Glossary

Many of our customers find the terms used in mortgage banking extremely confusing leading to frustration and dissatisfaction.
To avoid this problem, we've created a list of important lending terms. It helps to be educated so that you can make an informed decision regarding what could be the most important financial investment of your life.

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· Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. This product generally comes with a lower initial interest rate than 30 year fixed products.

· Amortization
Means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. Most loans are amortized over 30, 20 or 15 years.

· Annual Percentage Rate (APR)
An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs.

· Appraisal
An estimate of the value of property, made by a state certified professional called an 'appraiser'.

· Balloon (Payment) Mortgage
Usually a short-term fixed-rate loan that involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

· Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

· Caps
Limits on the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan.

· Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement meeting.

· Closing Costs
The costs associated with procuring and funding a mortgage loan. These may include one or all of the following: an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other miscellaneous costs. Closing costs usually are about 3 percent to 5 percent of the mortgage amount.

· Construction Loan
A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

· Conventional Loan
A fixed- or adjustable-rate, fully amortized loan secured by a mortgage or deed of trust that is not insured or guaranteed by an agency of the federal government (such as FHA or VA).

· Delinquency
Failure to make payments on time. This can lead to foreclosure.

· Discount Points
Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g. one point on a $100,000 mortgage would cost $1,000).

· Down Payment
The borrowers initial equity investment in the home. Or money paid to make up the difference between the purchase price and mortgage amount. Down payments generally vary from Zero percent to 50 percent of the sales price.

· Earnest Money
Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

· Equal Credit Opportunity Act (ECOA)
Is a federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

· Equity
The difference between the fair market value of a home and the balance of the mortgage.

· Escrow
Escrow refers to an account held by the lender into which the homebuyer pays money for tax or insurance payments.

· Federal Home Loan Mortgage Corporation (FHLMC)
Also called Freddie Mac, is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

· Federal Housing Administration (FHA)
A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standard for underwriting mortgages.

· Federal National Mortgage Association (FNMA)
Also known as Fannie Mae. A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

· FHA Loan
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.

· FHA Mortgage Insurance
Requires a small fee (up to 3 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount to either $2,250 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount.

· Fixed-Rate Mortgage
A mortgage on which the interest rate is set for the term of the loan.

· Foreclosure
A legal procedure in which property securing debt is sold by the lender to pay a defaulting borrower's debt.

· Government National Mortgage Association (GNMA)
Also known as Ginnie Mae. Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

· Gross Monthly Income
The total amount the borrower earns per month, before any expenses are deducted.

· Hazard Insurance
A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.

· Index
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury Security yields), which is then used to adjust the interest rate on an adjustable mortgage up or down.

· Jumbo Loan
A loan which is larger (more than $333,700 and less than $700,000) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

· Lien
A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

· Loan Commitment
An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

· Loan-To-Value Ratio
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

· Margin
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

· Market Value
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

· Monthly Assessment
Any additional monthly payments that will be applied to the property (ex. common charges, condo fees, etc.)

· Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent.

· Origination Fee
This fee is usually known as a loan origination fee but sometimes is called a "point" or "points". It covers the lender's administrative costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among lenders. Generally, the buyer pays the fee, unless otherwise negotiated.

· PITI
Principal, interest, taxes, and insurance. Also called monthly housing expense.

· Power of Attorney
A legal document authorizing one person to act on behalf of another.

· Prepaids
Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

· Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

· Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia.

· Principal
The amount of debt, not counting interest, left on a loan.

· Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment-as low as Zero percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance.

· Ratio
The ratio, expressed as a percentage, that results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income.

· Rescind
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

· Recording Fees
Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

· Servicing
All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections, and the like.

· Survey
A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.

· Title
A document that gives evidence of an individual's ownership of property.

· Title Insurance
A policy, usually issued by a title insurance company, that insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller.

· Title Search
An examination of municipal records to determine the legal ownership of property. Usually performed by a title company.

· Underwriting
The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

· VA Loan
A long-term, low or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

· Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.

· Verification of Employment
A document signed by the borrower's employer verifying his/her position and salary.