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Mortgage Glossary
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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.
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.
Basis
Points (bps)
One hundredth of a percentage point. Expressed as
0.01%.
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.
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.)
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.
Cash-out
Refinance
When refinancing an existing mortgage and receiving
money back at the closing above the original loan amount.
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 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.
Closing
Statement
See Settlement Statement
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.
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.
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.
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.
Collateral
Property pledged as security for a debt. In
mortgage financing it would be real estate.
Conversion
Option
Whereby the borrower has the option to convert an
adjustable rate mortgage to a fixed rate mortgage.
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 borrowers monthly payments including the
proposed house payment (PITI), divided by the borrowers 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 borrowers credit risk commonly used by creditors. The
score is based on a borrowers 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 Treasury Bills.
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.
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 borrowers 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.
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."
NOTE RATE
The interest rate on a loan.
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 borrowers 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
borrowers 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 Treasury Bills
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.
Title
Evidence of the ownership or right to real property
TITLE INSURANCE
An insurance policy which insures you and/or the lender against errors
in the title search of the property.
Treasury
Bills
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.
Truth in
Lending
Usually refers to the form that is given to the
borrower that discloses the APR, Finance Charge, Amount Financed and
Total of Payments and other information pertaining the mortgage
transaction.
Also the name of Regulation Z.
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.
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
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