Mortgage Frequently Used Terms
Interest that is earned but not paid, adding to the amount owed. Same as Negative amortization.
Adjustable Rate Mortgage (ARM)
An ARM, short for “adjustable rate mortgage”, is a mortgage on which the interest rate is not fixed for the entire life of the loan. The rate is fixed for a period at the beginning, called the “initial rate period”(Time periods range from 1 month-10 years), but after that it may change based on movements in an interest rate index.
The mortgage principle repayment from scheduled payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance decreases by the amount of the scheduled payment, plus the amount of any extra payment.
A mortgage application is taken by filling out a “1003” form. When taking the applications the lender will generally run credit, evaluate income, verify assets, confirm work history and review any other information needed to make a pre-qualification decision.
A written estimate of a property’s current market value prepared by an appraiser. Appraisers check local comparable properties to verify value. During the appraisal all health and safety issues discovered will be included into the report.
A professional with knowledge of real estate markets and skilled in the practice of appraisal. When a property is appraised in connection with a loan, the appraiser is selected by the lender, but the appraisal fee is usually paid by the borrower.
The Annual Percentage Rate is required to be reported by lenders under Truth in Lending regulations. It’s the total credit cost in the form of a percentage that takes account of the interest rate, points, and lender fees. The charges covered by the APR also include mortgage insurance premiums, but not other payments to third parties, such as payments to title insurers or appraisers. The APR is adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid in the future. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons. Programs like FHA carry a higher APR, due to the upfront MIP and monthly MIP.
A computer-driven process for informing the loan applicant very quickly, sometimes within a few minutes, whether the applicant will be approved, or whether the application will be forwarded to an underwriter. The quick decision is based on information provided by the applicant, which is subject to later verification, and other information retrieved electronically including information about the borrower’s credit history and the subject property.
A permanent buy-down is the payment of points in exchange for a lower interest rate.
Buy-up (Rebate Pricing)
Paying a higher interest rate in exchange for a rebate by the lender which reduces upfront costs.
One or more persons who have signed the note, and are equally responsible for repaying the loan. Unmarried co-borrowers who live together are advised to agree beforehand on what happens if they split.
A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. See Conventional Mortgage?
A numerical score, based on an individual’s credit history, that measures that individual’s credit worthiness. The three major credit information companies include Transunion, Equifax, and Experian. Mortgage lenders typically pull all three reports and use the middle score when credit qualifying. See article on Understanding Credit
Failure of the borrower to honor the terms of the loan agreement. Lenders (and the law) usually view borrowers delinquent 90 days or more as in default.
Direct lender (Correspondent Lender)
Direct Lender is usually a term that refers to a company which originates and closes home loans, rather than sending the loan file to the bank like a broker. Since Direct Lenders originate, process, and underwrite a loan file they have a higher degree of control when making lending decisions. Some Direct Lenders service loans, portfolio loans, but most act as correspondents for larger investors. With multiple investors Direct Lenders have a large advantage over banks; with increased assortment of loan options and expanded guidelines borrowers have a better chance of receiving loan approval.
In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home.
Ecrow is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a particular condition or event. In real estate the escrow collects and disperses funds for the real estate transaction.
It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.
Gift of equity
A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are only between family members. Lenders will usually allow the gift to count as down payment.
Good faith estimate
The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower after taking an loan application.
Money issued to a borrower without the need of a loan; grants don’t need to be repaid. Currently the CHF Platinum program offers grant to all borrowers purchasing an owner occupied residence with an FHA mortgage.
Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as “homeowner insurance“, it is the second “I” in PITI.
Housing expense ratio
The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers.
The rate charged to the borrower for a period on a loan secured by a property. A rate of 6%, for example, means a rate of 1/2% per month. See Mortgage Interest Rates.
The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts. For high LTV refinances see Underwater Refinance
An option exercised by the borrower, at the time of the loan application or later, to “lock in” the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.
Mortgage insurance premium
An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate.
A very large increase in the payment on an ARM that may surprise the borrower. Also used to refer to a large difference between the rent being paid by a first-time home buyer, and the monthly housing expense on the purchased home.
Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.
Private mortgage insurance is required for many borrowers who have loan-to-value’s higher than 80%. Mortgage insurance protects the lender in case of default by the borrower.
An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., “3 points” means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations with negative points. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed “discounts” and “premiums,” respectively.
A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Unlike a pre-qualification, the lender checks the applicant’s credit.
The process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay a loan. Qualification is sometimes referred to as “pre-qualification” because it is subject to verification of the information provided by the applicant. Qualification is short of approval because it does not take account of the credit history of the borrower. Qualified borrowers may ultimately be turned down because, while they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay. For articles on qualification, see Qualifying For a Mortgage.
Requirements stipulated by the lender that the ratio of housing expense to borrower income, and housing expense plus other debt service to borrower income, cannot exceed specified maximums, e.g., 28% and 35%. These may reflect the maximums specified by Fannie Mae and Freddie Mac; they may also vary with the loan-value ratio and other factors.
A second mortgage that doesn’t require payments until the loan term ends; most have minimal non-compounding simple interest. Non Profit Down Payment Assistance programs use them to allow upfront funds for first time homebuyers. Currently CALHFA, City of Stockton, San Joaquin County, City of Lodi, and the City of Elk Grove offer programs that can assist first time homebuyers with the use of a silent second. They all offer different amount and terms, please contact me for more information.
Simple interest mortgage
A mortgage on which interest is calculated on loan balance, but doesn’t charge interest on interest accrued.
Refinancing that omits some of the standard risk control measures, and is therefore quicker and less costly. The streamline concept varies depending on program, but it generally skips the appraisal, and income qualifications. Currently FHA and USDA offer a streamline program
The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity. On a 7-year balloon loan, for example, the maturity is 7 years but the term in most cases is 30 years. A term for a fixed rate loan of 30 years is 30 years.
Total housing ratio
Mortgage Payment, Insurance, HOA, Taxes (PITI)/ Gross Income
Total expense ratio
Total Housing payment (PITI) + Monthly Revolving Debt/ Gross Income
Truth in Lending (TIL)
The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information.
The process of examining all the data about a borrower’s property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.
The standards imposed by lenders in determining whether a borrower qualifies for a loan. These standards are more comprehensive than qualification requirements in that they include an evaluation of the borrower’s creditworthiness.
VA Funding Fee
The VA Funding Fee is a one-time, up-front charge applied as a percentage to the “Base VA Loan Amount”.