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Glossary of Terms

(In layman's language)


	If you want all of these terms in the fancy, proper way of stating them, check out Amazon or your local bookstore. I'm sure they will have a book with hundreds of terms in it. If you want an easy to understand glossary stated the way I would tell you if we were face to face and I was explaining it, here it is: A B C D E F G H I J K L M N O P Q R S T U V W X Y Z A Adjustable Rate Mortgage (ARM) A mortgage with an interest rate that is variable. This means that during the term of the loan your interest rate can go up or down. It is based on a specified financial index. Keep in mind that when your interest rate goes up or down, it means that your monthly payment will change. Annual Percentage Rate (APR) This one can be a little confusing because you would think that it should be the same as your interest rate. The difference is that it takes additional costs into consideration such as mortgage insurance, most closing costs, discount points and loan origination fees. The Truth-In-Lending Law requires disclosure of APR. Application (or 1003) A form you will fill out that has all of your pertinent information concerning your employment, income, assets, debts and other financial information as well as the purpose of the home loan and about the property that the home loan is for. Application Fee A fee that is usually paid at the time that an application is given to a lender. Some lenders collect fees for a property appraisal and a credit report, instead of an application fee, at the time of application. Appraised Value The value of a house as determined by a certified appraiser. To find this value the appraiser will compare the house to similar houses, in the same general area, that have recently sold. If you're going to have a mortgage on your house, the lender is going to want to know the appraised value. They don't want to lend you $100,000 against a house that is only worth $50,000. B Biweekly Payment Loan A loan that requires you to make your payments every two weeks as opposed to the standard monthly payment schedule. The advantage is that there is a substantial interest savings due to reducing your principal faster. Buydown A temporary buydown gives you a reduced monthly payment during the first few years of a home loan and is typically paid for in an initial lump sum made by the seller, lender, or borrower. A permanent buydown is paid the same way but reduces the interest rate over the entire life of a home loan. C Cap A provision in an adjustable rate mortgage (ARM) that limits how much the interest rate or loan payments can increase or decrease. Cash Reserve There is sometimes a requirement by lenders that you have sufficient cash available after closing to make the first two mortgage payments. Certificate of Eligibility This is a document issued by the federal government certifying a veteran's eligibility for a Department of Veterans Affairs (VA) loan. Clear Title A title that is marketable and is free of liens or disputed legal questions as to ownership of the property. Closing The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement. Closing Costs Expenses that are incurred by buyers and sellers when transferring ownership of a piece of property. These costs are above and beyond the price of the property and normally include things like real estate broker's commission, discount points, origination fees, attorney's fees, taxes, title insurance premiums, appraisal fees, inspections and surveys. Also called settlement costs. Closing Statement This is a form that is prepared for both the buyer and seller that computes the costs payable at closing. It shows the seller's net proceeds and the buyer's net payment. It is also called a HUD-1 settlement statement. Commitment Letter A formal notification from a lender stating that the borrower's loan has been conditionally approved and specifying the terms under which lender agrees make the loan. Also known as a loan commitment. Conforming Loan A home loan with a maximum loan amount of $322,700 that is eligible for purchase by FNMA and FHLMC. Conventional Loan A home loan that is not insured or guaranteed by the federal government. It can be for conforming or non-conforming loan amounts. Credit History This is your history concerning how you have paid your bills in the past. Previous credit history is typically a good indicator of future credit history so it is definitely a consideration when determining what type of loan you will qualify for. Credit Rating An expression of creditworthiness based upon your present financial condition and past credit history. Credit Report A report about your credit history, which is prepared by a credit bureau. Credit Repository (Credit Bureau) An organization that gathers, records, updates, and stores financial and public information about the payment records of individuals who are being considered for credit. Credit Scoring Credit scores are numerical values that rank individuals according to their credit history at a given point in time. Your score is based on your past payment history, the amount of credit you have outstanding, the amount of credit you have available, and other factors. According to Fannie Mae--one of the major investors in home loans, credit scores have proven to be very good predictors of whether a borrower will repay his or her loan. D Debt to Income Ratios This is a comparison of what you earn versus what you owe. You take your debt divided by your income and that equals the ratio. This ratio will be taken into consideration when we figure out if you qualify for a loan. It will also help determine how much money we will be willing to lend you. Deed The legal document that conveys title to a property. Department of Veterans Affairs (VA) An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans. Discount Points Money paid up front to the lender in order to lower the interest rate. See points. Down Payment This is the amount of the purchase price that you are paying up front and not financing. Say for instance that you are getting a 97% loan on a $100,000 house. This means that you need to have $3,000 (3%) for the down payment to take to closing with you. E Earnest Money Deposit (Earnest Money) Typically when you make an offer to purchase a home, you will be asked to put a deposit down. It is to show that you are serious about purchasing the home. Escrow Something of value that a third party holds. In terms of home loans, we're usually talking about funds that you give to your lender to pay taxes and insurance premiums when they come due. Escrow (or impound) Account The account in which a loan servicer holds the borrower's escrow payments prior to paying property expenses, such as property taxes or homeowner's insurance. Escrow Payment The portion of a borrower's monthly payment that is held by the loan servicer to pay for taxes, hazard homeowner's insurance, mortgage insurance, lease payments, and other items as they become due. Known as impounds or reserves in some states. Equal Credit Opportunity Act (ECOA) 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 This is the amount of worth in your home that you owe no money on. Let's say an appraiser has valued your house at $100,000. You currently owe $60,000 on your mortgage. This means you have $40,000 worth of equity. Equity Loan A loan based on the equity in your home. F Fannie Mae (Federal National Mortgage Association FNMA) A New York Stock Exchange company and the largest non-bank financial services company in the world. It operates pursuant to a federal charter and is the nation's largest source of financing for home mortgages. It adds liquidity to the mortgage market by investing in home loans through the country. Federal Housing Administration (FHA) An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and loan underwriting but does not lend money or plan or construct housing. FHA Home Loan A mortgage home loan that is insured by the Federal Housing Administration (FHA). Also known as a government loan. Firm Commitment A lender's agreement to make a loan to a specific borrower on a specific property. First Mortgage (also referred to as a home loan) A home loan that is the primary lien against a property. Fixed Rate Loan On a fixed rate mortgage your interest never changes. Freddie Mac (Federal Home Loan Mortgage Corporation) A federal agency within the Department of Housing and Urban Development (HUD), which insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans. G Government Loan A loan that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Contrast with conventional loan. Government National Mortgage Association (GNMA or Ginnie Mae) A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD). Created by Congress on September 1, 1968, GNMA assumed responsibility for the special assistance loan programs formerly administered by Fannie Mae. Gross Monthly Income This is your normal, before tax income including overtime that is regular or guaranteed. It may be from more than one source. Salary is generally the principal source, but other income may qualify if it is significant and stable. This will be used in figuring your ratios, which determine the dollar value of the loan you will qualify for. H Home Equity Line of Credit (HELOC) You might want to think of this one as a cross between a second mortgage and a credit card. The total value of the line of credit will be based on how much equity you have in your property. When you take out a HELOC, you don't have to take all of the available money at once. This is where it is similar to a credit card. You can take the money, as you need it. Home Inspection Many people who purchase a home will make it contingent upon the satisfactory outcome of a home inspection. Then they will have a thorough inspection that evaluates the structural and mechanical condition of a property. Homeowner's Insurance (Hazard Insurance) Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards. The policy typically combines personal liability insurance and property hazard insurance coverage for a dwelling and its contents. Housing Expense Ratio The percentage of gross monthly income that goes toward paying housing expenses. I Index A number used to compute the interest rate for an adjustable-rate mortgage (ARM). The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. A margin is added to the index to determine the interest rate that will be charged on the ARM. Some lenders provide caps that limit how much the interest rate or loan payments may increase or decrease. Initial Interest Rate The starting interest rate for an adjustable-rate mortgage (ARM) loan or variable-rate home equity line of credit. At the end of the effective period for the initial rate, the interest rate adjusts periodically during the life of the loan based on changes in a specified financial index. Sometimes known as start rate, intro rate or teaser rate. Insured Mortgage A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (PMI). If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount. Interest The fee charged for borrowing money. Interest Accrual Rate The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments. Interest Payment The portion of your monthly payment that goes to interest based on the amortization schedule. Interest Rate The percentage rate of return charged for use of a sum of money. This percentage rate is specified in the mortgage note. Interest Rate Buydown Plan A temporary buydown gives a borrower a reduced monthly payment during the first few years of a home loan and is typically paid for in an initial lump sum made by the seller, lender, or borrower. A permanent buydown is paid the same way but reduces the interest rate over the entire life of a home loan. Investment Property A property that is not occupied by the owner and is generally rented to a tenant to produce income. Interest Rate Cap A provision of an ARM limiting how much interest rates may increase in a given adjustment period. See also Lifetime Rate Cap. Introductory Rate The starting rate for a home equity loan or line of credit, usually a discounted rate, for a short period of time. See Initial Interest Rate. J Jumbo Loan A loan that exceeds Fannie Mae's legislated mortgage amount limits of $322,700. Also called a non-conforming loan. K No entries L Late Charge The penalty a borrower must pay when a payment is made a stated number of days (usually 10-15) after the due date. Lender's Fees Fees paid to the lender to cover costs associated with processing, underwriting and closing of the loan. Liabilities A person's debts or financial obligations. Liabilities include long-term and short-term debt, as well as potential losses from legal claims. Lien A legal claim against a property that must be paid off when the property is sold. A lien is created when you borrow money to purchase or refinance a home loan or and with obtain a home equity loan. Lifetime Rate Cap For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap. Line of Credit An agreement by a lender to extend credit up to a certain amount for a certain time without the need for the borrower to file another application. See home equity line of credit. Loan Amount The amount of money you're borrowing. Loan Commitment A lender's agreement to advance money on specified terms after specified conditions are met. See commitment letter. Loan Origination The process by which a mortgage lender makes a home loan and records a mortgage against the borrower's real property as security for repayment of the loan. Loan-To-Value (LTV) Ratio The ratio of the total amount borrowed on a mortgage against a property compared to the appraised value of the property. For example, if you have an $80,000 1st mortgage on a home with an appraised value of $100,000, the LTV is 80% ($80,000 / $100,000 = 80%). Lock-In A written agreement in which the lender guarantees a specified loan program interest rate and points if a mortgage goes to closing within a set period of time. Lock-In Period The time period during which the lender has guaranteed an interest rate to a borrower. See lock-in. M Margin For an adjustable-rate mortgage (ARM) or home equity line of credit, the amount that is added to the index to establish the interest rate on each adjustment date, subject to any limitations on the interest rate change. The margin is static and will not change during the life of the loan. Maximum Rate The maximum interest rate that can accrue on a variable rate loan. Monthly Debt A borrower's monthly expenses including credit cards, installment loans, student loan payments, alimony and child support and housing payment expense. Monthly Mortgage Insurance (MI) Payment Portion of monthly payment that covers the cost of Private Mortgage Insurance. Monthly Principal & Interest (P&I;) Payment Portion of monthly payment that covers the principal and interest due on the loan. Monthly Taxes & Insurance (T&I;) Payment Portion of monthly payment that funds the escrow or impound account for taxes and insurance. Monthly Payment Payments to reduce the principal balance of a home loan made once a month. Mortgage A legal document that pledges a property to the lender as security for payment of a debt. Mortgage Insurance A contract that insures the lender against loss caused by a borrower's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency such as the Federal Housing Administration (FHA). Depending on the type of mortgage insurance, the insurance may cover a percentage of or virtually all of the mortgage loan. See private mortgage insurance (PMI). Mortgage Insurance Premium (MIP) The amount paid by a borrower for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company. Mortgagee The lender in a mortgage agreement. Mortgagor The borrower in a mortgage agreement. N No Closing Cost Loan A loan in which the borrower(s) are not required to pay cash out-of-pocket at closing for the normal closing costs. The lender typically includes the closing costs in the principal balance or charges a higher interest rate than for a loan with closing costs. Net Worth The value of all of a person's assets, including cash, minus all liabilities. Non-Conforming Loan See jumbo loan. Non-Liquid Asset An asset that cannot easily be converted into cash. "No out of pocket cost" Loan A loan in which the borrower(s) are not required to pay cash out-of-pocket at closing for the normal closing costs. The lender typically includes the closing costs in the principal balance or charges a higher interest rate than for a loan with closing costs. Note A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time. O Origination Fee A fee paid to a lender for processing a loan application, making a home loan, and recording a mortgage against the borrower's real property as security for repayment of the loan. The origination fee is stated in the form of points. One point is 1% of the mortgage amount (e.g., 1,000 on a $100,000 loan). Owner Occupied This means that you own it and you're living in it, as opposed to it being rental/investment property. P Payment Cap A provision of some ARM's limiting how much a borrower's payments may increase regardless of how much the interest rate increases; be aware that on some ARM's this may lead to "negative amortization." Payoff To pay the outstanding balance of a loan in full. Periodic Payment Cap A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or loan payments may increase or decrease. In upward rate markets, it protects the borrower from large increases in the interest rate or monthly payment at each adjustment period. See cap. Periodic Rate Cap A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or loan payments may increase or decrease. In upward rate markets, it protects the borrower from large increases in the interest rate or monthly payment at each adjustment period. See cap. PITI Stands for principal, interest, taxes and insurance -- the components of a monthly mortgage payment. PITI Reserves A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months. Points A one-time charge by the lender to increase or decrease the stated interest rate on a loan. To decrease the interest rate, the borrower "pays" points, to increase the interest rate, the borrower "receives" points. Pre-approval A lender's conditional agreement to lend a specific amount on specific terms to a homebuyer. Pre-Paid Items Items required by lender to be paid at closing prior to the period they cover such as prorated property taxes, homeowners insurance and pre-paid interest. Pre-Paid Interest Mortgage interest that is paid in advance of when it is due. Prepayment Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner's decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized. Prepayment Penalty A fee that may be charged to a borrower who pays off a loan before it is due. Generally, a prepayment penalty is added to a loan in exchange for a discounted rate. Pre-Qualification The process of determining how much money a prospective homebuyer might be eligible to borrow before he or she applies for a loan. When you pre-qualify, you will be asked for information about your credit, assets and debts. Based on the information you provide and the loan type you want, the lender will calculate how large a loan you could qualify for. Primary Residence The place someone lives most of the time. Prime Rate The interest rate that banks charge on short-term loans to its most creditworthy customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates. Principal The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage. Principal Balance The outstanding balance on a mortgage. The principal balance does not include interest or any other charges. See remaining balance. Principal, Interest, Taxes, and Insurance (PITI) Four potential components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the amounts that may be paid into an escrow account each month for property taxes and mortgage and hazard insurance. Principal Payment Portion of your monthly payment that reduces the remaining balance of a home loan. Private Mortgage Insurance (PMI) Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80%. Purchase Agreement A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold. Purchase Price The total amount paid for a home. Q Qualifying Ratios Calculations that are used in determining whether a borrower can qualify for a mortgage. They consist of two separate calculations. First is a housing expense ratio, which is figured by taking your housing payment, divided by your gross income. Second is the debt-to-income ratio, which is your current monthly debt on loans and credit cards, divided by your gross income. R Refinance Transaction The process of paying off one loan with the proceeds from a new loan, typically using the same property as security for the new loan. This is most often done to get the better interest rates offered by the new loan. Remaining Balance The amount of principal that has not yet been repaid. See principal balance. Remaining Term The original amortization term minus the number of payments that have been applied. Rural Housing Service (RHS) An agency within the Department of Agriculture. This agency provides financing to farmers and other qualified borrowers buying property in rural areas who are unable to obtain loans elsewhere. Funds are borrowed from the U.S. Treasury. S Second Home A property occupied part-time by a person in addition to his or her primary residence. Second Mortgage A mortgage that has a lien position subordinate to the first mortgage. As such, these loans are often less secure and may demand a slightly higher interest rate. Settlement See Closing. Settlement Sheet See Closing Statement. Single Family Residence A residential structure designed to include one dwelling. T Term The length of the loan. Third Party Fees Fees collected by lender for services provided by other companies, such as an appraiser. Third-Party Origination A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the home loan. Title A legal document evidencing a person's right to or ownership of a property. 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. 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. Total Expense Ratio Total obligations as a percentage of gross monthly income. The total expense ratio includes monthly housing expenses plus other monthly debts. Used to help qualify a potential borrower for a home loan. Total Monthly Payment See Monthly PITI payment. Transaction Fee A fee that is charged each time the borrower draws on the credit line. Treasury Index An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or is derived from the U.S. Treasury's daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. See adjustable-rate mortgage (ARM). Truth-in-Lending A federal law that requires lenders to fully disclose, in writing, the terms and conditions of credit, such as a mortgage, including the annual percentage rate (APR) and other charges. U Underwriting The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself. Unsecured Loan A loan that is not backed by collateral. V VA Mortgage A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage. Variable Rate An interest rate that changes periodically in relation to an index. Payments may increase or decrease per the terms of the loan agreement or note. W No entries X No entries Y No entries Z No entries

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