Home Loan Workbook

Broker - An individual or company that brings borrowers and lenders together for the purpose of loan origination. Buydown - When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage. Buydowns can occur in both fixed and adjustable rate mortgages. Cap - Limits how much the interest rate or the monthly payment can increase, wither at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning and may cause negative amortization. Certificate of Eligibility - A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Aairs (VA) mortgage. Closing - A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also referred to as “settlement”. Closing Costs - These are expenses - over and above the price of the property - that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include and orgination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs vary according to the property’s area and the lender involved. Compound Interest - Interest paid on the original principal balance and on the accrued and unpaid interest. Consumer Reporting Agency (or Bureau) - An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from credit repository and from other sources. Conventional Mortgage - A fixed rate, fixed-term mortgage not insured by the federal government. Conversion Clause - A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually, conversion is allowed at the end of the first adjustment period. The conversion feature may be an additional cost. Credit Report - A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness. Credit Risk Score - A credit score measures a consumer’s credit risk relative to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO score, developed by Fair, Issac and Company. This three-digit number, ranging from 300-850, is calculated by a mathematical equation that evaluates many types of information included on your credit report. Higher FICO scores represent lower credit risks, which typically equates to better loan terms. Deed of Trust - This is a document used in some states instead of a mortgage. Title is conveyed to a trustee. Default - Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage. Delinquency - Failure to make mortgage payments on time. Discount - In an ARM with an initial rate discount, the lender gives up a number percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate. Down Payment - The part of the purchase price of a property that is paid in cash and not financed with a mortgage. Earnest Money - A portion of a down payment given to the seller by a potential buyer indicating the buyer’s intent to complete the purchase of the property. Effective Gross Income - A borrowers normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable. Equity - The amount of financial interest on a property. Equity is the dierence between the fair market value of the property and the amount still owed on the mortgage. Escrow - An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.

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