Taxes and Insurance

You'll hear many terms as you work with your mortgage lender, and one of the most frequently mentioned is "PITI." This abbreviation stands for principal, interest, taxes and insurance.

The tax and insurance components of a mortgage payment are generally held by the lender in an escrow account. The lender pays any property tax and homeowner's insurance bills as they are due, ensuring they are paid on time.

A home buyer's monthly mortgage payment generally covers expenses through the escrow account. If you don't have your homeowner's insurance and property taxes paid out of a lender escrow account, your local government and your property insurance company will send payment notices directly to you. It is your responsibility to make sure you pay these bills on time.

If you're planning to purchase a condominium or cooperative, talk to your lender about how they view condo and co-op fees. Most likely, they are considered housing costs and not a part of PITI. However, this can vary from lender to lender.

The Mortgage

Simply put, the mortgage is the legal document that gives the lender a legal claim against your house should you default on your loan payments. The mortgage indicates that a specific amount of money will be loaned at a specific interest rate so that you can buy your home. Another way of thinking of the mortgage is that you have possession of the property but the lender has ownership until you have repaid your loan.

The items stated in the mortgage include the homeowner's responsibility to:

• pay principal
• pay interest
• pay taxes
• pay insurance on time
• pay to maintain hazard insurance on the property
• adequately maintain the property.

The mortgage also includes the basic information found in the note.

Should you consistently fail to meet these requirements, your lender can seek full repayment of the balance of the loan, foreclose on the property, or sell the property and use the proceeds to pay off the loan balance and foreclosure costs.

A deed of trust is used instead of a mortgage in some states.

Third-Party Origination

A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

• Also see "Mortgage Broker" entry

Title

A legal document evidencing a person's right to or 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.

In order to make sure the borrower will receive clear title to the property, lenders require a title search. It attempts to uncover any "encumbrances" on the title and makes sure the seller is the actual owner of the property.

Encumbrances include any liens or legal claims against a property filed by creditors as a means to collect unpaid bills. Liens can also be filed by the Internal Revenue Service for nonpayment of taxes. Any such claims must be paid by the seller.  This often occurs either before or at the closing.

Title Company

A company that specializes in examining and insuring titles to real estate.

Title Insurance

Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.

Your lender will require that you buy title insurance to ensure that you are receiving a "marketable title." There are two types of title insurance policies:

• Lender's policy (mandatory): This protects the lender should a flaw in the title be detected after the property has been purchased.
• Owner's policy (optional, but recommended): This protects you should a flaw in the title be detected after the property has been purchased.

Generally, the buyer pays the cost of both policies. Check with your insurer, because you may receive a price break if you seek a combined lender/owner policy or if you purchase a "reissue" policy from the company that previously insured the title.

Total Expense Ratio

Total obligations as a percentage of gross monthly income. The total expense ratio includes monthly housing expenses plus other monthly debts.

Transfer Tax

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

Truth-in-Lending

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

Your lender should provide you with the Truth-in-Lending (TIL) Statement within three business days of your loan application. This document outlines the costs of your loan, and is given to you so you can compare the costs with those of other lenders. Among the costs listed:

• The annual percentage rate (APR), which is the cost of your mortgage compiled as a yearly rate. It may be higher than the interest rate stated in your mortgage because it includes points and other costs of credit.
• The finance charge.
• The amount financed.
• The payment amount.
• The total payments required.

The lender is required to give you the final version of your TIL Statement at or prior to the closing meeting because it’s possible the APR calculated at your loan application will change at closing.