Mortgage Glossary cont. | Loan Definitions

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Mortgage Loan Definitions

Commitment Letter

A commitment letter is a form letter issued by a mortgage lender stating the terms under which it agrees to loan money to a homebuyer.

Community Homebuyers' Program

A community homebuyer's programs is a low down payment loan designed for first time homebuyers. Applicants must complete a course in the responsibilities of home ownership. Like the FHA loans, applicants do not have to be as financially strong as with conventional loans.

Construction Loan

A type of mortgage loan designed for building a new house. The construction loan is a short term, interest only loan, that is disbursed during the course of construction.

Construction/Perm

A construction/perm loan is a form of construction loan made to a borrower for the construction of new house. The loan may be converted to a permanent mortgage at the completion of construction.

Credit Report

A borrower's history of meeting financial obligations on a timely basis. You are entitled to receive a free copy of your credit report annually so that you may look for mistakes.

Credit Score

A numerical rating developed and maintained by Fair Isaac and Company that indicates a consumers creditworthiness.

Debt Ratio

A borrower's total monthly debt payments divided by their monthly income. It is sometimes called "back end ratio" in mortgage slang. This ratio is used by the underwriter to determine if the borrower can afford the new mortgage payment.

Down Payment

The portion of the home purchase price that the borrower pays. The remainder of the cost of the home is financed with a mortgage. Mortgages are now available with as little as 3% down with an FHA loan.

Escrow

A tax and insurance escrow account is money held by a mortgage lender to assure timely payments of insurance and taxes for the borrowers. Typically, part of each mortgage payment goes into an escrow fund that the mortgage lender uses to pay the borrower's tax and insurance bills when they come due. In some states, escrows of taxes and insurance premiums are called impounds or reserves. An escrow account will be set up at loan closing.

FHA Mortgage

These are government insured mortgage loans designed for homebuyers with little money for a down payment. Anyone may apply for a FHA loan and the underwriting criteria are more lenient than they are for conventional loans.

Fixed Rate Mortgage

A mortgage loan where the interest rate is fixed for the term of the loan. The term may be 10, 15, 20, or 30 years.

Flood Insurance

All homes that are identified as being in a flood zone are required to have flood insurance. Flood zones have been determined by the US Government and published on maps for this purpose. Mortgage lenders use a " Flood Certification " to determine if the house you are purchasing is in a flood zone.

The charge for this certification is passed onto the borrower and ranges from $15 to $25. The cost of the actual flood insurance is paid by the borrower in addition to normal homeowners insurance.