Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that can change according to a schedule outlined in the Note (Note Rate). The interest rate is based upon an index that changes based on the market, plus a margin which is determined by the lender. Often, the initial interest rate is lower than that of a fixed-rate mortgage.

Amortization: Refers to the act of paying off a debt based on a preset schedule that is determined by the loan term. If a loan is fully amortized, the entire debt will be repaid when the last payment is made.

Annual Percentage Rate (APR): The annual equivalent of the rate shown in your Note (Note Rate) plus any other fees paid at closing or throughout the life of the loan, such as monthly mortgage insurance. APR allows borrowers to compare different mortgages when shopping for a lender.

Appraisal: A professional evaluation of a home’s market value, required by the lender to secure home financing.

Builder’s Liability: An insurance policy during ongoing construction which covers any damage or injuries resulting from activities undertaken during construction or renovation work.

Builder’s Risk Insurance: Also known as construction insurance, this specialized policy provides coverage for damage or loss to a building or structure during construction. It safeguards the project’s stakeholders, including contractors and property owners, against various risks, such as theft, fire, vandalism, and natural disasters, ensuring financial protection during the construction process.

Building Permit: An official authorization issued by a local government or relevant authority that allows property owners or builders to proceed with specific construction or renovation projects. This may be required to ensure that the proposed work complies with building codes, safety regulations, and zoning laws.

Buydown: A lump sum payment made at the time of closing that prepays interest on the loan for a set period of time. As an example, a 3-2-1 buydown reduces the interest rate the monthly principal and interest payment (P&I) is based upon by 3% the first year, 2% the second year, and 1% the third year. Starting with the fourth year the payment is based upon the rate shown in the Note. Buydowns may be paid by the borrower, seller, lender, or a third party.

Certificate of Occupancy (CO): A certification issued by a local government or building authority proving that a property is habitable and meets all code and usage requirements.

Change Order: A formal document that outlines modifications or adjustments to the original project scope, specifications, or contract terms. It is used to document and authorize changes, including additional work, cost adjustments, or scheduling alterations, often necessitated by unforeseen circumstances or client requests. Any change order must be reviewed and approved by Cornerstone before work can begin.

Closing Costs: These are the costs and fees that are due on the date of closing, when a borrower obtains their mortgage and receives the title to their property. Closing costs include insurance, taxes and other applicable fees.

Collateral: The property that a borrower pledges to a lender as security for the loan, providing assurance for the loan agreement. If the borrower fails to repay the loan, the lender can take the collateral to recover the outstanding debt.

Construction Budget: A detailed financial plan outlining all the estimated expenditures associated with a construction project, encompassing aspects such as materials, labor, permits, equipment, overhead costs, and other expenses.

Construction Contract: A legally binding agreement between a client and contractor or construction company, covering the terms, conditions, scope of work, and various details specifying the expectations of all involved parties.

Construction Loan: A short-term loan to finance the building phase of a real-estate project.

Construction Period: A projected schedule covering the full time period when building or renovation work takes place on a property.

Contingency Fund: A part of a project’s budget that is set aside to cover any unforeseen expenses, events, or changes in scope that may arise over the course of the construction process. These funds exist as a buffer to ensure the project continues smoothly if unexpected issues arise. Speak with our team for more information.

Credit Approval: A preliminary decision by the lender indicating that, based upon credit, assets and employment, the borrower qualifies for a mortgage at a specified rate, term, and amount. Credit report, bank statements, pay stubs, and W-2s have been reviewed by an underwriter. Additional documentation may be required as well as confirmation that the information has not changed in a derogatory manner prior to closing. This does not include an appraisal. This may be obtained prior to searching for a home and is more formal than a Prequalification Letter.

Credit Report: This report details a borrower’s credit history and current financial obligations.

Credit Score: A three-digit number (300-850) that shows how likely you are to repay debt. Having good credit can help you get better mortgage terms, but you don’t need perfect credit to qualify for a mortgage.

Debt-to-Income (DTI) Ratio: This is the percentage of your gross monthly income (before taxes are taken out) that goes to paying monthly debts, including the new mortgage payment. The lower DTI typically means better mortgage terms.

Down Payment: The difference between the sales price and the loan amount on a real estate transaction. The down payment is brought to the closing by the buyer along with other fees to be paid at that time.

Down Payment Assistance Program (DPA): Programs which provide additional funds, usually to first-time homebuyers, which reduce the amount of cash needed to close. These may be in the form of a grant, requiring no repayment; forgivable seconds, which only require repayment for a certain period or if certain events happen (e.g., if you sell your home); repayable seconds, which typically have a low (or, in certain cases, no) interest rate which must be repaid. The period prior to repayment varies, usually between 3 and 30 years.

Draw Request: A formal request for a portion of the allocated funds to cover the costs during a specific phase of the construction project, showing clear evidence of the expenses associated with the completed milestone. Typical documentation in a draw request can include invoices, receipts, a schedule of value, change order, lien waivers, amongst others. It is based off of completed work and not future costs.

Draw Schedule: A predetermined timetable that outlines when and how funds from a construction loan will be disbursed to the builder or contractor. It typically corresponds to project milestones or completion of specific phases, ensuring that funds are released to cover expenses as work progresses.

Earnest Money or Escrow Deposit: A deposit required at the time a contract is accepted, demonstrating good faith intent of purchasing the home. This is usually held by the title or escrow company until closing.

FHA Loan: A loan insured by the Federal Housing Administration open to all qualified home purchasers. There are limits to the size of FHA loans, but they are usually generous enough to cover moderately priced homes.

First-Time Homebuyer Program: Mortgage loans with special qualifying terms for those who have never owned real estate or have not in the past few years. Although the programs and terms vary by state, they often offer down payment and closing cost assistance.

Fixed-Rate Mortgage: A mortgage in which the interest rate does not change during the loan term.

Hard Costs: The tangible expenses associated with the physical construction of a project. These costs typically include materials, labor, equipment, and other expenses related to the construction of the home, excluding soft costs.

Index: A benchmark set in financial markets used to determine the interest rate on an adjustable-rate mortgage. The index plus a margin set by the lender are added together to determine the fully indexed rate. This is the rate that payment changes will be based upon throughout the term of the loan.

Interest: This is the money the borrower pays a lender over a period of time as a part of the mortgage agreement.

Land Cost: All costs incurred when acquiring a piece of property or building site, including both the initial purchase costs and those necessary to make the land ready for construction.

Lien: A legal claim against property that must be paid when the property is sold.

Lien Waiver: A formal, legal document signed by a contractor or subcontractor, indicating that they have received payment for the agreed-upon services and waive their right to place a lien on the property for the work or materials provided. A signed Lien Waiver is required at each draw from the builder/dealer/contractor.

Loan-to-Value (LTV): A ratio measuring how much you borrow to the appraised value of a property being purchased or constructed. LTV is used by lenders to help assess the potential eligibility or risk in taking on a loan.

Lock-in Agreement: A written agreement which guarantees the homebuyer a specified interest rate provided the loan is closed within a set period of time.

Margin: The amount a lender adds to the index on an adjustable-rate mortgage to establish the adjusted interest rate.

Mortgage Insurance: A fee typically paid by the borrower to provide insurance in the event of default on the loan. Required on most loans with less than a 20% down payment.

Origination Fee: This is the fee that a lender may charge to prepare the documents related to a borrower’s mortgage.

Plans and Specifications: Also known as ‘Plans and Specs’, these are all the architectural drawings/plans and specifications for a construction project, outlining the design, materials, and construction requirements and instructions. These documents serve as the blueprint for the process to ensure the work is completed according to its intended design.

Points: Points are fees paid which decrease the loan's interest rate, with the cost of each point equal to 1% of the loan amount. This means that a loan with points paid at closing will have a lower interest rate than one where no points have been paid. Points may be deductible on your tax return for the year your loan closed. Consult your tax professional.

Prequalification: The process of determining how much money a prospective homebuyer will be eligible to borrow before a loan is applied for.

Principal: The amount shown on the note and, over time, the remaining amount due to pay off the note, plus any outstanding interest.

Principal, Interest, Taxes and Insurance (PITI): Often referred to by the acronym “PITI” which is the total monthly housing expense: principal, interest, taxes, and insurance. Some loans will also require a monthly payment for mortgage insurance.

Progress Inspections: Periodic on-site assessments by inspectors or lenders to evaluate the state of completion and quality of work at various stages of a construction project. These inspections help ensure that the project is proceeding according to the agreed-upon plans and schedule, and they play a vital role in disbursing funds to contractors as per the construction loan agreement.

Property Taxes: Taxes levied by local governments on the value of real property, including land and buildings.

Rate Lock: This is a commitment between you and the lender to hold a certain interest rate for a specified period of time. When you decide to lock your rate you will receive a written confirmation from your lender.

Reserves: These are assets that can be easily converted into extra cash you can use to cover your monthly mortgage payments. The minimum cash reserves required will vary by loan program. Speak with your loan officer for more information on reserves.

Soft Costs: Soft costs in construction encompass expenditures that are non-physical in nature but still essential for the project’s completion. These costs include items such as architectural design fees, permits, legal or financing expenses, and other types of costs.

Title/Deed: This is a document which transfers ownership from the seller to the buyer and establishes the real estate transaction took place.

Title Insurance: Title insurance protects a real estate owner or lender against any loss or damage they might experience because of liens, encumbrances, or defects in the title to the property, or the incorrectness of the related search.

Truth-in-Lending Act (TILA): A regulation established by the government requiring creditors to provide clear, accurate costs to the borrower in order to allow them to compare one lender to another, and to keep them informed about their financial decisions (i.e. mortgages and credit cards).

Underwriting: The process of evaluating a loan application to determine the risk involved for the lender.

USDA Rural Home Loan: A USDA Guaranteed Loan is a government-insured 100% purchase loan. These loans are typically only offered in rural areas and serviced by direct lenders that meet federal guidelines.