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These are some terms you will hear when buying your home.
Applying for a mortgage means taking a large financial step. You will hear many terms throughout the process, and becoming familiar with these terms through the use of this "dictionary" will help you feel more in touch.
Adjustable Rate Mortgage (ARM)-A mortgage in which the interest rate is adjusted periodically based on a preselected index. This type of mortgage is sometimes called a variable-rate mortgage.
Amortization-The repayment of debt in equal payments over a specified period of time.
Annual Percentage Rate (APR)-The cost of credit expressed as an annual rate. It must be calculated by using a formula set by federal law and disclosed to the Borrower to aid in comparing different credit plans. All finance charges imposed by a Lender are included in this calculation, and an APR is always higher than the simple interest rate when finance charges such as points, origination fees, or mortgage insurance are charged by a Lender.
Appraisal-An estimate of the value of property; made by a qualified professional called an "appraiser".
Cap-A limit on an adjustable rate mortgage (ARM) which determines how much the interest rate can increase.
Closing Costs-Costs assessed at settlement. Closing costs may include an origination fee, discount points, appraisal fee, title search and insurance, survey, deed recording fee, credit report charge, and other miscellaneous costs. These costs usually total about 2 percent to 4 percent of the mortgage amount.
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 meeting specified conditions.
Construction Loan-A short-term interim loan for financing building costs. The Lender advances funds to the builder of the Borrower at periodic intervals as the work progresses. The Borrower then obtains a long-term loan (permanent financing) to refinance the construction loan.
Conventional Loan-A mortgage not insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or USDA-Rural Development.
Credit Report-A report documenting the credit history and current status of a Borrower's credit standing.
Debt-to-Income Ratio-The ratio, expressed as a percentage, which results when a Borrower's monthly payment obligation on long-term debts is divided by the gross monthly income.
Deed-The legal document conveying title to a property.
Deposit (also called Earnest Deposit)-A cash deposit made by a potential buyer to demonstrate that the offer to purchase is serious.
Down Payment-Money paid to make up the difference between the purchase price and the mortgage amount. Down payments are usually 5 percent to 20 percent of the sale price on conventional loans, and may be less on FHA, VA, or NIFA loans.
Equal Credit Opportunity Act (ECOA)-Federal law that prohibits lenders from denying credit on the basis of race, color, religion, national orgin, age, sex, marital status, public assistance, and the Consumer Protection Act.
Equity-The difference between the fair market value of the property and current indebtedness on it; also referred to as the Owner's interest.
Escrow Agent-A neutral third party who carries out the instructions of both the Buyer and the Seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the Lender for the benefit of the Borrower to pay tax or insurance payments.
Federal Housing Administration (FHA) mortgage-A mortgage insured by the Federal Housing Administration.
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 investor makes mortgage money available and more affordable.
Fixed-Rate Mortgage-A mortgage on which the interest rate is set for the term of the loan.
Flood Insurance-Insurance required on properties located in a designated flood area.
Good Faith Estimate-An itemized breakdown of estimated closing or settlement costs.
Gross Monthly Income-The total amount the Borrower(s) earn(s) per month before any expenses are deducted.
Loan-to-Value Ratio-The relationship between the amount of the mortgage loan and the lesser of the appraised value or sales price of the property expressed as a percentage.
Market Value-The highest price that the Buyer would pay and the lowest price the 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.
PITI-An acronym for principal, interest, taxes and insurance, the components of a monthly mortgage payment.
Points (Loan Discount Points)-Prepaid interest assessed at closing by the Lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).
Prepayment-A privilege in a mortgage permitting the Borrower to make payments in advance of their due date.
Prequalification-Determining the amount a buyer is eligible to borrow before a loan application is made.
Private Mortgage Insurance (PMI)-May be required by a Lender if the loan applied for cannot be granted because the loan does not meet the normal standards for the Lender. The most common reasons for this requirement is a smaller down payment than the Lender usually requires (usually around 20 percent). This insurance protects the Lender from loss if the Borrower defaults. It does not protect the Borrower though it may allow the Borrower to qualify for a loan otherwise not available. This insurance will require an initial premium payment of .5 percent to 2 percent of the mortgage plus an additional monthly fee, depending on the loan type.
Real Estate Settlement Procedures Act (RESPA)-Requires lenders to give borrowers advance notice of closing costs.
Survey-A drawing showing the legal boundaries of a property.
Title-A document that gives evidence of the ownership of property.
Title Insurance-A policy, usually issued by a title insurance company, which insures the Buyer and/or Lender against errors in the title search. The cost of the policy is usually a function of the value of the property and is often paid by the Buyer and/or Seller.
Title Search-An examination of municipal or county records to determine the legal ownership of property, usually performed by a title company.
Verification of Deposit (VOD) -A form sent to each depository listed on the loan application to verify funds of the borrower.
Verification of Employment (VOE)-A form sent to the borrower's employer to verify the borrower's employment and employment history.
Veterans Administration (VA)-A federal agency that guarantees no downpayment loans to veterans who have served and to active military who are serving in the U.S. military.
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