Glossary of Terms - Colorado Country Homes

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Glossary of Terms

Finance

Glossary of Lending Terms

Adjustable Rate Loan or Adjustable Rate Mortgage (ARM)
A loan with an interest rate that changes during the term of the loan. The payments
generally increase or decrease with the interest rate. Rate is based on one of several
"index" options.
Amortize
Payoff off a debt in installments which includes both principal and interest.
Amount Financed
A required Truth in Lending Act disclosure for consumer loans. It is calculated by starting
with the full amount borrowed (principal) and subtracting out the dollar amount of prepaid
finance charges (finance charges the borrower is paying in advance).
Application Fee
A fee charged by the lender or broker for the loan application.
Appraisal
A report that estimates the value of real estate.
Appraiser
A person typically hired by a lender to provide an appraisal.
Annual percentage rate (APR)
A required Truth in Lending Act disclosure for consumer loans. It is a calculation of the cost
of credit as a yearly rate and shown as a percentage. It is often higher than the interest
rate because it incorporates prepaid finance charges that are not interest.
Arbitration
A privately conducted trial to resolve a dispute. Arbitration can be binding (in which case
there is no appeal), or non-binding, in which an appeal may be possible.
Balloon payment
A scheduled payment due at the end of a loan term that is substantially greater than the
regular monthly payments. This may be a very large payment. It is designed to occur when
the regular payments do not pay off all interest and principal owing (not fully amortizing) on
the loan over the term of the loan.
Borrower
A person who receives funds in the form of a loan with the obligation to repay the loan in
full.
Broker Agreement (Mortgage Broker Agreement)
A contract between a borrower and a mortgage broker. It describes what the broker will do
for the borrower, and the terms of the agreement, including compensation.
Broker Compensation or Fee
The amount of money the broker will receive for finding a loan for a borrower. This may be
an amount paid by the borrower, an amount paid by the lender or a combination of the
two.
Cash-out Refinancing Loan
A loan that refinances a prior mortgage and that provides additional cash to the borrower.
funds.
Closing Costs
A general term to describe the fees that a borrower will pay at closing. Sometimes called
"settlement fees."
Conforming Loans
Loans which conform to Fannie Mae guidelines.
Courier Fee
This is a fee that may be charged to send documents or payments by courier, messenger
or overnight mail service to various parties involved in the loan transaction.
Credit Report
This is a report which is generated by a credit reporting agency (such as Trans Union,
Experion or Equifax). It is supposed to show accurately the history of your on-time and late
payments on mortgages, credit cards, rent, utilities, and other debts. It may also show how
much you owe on your various debts and whether you have taken the maximum amount of
credit available to you through credit card borrowing. Your credit reports are used, with
other information, to generate a credit score that is supposed to reflect how good a credit
risk you are.
Credit Score
This is a number that is supposed to show the lender how likely you are to repay a loan--
whether you are a good or poor credit risk. This score can be a very big factor in
determining whether you will get a loan, from whom, and what interest rate and fees you
will be charged for your loan. The score is generated by a mathematical formula that
considers your credit reports and other factors. It may also be referred to as FICO score
(Fair Isaac Company) or Beacon score or some other name-these are companies that
create credit scores. (See Chapter 6 in
The Complete Guide to Your Real Estate Closing.)
Deed of Trust
In some states loans are secured by means of a document called a deed of trust, instead of
a mortgage document.
Document Preparation Fee
An amount of money that you may be charged for the preparation of mortgage loan
documents. This charge will be shown on the HUD-1 Settlement Statement.
Equity
This is the dollar amount of your home that you really own. You can calculate your equity
by taking the market value of your home and subtracting out the debt that is secured by
your home. For example, if your house is worth $150,000 and you owe $65,000 on a first
mortgage and $15,000 on a home equity line of credit. You would take $150,000 - $80,000
(65,000 + 15,000) to arrive at $70,000 in equity.
Fees
This is money you pay or is charged to you up front to get a mortgage loan. You may pay
fees in cash or finance them (or a portion of them) as part of the loan. If you finance fees,
your loan balance will be higher and your equity will be lower. The fees appear on the
Good Faith Estimate and HUD-1 Settlement Statement. Many of these fees are negotiable
or can be reduced if you shop around.
FICO
Credit scores calculated by Fair Isaac Company are often referred to as FICO Normally an
average of credit scores taken by 3 national credit bureaus.
Finance Charge
The finance charge is a disclosure that appears on the Truth in Lending Act Disclosure
Statement. It is intended to show the cost of your loan as a dollar amount. It includes (1)
interest that will be charged over the life of the loan and (2) some up front fees (prepaid
finance charges). Prepaid finance charges include such items as mortgage broker fees;
lender fees; points; and some closing agent fees. Any closing fees that are unreasonably
high should also be included. You may also be required to pay other fees that will not be
included in the finance charge.
Finance Companies
These are companies that make loans which are generally at higher rates than are
available from banks or credit unions.
Fixed Rate Loan
A loan where the interest rate does not change during the term of the loan.
Flood Certification Fee
A fee charged to determine if the property lies in a flood zone and whether flood insurance
is required.
Foreclosure
The legal procedure by which a lender holding a mortgage on your house forces a sale of
your house to obtain repayment of your loan. Foreclosure proceedings are typically started
by a lender when you do not pay your loan on time. It might also be started if you fail to
pay property taxes or insurance or keep other promises.
Foreign National
Term used to describe a person who is not a citizen of the country in which they may be
visiting or residing. Used for U.S. taxation purposes to mean someone who is not a U.S.
citizen.
Fully Amortizing
This describes a loan where the balance owed at the scheduled end of the loan is zero if all
regular monthly payments are made as scheduled.
Good Faith Estimate
This document lists the estimated fees you will have to pay to get the loan. It also
identifies who is expected to provide services and receive fees in connection with your
loan, such as credit bureaus, appraisers, and closing agents.
Government Recording Fees and Taxes
Fees and taxes required to be paid to the local government where your mortgage
documents are filed.
Home Equity Loan
A loan made to a current homeowner that is secured by the equity in the home.
Homeowner's/Hazard Insurance
Homeowner's or Hazard Insurance is insurance required to protect the mortgage lender
against possible damage to your home. It can also protect the borrower. A borrower must
obtain this insurance and bring proof of its existence to the loan closing.
HUD
The U.S. Department of Housing and Urban Development
HUD Special Information Booklet
This is a booklet published by HUD that describes important terms and provides
information about the home buying and mortgage loan process.
HUD-1
Also called a "Settlement Statement" of all costs and fees in your closing.
Indorsement
1. the act of signing one's name on the back of a check or a note, with or without further
qualification.
2. the signature described above.
3.
Installment note
a note which provides that payments of a certain sum or amount be paid in more than one
payment on the dates specified in the instrument.
Installment sale
also known as an agreement of sale or a land contract. This is a method of reporting
capital gains by installments for successive tax years to minimize the impact of capital
gains tax in the year of the sale.
Institutional lender
a lender which makes a substantial number of real estate loans, such as banks, savings
and loan associations, and insurance companies.
Interest Rate:
Cost of borrowing money expressed as a percentage of the amount borrowed.
Introductory Rate
Some loans have a lower introductory interest rate, which is in effect for a limited time. At
the end of the introductory period, the interest rate will increase. It is also known as a
"teaser rate."
Jumbo Loans:
Loans which exceed the Fannie Mae guidelines for loan size and amount. Jumbo loans may
have different guidelines from a "conforming" loan.
Late Charge
A penalty you will have to pay if you do not make your loan payment on time. This usually
is calculated as a percentage of the payment amount or a minimum dollar amount, such as
5% of the late payment, or $25.
Lender
A company or person that makes mortgage loans, such as a mortgage banker, credit
union, bank, or savings and loan. Your lender's name will appear on your promissory note.
Lender Paid Compensation to Broker
This is also called the Yield Spread Premium. Fee which the lender pays to the mortgage
broker for obtaining the loan for his client.
Lien
A claim (legal interest) against a home. Common types of liens include a mortgage, tax lien
or judgment lien.
Line of Credit
Also called an "open line of credit" secured on your home. Often there are no closing costs
involved, or the lender offers to pay all closing costs. Use like a checking account,
borrowing credit over time up to your credit limit.
Loan Approval/Commitment
A lender's agreement to make a loan on particular terms, including interest rate, fees and
charges.
Loan Term
Length of time until your loan is due and payable.
Mediation
A process of dispute resolution in which an impartial third party, a mediator, intervenes in a
dispute with the consent of the disputing parties and helps them negotiate an agreement.
The role of the mediator is to assist the disputants define and clarify issues, help reduce
obstacles to communication, explore possible solutions, and reach a mutually satisfactory
agreement.
Mortgage
A mortgage is a promise in which you agree to put up your home as security for a loan.
The mortgage is the instrument which secures the Promissory Note, in which you promise
to repay the loan at a certain date. The mortgage document allows the lender to force a
sale of your home (foreclosure) if, for example, you fail to make payments, to pay property
taxes or insurance, or keep other promises. In some states the mortgage document is
called a "deed of trust." Refer to your copy of
The Complete Guide to Your Real Estate
Closing
for full details of these two documents.
Mortgage Banker
A lender, other than a bank, credit union, or savings and loan, that specializes in making
residential mortgage loans.
Mortgage Broker
A person or company that obtains a mortgage loan for the borrower from another lender. A
mortgage broker will not always be representing the borrower and will not necessarily be
looking after the borrower's best interests.
Mortgage Insurance (PMI or MI)
Insurance that may be required when a loan is greater than 80% of the value of the home.
This insurance protects the lender in the event a borrower fails to make his or her loan
payments. The borrower ordinarily pays the cost of MI or PMI, in the form of monthly
premiums added to the mortgage payments.
Notice of Right to Cancel
Under federal law, you may be permitted to cancel or "rescind" a mortgage loan within a
specified time, generally three days, after you have signed loan documents in a refinance,
second mortgage or other mortgage loans which do not involve the purchase of a home. .
The lender is required to give the borrower notice in writing of this right to cancel or
rescind and the deadline to cancel. (read full details in The Complete Guide to Your Real
Estate Closing.)
Open-End Loan
A loan that permits the borrower to draw money from time to time up to a credit limit. A
home equity line of credit (HELOC) is an open-end loan secured by a home.
Payment Schedule
This information on the Truth in Lending Disclosure Statement shows the amount of the
first loan payment, the amount and number of the regularly scheduled payments (usually
monthly), the amount of the final payment, and when all those payments are due. The
actual payment due may be greater for a number of reasons, including taxes and
insurance. If the loan has an "adjustable rate," the actual payments will differ from the
payment schedule.
Points
A fee charged by the lender as additional compensation for making the loan. One "point" is
equal to 1% of the principal amount of the loan.
Prepayment Penalty
The charge which can be imposed if you pay off your loan before maturity. The Truth in
Lending Disclosure Statement will show whether a loan has a prepayment penalty.
Prime Loan
A loan offered to borrowers with better credit history (sometimes called "A" loans). Prime
loans generally are priced lower and cost the borrower less.
Private Mortgage Insurance
Private Mortgage Insurance (PMI or MI)- Insurance required to be paid for by the borrower
to protect the lender in the event payments are not made on time; most often required
when the loan amount exceeds 80% of the purchase price.
Processing Fee
A fee charged by lenders or brokers to prepare a complete loan application file. A
processing fee may be charged to the borrower and shown on the Settlement Statement
(HUD-1).
Promissory Note
A legal contract in which the borrower promises to pay back the loan. The "promissory
note" sets forth the terms and conditions that apply to the loan repayment, such as
interest rate, when payments are due, where payments are made, what happens if
payments are not made, etc.
Purchase Money Loan/Mortgage
A loan for the purpose of purchasing a home.
Rate Lock (Lock in the Rate)
Refers to the agreement between the borrower and the lender or broker that as long as
the loan is closed within a certain period of time (for example, 30 or 60 days), the interest
rate on the loan will be set (locked) at an agreed- upon rate. A "rate lock" agreement must
be in writing or it will be unenforceable.
Recording Fees
Fees charged by the local government to record loan documents (for example, the
mortgage). These fees will be charged to the borrower and shown on the Settlement
Statement (HUD-1).
Refinance
To repay one or more existing mortgage loans by getting a new mortgage loan.
Rescind (also Right of Rescission)
Literally means "to take back" or "cancel." If a borrower rescinds a mortgage loan, it is as if
the mortgage loan never existed. Some borrowers have by law a right to "rescind" certain
mortgage loans. Note: A Borrower is entitled to a refund all fees paid in connection with
the loan if the Borrower exercises his right of rescission.
Secondary Mortgage Loan
A mortgage loan that is in addition to a mortgage that already exists on the home.
Settlement
The time when loan and mortgage documents are formally signed and the loan transaction
is completed. Sometimes called "Closing."
Settlement Agent (may also be called closing agent or settlement attorney)
The person who organizes and is in charge of the loan closing. The settlement agent is the
person who can explain any document the borrower must sign.
Settlement Statement
A mortgage loan closing form required by HUD that is often called a HUD-1. It provides
details of all charges and payments made in connection with your loan, and shows to
whom they are distributed.
Sub prime Loans
These loans are priced higher than prime loans, often much higher. Loans to borrowers
whose credit is less than perfect will almost always be subprime loans. There are also other
circumstances that lead to subprime loans, including high outstanding debt, unproven
income, etc. Even borrowers with good credit may receive subprime loans for a variety of
reason, including fraud, discrimination, failure to shop around, etc.
Survey
A drawing or map showing the precise legal boundaries of a property and other physical
features, prepared by a registered land surveyor
Term
The period of time during which loan payments are made. At the end of the loan term, the
loan must be paid in full.
Transfer Tax or Charge
This is a government tax or charge that is usually based on a percentage of the property
value or loan amount and imposed by state or local law. Many states do not require this
charge for a refinance loan, but almost all require it for a home purchase. A transfer tax
will be shown on the Settlement Statement (HUD-1).
Truth in Lending Act (TILA)
This is a federal law designed to protect borrowers and to give them enough information to
comparison shop for loans. TILA requires certain disclosures about the loan and when they
must be given to the borrower. TILA also provides additional protections and prohibitions.
Truth in Lending Disclosure Statement
This is a very important document that federal law requires for all consumer loans.] It
provides key information to enable borrowers to shop around and compare loan terms from
various lenders.
Underwriting Fee
This is a fee charged by the lender to evaluate whether the borrower qualifies for a
mortgage loan. An underwriting fee may be charged to the borrower and shown on the
Settlement Statement (HUD-1).
Up Front Costs
These are costs or fees which are charged to the borrower at or before closing of the
mortgage loan, such as loan application fees, appraisal fees, points, broker fees, credit
report fees, real estate taxes, etc. Up front costs can be paid in several ways: (1) they can
be paid by the borrower in cash; or (2) they can be added to the loan amount and financed
over the life of the mortgage.
Yield Spread Premium (YSP)
This is a payment made by a lender to a mortgage broker in connection with a borrower's
mortgage transaction. It is shown on the Settlement Statement (HUD-1), but often in a
way that is difficult to understand. For example, a $1,000 yield spread premium may be
shown as "YSP POC 1000." Borrowers are often unaware that the YSP payment is being
made. The payment of a YSP by a lender affects the interest rate charged to the borrower.

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