Lending Glossary

Lending Terms
During the loan buying process, you will hear a number of terms and phrases that are specific to loans. The following information will help you understand your loan better and "speak the language". As always, at Farmers National Bank, our professional lending staff will assist you in completing a thorough loan application. If you ever have a question, just ask us. We welcome any and all opportunities to make this process as easy as possible for you.

A

Abstract - A written history of public records on a property.

Adjustable Rate Mortgage (ARM) - These loans have an interest rate which changes periodically according to a specified financial index.

Amortization - Repayment of a loan through scheduled installment payments.

Annual Percentage Rate (APR) - The cost of credit. Designated charges imposed on the borrower - such as points, origination fees, mortgage insurance, processing fees - are calculated using a formula set forth by the federal government. The APR will generally be higher than the interest rate. This number helps the borrower to compare financing plans from one institution to another.

Application Fee - The amount paid to a lender to process your application.

Appraisal - A report made by a qualified person indicating the value of a property at a given date.

Assumable Mortgage - The buyer takes over the seller's mortgage, and the buyer then accepts the responsibility for the payments.


B

Balloon Mortgage - Scheduled repayment of the loan balance at one time.

Binder - A preliminary agreement to purchase, often secured by the payment of money in earnest. Also, known as purchase offer.

Blanket Mortgage - A single mortgage that covers two or more properties.

Buy-Down - Money advanced by an individual (e.g. builder, seller, buyer, developer) to lower mortgage payments for a few years or for the whole term.


C

Cap (Interest Rate) - The maximum interest rate increase allowable on an adjustable rate mortgage.

Closing - The actual legal transfer of property from seller to buyer.

Closing Costs - Fees paid at the time of closing. Costs vary by lender.

Conventional Mortgage - A loan that is not insured or guaranteed by the government.

Credit Report - Documentation of your outstanding debts, payment history and overall credit rating. Obtained from an outside reporting source.


D

Debt-To-Income Ratio - The relationship (percentage) between an individual's monthly income and debt expense. Often used as a loan qualification assessment by lenders.

Deed - The written transfer of property ownership.

Default - Failure to meet an obligation when due.

Down Payment - The difference in the purchase price and the loan amount. Requirements usually range from 5 to 20 percent of the purchase price.

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E

Easement - The legal right for limited use of another's land.

Encumbrance - A claim, lien, or liability that has been attached to the title of a property. May affect the value of property. A valid claim against property.

Equity - The difference between the fair market value (appraised value) of your home and the outstanding mortgage balance, i.e. the portion of property you own.

Escrow - Deposits made to a special account until the terms of a contract are fulfilled.


F

FHA Loan - Federal Housing Authority insures mortgages on residential property with a low down payment.

Fixed Rate Mortgage (FRM) - The interest rate always remains the same on this loan.

Foreclosure - The procedure where the lender reacquires property after default.

Freddie Mac (FHLMC)/Federal Home Loan Mortgage Corporation - Quasi-government agency that pools mortgages and sells participation agreements.


G

Grantee - Buyer of property

Grantor - Seller of property


I

Index - The guide for rate changes which lenders use to decide how much the annual percentage rate will change over time.

Interest Rate - The periodic charge, expressed as a percentage, for use of credit.

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L

Lien - A legal claim on property used as security for a debt.

Loan Application Fee - Some loan types may carry a nominal fee for the initial costs of preparation of the loan package. Fees vary from one type of loan to another and, in some cases, may be collected at time of application.

Loan-To-Value Ratio - The relationship (percentage), between a property's mortgage and value. For example, if you owe $50,000 on a $100,000 home, the ratio is 50%.


M

Margin - On an adjustable mortgage, the number of percentage points the lender adds to the index rate to determine the adjusted rate.

Mortgage - A legal document where the owner uses the new property as security to guarantee repayment of loan. The mortgage is also known as the lender. The mortgagor is known as the borrower.

Mortgage Insurance - A lender may require the purchase of Mortgage Insurance in cases where the down payment is lower than usual guidelines. This insurance does not protect the borrower - it is protection for the lender in the event of default. The cost is usually based on the Loan-to-Value of the loan.


N


Negative Amortization - The loan balance increasing over time (often due to monthly payments less than the interest owed).


O

Origination Fees - Also, referred to as "points", the Origination Fee is generally a percentage of the loan amount.


P

PITI - An acronym for payments to a lender that cover principle, interest, taxes and insurance on a property.

PMI (Private Mortgage Insurance) - Often required if the Loan-to-Value is above 80%. Allows a borrower a smaller down payment by insuring the lender against default. PMI does require an initial premium at closing and monthly premiums until the specified Loan-to-Value is attained.

Points - A method of "buying a lower rate" by prepaying interest as a percentage of the loan amount at closing. Generally, points range from 1 - 2% of the loan amount.

Prepayment Penalty - A fee paid by the borrower, if loan is paid off early.

Principal - The balance still owed or the amount of money borrowed on a loan.

Promissory Note - Document signed and given to the lender by the borrower. It explains what is owed and will be paid.

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R

Rate Cap - A limit on how much the variable-interest rate can increase during the life of the loan.

Refinancing - This process involves getting a new mortgage, usually with a better (lower) rate to payoff the existing loan.

Reverse Mortgage - The lender makes payments to the borrower (a form of negative amortization).


S

Secondary Market - The buying and selling of mortgages after closing.

Survey - Often a survey is required to ensure that the house is within its legal boundaries.


T

Title - A document showing ownership of property.

Title Insurance - Insurance against defects in title.

Title Search - Report checks all records of a specific piece of real estate to guarantee there are no liens, encumbrances, ownership concerns, etc.

Transfer Tax - In some areas, city, county or state taxes imposed when property passes from one person to another.


V

VA Mortgage - Veteran's Administration insures loans for those involved in the armed services (service persons/veterans).

Variable Rate Mortgage - A mortgage loan in which the interest rate may increase or decrease at specified intervals within certain limits, based upon an economic indicator.

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