month or term, then the remaining amount of interest owed may be added to the principal balance of your loan instead. The total amount deferred is due and payable in full when you pay off your loan or the loan reaches maturity.
Not all loans have the deferred interest payment option. If you're unsure whether or not this applies to your loan, please review your loan documents.
With an assumable mortgage, the home buyer has the ability to take over the existing mortgage of the seller as long as the lender of that mortgage approves.
What is an APR?
APR or Annual Percentage Rate is the interest rate, points, broker fees, and other charges that go along with your loan.