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Side by Side: A Guide to Fair Lending

APPENDIX B: LENDING GLOSSARY FOR TESTERS The Lending Glossary is used to familiarize testers with various lending terms that are useful to know prior to a lending institution site visit. Term Definition Adjustable (or Variable) Rate Mortgage A mortgage on which the rate is subject to periodic adjustment. The method, frequency, and basis for the change are disclosed to the borrower. ARM rates are usually tied to some widely published market rate of interest or index. Amortized Mortgage Loan A mortgage loan that provides for regular repayments at stated intervals, usually monthly, quarterly, or semiannually, to reduce the principal and to cover interest as it comes due. Application Fee A charge by financial institutions to cover the initial costs of processing a loan request and checking credit. Appraisal An independent estimate of the fair market value of real estate. An appraisal fee is part of the closing costs for a loan. Closing Costs. The costs to a borrower of closing a mortgage loan. These usually include an origination fee, title search and insurance, attorneys fees, survey fee, home inspection fee, and prepaid items such as taxes and insurance escrow payments Conventional Loan A mortgage loan that is not insured by the Federal Housing Administration or guaranteed by the Veterans Administration or Farmers Home Administration. Debt-to-Income Ratio The ratio of the borrower's monthly debt to monthly income, using either net or gross income levels, expressed as a percentage. An acceptable ratio may differ according to the loan product or available down payment. Down Payment An amount equal to the difference between the purchase price of a house and the down payment. Conventional loans usually require a down payment of 5%-20%; federally insured loans often require less than 5%. Earnest Money A portion of a down payment delivered to a seller or an escrow agent by the purchaser of real estate, along with a purchase offer, as evidence of good faith in negotiating the purchase of the property. The purchaser forfeits the earnest money if the sale is not consummated through the fault of the purchaser. Federal National Mortgage Corporation ("Fannie Mae") A corporation chartered by Congress that purchases and sells conventional and federally insured residential mortgages. Federally Insured Loans Loans insured against default by the Federal Housing or Veterans Administration. Federal Home Loan Mortgage Corporation("Freddie Mac" ) A corporation authorized by Congress to purchase conventional mortgages from depository institutions and HUD approved mortgage bankers. Fixed-Rate Mortgage A mortgage with a constant rate of interest over the life of the loan. Hazard Insurance Insurance covering physical damage to property by natural causes, vandalism, and other causes. Loan Origination Fee The amount the lender charges for handling the initial application and the processing of a loan. Loan-to-Value Ratio The ratio between the amount of a loan and the appraised value of property securing the loan, expressed as a percentage of the appraised value. Point A prepaid finance charge imposed by the lender at closing to increase its yield beyond the stated mortgage interest rate. A point equals one percent of the loan amount. Private Mortgage Insurance Insurance written by a private company protecting the mort-gage lender against loss from a default by the borrower. Premiums are paid by the borrower. Often referred to as " PMI." Survey A measurement of land showing its location with reference to known points, its dimensions, and the location and dimensions of any improvements. Surveys are often required by lending institutions to show that the lot on which a house is located has not been encroached upon by another structure. Title Legal evidence of ownership of real or personal property. Title Insurance Insurance for lenders and/or borrowers against financial loss resulting from claims arising out of defects in the title to real property which may not have been discovered during the title search. The cost of the policy is based on the loan amount, and it often paid by the buyer. Title Search A review of public records to disclose past and current facts about the ownership of real property. Previous | Table of Contents | Next

Last Updated 07/28/1999

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