Financing Glossary

Adjustable Rate Mortgage (ARM)
A mortgage loan in which the interest rate is adjusted periodically based on a preselected index; i.e., "llth District Cost of Funds", "6-month and l-year Treasury Bills", "Prime Rate", "Libor", and others. 

Refers to a loan whereby the periodic loan payments are calculated to payoff the debt completely at the end of a fixed period, including accrued interest. 

Annual Percent Age Rate (APR) 
An interest rate reflecting the cost of a mortgage loan as a yearly rate. This rate is usually higher than the note rate, because it takes into account the costs to obtain the loan; i.e. , loan origination fees, discount points, and other costs. 

An estimate of the value of property, made by a qualified professional called an " Appraiser" . 

The person who obtains a mortgage loan; also called a "Mortgagor." 

Broker (MORTGAGE) 
An individual or company, in the business of assisting and arranging financing for a client, but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services. 

An individual or company in the business of assisting and arranging the sale/purchase of property .Acts as a intermediary for and/or between the Buyer or Seller; also known as a Realtor. 

When the lender and/or homebuilder subsidizes the mortgage payment by lowering the effective interest rate during the first few years of the loan. While the payment are initially low, they increase annually until the subsidy expires. 

The meeting between the Buyer, Seller, Lender and Realtor or their agents where the property and funds legally change hands. Also called Settlement. 

Closing Costs 
Usually include an origination fee, discount points, appraisal and credit report fees, title insurance and escrow fees, taxes, prepaid interest, fire insurance, deed recording costs and others. .The fees vary with the loan type (FHA, VA or Conventional} and lender. 

A condition put in an offer to buy a home. 

Conventional Loan 
A mortgage loan not insured by FHA or guaranteed by V A or the Farmers Home Administration (FmHA). 

A person who agrees to share credit responsibilities and repays the debt if the borrower defaults. 

A specific agreement or regulation, which is legally enforceable and is transferred with the deed to the new owner, governing the use of a property.  Also, called covenants, conditions and restrictions (C.C. & R’s), deed restrictions or restrictive covenants. 

Credit Report
A report documenting the credit history and current status of a borrower's credit rating. 

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 his/her gross monthly income. See Housing~ Expenses-to-Income Ratio.  

Deed of Trust
In California, this document is used in place of a mortgage to secure the payment of a note. 

Department of Veterans Affairs (VA) 
An independent agency of the federal government which guarantees long-term low or 00 down payment mortgages to eligible veterans. 

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 sales price on conventional loans, and zero percent to 5 percent on V A and FHA loans. 

Earnest Money
Money given by a Buyer to a Seller (or Seller's agent) as part of the purchase price to bind a transaction or assure payment. 

A right of way giving people other than the owner access to or over a property. 

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 (provided the person has the capacity to contract), sex, marital status, handicap, familial status (having children under the age of 18), or receipt of income from public assistance programs. 

The difference between the fair market value and current indebtedness also referred to as the Owner's Interest. 

Refers to a neutral third party who carries out the instructions of both the Buyer and Seller and to handle all the paperwork of settlement of "closing". Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments. 

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

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 ($151,150), they are generous enough to handle low and moderate-priced homes in the greater Sacramento area. 

FHA Mortgage Insurance 
FHA requires (for most FHA loans) an "up front" premium of 3.8% of the loan amount to be paid at closing. The premium can be financed (added to the loan amount) and paid monthly for the life of the loan. Additionally, FHA requires an annual premium to be paid, in the amount of .5 % ( .005) of the unpaid loan balance. The annual premium is added to the monthly mortgage payment and continues' for 10 years. 

Fixed Rate Mortgage
Amortgage on which the interest rate is set for the term of the loan. 

Flood Insurance
A policy required by a lender if a buyer’s house is located in a flood zone. 

Good Faith Estimate
A document that discloses anticipated settlement costs. 

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

Hazzard Insurance 
Aform of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like. 

Homeowners Association or HOA
A group of homeowners within a defined community, neighborhood or complex who make decisions, pay to maintain and repair land and common areas and/or enforce community rules and covenants. 

Housing Expense to Income Ratio 
The ratio expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. See Debt-to-Income Ratio.

That portion of a borrower's monthly mortgage payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, and other items as they become due; also known as "reserves". 

Interest Rate
The percentage of the loan amount charged for a loan. 

Jumbo Loan
A loan which is larger (more than $580,000) than the limits set by FannieMae and Freddie Mac. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate. 

Loan Fee
Costs associated with loan processing. 

Loan Term
The amount of time borrower has to pay off a loan. 

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

The entity or person who offers the mortgage loan; also called a "mortgagee." 

A security agreement between the lender and the buyer in which the property is collateral for the loan. 

Mortgage Insurance 
Money to be paid to insure the mortgage when the down payment is less than 20 % for conventional loans, or for any FHA loan, regardless of down payment. 

Origination Fee 
The fee charged by a lender to process the loan paperwork, prepare loan document and other services for the borrower; usually expressed as a percentage of the loan amount. 

P .I. T .I.
Principal, Interest, Taxes and Insurance. Also called monthly housing expense. 

Also known as Loan Discount Points. Prepaid interest assessed at closing by the lender. Discount points are required by the investor when the interest rate is below market. Each "point" is equal to I percent of the loan amount (i.e., 2 points on a $100,000 loan would equal $2,000).  

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

Expenses necessary to create an escrow account or to adjust the Seller's existing escrow account. Can include taxes, hazard insurance, mortgage insurance and other assessments. 

A guarantee that a lender will loan a potential buyer a fixed amount as long as the borrower buys a home by a certain time and the house appraises for the amount of money for which the borrower qualifies. 

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

The outstanding balance of a loan, not including interest and other charges. 

Property Tax
A tax charged by the local government and used to fund a variety of municipal services such as schools, police or street maintenance; also call "real estate tax." 

Purchase and Sales Agreement
A written contract signed by the buyer and the seller stating the terms and conditions under which a property will be sold. 

Real Estate Settlement Procedures Act (RESPA)
A law that establishes procedures for closing mortgage loans.  RESPA prohibits cost-increasing practices such as kickbacks and referral fees and requires advance disclosure of settlement costs. 

Single Family Home
A type of house, usually detached, that is owned by one person or family, including the land on which it sits. 

A legal document establishing the right of ownership in a property. 

Title Insurance
A policy, usually issued by a title insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is usually paid by the Buyer and/or Seller. 

Afederal law requiring disclosure of the Annual Percentage Rate (APR) to homeowners shortly after they apply for the loan. 

The decision whether to make a loan to a potential Buyer based on credit. employment. assets, and appropriate rate and term or loan amount. 

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

VA Mortgage Fund Fee 
A"user" fee that varies depending upon the amount of down payment.

Walk Through
A buyers final inspection of a property, usually conducted right before closing, to determine that the property is as described in the purchase agreement.