Santa Rosa Home Loans - Financing Terms

One of the first things you will be doing in your new home search is getting pre-approved for a mortgage loan. While going through this process, you will come across financing terms that you may not be familiar with. Your understanding of these financing terms will help you make an educated decision on what the best loan for you will be. In addition, while speaking with your loan officer, it is important you understand the process. Understanding some of the financing terms will help make sense of all that is going on.

• Adjustable Rate Mortgage (ARM)~ This type of loan has an interest rate that will adjust after a pre-determined period of time. The time periods can range from 6 months to 10 years.

• Amortization ~ the way a loan is paid off, with regular payments over a specific period of time. Payments must be sufficient to cover both principal and interest.

• Annual Percentage Rate (APR)~ the actual interest you are paying which factors in fees, points and other costs paid for obtaining the loan

• Appraisal/Appraised Value ~ A report completed by a qualified professional that makes a complete market analysis of a properties surrounding area to determine a reasonable value for a home. Based on comparable properties that have recently sold.

• AUS/DU/LP~ Automated Underwriting System/Desktop Underwriter (FNMA)/Loan Prospector(FHLMC) Using completed loan application information, an automated underwriting systems retrieves relevant data, such as a borrower's credit history, income information, asset information and arrives at a logic-based loan decision.

• Buy Down ~ Money paid to "buy down" an interest rate. Interest rates may be permanently bought down by paying points or temporarily bought down 1 year, 2 years or 3 years. Example: interest may start at 3% for the first year, 4% for the second year 5% for the remaining life of the loan.

• Caps ~  Both payment and interest rate safeguards set in place for an ARM loan that will not allow a payment or interest rate to increase over a certain amount in a given time period.

• Certificate of Eligibility~ Document given to qualified Veterans that show their eligibility to use the benefit of a VA Home Loan.

• Closing ~ The date written into your offer as when the escrow will be completed. Money will be transferred to the seller. Close of Escrow date.

• Closing Costs ~ Expenses over and above the purchase price of the property for lenders fees, appraisals, property taxes, escrow and title fees.

• Conventional Loan ~A mortgage loan that is not insured or guaranteed by a government entity. A loan that will meet guidelines set forth by FNMA (Fannie Mae) and FHLMC (Freddie Mac) (also known as a conforming loan)

• Credit Report ~A detailed report of all loans, credit cards, car payments and the payment history for each. Will include all current and closed accounts. Will also include any liens or judgements in public record.

• Credit Score~also known as FICO score. Based on the information in your credit report, it is a statistical summary of the payment history. It is a mathematical summary calculation that gives numerical values to information in the credit report. YOUR CREDIT SCORE IS AN IMPORTANT FACTOR IN OBTAINING A MORTGAGE LOAN

• Debt to Income Ratio (DTI)~ This figure is calculated by taking any long term monthly debt and dividing it into your gross monthly income to determine affordability.

• Deed of Trust ~ Document executed by the borrower evidencing the debt owed to a lender. This document is recorded with the County Recorder's Office and will be public record of the debt.

• Discount Points ~ Prepaid interest based on 1% of the loan amount for each point. Paying discount points will help lower the interest rate being negotiated.

• Earnest Money Deposit~ Money given by a buyer to a seller to bind the contract. This money is held by the Escrow Company and will be applied to down payment at the close of escrow.

• Escrow~ A third party intermediary who will hold and disburse funds in the transaction. The Escrow Company will assist in getting paperwork signed and arrange the recording of documents.

• FHA Loan ~ A mortgage loan insured by the Federal Housing Administration. FHA loans have their own underwriting guidelines that must be met, but may also be underwritten by an automated underwriting system.

• Fixed Rate Mortgage ~ A mortgage loan where the interest rate will remain consistent throughout the life of the loan.

• Impound Account ~ An account set up for the buyer by the lender to collect monthly payments that will cover property taxes and insurance. The lender will pay these installments when they come due.

• Jumbo Loan~ A mortgage loan that is higher than the conforming loan limits that are set by Fannie Mae and Freddie Mac

• Loan Origination Fee ~a percentage of the loan amount charged by the lender to originate the mortgage loan.

• Loan to Value (LTV) ~ Based on the appraised value of the home, the amount of money borrowed. Example: A loan with 20% down payment would equal an 80% Loan to Value ratio.

• Lock or Rate Lock ~ An opportunity to lock in a certain interest rate for a period of time. Usually between 12 and 45 days.

• Mortgage Insurance, PMI or MIP~ insurance to protect the lender in the event of default required on any loan with less than 20% down. Please see a more detailed explanation in my post on What is PMI

• Note~ A written promise to pay back money borrowed from the lender. This will include the terms of the loan, interest rate, payment dates, lender and borrower.

• PITI~ abbreviation for describing a total monthly mortgage payment that includes Principal, Interest, Taxes and Insurance.

• Prepayment Penalty~ A penalty charged by the lender for paying off or paying down a loan prior to a specified date. Not as common today as in the past. It is important to ask if your loan has a prepayment penalty.

• RESPA (Real Estate Settlement Procedures Act)~ The requirement for lenders to provide detailed information to the borrower in advance of what closing costs are to consist of.

• Title Insurance~ An insurance policy issued by a Title Company that may cover the lender and the buyer in the event of unfound claims against the property.

• Truth In Lending (Reg Z) ~ Federal law requiring the lender disclose the annual percentage rate (APR) to the buyer.

• Underwriting~ A decision made to lend or not to lend money based on information provided by the borrower regarding income, employment, assets and liability. The property will also be considered in the underwriting decision. Condition and loan to value will be evaluated.

• VA Loan~ A loan guaranteed by the Veterans Administration available to qualified veterans. May require no money down.

This is a short list of financing terms that will at least help you more fully understand the basics of the loan process and some of the forms that will accompany your process. Be sure to ask questions on anything you do not understand, continue to ask until you do. We are so used to talking to people in our industry on a daily basis that often times the terms and phrases that are used are just assumed to be known to the lay person. You should feel comfortable throughout the process you know what is going on.  

For information on choosing a lender, please see my post on the Importance of a Good Lender. Happy House Hunting!

 

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