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TERMS TO
KNOW
Alphabetically Listed
The mortgage industry is full of terms that are foreign
to many people. The following glossary of terms should
help you translate the mortgage language into English
and help you make sense of the mortgage process.
Appraisal
An expert opinion/report on the value of a property
performed by a licensed appraiser in your state. The
value is normally based on home sales comparable to the
property being appraised. Those home sales have to be
less than 12 months old.
Annual Percentage Rate
This is not the note rate applied for, but rather is a
government mandated formula that shows the cost of the
loan in a yearly rate by using the note rate plus
certain other closing costs and/or points.
ARM Loan
Adjustable Rate Mortgage. Mortgage characterized by an
interest rate that can adjust up or down at certain
intervals based on a current index (commonly the 1 year
T-Bill) plus a preset margin. Most common ARMS are 1
year, 3 year, 5 year and 7 year. This means that the
amortization period is normally 30 years, but the
initial rate lock period 1, 3, 5 or 7 years. After the
initial rate lock period has been passed, ARM loans
normally adjust every 6 or 12 months.
Balloon
Mortgage characterized by level fixed payments for a
predetermined time frame followed by either a refinance
or adjustment in interest rate
Capital Gains
The tax paid upon certain types of real estate
transactions. Contact accountant for specifics (see
links for details)
Cash to Close
The amount needed from the borrower at closing. Consists
of down payment, closing costs and prepaid items. This
amount needs to be in the form of a cashier check made
payable to the buyer.
Closing Date
Date stated on the purchase agreement that buyer and
seller agree to finalize or close the transaction
Closing Costs
Various costs of setting up and funding the transaction
- including origination or broker fee, processing fee,
courier or overnight fee, attorney/title charges, title
insurance, appraisal fees, underwriting fee, mortgage
registration tax etc.
Condo/Town Home
Property types that usually have the following
characteristics: they are attached, have a homeowners
association and dues, the outside maintenance is taken
care of by the association, and common areas and
amenities available to all owners in the association.
Conventional Financing
Standard, non-government financing. FHA or VA loans are
not included in Conventional Financing.
Credit Bureaus
Agencies that provide compilations of your credit
history. The three main credit bureaus are Experian,
Trans Union, and Equifax
Credit Report
Report provided by the credit bureaus which shows the
history, current status, and profile of an individual
Credit Scores
The number generated by the credit bureaus which is a
numerical representation of the subjects credit profile,
range is from 450 on the low side to 900 being the
highest score possible.
Debt Ratios
Ratio of debt to pretax income, often expressed as a
front (housing payment only) or back (all debt) ratios.
Ex- $5000 monthly income, $1400 housing payment, $1700
total debt would equal ratios of 28%/34%.
Discount Points
One point equals one percent of the loan amount. Points
are used to lower the interest rate. One point does not
equate into lowering the interest rate one percent.
Generally lowering the interest rate 1/8 will cost about
1/2 point, although this can vary based on daily
pricing. Typically is tax deductible. (see Links for
accountant advice)
Down Payment
Difference between loan amount and purchase price.
Earnest Money
Deposit toward down payment submitted with a purchase
agreement as evidence of the buyers commitment
Equifax Information Services
PO Box 740243
Atlanta, GA 30374
(800) 685-1111
Escrows
The portion of the monthly payment that is not applied
to principal or interest, but rather is used to pay
mortgage insurance, homeowners insurance and property
taxes.
Experian Information Services
PO Box 2002,
Allen, TX 75013-3742
(888) 397-3742
Fannie Mae
Short name for the Federal National Mortgage Association
(FNMA). One of the main Government Sponsored Agencies
which are the companies who sell mortgage backed bonds
to investors. They are the ultimate source of the money
that we lend. Fannie Mae protects its investors by
issuing underwriting guidelines that are to be followed
to ensure quality lending.
Freddie Mac
Short name for Federal Home Loan Mortgage Corporation (FHLMC)
- similar agency to FNMA, see above
FHA Financing
Government backed minimum down financing program which
has a lower mortgage insurance premium and greater
credit leeway as compared to conventional minimum down
programs
Fixed Loan
Most common type of financing. Terms ranging from 10 to
30 years. Interest rate and P&I payment remains constant
throughout life of loan.
Floating
Not locking in a rate, but rather choosing to float the
interest rate as the market moves up or down.
Flood Certification
Required document on all loans. Confirms if the property
is in or out of a FEMA designated flood zone
Funds held in Escrow
Generally only applies to new construction. Monies held
from the seller to provide payment for repairs or non
completed items.
Good Faith Estimate
Document prepared by lender which estimates and
delineates the various fees and closing costs associated
with the home purchase
Government Financing
Financing provided from government agencies such as FHA,
VA etc…
HELOC
Home Equity Line of Credit. Second mortgage product,
generally characterized by interest only payments and
the ability to draw, pay back, and redraw
Home Inspection
Not required by lender. This is a private inspection
done by the buyers choice to confirm that the property
is in acceptable condition.
Homeowners Association Dues
Amount paid by owner of a townhome or condo to cover
various amenities or services provided by the homeowners
association (examples -- common areas, hazard insurance,
garbage, mowing, snow removal)
Homeowners/hazard Insurance
Insurance which covers damage or loss to the property.
The premium is usually paid into an escrow account held
by the mortgage company, which then pays the insurance
company once a year
HUD-I (Settlement statement)
Document prepared by title company at closing which
shows where all of the money in the transaction was
coming from and going to.
Jumbo Loan
Loan with an initial balance greater than $300,700.
Jumbo Pricing
Refers to the fact that rates are generally slightly
higher on jumbo loans.
Loan-to-Value (LTV)
Ratio of liens versus value of property or sales price.
Ex. 80,000 owed on a property worth 100,000 equals an
80% LTV
Lock-in Period
Time period that a rate is protected for during the loan
process
Locking in
Choosing to protect a particular rate and program for a
specific period of time
Mortgage Insurance (MI)
Insurance which protects the LENDER against default.
Generally the higher the loan-to-value the higher the
monthly premium.
Mortgage -- Document
This document signed at closing is the collateralization
of the property to the note or loan.
Note
Document. This document signed at closing is the promise
by the signers to repay the loan.
Origination Fee
1% of the loan amount. Can be avoided by paying a higher
rate; typically is tax deductible.
Odd Days Interest/Per Diem Interest
Collected at closing, it is money collected/refunded to
borrower to synchronize the closing to the monthly
payments
Paying Points
Money paid upfront to lower the interest rate. Rule of
thumb - breakeven point is (where monthly savings
meets/exceeds money paid upfront) usually around 60
payments or 5 years. This means that in many cases
paying points will pay off as long as you do not sell or
refinance your loan before the breakeven point. (actual
breakeven point may vary, please talk to us about your
exact situation) Some niche programs and products may
require points to be paid.
Piggy Back
A second mortgage closed at the same time as a first
mortgage. Usually purpose is to avoid mortgage
insurance, jumbo pricing, or for future needs.
PITI
Monthly payment. Stands for Principal, Interest, Tax
escrow, Insurance (both hazard and mortgage) escrow
Pre-Approval
Based on documented income, assets, and credit.
Pre-paids
Group of items paid at closing including monies to set
up the escrow account and to pay prepaid or odd days
interest.
Pre-Qualification
Based on stated income, assets and debt. Information not
verified, not as useful or informative as a
Pre-Approval.
Pre Payment Penalty
An option on certain loan types. A benefit in that the
rate is lower on these products compared to other
similar products.
Property Taxes
Amount of tax due on a property. Usually is collected as
part of the escrow portion of the monthly payment, with
the lender being responsible to forward the escrowed
money as the bills come due on May 15 and Oct 15.
Purchase Agreement
Contract between buyer and seller outlining the terms of
the agreement.
Rate vs. Price
Rate refers to the interest rate. Price refers to
points. It is easy to become confused as both rate and
points are usually referred to in 1/8 percent
increments. A good rule of thumb is that often a 1/8%
change in interest rate reflects a 1/2% change in points
(actual rate and points may vary slightly)
Single Family Residence
Standard, one unit home, as opposed to a Condo/Town Home
with a homeowners association
Title Company
Company that prepares title work and is where the
closing is held
Title Insurance
Policy provided by the title company on their title work
guaranteeing the accuracy and completion. Lenders Policy
is required and only protects the Lender from loss,
Owners Policy is available at buyers discretion and
protects the owner
Title Work
Document prepared by title company which outlines the
ownership of the property and other various details
Trans Union Information Services
PO Box 1000
Chester, PA 79022
(800) 916-8800
Underwriting
Act of approving a loan application. Underwriters are
bound by guidelines set forth by Fannie Mae, Freddie
Mac, FHA or VA as applicable
VA Financing
Government backed financing available only for service
veterans, characterized by no down payment, no mortgage
insurance, but with a funding fee. |
