ADJUSTABLE RATE MORTGAGE (ARM) – This is a mortgage in which the interest rate is adjusted periodically based on a pre-selected index.
APPRAISAL – This is an estimate of the value of property, made by a qualified appraiser, usually hired by a bank.
CLOSING – This occurs after all the paperwork has been signed, funds have been disbursed, and the property legally changes hands. Also called settlement.
CREDIT REPORT – a report documenting the credit history and current status of a borrower’s credit standing.
DOWN PAYMENT – Money paid to secure a property. Down payments are usually 10% or higher on conventional loans. FHA and VA loan down payments may be lower – 0% to 5%.
EARNEST MONEY – Money “given” by a buyer to a seller (held in escrow) as part of the purchase price to bind a transaction and show good faith.
EQUITY – The difference between the fair market value for a property and current mortgage balance.
ESCROW – Refers to a neutral third party who carries out the instructions in the purchase and sales agreement and handles all the paperwork of settlement or “closing.” Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.
FIXED-RATE MORTGAGE – A mortgage on which the interest rate is set for the term of the loan, usually 15 or 30 years.
HAZARD INSURANCE (AKA HOMEOWNER’S INSURANCE) – a form of insurance in which an insurance company protects the insured from specified losses on a property such as fire, wind, and accidents.
JUMBO LOAN – A mortgage which is larger 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 property for the payment or satisfaction of a debt, obligation, or judgement.
LOAN-TO-VALUE RATIO – The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. This is important for calculating mortgage insurance.
MARKET VALUE – The intersection of the highest price a buyer is willing to pay and the lowest price a seller will accept on a property.
POWER OF ATTORNEY – A legal document authorizing one person to act on behalf of another.
PRINCIPAL – The amount of original debt, not counting interest, left on a loan.
PRIVATE MORTGAGE INSURANCE (PMI) – In the event a borrower does not have a 20% down payment or 20% equity in the property, lenders will allow a smaller down payment with private mortgage insurance. This requires an initial premium payment of 1% – 5% of the mortgage amount and may require an additional monthly fee depending on the loan structure.
SURVEY – A land surveyor will measure land to determine boundaries, showing references to known points.
TITLE– A legal document that provides evidence of an individual’s ownership of property.
TITLE INSURANCE – A policy, usually issued by a title insurance company, which insures a homebuyer against errors in the title search. A separate policy may also be taken out by the lender.
TITLE SEARCH – An examination of records to determine the legal ownership of property as well as other legalities that come with ownership. A title search is usually performed by a title company.
UNDERWRITING – The process in which a lender decides to make a loan to a potential homebuyer based on credit, employment, assets, and other factors.
VERIFICATION OF DEPOSIT – May also be known as “proof of funds”. Usually requested by escrow or the lender, this is a document signed by the borrower’s financial institution verifying the status and balance of his/her financial accounts as evidence of lendability or as evidence that an amount used for a down payment actually exists.
VERIFICATION OF EMPLOYMENT –This is a document signed by the borrower’s employer verifying his/her position and salary to indicated lendability.