Glossary

All the important terms you need to know

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ADJUSTABLE RATE MORTGAGE (ARM)

A mortgage in which the interest rate is adjusted periodically according to a pre-selected index. Adjustments may occur at different intervals depending upon the loan program. Some adjust yearly while others may stay fixed for a term of one, three, five or seven years then adjust yearly. The terms, adjustment schedule and index that the loan is based upon vary by loan program. To protect the borrower, “caps” are put into place to limit the amount of payment adjustment.

ALTERNATIVE DOCUMENTATION (Alt Doc)

A method of loan processing where the use of pay stubs, W-2 forms, and bank statements are used instead of written verifications are used for income and asset verification.

AMORTIZATION

A gradual debt reduction of the amount borrowed. This is accomplished by making installment payments (usually monthly) according to a predetermined schedule.

AMORTIZATION TABLE

A spreadsheet or table that shows the periodic payment, interest and principal requirements, and unpaid loan balance for each period for the life of a loan.

ANNUAL PERCENTAGE RATE (A.P.R.)

The total cost of credit on a yearly basis expressed as a percentage. It takes into account the total cost of the loan including origination fee, points, prepaid interest, etc. The APR is typically higher than the note rate.

APPRAISAL

A written report made by a licensed person as to the current estimate of value. The term also refers to the process by which this estimate is obtained. The “loan-to-value” is usually based on the appraisal value not the sales price.

AUTOMATED UNDERWRITING

A generic term meant to describe any type of computer based system whereby the underwriting decision is based upon statistical models and historical data of mortgage loans with similar characteristics of the application data submitted. In other words a computer instead of a real person determines if the loan should be approved or not. This system does not evaluate the collateral (appraisal) part to the loan approval process.

BI-WEEKLY MORTGAGE

A mortgage payment system whereby one-half of the normal monthly payment is required to be paid every two weeks. As there are 52 weeks in a year, then a total of 26 half payments are made which equals 13 full payments. If this is done a 30 year fixed rate mortgage would be paid of in about 24 years.

BASIS POINTS (BPS)

One hundredth of a percentage point. Expressed as 0.01%.

BALLOON LOAN

The balance of the mortgage that is due in a lump sum at a specified date in the future. Usually three, five or seven years.

BLENDED RATE

The overall effective interest rate of the combined rate and term of a First and second mortgage.

BUY DOWNS

Temporary – An up-front fee paid to the lender (by the borrower, seller or builder) to reduce the monthly payments for a home mortgage. Typically the monthly payment reduction is only the first one to three years.
Permanent – An up-front fee paid to the lender (by the borrower, seller or builder) to reduce the monthly payments for a home mortgage for the life of the loan. (Sometimes referred to as points.)

CASH-OUT REFINANCE

When refinancing an existing mortgage and receiving money back at the closing above the original loan amount.

CAP

A limit on the amount of adjustment in the interest rate, payment amount or both on an ARM mortgage. Caps may be applied to each adjustment period and/or over the life of the loan. Example, a 2/6 would denote a 2% cap on the rate per adjustment period and 6% over the term of the mortgage.

CLOSER

An employee or agent of a closing or title company that assists the parties at the closing with the signing of the loan documents.

CLOSING

As referred to as the settlement. Where the new loan documents are signed and the disbursement of funds to all parties to the transaction. In the case of a purchase transaction the delivery of the deed also takes place.

CLOSING AGENT

See Closer

CLOSING STATEMENT

See Settlement Statement

CLOSING COSTS

Fees associated with obtaining a mortgage. They include such items as origination, appraisal, credit report, title insurance, attorney, processing , underwriting , etc. Local custom and loan type dictate what party to the transaction pays which fees. Prepaid items such as daily prepaid interest, property insurance and real estate taxes are not typically considered closing costs.

CLTV - Combined Loan To Value

The total of all loan amounts (first and second mortgages) divided by the value of the property. Usually expressed as a percentage such as 90% CLTV.

CO-BORROWER

A person who is obliged on the debt with a primary borrower and who also is on title to the subject real estate.

CONVENTIONAL LOAN

A mortgage loan that meets the underwriting guidelines of Fannie Mae or Freddie Mac. Not a government backed loan such as FHA or VA.

CONFORMING LOAN

A loan with a mortgage amount that does not exceed limits set by Fannie Mae or Freddie Mac. Currently at $417,000 for a single-family dwelling. There are higher loan limits for 2, 3 and 4 unit properties. Loans with amounts above the stated limits are classified as “Jumbo” loans are subject to higher rates.

CONDOMINIUM

A form of ownership of real property. The purchaser receives title to a particular unit and a proportionate interest in the common areas. A condominium generally defines each unit as a separately owned space to the interior surfaces of the perimeter walls, floors, and ceilings.

COLLATERAL

Property pledged as security for a debt. In mortgage financing it would be real estate.

CONVERSION OPTION

A form of ownership of real property. The purchaser receives title to a particular unit and a proportionate interest in the common areas. A condominium generally defines each unit as a separately owned space to the interior surfaces of the perimeter walls, floors, and ceilings.

CO-SIGNER

Anyone who sings on a debt but is not on title and has no legal right or interest in the property.

COFI (Cost of Funds Index)

An interest rate indicator used to determine changes in the mortgage interest rate for an ARM loan.

CO-SIGNER

Anyone who sings on a debt but is not on title and has no legal right or interest in the property.

COFI (Cost of Funds Index)

An interest rate indicator used to determine changes in the mortgage interest rate for an ARM loan.

CORRESPONDENT LENDER

A type of mortgage company that is a cross between a mortgage broker and a mortgage lender. This is a term applied to a mortgage broker that originates and closes the loan in their own company name, funds the loan from their own source of money such as a line of credit (also referred to as a ”Warehouse Line” and then immediately sells the loan on an individual basis to a lender who is their sponsor.

CREDIT SCORE

A means in which the lender may evaluate the credit rating of the potential borrower using standardized guidelines. The credit score takes into account such things as the amount of money owed in relationship to the credit limit, the number of open credit lines, the length of the credit history, the number of recent credit inquiries and numerous other factors.

DEFAULT

Failure to make payments as agreed on a loan or to comply with other stipulations of the agreement. Such as not paying home owners insurance or real estate taxes on the subject property.

DEBT RATIO

The total of all of the borrower’s monthly payments including the proposed house payment (PITI), divided by the borrower’s gross income.

DISCOUNT POINTS

A fee paid to the lender to “discount” or lower the rate of interest. Expressed as a percentage of the loan amount. One point equals one percent.

EQUITY

The difference between the fair market value of the property and the total amount of money owed on that property.

ESCROW

A transaction in which a third party, acting as an agent, carries out instructions of both parties and assumes the responsibilities of handling the paperwork and disbursement of funds.

ESCROW ACCOUNT

The account at a lending institution where the borrower pays monthly installments for insurance property taxes. When the payment of these items are due the lender disburses the funds.

FHA (Federal Housing Administration)

The division of the Department of Housing and Urban Development who’s main directive is the insuring of residential mortgage loans made by private lenders. FHA does not lend or provide funds for lending, they only insure the loan.

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)

A private corporation authorized by Congress. It sells participation sales certificates secured by pools of conventional mortgage loans. Also known as Freddie Mac.

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)

A tax paying corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA or guaranteed by VA as well as conventional home mortgages, Also known as Fannie Mae.

FICO SCORE

The acronym for Fair Isaac Credit Organization. A measurement of a borrower’s credit risk commonly used by creditors. The score is based on a borrower’s credit history and many other credit factors. The scores range from between 400 and 850.

FINANCE CHARGE

The dollar amount the credit will cost you. It is the total amount of interest that you will pay if you make the monthly payments as shown. This figure includes the interest on the loan plus the items that are noted as prepaid finance charges on the Good Faith Estimate and the total amount of any required mortgage insurance premiums charged over the life of the loan.

FLOATING

A term used to denote that the interest rate is not locked in and is “floating” with the market.

FORWARD COMMITMENTS

A pledge made by the lender to deliver a loan to a secondary market participant such as Fannie Mae or Freddie Mac.

FUNDING FEE

The fee paid and forwarded to the Veterans Administration to guarantee a VA home loan provided to a Veteran.

GINNIE MAE

Government National Mortgage Association (GNMA). A government owned corporation within the Department of Housing and Urban Development (HUD). FHA and VA loans are backed by Ginnie Mae.

GOOD FAITH ESTIMATE

A document provided at application that provides estimates for all costs associated with obtaining and closing the home loan.

HAZARD INSURANCE

Also know as homeowners insurance. Insurance that is put in place to cover the property against different types of hazards.

HARD MONEY

Mortgages that are approved based upon the equity in the property. Credit and income are a secondary factor. These loans usually require a 35% equity position and the interest rates are from 10 to 15% with very high fees.

HUD

Housing and Urban Development

HUD-1

See Settlement Statement

INDEX

An interest rate indicator used to determine changes in the mortgage interest rate for an ARM loan. Commonly used indices include; 6-Month, 1, 3, or 5-Year t-notes.

INDEX MARGIN

See Margin

JUMBO LOAN

A loan with a mortgage amount that exceeds limits set by Fannie Mae or Freddie Mac. Currently at $417,000 for a single-family dwelling. There are higher loan limits for 2, 3 and 4 unit properties. Also referred to as a non-conforming loan.

LIBOR (London Inter Bank Offered Rate)

An interest rate indicator used to determine changes in the mortgage interest rate for an ARM loan. This the rate on deposits traded between banks in London. LOAN APPLICATION (form1003) The receiving of personal financial information and property information. The information my be verbal or written. A formal paper application is sometime referred to as a 1003.

VA

Veterans Administration. The division of the government that guarantees VA loans made to Veterans.

WAREHOUSE LINE (OF CREDIT)

A line of credit extended to a mortgage broker so they are able to close and fund loans in their own name. When the loan is sold or delivered to the lender the funds are repaid to the warehouse line.

LTV

See LOAN-TO-VALUE

LOAN-TO-VALUE

The ratio of a loan amount against the value of the property expressed as a percentage. Such as 90% LTV

MARGIN

The percentage added to the index at each adjustment of an ARM to determine the borrower’s new interest rate.

MORTGAGE

A conveyance of an interest in real property given as security for the payment of an obligation.

MORTGAGE

A written legal instrument by which property is used to secure the repayment of a debt or obligation. The borrower gives their home as security without giving up possession of it. A mortgage may be in 1st, 2nd and even sometimes 3rd position. Interestingly the Latin translation is “dead deed”

MORTGAGEE

A person to whom property is conveyed as security of a loan made by such person of firm.

MORTGAGE BROKER

A person or company that originates home loans and sells that mortgage to any one of a number of mortgage lenders. the mortgage broker has the ability to find the best rate and/or program among the many sources available to him. He is usually compensated by the lender whom he places the loan with. there is no extra fees paid by the borrower for this service.

MORTGAGE INSURANCE

(MI) Insurance that pays off the existing mortgage. Also see PMI.

MORTGAGEE

The institution, group, or individual that lends money on the security of the real estate. The lender.

MORTGAGE INSURANCE PREMIUM (MIP)

Mortgage insurance on an FHA insured loan. Unlike conventional loans it is required regardless of the loan-to-value.

MORTGAGOR

The borrower of money. One who gives as security a mortgage or deed of trust on real property.

NOTE RATE

The interest rate on a loan.

NON CONFORMING

A loan with a mortgage amount that exceeds the limits set by Fannie Mae and Freddie Mac. Loans above this amount are considered “jumbo loans”. The term also refers to loans that are not sellable to by Fannie Mae or Freddie Mac such as sub-prime loans. NOTE A legal written promise to pay a sum of money to another party agreed upon conditions. Also known as a “Promissory Note.”

ORIGINATION FEE

A fee charged for work involved in the evaluation, preparation, submission and successful closing of a mortgage loan. Usually expressed as a percentage of the loan amount.

PAY OPTION ARM'S

An adjustable rate mortgage program where the lender allows different payment options.

PITI

An acronym for the total monthly payment. Principal, Interest, Taxes and Insurance.

QUALIFYING RATIOS

Compares the amount of the proposed monthly housing payment and monthly debts to the amount of the borrower’s monthly income to determine if the potential borrower is qualified for the proposed loan. Also known as “income-to-debt” ratio.

POINTS

A fee expressed as a percentage of the loan amount. One point equals one percent. Points are usually collected at closing. Payment of discount points usually results in a lower interest rate on the loan.

PREPAIDS

The amounts that are put into an escrow account at closing, usually including real estate taxes and insurance.

PREPAID INTEREST

That amount of money collected at closing to cover the interest for the loan from the settlement date to the end of the month.

PRE-APPROVAL

A process in which an applicant provides information as to income, debts and assets that will be used to make a decision as to the qualification of a mortgage. This information is verified. The applicant may or may not have a property identified but a loan amount has been determined.

PRE-QUALIFICATION

Similar to the Pre-Approval process but an approval opinion is based upon the verbal information supplied by the applicant. In a Pre-Approval situation the information provided is verified.

PREPAIDS

Refers to the funds that will be required to be “prepaid” in order to establish an escrow account for the payment of taxes and insurance on the property being refinanced or purchased. It also refers to the amount of interest that will be accrued from the day of closing until the date that the first mortgage will be due.

PREPAID FINANCE CHARGE

Fees that are used in the calculation of the Annual Percentage Rate (APR). These are usually noted on the Good Faith Estimate.

PREPAID INTEREST

The amount of interest that will be accrued from the day of closing until the date that the first mortgage will be due.

PREPAYMENT PENALTY

A fee that is due and payable if the loan is paid in full (or more than 20% per year of the balance) prior to the maturity date. Usually expressed as a percentage of the remaining balance of the loan.

PRIVATE MORTGAGE INSURANCE (PMI)

A private company which insures the mortgage lender on a conventional loan against loss caused by a mortgagor’s default. It may cover all or part of the loss. It is usually not required for loan-to-values of 80% or less.

RATE LOCK

An agreement between a broker or lender and borrower that specifies the type of loan and time frame that a given interest rate is guaranteed for on a particular property and borrower.

RATE/TERM REFINANCE

The refinancing an existing mortgage where only the rate and/or term are changed. No cash is given to the borrower.

RESCIND

To cancel the mortgage application after the loan documents have been signed.

REVERSE MORTGAGES

A loan whereby the lender places a lien on the borrower’s property and then pays the borrower monthly payments The borrower is not obligated to repay the loan until the home is sold, the borrower moves out of the property or the last borrower passes away. Must be at least 62 years of age.

SECONDARY MARKET

A system where existing mortgages are bought and sold.

SELLER CONTRIBUTION

Refers to any amount of funds that the seller contributes towards the buyers closing costs or prepaid items. There are limitations based upon the loan-to-value.

SERVICING (LOAN SERVICING)

The collecting of monthly mortgage payments from the borrower and the disbursement of funds to pay the real estate taxes and insurance for the property. Also issues an annual report to the borrower on the mortgage and escrow accounts.

SETTLEMENT STATEMENT (HUD-1)

A statement that is prepared by the closing agent on a real estate transaction that summarizes the fees that will be disbursed on behalf of all parties to the transaction. It also shows the amount of the loan and who the lender is.

SUBORDINATE FINANCING

A lien such as a “Second” mortgage that is placed against real estate This lien is second priority to the first mortgage. SUB-PRIME Mortgage loans that do not qualify for “conventional” financing due to low credit scores or lack of income or assets. These types of loan carry a higher interest rate and fees and sometimes also pre-payment penalties.

T-BILL

See t-notes

TABLE FUNDING

When a mortgage broker closes the mortgage loan in their company’s name and funds the loan from their own source of funds then at the time of settlement transfers that loan to the lender. The lender then repays the broker the funds he advanced. After the loan has closed the broker delivers the loan package to the lender. One of the reasons this is done this way is so the broker does not have to disclose the Yield Spread Premium.

T-NOTES

Also referred to as T-Bills. Interest bearing U.S. government obligations sold at a weekly sale. These are often used as a rate index for adjustable rate mortgages.

UNDERWRITING

Where the complete loan package is reviewed and approved or denied based upon standardized guidelines for that particular loan program. Sometimes referred to as the Loan Committee.

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