Our glossary defines some of the most important terms you will want to be familiar with as you move through the mortgage process. You should find them useful, especially if you are a first-time homebuyer.
A shorter-term mortgage (often 5 to 7 years), but with monthly payments that are amortized over a longer period. "Balloon" refers to a single, lump-sum payment you make at the end of the loan term to cover the remainder of the amount you borrowed. It may be possible to refinance the amount of the balloon payment at the end of the loan.
A cap for an Adjustable-Rate Mortgage (ARM) limits the amount your mortgage payments or interest rates may increase or decrease during the term of your loan. This sets parameters you can predict and creates a comfort zone.
Expenses incurred by buyers and sellers above the price of the property during the transfer of ownership. Typically, your closing costs tally around 3% to 6% of your mortgage amount (but may be higher on lower loan amounts). Usual costs include an origination fee, discount points, appraisal fee, title search and insurance, taxes, survey, deed recording fee and other costs assessed at settlement. Your personal mortgage banker will give you an estimate ahead of time.
In determining the amount you are qualified to borrow for a home, your CNB&T mortgage lender calculates the relationship, or ratio, between your total monthly installment debt, including proposed housing expenses, and your gross income.
Debt / Gross Income = Ratio
When the homeowner fails to make a scheduled payment or is out of compliance with the mortgage loan terms.
Discount Point (or Points)
One percent of the loan amount equals one point. Discount points are prepaid interest on the mortgage loan and are tax deductible. Paying a percentage point up front allows you to reduce the interest rate on your home loan. The more points you pay, the lower your interest rate. Typically, your loan rate is reduced by one-eighth percent (0.125%) per point purchased, and you can pay from zero to 3 or 4 points, depending on how much you want to lower your rates.
The up-front payment you make of typically 3.5% to 20% of the purchase price in order to qualify for your home mortgage. By investing a larger down payment, you can often lower your mortgage payments or purchase a more expensive house.
The money you pay to the seller to secure a transaction or ensure payment—to show you are "in earnest" about buying the home. This amount, usually between 1% to 5% of the purchase price, becomes part of your down payment if the offer is accepted. And even if your offer is rejected, the earnest money will be returned to you. In the unlikely event that you were to cancel the transaction, the entire amount could be forfeited.
Hazard insurance protects a property owner against damage caused by fires, severe storms, earthquakes or other natural events. The specific event must be covered within the language of the policy for the property owner to receive compensation to cover the cost of any damage incurred. Usually, the property owner will have to pay for a year's worth of premiums at the time of closing, but this will depend on the exact details of the policy and will be included in the closing costs.
A construction loan you receive during the completion of a building project, which is typically replaced by a permanent loan granted to you after the building project is completed.
Loan Estimate (LE)
The Loan Estimate from a lender assists you in making sound decisions when shopping for a loan. This list estimates all fees that need to be paid before closing, all closing costs and any escrow costs you will incur when purchasing a home. In good faith, the lender must present this estimate within three days of receiving your application. (See RESPA for more information.)
Loan-to-Value Ratio (or LTV Ratio)
A lending risk assessment ratio that financial institutions and other lenders examine before approving your mortgage. The LTV ratio is determined by dividing the amount of your mortgage loan by the appraised value of the property. High LTV ratios are generally seen as higher risk. For LTVs above 80%, Mortgage Insurance is usually required.
Mortgage Insurance (MI)
Mortgage insurance, sometimes referred to as MI or PMI (private mortgage insurance), protects the lender or titleholder in the event that a borrower defaults on loan payments, dies or is otherwise unable to meet the contractual obligations of the mortgage. (See also Title Insurance.) Mortgage insurance may come with a typical “pay-as-you-go" premium payment included in your escrow payment, or may be capitalized into a lump-sum payment at the time your mortgage is originated. Should you be required to have PMI due to the 80% loan-to-value rule, you can request that the insurance policy be canceled once the required 20% of the appraised value has been paid off, except on some government loans such as FHA.
An acronym for the four primary components of a monthly mortgage payment: principal, interest, taxes and insurance.
Determining your prequalification for a mortgage loan is designed to create safer loans and successful, satisfied homeowners. Your CNB&T mortgage banker calculates how much money you are eligible to borrow before you shop for a home. Knowing your loan prequalification amount saves time and enables your realtor to show you homes that you know you can afford. It also lets the seller know you can qualify for the loan when putting in an offer on their home.
RESPA stands for Real Estate Settlement Procedures Act, administered and enforced by the Consumer Financial Protection Bureau (CFPB) under the US Department of Housing and Urban Development. It improves the disclosure of information to protect you throughout the mortgage process from potential abusive practices. The most recent RESPA rule makes obtaining mortgage financing clearer and, ultimately, cheaper for you as a consumer. The new rule requires a standardized Loan Estimate (LE) to facilitate shopping among settlement service providers. The Closing Disclosure, part of your closing paperwork, also has been improved to assist you in determining if your closing costs were within established tolerance requirements. At CNB&T, we implement all RESPA rules with one thing in mind: to make your mortgage process work better for you.
Another valuable part of your mortgage loan process is the measurement of land you're buying, conducted by a registered land surveyor. The survey shows the location of the land with reference to known points, its dimensions and the locations and dimensions of any buildings. Your mortgage lender can recommend professional surveyors who can provide you with a free cost estimate.
Title insurance protects you, the homebuyer, against possible financial loss caused by covered title risks. Sometimes title problems arise in spite of a very careful search of public records such as missing heirs, inaccuracies, fraud and forgery. Click here for a substantial list of these and other unexpected issues that could result in partial or complete loss of property, even lawsuits, without title insurance. A modest, one-time premium buys you priceless peace of mind, knowing your insurer will defend against an attack on your title as insured, or indemnify you against a defined financial loss up to the policy limit.
As a homebuyer, you're not the only one signing on the dotted line. When CNB&T decides to underwrite your mortgage loan, our name and character as a lender fully supports you. At this step in the loan process, a decision is made based on your credit rating, employment, assets and other factors, matching the risk assessment to an appropriate rate and term or loan amount. As your quest for home ownership is about to be realized, Community National stands with you as a trusted partner.