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Banking Acronyms and Terms Defined

Banking acronyms

Imagine you are going to buy a home and during the process, in conversation with your real estate agent or a new home counselor, all these banking acronyms start being tossed around. Acronyms that you have no clue what they mean. Sure, you’ve heard them before, but different words start jumbling in your mind. Before you know it you are woozy and need to sit down with a glass of water. It can be a confusing situation.

Prepare yourself before going in to talk turkey about buying a home and read through this list of acronyms. You’ll feel smarter, be better prepared and totally ready to stump your friends when your next debate about mortgage lending occurs. That happens with everyone’s friends right?!

  • ARM (Adjustable Rate Mortgage): A  loan where the interest rate changes according to a benchmark. You have a set period where the rate is stable and then after that time is adjusts periodically (often monthly). These are also referred to as a “variable rate mortgage” (VRM) or “floating-rate mortgage”.
  • Amortization: A payment plan that enables you to reduce your debt gradually through monthly payments. The payments may be principal and interest, or interest-only. The monthly amount is based on the schedule for the entire term or length of the loan.
  • APR (Annual Percentage Rate): This is the rate at which the bank loans you money. To keep things simple always look for the lowest APR from a bank. That means you are paying the least amount of money back to the bank. Be forewarned though that this number can include PMI, processing fees or other charges, so each APR should be looked at closely.
  • Application: The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
  • Application Fee: A fee charged by lenders to process a loan application.
  • Appraisal: A document from a professional that gives an estimate of a property’s fair market value based on the sales of comparable homes in the area and the features of a property; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
  • Appraised Value: An estimation of the current market value of a property.
  • Appraiser: A qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.
  • Appreciation: An increase in property value.
  • Back End Ratio (debt ratio): A ratio that compares the total of all monthly debt payments (mortgage, real estate taxes and insurance, car loans, and other consumer loans) to gross monthly income.
  • Borrower: A person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
  • Cap: A limit, such as one placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage. Payment caps do not limit the amount of interest the lender is earning, so they may cause negative amortization.
  • Cash Reserves: A cash amount sometimes required of the buyer to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.
  • Closing: The final step in property purchase where the title is transferred from the seller to the buyer. Closing occurs at a meeting between the buyer, seller, settlement agent, and other agents. At the closing the seller receives payment for the property. Also known as settlement.
  • Closing Costs: Fees for final property transfer not included in the price of the property. Typical closing costs include charges for the mortgage loan such as origination fees, discount points, appraisal fee, survey, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes. A common estimate of a Buyer’s closing costs is 2 to 4 percent of the purchase price of the home. A common estimate for Seller’s closing costs is 3 to 9 percent.
  • Co-Borrower: An additional person that is responsible for loan repayment and is listed on the title.
  • Co-Signed Account: An account signed by someone in addition to the primary borrower, making both people responsible for the amount borrowed.
  • Collateral: Security in the form of money or property pledged for the payment of a loan. For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made.
  • Collection Account: An unpaid debt referred to a collection agency to collect on the bad debt. This type of account is reported to the credit bureau and will show on the borrower’s credit report.
  • Compensating Factors: Factors that show the ability to repay a loan based on less traditional criteria, such as employment, rent, and utility payment history.
  • Conforming loan: A loan that does not exceed Fannie Mae’s and Freddie Mac’s loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans.
  • Credit Report: A report generated by the credit bureau that contains the borrower’s credit history for the past seven years. Lenders use this information to determine if a loan will be granted.
  • Credit Score: A score calculated by using a person’s credit report to determine the likelihood of a loan being repaid on time. Scores range from about 360 to 840.  A lower score means a person is a higher risk, while a higher score means a person is lower risk.
  • Creditor: The lending institution providing a loan or credit.
  • Debtor:The person or entity that borrows money. The term debtor may be used interchangeably with the term borrower.
  • Debt-to-Income Ratio: A comparison or ratio of gross income to housing and non-housing expenses. With the FHA, the-monthly mortgage payment should be no more than 29 percent of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41 percent of income.
  • Deed: A document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description and the owner’s signature. Also known as the title.
  • Discount Point: Normally paid at closing and generally calculated to be equivalent to 1 percent of the total loan amount, discount points are paid to reduce the interest rate on a loan. In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to give you a lower rate and lower payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate will probably go up depending on the index rate.
  • Down Payment: The portion of a home’s purchase price that is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual mortgage loan amount. Mortgage insurance is required when a potential buyer makes a down payment of less than 20 percent.
  • Earnest Money (Deposit): Money put down by a potential buyer to show that they are serious about purchasing the home. It becomes part of the down payment if the offer is accepted. It is returned if the offer is rejected and is forfeited if the buyer pulls out of the deal. During the contingency period, the money may be returned to the buyer if the contingencies are not met to the buyer’s satisfaction.
  • Equal Credit Opportunity Act (ECOA): A federal law requiring lenders to make credit available equally without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
  • Equity: An owner’s financial interest in a property. Equity is calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.
  • Escrow Account: A separate account into which the lender puts a portion of each monthly mortgage payment.  An escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, and mortgage insurance.
  • FICO Score: FICO is an abbreviation for Fair Isaac Corporation and refers to a person’s credit score based on credit history. Lenders and credit card companies use the number to decide if the person is likely to pay his or her bills. A credit score is evaluated using information from the three major credit bureaus and is usually between 300 and 850.
  • FHA (Federal Housing Administration): A US government agency that is the largest insurer in the world, and provides mortgage insurance to lenders (banks) in the event that a homeowner defaults on his or her loan payment. Only certain lenders are FHA approved. These loan types require very little cash investment to be put down to close on a loan, making it an ideal investment option for a family that can’t save up the 5-20 percent down payment that a conventional loan would require.
  • UFMIP (Up Front Mortgage Insurance Premium) – When taking out an FHA loan they require that you pay a premium upfront for the insurance they are providing to the bank in the case you default.  This is a way for FHA to protect itself. The premium is typically required at closing, but many banks will roll it into your total loan amount if you don’t have it in cash to pay.
  • PMI (Private Mortgage Insurance) – If you don’t have 20 percent to put down on a home then you will most likely end up paying PMI. It’s insurance that protects mortgage lenders against default on loans by homeowners in the event of foreclosure. After the current housing crises PMI is pretty standard. Homebuyers pay for the coverage in monthly installments, but it should be terminated when they have built up 20 percent equity in the property.

One Comment

  1. Isabelle
    Posted Sep 21 at 4:49 pm |

    Impressvie brain power at work! Great answer!

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