Loan Terms & Definitions

Question 1

Amortization

Answer 1

periodic payments on a loan requiring payment of enough principal and interest to ensure complete repayment of the loan by the end of the loan term.

Question 2

Closing costs

Answer 2

at the time of closing, payment is due for a number of fees that relate to the cost of obtaining a loan, the transfer of ownership to the borrower, and the taxes and fees owed to the state and local government. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area of the country and the lenders used. The borrower does not always cover all of the costs of closing. The parties to a lending transaction can negotiate the payment of certain closing costs.

Question 3

Debt-to-income ratio

Answer 3

the relationship, expressed as a percentage, between a borrower’s monthly obligations on long-term debts and his or her gross monthly income.

Question 4

Discount point

Answer 4

a fee paid in exchange for a reduction in the interest rate

Question 5

Earnest money

Answer 5

money paid by a buyer to a seller at the time of entering a contract to indicate intent and ability of the buyer to carry out the contract.

Question 6

Equity

Answer 6

the difference between the fair market value of a property and the current balances of any mortgages and other liens against the property.

Question 7

Escrow account

Answer 7

an account held by the lender, on behalf of a borrower, into which the borrower deposits money for taxes and/or insurance payments. Escrow accounts may also hold other funds related to a real estate purchase such as earnest money.

Question 8

Fees

Answer 8

any kind of money paid in conjunction with a mortgage loan, other than the actual loan amount and interest. “Fees” might include third-party fees such as those for credit reports or appraisals, or origination/broker fees. Fees affect the total cost of credit when obtaining a loan.

Question 9

Finance charge

Answer 9

the cost of credit, expressed as a dollar amount

Question 10

Negative amortization

Answer 10

an amortization method in which the minimum monthly payments are not large enough to pay all the accrued interest due on the loan. This unpaid interest is added to the balance of the loan.

Question 11

PFC

Answer 11

prepaid finance charge

Question 12

POC

Answer 12

paid outside of closing

Question 13

Prepayment penalty

Answer 13

fees charged for an early repayment of debt. Prepayment penalties are subject to laws that restrict the amount of the penalty and that limit the imposition of prepayment penalties to the early years of a loan. Current regulations prohibit them in almost all loan transactions, other than those for certain fixed-rate qualified mortgages. “Hard” prepayment penalties apply to both the sale of a home and a refinance transaction. “Soft” prepayment penalties are prepayment penalties that apply only to refinancing transactions.

Question 14

Sales contract

Answer 14

a legally-binding agreement between a buyer and seller detailing the terms and conditions of the sale of real estate.

Question 15

Seller carry-back

Answer 15

a purchase transaction, often involving an assumable mortgage, in which the party selling the property provides all or part of the financing.

Question 16

Service release premiums (SRPs)

Answer 16

service release premiums (SRPs) are fees which lenders or servicers may receive for selling or transferring their right to service a mortgage loan.

Question 17

Servicer

Answer 17

an individual or entity that services a loan by performing responsibilities such as sending statements to borrowers, accepting payments, issuing late payment notices, and managing escrow accounts.