Glossary of Terms
Amortization : t he repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment.
A Paper: A borrower with a credit rating that meets the Fannie Mae and Freddie Mac quidlines (see automated underwriting). In most cases the minimum FICO score would be 620, but with other factors a borrower below may also qualify below the minimum score.
APR: The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a comprehensive measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges. It is also adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid ten years down the road. 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.
Appraisal: A written estimate of a property's current market value prepared by an licensed appraiser.
ARM : Adjustable Rate Mortgage
Authorized user: Someone authorized by the original credit card holder to use that holder's card. The card-holder is responsible for the charges of the authorized user, but the authorized user is not responsible for paying any charges, including his own. But sometimes authorized users are harassed for the unpaid bills of the card holder.
Automated underwriting : A computer-driven process for informing the loan applicant very quickly, sometimes within a few minutes, whether the applicant will be approved. 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.
Bridge loan : A short-term loan, usually from a bank, that "bridges" the period between the closing date of a home purchase and the closing date of a home sale. The maximum loan amount for this loan is $200,000.
Buy-down: A permanent buy-down is the payment of points in exchange for a lower interest rate. See points.
Cash-Out Refi : Refinancing for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes "cash-out" of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan.
Conforming Mortgage : Any mortgage that does not exceed $417,000
COSI : Cost of Savings Index that is derived from the interest that
is being paid on savings, checking, and money market accounts
COFI: Cost of Funds Index derived from the 11 th District Federal
Reserve located in California
CODI: Cost of Deposit Interest that is derived from the interest
that is being paid on time deposit accounts
Default: 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.
Deferred Interest: Interest that is earned but not paid, adding to the amount owed. A rise in the loan balance when the mortgage payment is less than the interest due. This arises the most frequently on ARMs. It is also known as negative amortization and/or accrued interest.
Discount mortgage broker: A mortgage broker who is compensated entirely by the lender rather than by the borrower ***Van Dyk Mortgage IS a Discount Mortgage Broker***
DTI: Debt to income ratio that compares how much a borrower makes to how much they owe.
Equity : In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home.
Escrow : An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. 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. If you chose not to escrow, the bank usually charges .0025% of your loan amount.
Fannie Mae and Freddie Mac: Federal agencies that purchase home loans from lenders. Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by these agencies.
FICO: the credit score, we run a tri-merge credit report and are required to use the middle score of the three
Float: Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so 3 days before the closing.
Float-down : A rate lock, plus an option to reduce the rate if market interest rates decline during the lock period. Also called a cap. A float-down costs the borrower more than a lock because it is more costly to the lender. Float-downs vary widely in terms of how often the borrower can exercise (usually only once), and exactly when the borrower can exercise.
Foreclosure: The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults.
Fully amortizing payment : The monthly mortgage payment which, if maintained unchanged through the remaining life of the loan at the interest rate, will pay off the loan over the remaining life.
Fully indexed interest rate : The Current index value plus the margin on an ARM
Gift of equity: A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually 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 within three business days of receiving the loan application.
Grace period : The period after the payment due date during which the borrower can pay without being hit for late fees. Grace periods apply only to mortgages on which interest is calculated monthly.
Hazard insurance: 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."
HELOC: Home Equity Line of Credit
HUD1 form: The form a borrower receives at closing that details all the payments and receipts among the parties in a real estate transaction, including borrower, lender, home seller, mortgage broker and various other service providers.
Index: A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (CODI, COFI, COSI, MTA, LIBOR) which is then used to adjust the interest rate on an adjustable mortgage up or down
Interest rate ceiling : The highest interest rate possible under an ARM contract; same as "lifetime cap." It is often expressed as a specified number of percentage points above the initial interest rate.
Interest rate floor: The lowest interest rate possible under an ARM contract. Floors are less common than ceilings.
Interest rate increase cap : The maximum allowable increase in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points, but may be 5 points if the initial rate period is 5 years or longer.
Jumbo Mortgage: Any mortgagee over $417,000 (rates may be higher), also known as a non-conforming loan.
LIBOR: London InterBank Offered Rate, average interest rate of
dollar denominated deposits (A.K.A. Eurodollar) traded between banks in London
Lien: The lender's right to claim the borrower's property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.
Lifetime Rate Cap: The maximum that a rate can adjust over time
LTV: Loan to Value ratio based on the difference between the loan amount and the appraised value of the house
Loan Commitment: A formal offer by a lender making clear the terms under which it agrees to lend money to a borrower over a certain period of time.
Lock : 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.
Lock commitment letter: A written statement from a lender verifying that the price and other terms of a loan have been locked. Borrowers who lock through a mortgage broker should always demand to see the lock commitment letter.
Lock period: The number of days for which any lock or float-down holds. Ordinarily, the longer the period, the higher the price to the borrower.
Manufactured housing: A house built entirely in a factory, transported to a site and installed there. They are usually built without knowing where they will be sited, and are subject to a Federal building code administered by HUD.
Margin: Set by each financial institution and effects the ARM rates
Mortgage : A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term "mortgage" or "mortgage loan" is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.
Mortgage broker : An independent contractor who offers the loan products of multiple lenders, termed wholesalers . A mortgage broker counsels on the loans available from different wholesalers, takes the application, and usually processes the loan. When the file is complete, but sometimes sooner, the lender underwrites the loan. In contrast to a correspondent , a mortgage broker does not fund a loan.
Mortgage lender : The party who disburses funds to the borrower at the closing table. The lender receives the note evidencing the borrower's indebtedness and obligation to repay, and the mortgage which is the lien on the subject property.
MTA : Monthly Treasury Average, 12 month average of the yields of
the US Treasury securities
NINA: No Income and No Asset loan enables us to simply list the employer and no questions asked about income or asset amount (may require a statement from the accountant)
Non-conforming mortgage : A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.
Note : A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents.
Origination fee : 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.
Payment shock: 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.
Per diem interest : Interest from the day of closing to the first day of the following month. In some cases, however, the borrower can get a credit at closing by making the first payment a month earlier.
Piggyback mortgage: A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down.
PITI : Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.
PMI : Private Mortgage Insurance that is required to be paid monthly when the borrower is putting anything less that 20% down. In certain circumstances, rates can be increased to avoid paying PMI.
**Please note that as of 1/1/2007 PMI will now be tax deductible (As of today, this as only been approved for loans closed in 2007. More on this to come as the year progresses)
Points : 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.
Prepayment : A payment made by the borrower over and above the scheduled mortgage payment. If the additional payment pays off the entire balance it is a "prepayment in full"; otherwise, it is a "partial prepayment."
Prepayment penalty: A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest.
Principal: The portion of the monthly payment that is used to reduce the loan balance.
Qualification rate: The interest rate used in calculating the initial mortgage payment in qualifying a borrower. The rate used in this calculation may or may not be the initial rate on the mortgage. On ARMs, for example, the borrower may be qualified at the fully indexed rate rather than the initial rate .
Qualifying ratios: Requirements stipulated by the lender that the ratio (DTI) of housing expense to borrower income, and housing expense plus other debt service to borrower income, cannot exceed specified maximums, usually the maximum is around 50% but credit can alter that number.
Refinance: Paying off an old loan while simultaneously taking a new one. This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan. It may be done to raise cash, as an alternative to a home equity loan. Or it may be done to reduce the monthly payment.
RESPA: The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.
Reverse mortgage: A loan to an elderly home owner on which the balance rises over time, and which is not repaid until the owner dies, sells the house, or moves out permanently.
Right of rescission: The right of refinancing borrowers, under the Truth in Lending Act, to cancel the deal at no cost to themselves within 3 days of closing when refinancing their primary residence.
Seller concession: A contribution to a borrower's down payment or settlement costs made by a home seller, as an alternative to a price reduction .
Servicing: Administering loans between the time of disbursement and the time the loan is fully paid off. This includes collecting monthly payments from the borrower, maintaining records of loan progress, assuring payments of taxes and insurance, and pursuing delinquent accounts.
Servicing agent : The party who services a loan, who may or may not be the lender who originated it. When a loan is sold, it goes to a servicing agent.
Settlement costs : Costs that the borrower must pay at the time of closing, in addition to the down payment.
SISA : Stated Income and Stated Asset loan that enables us to state the income and the assets on the application provided it is realistic for that occupation, the mortgage company's have a site they use to determine what is "reasonable".
Subordinate financing: A second mortgage on the property which is not paid off when a new loan is taken out. The second mortgage lender must allow subordination of the second to the new first mortgage.
Title insurance: Insurance against loss arising from problems connected to the title to property.
Underwriting : 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.
Waive escrows: Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure where the lender adds a charge to the monthly mortgage payment that is deposited in an escrow account, from which the lender pays the borrower's taxes and insurance when they are due. On some loans lenders will not waive escrows, and on loans where waiver is permitted lenders are likely either to charge for it in the form of a small increase in points, or restrict it to borrowers making a large down payment.
Wholesale lender : A lender who provides loans through mortgage brokers or correspondents. The mortgage broker or correspondent initiates the transaction, takes the borrower's application, and processes the loan. As distinct from a Retail lender .
1031 Exchange : When a customer sells and buys "like properties" they may be able to defer taxes on the profit (refer customer to accountant or attorney for more details)
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