|
|
|
Glossary
of Mortgage Terminology
A
Adjustable-rate mortgage (ARM):
Adjustable-rate mortgages (ARMs), are loans that have a fixed interest rate for a set period of time, which later begins adjusting according to terms specified in advance by the lender. The initial interest
rate ("start rate") is usually lower than that currently offered with a fixed-rate mortgage, resulting in a lower monthly payment. At predetermined times, the interest rate (and payment) will be adjusted
either up or down. The amount of the annual and lifetime adjustments are controlled by the rate caps, ensuring that it can only adjust a certain amount each time, or during the entire loan.
Adjustment date:
The date that the interest rate can/will change for an adjustable-rate mortgage (ARM) loan.
Amortization:
The gradual repayment of a mortgage loan through regularly scheduled payments of principal and interest over the term of the loan. The amount applied towards principal increases each month, while the
amount applied towards interest decreases each month.
Amortization term:
The amount of time (expressed in months) required to repay the mortgage loan. For a 30-year mortgage, the amortization term is 360 months (30 years X 12 months).
Annual percentage rate (APR):
The APR reflects the cost of your mortgage loan at a yearly rate. It may be higher than the note rate because it also includes points and fees paid by the borrower. This allows the borrower to compare
two offers at the same note rate, and determine which one has the lowest costs - the one with the lower APR has the lower closing costs.
Application:
The formal process of applying for a loan by completing the necessary paperwork, as well as providing a lender with information about a borrower's income, debt, and assets as well as information about
the property being financed. This information is evaluated and verified to determine if it fits into the guidelines for the type of mortgage loan the borrower would like to obtain.
Appraisal:
An unbiased, professional opinion of a property's value based on a number of objective factors, including: recent sales prices of similar properties in the same area, the type of property and the features of
the property.
Appreciation:
An increase in the value of a property due to increased sales prices of comparable homes in the area.
Asset:
Items of monetary value that are owned by a borrower, such as bank accounts, stocks, mutual funds, personal property. See also Reserves.
TOP
B
Balloon mortgage:
A balloon mortgage is a mortgage that is amortized over a 30 year period, allowing for a lower monthly payment. However, the remaining balance of the loan becomes due at the end of a specified period
of time. Thus, a balloon payment needs to be made. For example, with a 15 year balloon you would make monthly payments for 15 years that have been calculated based on a 30-year mortgage
payment. At the end of the 15 years, the remaining principal balance would be due and payable in full. Most people simply refinance prior to their balloon coming due.
Balloon payment:
The final lump sum payment that is made at the maturity date of a balloon mortgage.
Bankruptcy:
Proceedings under federal bankruptcy by a court. Personal bankruptcies are Chapter 7 and Chapter 13. A Chapter 13 is a debt repayment plan; a Chapter 7 eliminates the debt completely.
Basis point:
One one-hundredth of one percent. One hundred basis points is equal to one percentage point.
Borrower:
The person applying for a mortgage loan that will be responsible for repaying the loan. Anyone that is named on the mortgage note is a borrower and is responsible for repayment of the loan.
TOP
C
Caps:
Caps limit the amount the interest rate or payment may change at each adjustment (or during the life of the loan) on an ARM loan.
Cash-out refinance:
A refinance transaction where the borrower takes additional funds over and above their current mortgage amount (plus closing fees) to use for any purpose, including debt consolidation, cash in hand, or
any other purpose. Cash in hand of less than 1% of the total loan amount is generally not considered "cash out".
Charge-off:
Also known as a profit and loss write-off. A charge-off is an account that has not been paid as agreed, and has now been internally listed by the creditor as a loss for tax purposes. The creditor will
continue to attempt to collect the amount that is owed.
Closing:
A set time for the borrower to sign mortgage documents for a purchase or refinance transaction. Also called "settlement". At the closing for the purchase of a property, the closing includes the buyer
and seller signing the documents needed to transfer legal ownership of the property. For a purchase, most buyers have an attorney present, as the deal is final after the papers are signed. For a
refinance, an attorney can be present if desired, however the borrower has 3 days to review the paperwork on the refinance of their primary residence before the deal is final.
Closing costs:
Fees associated with the mortgage loan process. Usually includes fees to the lender, appraiser and title company. These fees are paid at the time of settlement and are frequently "rolled in" to the new
loan on a refinance transaction. Closing costs vary by loan type and loan amount. Some loans offer no closing costs by offering a higher interest rate. Ask your Loan Specialist to compare different options
to provide you the loan with the lowest total cost.
Closing statement (also called settlement statement or HUD-1):
An itemized form used at closing that specifies exact amounts of all fees, payoffs and escrow information.
Co-borrower:
If more than one person will be listed on the Note, the second person listed on the application is the Co-Borrower. The Co-Borrower is equally responsible for repayment of the loan.
Collateral:
Property pledged as security for a debt.
Commitment letter:
A formal offer by a lender stating the terms under which it agrees to lend money to an applicant. Also known as a "loan commitment." The commitment letter can only be issued after the file has been
reviewed by an underwriter.
Comparable sales (Comps):
Comparable sales are properties similar to the property being financed; they are reasonably similar in size, location, appeal and amenities and have been recently sold (ideally in the last 6 months).
Comparables help the appraiser determine the approximate fair market value of the subject property. Also referred to as Comps.
Conforming loan:
Loans that adhere to the guidelines of Fannie Mae and Freddie Mac that would qualify them to be sold to these investors. These include mortgage loans for up to $322,700 (amount changes annually)
within certain loan parameters. Loans for greater than $322,700 (as of 2003) are called Jumbo loans or Non-conforming loans and are subject to different interest rates and program guidelines.
Contingency:
A condition that must be met before a contract is legally binding. For example, home buyers often include a contingency that specifies that the contract is not binding until the purchaser obtains a
satisfactory home inspection, an appraisal report, attorney review, or possibly finds a buyer for their own property.
Conventional mortgage:
Any mortgage that is not insured or guaranteed by the federal government (i.e. not a FHA or VA loan).
Credit report/credit history:
A record of an individual's open and fully repaid debts for a set period of time. Credit accounts will be reported for the last 7 years, whereas bankruptcies will be reported for a 10 year period. A credit
history helps a lender assess risk and an applicant's creditworthiness in order to determine whether a potential borrower has a history of repaying debts in a timely manner and whether they will likely repay
debts on time in the future.
Credit repository:
An organization that gathers, records, updates, and stores financial and public records information about the payment records of applicants who are being considered for credit. The three credit
repositories are: Equifax, Trans Union and Experian. A lender will typically look at all three reports, so it is important to regularly view your own report from each of the three agencies in order to correct
any errors that can occur prior to applying for a mortgage.
TOP
D
Debt:
An amount owed. Also referred to as liability.
Debt-to-income ratio (DTI):
Relationship of a borrower's monthly payment obligation on long-term debts divided by gross monthly income, expressed as a percentage. Also called the back-end ratio. (Total monthly payments,
including PITI, divided by gross monthly income)
Default:
The failure to make on-time payments in the amount specified in the terms of the obligation or note. Once a borrower is behind on their payments for a certain amount of time, they are then considered
in default.
Delinquency:
Late payments on a credit account. Major and frequent delinquencies will affect an individual's credit score and thus can hinder the chances of getting a low rate mortgage in the future.
Depreciation:
A loss of value in real property due to age, deterioration or obsolescence, or due to decreasing property values in the area.
Discount points:
Charges levied by a mortgage lender and usually payable at closing. One point represents 1% of the amount of the mortgage loan. By paying discount points, a borrower can obtain a lower interest rate
loan. Ask your Loan Specialist to compare a loan with points to one without points to determine the "break-even" point and see if it makes sense for you to "buy down" the interest rate by paying points.
Down payment:
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage. Down payment requirements vary by loan type. For example, on a conforming loan, the
buyer must put down a minimum of 5% of the purchase price, and this down payment must be in an account in the buyer's name for a minimum of 60 days prior to application. Conversely, FHA loans
require only 3% down, and the entire amount can be a gift from a family member.
TOP
E
Earnest money:
Money put down on a property and held by the seller, or a representative for the seller, prior to the closing of a purchase transaction. This money is often non-refundable should the contract be broken.
Earnest money is sometimes held in an interest-bearing account by the seller's realtor or attorney, depending on the amount of earnest money offered by the buyer at the time of contract.
Equal Credit Opportunity Act (ECOA):
A federal act requiring lending institutions to make credit equally available without discrimination based on race, color, creed, religion, national origin, sex, marital status, public assistance income or
exercising of rights under the Consumer Credit Protection Act.
Equity:
A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount owed on its mortgage. To determine the amount of equity you
have, take the appraised value less any mortgages, and the difference is the amount of equity you have. This amount will increase as the property appreciates in value and as the mortgage balances are
amortized down over time.
Equity loan:
A loan based upon the available equity in a property. Equity can be taken out through a cash-out refinance or through obtaining a second mortgage or home equity line of credit (HELOC).
Escrow:
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower to the lender of funds to pay taxes and
insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate. Funds may be held in a "
possession" escrow account by a third party if the seller is retaining possession for a period of time after the closing, as opposed to allowing the buyer to take immediate possession after closing. The
escrow funds are returned to the seller once the buyer takes possession.
Escrow account:
Third-party account for holding money, such as property taxes and insurance payments, prior to paying the expenses. The mortgage company accumulates the funds each month in an account and then
pays the bills semi-annually on behalf of the customer. This allows the customer to budget the amounts each month instead of having to come up with the entire tax or insurance payment at once.
Escrow analysis:
The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due. From time to time, an escrow analysis
will determine there is a surplus of funds, resulting in a refund to the customer; other times a shortage will be noted, requiring either a payment adjustment or lump sum payment to make up the
shortage (usually occurring if taxes or insurance increase substantially).
Escrow payment:
The portion of a mortgagor's monthly payment that is held by the lender or loan servicer to pay annual bills for property taxes, hazard and/or flood insurance, mortgage insurance, and other items as they
become due. Known as "impounds" or "reserves" in some states.
Examination of title:
The review of title on a property from the County's public records. A title examination must be performed on all purchase and refinance transactions.
TOP
F
Fair Credit Reporting Act:
A law which requires that lenders rejecting a loan because of adverse credit must inform the borrower of the source of that information.
Fannie Mae/Freddie Mac:
The nation's largest mortgage investors, that purchase mortgage loans from the secondary market. This stockholder-owner corporation, a portion of whose board of directors is appointed by the President
of the United States, supports the secondary market in mortgages on residential property with mortgage purchase and securitization programs. Conforming loans can by purchased by Fannie Mae or
Freddie Mac.
Federal Housing Administration (FHA):
A federal agency within the Department of Housing and Urban Development (HUD) that provides mortgage insurance for residential mortgages and sets standards for construction and underwriting. The
FHA does not lend money, nor does it plan or construct housing.
Fee simple:
A term used to describe
ownership in real estate meaning that the person owning the property
has all possible rights to the use of the property, including the
right to take a mortgage out on the property or pass it on to their heirs.
FHA mortgage:
An FHA mortgage is insured/guaranteed by the Federal Housing Administration (FHA). FHA mortgages have limits on the maximum amount of money that can be borrowed. These limits vary by county.
First mortgage:
A real estate loan that has priority over all subsequently filed loans against a property.
Fixed-rate mortgage:
A mortgage in which the interest rate will never change during the entire term of the loan.
Forbearance:
The act of refraining from legal action when a mortgage loan is in arrears. This is usually only granted when a satisfactory payment arrangement is made by the borrower with the mortgage company. (
For example, a borrower that missed a payment might make 1 ½ times their normal payment for the next 2 months to pay back the amount delinquent rather than make 2 payments the next month.
This arrangement must be agreed upon with the lender in writing.)
Foreclosure:
The legal procedure in which a mortgaged property is sold by the mortgage company in order to pay the outstanding debt in the case of default. In the event of a foreclosure, the first mortgage holder
gets paid first; then any remaining funds would be applied to the second mortgage holder, and so on.
TOP
G
Good faith estimate (GFE):
A written estimate which provides a borrower with the approximate costs they will pay at the time of settlement.
TOP
H
HELOC (Home Equity Line of Credit):
A secured line of credit using the available equity in the applicant's residence as collateral. HELOC stands for Home Equity line of credit. Usually has an interest-only payment option, and allows the borrower
to borrower and repay the full amount of the credit line during the "draw" period (usually the first 5-10 years).
Homeowner's association (HOA):
A nonprofit corporation or association that manages the common areas and services of a PUD or condominium. The HOA usually collects a monthly assessment fee to pay for common area expenses (e.g.,
landscaping, maintenance, etc.) They also might have guidelines and regulations regarding the modifications a homeowner can make to their property.
Homeowner's insurance policy:
Insurance policy covering full replacement coverage of the property being financed. Also referred to as Hazard Insurance.
HUD:
The U.S. Department of Housing and Urban Development.
HUD-1 Uniform Settlement Statement:
Standard form used to disclose costs at closing. All charges imposed in the transaction, including lender fees, third party fees, escrows and prepaid insurance must be itemized.
TOP
I
Income:
Sources of revenue to be considered for the application such as salary, bonuses, interest, investment income, etc.
Index:
This determines the changes to the interest rate of an ARM loan. It is usually based off a composite of interest rates such as the US Treasury Securities or the LIBOR (London Interbank Offered Rate).
Interest rate:
The fee paid to a lender to borrow money. The interest rate may be fixed or adjustable.
TOP
J
Jumbo mortgage:
A mortgage loan for more than $322,700 (this amount increases annually). Also called Non-conforming loans. Loans for less than this are called Conforming loans, providing they adhere to Fannie Mae/
Freddie Mac guidelines.
TOP
L
Land contract (contract for deed):
An agreement to transfer title to a property once the conditions of the contract have been fulfilled. Also known as buying on contract. May be useful when a seller wants to sell a property to their long-
time tenant who is having trouble getting financing. This will enable the buyer to have better chances of obtaining financing after a period of time has gone by.
Lien:
A legal claim against a property for money due, either voluntary or involuntary, that must be paid when the property is sold or refinanced. Liens may be left unpaid, providing that the lienholder is willing
to "subordinate" their lien position. In other words, if a second mortgage holder is willing to allow a new first mortgage to replace the existing first mortgage without paying off the second mortgage, then
the second mortgage holder must agree to allow the new first mortgage holder to record their lien in "first position".
Lifetime cap:
A provision of an adjustable-rate mortgage that limits the highest rate that can ever occur over the entire life of the loan.
Loan amount:
The amount of money the borrower is financing from the lender.
Loan Specialist:
An experienced mortgage professional that will assist you with evaluating and selecting The Right Loan program that best meets your needs.
Loan to value ratio (LTV):
The ratio of the amount of a mortgage loan to the appraised value of the home or the sales price, whichever is lowest. The LTV may affect programs available to a borrower, and may also determine the
interest rate. (Loan Amount divided by Appraised Value on a Refinance; or Loan Amount divided by Purchase Price on a Purchase).
Lock-in:
The process by which a lender commits to lend at a particular rate as long as the mortgage transaction closes within a specified time period. The document which specifies the terms of the lock-in is called
a rate commitment or lock-in agreement. A lock-in fee may be charged at the time of the lock.
TOP
M
Monthly mortgage payments:
Principal and interest paid each month to repay the total amount borrowed; in some cases also includes monthly portion of property tax, mortgage insurance, and homeowner's insurance.
Monthly rental income:
The amount of income you receive monthly from a rental property. For your mortgage application, we can usually consider 75% of this income. See net rental income.
Mortgage:
An instrument used to encumber land as a security for debt. The original signed mortgage will be retained by the county where the property is located until the mortgage is "satisfied" or "released" (paid
in full).
Mortgage insurance (MI):
Insurance which protects mortgage lenders against loss in the event of default by the borrower. This allows lender to make loans with lower down payments. The federal government offers MI through
HUD/FHA; private entities offer MI for conventional loans. Generally, mortgage insurance is required on FHA loans as well as on conforming loans higher than 80% Loan to Value (LTV). Some loans over
80% LTV do not require mortgage insurance, but may have a higher interest rate to compensate for this.
Mortgage note (Note):
A written promise to pay a sum of money at a stated interest rate during a specified term. A mortgage note is secured by a mortgage. The original note will be retained by the mortgage company (or
note holder) until the loan is satisfied or paid in full.
Mortgagee:
The lender who receives the mortgage as a pledge for repayment of the loan.
Mortgagor:
The mortgage borrower who gives the mortgage as a pledge to repay.
TOP
N
Net rental income:
To calculate your net rental income, take your monthly rental income and multiply by 75%. Subtract your monthly mortgage payment from this number to determine your net rental income. If this is a
negative figure, this figure will be counted in the debt to income ratio instead of the entire PITI payment on the rental home. If this is a positive figure, it will be added to your income, and no PITI
amount will be counted in your debt to income ratio.
Non-conforming loan:
Includes mortgage loans for more than $322,700, which are called Jumbo loans. Loans for less than this amount that meet Fannie Mae and Freddie Mac guidelines are called Conforming loans. Also refers to
loans of any amount that do not adhere to Fannie Mae/Freddie Mac guidelines due to LTV, debt ratio or credit issues.
TOP
O
Origination fee:
A fee charged by a lender to cover certain expenses in connection with making a mortgage loan. Usually a percentage of the loan amount.
Owner's policy:
A title insurance policy issued at purchase to insure that there are no outstanding liens against the property that are not being paid off prior to transfer of title.
TOP
P
P&I (principal and interest):
An abbreviation for Principal and Interest. P&I is an amount of money paid to the lender on a monthly basis. Principal is the portion of the mortgage payment that goes to reduce the outstanding balance
of the loan. Interest is the portion of the mortgage payment that goes to pay the finance charge on the outstanding balance of the loan. Most loans have a higher portion of the payment going towards
interest at the beginning of the loan, with more going towards principal as the loan is further amortized. For the complete monthly payment associated with a loan see PITI.
Payment cap:
The predetermined limit on increases or decreases in the payment amount of an adjustable-rate mortgage. This will be detailed in the Note.
Piggyback:
The simultaneous closing of two mortgage loans. The customer will have two mortgage payments, but will avoid MI by choosing this alternative.
PITI (Principal, interest, taxes & insurance):
An abbreviation for Principal, Interest, (property) Taxes and (homeowners) Insurance, which are the components of a total monthly mortgage payment.
Points:
Charges levied by the mortgage lender and usually payable at closing. One point represents 1% of the face value of the mortgage loan. Also referred to as Discount Points.
Prepayment penalty:
A charge imposed by a mortgage lender on a borrower who wants to pay off part or all of a mortgage loan in advance of schedule. The amount of this penalty is determined by the loan program, with
only certain loan programs featuring a prepayment penalty. Prepayment penalties usually allow the customer to obtain a lower interest rate by agreeing to stay with the same loan for a set period of time
(usually 2-3 years). Prepayment penalty laws vary by state.
Pre-qualify:
An informal estimate of the amount of money a homebuyer can obtain through a mortgage loan.
Principal:
The original balance of loan, excluding interest. Also, the remaining balance of a loan, excluding interest.
Principal and interest:
See P&I.
Private mortgage insurance (PMI):
Insurance written by a private company protecting the mortgage lender against financial loss in the event that a borrower defaults on their mortgage. Also see MI.
Processing:
The preparation of a mortgage loan application and documentation for consideration by a lending institution. This includes verifying employment and assets, obtaining payoffs on current mortgage liens
and performing a preliminary review on the title search and appraisal report before providing the entire loan application to the underwriter for final review.
Property type:
A detached home is a single-family, free-standing home. An attached home/townhouse is a single family home attached to another where the homeowner actually owns their land and receives a survey at
the time of purchase. A condominium is a single unit of a multiple unit building (can be a townhouse style property where the homeowners does not actually own the land). A co-op or "cooperative" is a
share of ownership in a multiple unit building where your share is represented by the unit you own. (Co-op loans may be more difficult to obtain.) A planned unit development (PUD) is a single family home
in a development which may have common amenities and usually has an assessment fee. A 2-, 3- or 4-Unit Multi-Family is a dwelling that consists of up to 4 residences from which the owner receives rental
income.
Purchase price:
The price a homebuyer pays to buy a home. The home must appraise for at least as much as the purchase price, or else the buyer must pay the difference at closing. The LTV is based off the lower of
the purchase price or appraised value.
TOP
Q
Qualify:
Ability to meet a loan program's predetermined guidelines for income, assets, credit history, debt, etc.
Quitclaim deed:
A deed relinquishing all interest, title or claim an individual has in a property. For example, this may be needed to remove a former spouse at the time of divorce. A quitclaim deed may also be used to
add another person to title.
TOP
R
Rate:
The interest rate that is charged as a fee for borrowing money from a lender.
Real property:
Land and that which is affixed to it.
Refinancing:
The process of paying off one loan with the proceeds from a new loan using the same property as security. Customers can refinance to obtain a lower interest rate, change the term (length) of their
loan, convert loan types (i.e., fixed, ARM, balloon), consolidate bills, or obtain cash out.
Reserves:
Additional funds that the borrower will have remaining after the purchase or refinance of a property. For example, 2 months reserves is equal to the amount of PITI x 2 months, that the borrower would
have remaining as an "emergency fund".
RESPA (Real Estate Settlement Procedure Act):
A federal law requiring lenders to provide borrowers with information on known or estimated settlement costs.
TOP
S
Sales contract:
A written agreement between a buyer and a seller stating the terms and condition of the sale of real property. A fully executed sales contract will be signed by both the buyer and seller and will be
required in order to lock in an interest rate.
Secondary financing:
Lien against real property that takes second position behind a first mortgage.
Second home:
A residence other than the borrower's primary home that the borrower intends to occupy during a portion of the year. No rental income can be collected for a property to be considered a second home.
Secondary mortgage market:
A market where existing mortgages are bought and sold.
Security:
Collateral pledged to secure the interest of the lender in repayment of debt.
Seller contribution:
Payment by the seller for some, or all, of the buyer's closing costs.
Settlement statement:
Standard form prepared by closing agent used to disclose actual closing costs at time of settlement. All charges imposed in the transaction, including lender fees, third party fees, escrows and prepaid
items must be itemized. Also referred to as the HUD-1.
Subject property:
The property being financed, and for which the proceeds of the mortgage loan will be applied.
TOP
T
Tax lien:
A claim against a property for unpaid taxes. This can become a lien on title and will be required to be satisfied at the time of a refinance, or upon the sale of a property.
Tax savings:
Amount that can be saved in taxes under the IRS deduction for mortgage interest. Consult your tax professional to determine actual tax savings.
Term:
The amount of time required to repay the mortgage loan. The term of loan is expressed in months. For example, for a 30-year, fixed-rate mortgage, the term is 360 months (30 years X 12 months). See
also amortization term.
Title:
Written evidence of ownership of a property. In the case of real estate, evidence of ownership is the title deed that specifies in whom the property is vested and the history of ownership and transfers.
Title insurance:
Lender requirement for most real estate transactions, title insurance insures the lender's lien position. It also insures that the borrower has vested ownership interest in the property. It also insures that
anyone with a vested interest in the property must be made aware of the financing prior to or at the time of closing.
Total monthly payment:
The total monthly mortgage payment includes principal, interest, taxes, and insurance. See also PITI and Monthly Mortgage Payment.
Truth-in-Lending Act:
A federal law requiring a disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions. For example one loan at 5
.50% might have an APR of 5.65%, while another loan at 5.50% could have an APR of 5.85%. The loan with the lower APR has the lowest total costs.
TOP
U
Underwriting:
Analysis of risk and setting of appropriate rate and term for a mortgage on a given property for a given borrower. Also the process of determining whether a loan adheres to the guidelines set forth by
Fannie Mae and Freddie Mac to determine if the loan is eligible for purchase by either of these investors.
TOP
|
|
|
|
|