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Shopping for a home can be exciting as well as puzzling. You may have already discovered that there are many unfamiliar terms in the home financing industry.

Because you may be wondering what they mean, we have provided this glossary of the most common terms used during the home financing process. It is important that you completely understand these terms before you begin the mortgage process. Your loan officer can explain these in detail and provide you with more information.

Adjustable rate mortgage (ARM) - A mortgage loan which allows the lender to adjust the interest rate periodically in accordance with a stated index and as agreed to at the inception of the loan by all parties. (Also known as variable rate mortgages)

Amortization - Repayment of a mortgage loan with periodic payments of principal and interest. The payments are calculated so that the debt is paid off at the end of a fixed period.

Annual percentage rate (APR) - A numerical figure which expresses (on an annual basis) the charges imposed on the borrower to obtain a mortgage loan (such as interest, discount points and other costs).

Appraisal - A report prepared by a qualified real estate appraiser which creates an estimate of the fair market value of a property.

Balloon mortgage - A short-term mortgage with fixed installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at the end of the term.

Buy down mortgage - A fixed rate mortgage with a below-market interest rate for a stated initial period. The lender receives a payment subsidy in the form of additional discount points paid by the builder, seller or buyer.

Caps - Percentage restrictions on an ARM which limit the amount the interest rate may change per year and over the life of the loan.

Cash reserve - In the mortgage commitment, some lenders require that the borrower have on deposit in their bank accounts at the time of the closing an amount equal to a predetermined number of months of the cost of principal, interest, taxes, and insurance. This is called a cash reserve.

Certificate of occupancy - A certificate issued by a local governmental entity responsible for the use of land in the community where the property is located stating that the structures on the property or any improvements made to those structures comply with the codes, ordinances and regulations of that governmental entity and that they may be occupied.

Closing - The final step in the mortgage loan process after loan commitment. The closing is a meeting between all parties involved in the mortgage transaction in which mortgage documents are signed. (Also known as, settlement)

Closing costs - Fees paid at a mortgage closing. Some examples of closing costs are title insurance, attorney fees, appraisal fees, recording fees and taxes.

Collateral - Property pledged as security for repayment of a mortgage loan.

Commitment fee - A fee paid to the lender for processing, underwriting and originating the mortgage. When this fee is a percentage of the amount of the mortgage it is also called points. One point is one percent of the amount of the mortgage. (Also known as points or origination fee)

Commitment letter - A written offer by the lender to the applicant which states the terms under which the lender agree to make a mortgage loan.

Credit score - A numerical rating provided on a credit report that establishes creditworthiness based upon a person's past credit/payment history and their current credit standing.

Debt-to-income ratio - Relationship of a borrowers monthly payment obligation on long-term debts divided by gross monthly income, expressed as a percentage. (Also known as bottom ratio)

Discount points - A one-time charge paid by the borrower to the lender at closing to obtain a lower interest rate on the mortgage loan. One point equals 1% of the loan amount; therefore, two points on a $100,000 mortgage would cost $2,000. (Also known as points)

Equity - The amount by which the value of the borrower's home exceeds the amount owed on the mortgage loan. If the borrower's home is worth $100,000 and the borrower owes $65,000 on the mortgage loan secured by the borrower's home, then the borrower's equity in that home is $35,000 or 35% equity in the home.

Escrow account - An account established with a mortgage lender comprising of funds from a borrower used to pay taxes and insurance premiums when they become due. (Also known as impounds or reserves)

Federal Housing Administration (FHA) - A federal agency that is part of the Department of Housing and Urban Development (HUD) that sets policy for mortgage underwriting and provides insurance for residential mortgages.

First mortgage - A mortgage whose lien is superior to the lien of any other mortgage on the same property. This lien is superior either because it was recorded prior to all other mortgages or because the mortgagee of another mortgage which had been recorded ahead of this mortgage has agreed to have a lien subordinated to the lien of this mortgage.

Good Faith Estimate - An estimate of the fees a mortgage borrower will be required to pay at closing. It is required by Federal law that the lender provide the Good Faith Estimate within three business days of the initial loan application.

Housing expense ratio - The relationship of a borrowers monthly payment obligation on housing (principal, interest, taxes, insurances and other applicable housing expenses) divided by gross monthly income, expressed as a percentage. (Also known as top ratio)

Interim interest - Interest owned by the borrower to the lender on the mortgage loan from the day of the closing to the date covered by the first payment.

LIBOR index - The London Interbank Offered Rate Index is the average yield of interbank offered rates for one-year U.S. dollar-denominated deposits in the London Market, as published in The Wall Street Journal.

Lien - An encumbrance on property which act as security for the payment of a debt or the performance of an obligation. A mortgage is a lien. A lender will want most, if not all, liens on the property removed before making a mortgage loan.

Loan-to-value ratio - The mortgage amount divided by the lower of the purchase price or the appraised value of the property. This ratio is expressed as a percentage. A lender will use this ratio in determining the maximum mortgage loan that it will make on the property.

Lock-in / rate lock agreement - An agreement by the lender guaranteeing the applicant a specified interest rate on the mortgage loan provided the loan closes within a set period of time.

Mortgage - A pledge of real estate collateral to secure a debt. Also, the legal document describing and defining the pledge. The mortgage may also include the terms of repayment of the debt. (Also known as deed of trust)

Mortgage insurance - Insurance that protects the lender in case the homebuyer does not make their mortgage payments. Typically, a borrower would be required to pay a fee for mortgage insurance if their down payment is less than 20%. (Also known as private mortgage insurance or PMI)

Mortgage note - A document signed at closing which states the borrower's promise to re-pay a sum of money. The note states an interest rate and a fixed period of time (term) for repayment.

Mortgage - The lender in a mortgage transaction.

Mortgagor - The borrower in a mortgage transaction.

Origination - The first step in the mortgage loan process consisting of the completion of the application.

Points - A one-time charge paid by the borrower to the lender at closing to obtain a lower interest rate on the mortgage loan. One point equals 1% of the loan amount; therefore, two points on a $100,000 mortgage would cost $2,000.

Pre-approval - A process in which a conditional commitment is issued after a loan profile is underwritten with all standard documentation except a property appraisal and a title search.

Pre-qualification - A process in which the loan officer calculates the housing-to-income ratio and the total debt-to-income ratio to determine an approximate maximum mortgage loan amount.

Private mortgage insurance (PMI) - Insurance that protects a lender in the event of the borrower's default in the payment of a mortgage loan and is generally required if the amount borrowed is more than 80% of the value of the real property securing the mortgage loan.

Processing - The second step in the mortgage application process which involves the verification of information stated on the application. Credit reports and the appraisal are also ordered at this time.

Pro-rata share - In relation to a Co-Op, the pro rata share is your apartments share of the buildings underlying mortgage. The share is determined by dividing the amount of the underlying mortgage by the number of shares in the building and then multiplying the per-share amount by the number of shares for your apartment. The lower of either the appraised value or purchase price then divides that number.

Ratios - Guidelines applied by the lender during underwriting a mortgage loan application to determine how large a loan to grant to an applicant. The ratios that lenders use are generally the Loan-to-Value Ratio, Housing-to-Income Ratio and Debt-to-Income Ratio.

Real estate broker - An individual employed on a fee or commission basis as agent to bring buyers and sellers together and assist in negotiating real estate contracts between them.

Recording fees - The fee charged by the recorder's office to record a document such as a mortgage, deed of trust, deed and UCC Financing Statement.

Refinancing - Proceeds of a new loan used to pay off an existing mortgage on the same property.

Sales contract - A written agreement between buyer and seller that is witnessed by a broker stating the terms and conditions of a sale of a property.

Seller contributions - Payment by the seller of a property of some or all of the buyer's closing costs.

Servicing - Activities the lender performs such as collecting the payments and/or paying taxes and insurance from an escrow account.

Title - Written evidence of the ownership of property, such as a property deed.

Title search - A process that examines local public records, laws and related court decisions to determine if any other parties have valid claims against the subject property (such as past due taxes, judgments or mechanics' liens). It also discloses past and current facts about the subject property's ownership.

Title insurance policy - In real estate, an insurance policy by which the insurer agrees to pay the insured (purchaser, mortgage, etc.) a specific amount for any loss caused by defects of title to the subject property.

Treasury Index - The Treasury Index is the weekly average yield on US Treasury securities adjusted to a constant maturity of one, three or five years, as made available by the Federal Reserve Board.

Truth-in-Lending Disclosure - Federal law requires that the lender must give this document to the homebuyer within three business days after loan application. This disclosure gives details of the mortgage payments along with the corresponding APR and finance changes.

Underwriting - In mortgage lending, the decision-making process use to determine whether the loan risk is acceptable to the lender. Underwriting involves the satisfactory review of the property appraisal and examination of the borrower's ability and willingness to repay the debt.

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