3-Repositories – Transunion, Equifax, and Experian
5-year ARM – Fixed for 5 years, then can adjust based on: market conditions at that time, the index type, and set caps
7-year ARM – See 5-yr ARM, but this is fixed for 7 years
Adjustable Rate Mortgage (ARMs) – A mortgage rate that can adjust immediately adjust after the loan closes, or can adjust after a certain fixed period... see 5-year ARM
Amortization – The breakdown of monthly principal and interest installment payments, as well the loan balance, based on a certain period (i.e. 30 or 15 years).
Annual Percentage Rate (APR) – The APR is a confusing rate to base your loan comparisons on. The APR includes the loan balance, plus certain closing costs, private mortgage insurance, and mortgage interest amortized over a 30-yr period (or whatever loan period the client is choosing). The note rate is much more sensible, as it determines a client’s true principal and interest payment.
Appraisal – A valuation of one’s property performed by a licensed, non-biased Appraiser. The final report showcases the value based on recent comparable sales of similar properties. Typically, the comparable sales are within the same neighborhood/complex, similar square footage and views, and preferably within 1-3 months from their sale date.
Appreciation – Profit built from the purchase price versus the current value of the home.
Assessed Value – For the purpose of assessing tax bill dues, the county treasurer determines the value of one’s home. When a purchase is completed, the buyer of that home will initially pay the previous owners property tax bill rate until the county catches up on filings. The county then assesses the new buyer with the new property tax rate based on the actual purchase price. The county will send supplemental property tax bills to cover the shortage (when the buyer was paying the previous owners tax bill rate). If the new buyer established an impound account, there are typically enough funds in their tax and insurance impound account to cover the assessment and supplemental bills.
Assets – Typically (2) months-worth of the client’s bank, investment, and retirement statements are required from the Underwriter for qualifying purposes. All pages are needed (even if blank).
Assumption – If allowed by the existing lender, the purchaser of a home can assume the seller’s mortgage. This is very popular on VA loans. Typically, the person assuming the mortgage will need to cover the difference between the loan and the purchase price with cash and/or a 2nd mortgage.
Balloon Mortgage – With this type of mortgage, the remaining mortgage balance is due on or before a specific date. This is popular on 2nd mortgages where the monthly loan payments are calculated based on a certain amortization period (i.e. 30 years), but the outstanding balance is due after a point in time (i.e. 15 years).
Bridge Loan – A temporary loan provided for the down deposit and closing costs on another home, in anticipation of one’s existing house selling.
Broker – A licensed mortgage company and/or business owner that does not fund loans in their name, rather in the name of a banking partner, in return for a lender paid compensation.
Buyer – The chosen party purchasing the property listed for sale.
Caps – On ARMs, caps prevent the adjustable rate from going higher than a certain threshold. For example, on a 7yr ARM, the adjustments may be presented 2/2/5… meaning, after the fixed period of 7-years, the rate cannot increase more than 2% in the first variable year, nor can the rate increase more than 2% every year thereafter, and finally, the loan cannot go 5% higher than the original rate.
Cash-to-Close – The money that is required to wire (or cashiers check) into Escrow for the remaining down deposit, closing costs, and tax/insurance prepaid dues… minus the Earnest Money Deposit.
Certificate of Title – Proof of ownership of property, typically provided after the recording of the Deed of Trust.
Clear-to-Close Approval – When ALL Underwriter Conditions are signed off on, and the next step is to draft up closing documents to sign with the Notary.
Closing – The last day of the purchase transaction, when the loan has funded, and the necessary purchase/ownership documents have been officially recorded.
Closing Disclosure (CD) – A Closing Disclosure is the client’s final official estimate breaking down rate, fees, cash-to-close, and total monthly payment. The CD includes various loan notices and disclosures as well. This is typically emailed to the client within the last week of the transaction. The client must consent to viewing the Closing Disclosure package and e-sign it. (3) days need to pass before the client can sign the official Closing Documents.
Closing Documents – The final loan documents that are signed with the client(s) and a Notary at a mutually beneficial location. These documents are then sent back to Escrow and the Lender for their filings, as well as to the County Recorder for the official recording.
Comparables – These are homes with the most similar value to the home being purchased or refinanced. The ‘comparable’ values are based on the most recent sale date, along with similar square footage, amenities/upgrades, and character. Since not all homes are created equal, an Appraiser will make value adjustments depending on variances between the comparables being used.
Condominium – A condo is a residence/unit within a property complex that is represented by a Home Owner Association (HOA). A client’s rate can be a little higher on the purchase of a condo vs. a single-family residence because there is typically more risk to the bank on condo financing. For example, if an HOA’s budget is low, and it can’t consistently maintain the common areas, the value of those residences can go down, in return, poses a higher threat of foreclosures on bank loans.
Conforming Loan – A loan that conforms with Fannie Mae and/or Freddie Mac guidelines. Down payments traditionally begin with 5% down, although 3% down is allowed on Home Ready and Home Possible programs. 30-yr and 15-yr fixed rate loans, along with ARMs are the most popular Conforming Loans. Any purchase loan with less than 20% down deposit requires Private Mortgage Insurance (PMI). On Conforming Loans, PMI can either be wrapped into the rate (making the rate higher), or it can be paid alongside one’s monthly mortgage payment.
Contingency – During the purchase process, performance metrics must be met in a timely manner for the purchase agreement to remain intact. These contingency periods are set up in the Residential Purchase Agreement. For example, many Listing Agents will have a 17-day contingency removal period on any issues or requests stemming from the Buyer’s inspection of the property, and once the 17-days have passed, the Buyer can no longer request repairs from the Seller.
Convey – The official transfer of real estate from the selling party to the buying party
Credits – It’s an agreed upon amount for recurring and non-recurring closing costs. Typically, it’s offered by the Listing Agent in lieu of paying for repairs determined in the Inspector’s report. In addition, the Buyer Agent and/or the Lender can offer a credit off closing costs to assist the Buyer.
Debt-to-Income Ratio (DTI) – There are two types of DTI’s… one based on the monthly house payment debt divided into one’s gross income. The other DTI ratio is based on the total monthly house payment plus all monthly installment and revolving debt payments, divided into one’s gross income. For example, if one’s monthly principal, interest, taxes, and insurance payment (PITI) is $2,000.00, and their monthly gross income is $8,000.00, their total housing DTI ratio is 25% ($2,000.00 / $8,000.00 = 25%). Let’s imagine their monthly installment debt (car loans, student loans, etc.) and monthly revolving debts (credit cards, etc.) add up to $1,000.00. That would give that borrower a 37.5% total DTI ratio ($1,000.00 + $2,000.00 = $3,000.00 / $8,000.00 = 37.5%). Most mortgage companies will explain this DTI ratio as 25/37.5… showing the front and back-end ratios together.
Deed – A signed and notarized official document that conveys ownership to a purchaser, which is then recorded with the county.
Default – The act of not performing one’s payment responsibilities and commitments to a mortgage debt, as detailed in the note.
Derogatory Mark (on credit) – Typically a 30, 60, or 90 day-late on a credit account… or a creditor sent a debt owed to collection and is shown on one’s credit report.
Down Payment – The amount of money the buyer puts down on a property. This can come from their own liquid assets, or through a family gift. For example, a borrower may choose to put down 10% of their own money towards the purchase of a property. The client will then borrow the remaining 90% of funds from a lending institution.
Early Payoff – On some loans, if the loan is paid off within the first 6 months, a penalty may be charged.
Earnest Money Deposit (EMD) – A mutually acceptable deposit (per the Purchase Agreement) that is typically wired into Escrow. This EMD shows the seller that the buyer is committed to the purchase of the property and persuades the seller from accepting more offers on that property. The funds provided will be subtracted from the initial Cash-to-Close Estimate. For example, if the client’s down deposit, closing costs, and tax/insurance impounds are estimated to be $122,000.00, and the Earnest Money Deposited was $12,000.00, the net amount owed at closing will be $110,000.00.
Escrow – A third party company that serves as the middle-man between the seller, buyer, and the lender. Escrow companies are popular in the Western United States, vs. Attorney’s that are heavily used in the Mid-West and East Coast. Escrow companies manage the intake of money from the Buyer, the payout of funds to the Seller, as well as the payoff of loans. Escrow Officers will send the buyer and seller important property documents to sign in preparation for the transfer of ownership. In many cases, they will also provide the buyer with important title paperwork. The escrow company is a very important role in the sale/buy process.
Equity – The difference between the any debt on one’s property and the appraised value of that property. For example, if one’s loan balance is $400,000.00, and the appraised value is $500,000.00, the owner’s equity is 20%. Having 20% equity is important when trying to remove PMI on a Conventional Mortgage.
FHA – Federal Housing Administration – FHA is overseen by HUD and is the largest insurer of mortgages worldwide. Typically, down deposits start at 3.5% down, and include an Upfront Mortgage Insurance Premium (UFMIP), as well as monthly Private Mortgage Insurance (PMI). The loan is generally designed for clients that prefer not to put a lot of money down, and/or have sub-fair credit scores.
Fixed Rate Mortgage – A rate and payment that does not adjust during the life the loan. For example, if the client chooses a 30yr fixed rate mortgage, their monthly principal and interest payment will stay the same for 30 years, and/or until the loan is officially paid off.
Floating (the rate) – A client has the option to lock-in their rate or float the rate when they enter into a loan agreement. Considering the mortgage market is always fluctuating, it may be wise to float the market down if the client is confident mortgage rates are poised to go down. The client may rely on the mortgage professional for advice on whether to lock-in or not, but in the end, it’s the client’s decision.
Flood Certification – The lending institution will order a 3rd party evaluation of the property being purchased to find out if it lies in a flood zone determined by FEMA, a governmental agency. If the property is in a flood zone, flood insurance will be required to protect against future damage.
Foreclosure – When a mortgage debt on a property isn’t paid as agreed, the lender has the right to take ownership of that property and sell it to cover the un-paid mortgage debt.
Gift Funds – VA, FHA, and Fannie Mae/Freddie Mac allow gift funds. In most cases, it can only come from a family member, a spouse, or an employer. Gift funds must be sourced properly. A gift letter from the Giftor must be filled out and signed. In some circumstances, the Giftor may have to provide (2) months-worth of bank statements and an account summary showing the seasoning of their funds as well as proof the funds leaving their account. In most cases, the Giftor can simply wire the funds directly to Escrow and avoid providing proof of funds, and only fill out the Gift Letter.
Gross Income – The income one receives from their employer before payroll deductions. Deductions may include taxes, social security, state disability insurance, 401k, health benefits, etc.
Guidelines – A set of rules that must be followed by all parties in the purchase transaction to obtain a Clear-to-Close Approval status from the Underwriter. Conforming, Jumbo, FHA, and VA loans are the most popular loans that have their own set of guidelines. The borrower’s responsibilities to meet these guidelines are restricted by their ability to pay, debt-to-income ratios, credit worthiness, loan purpose, type of property, and down payment amount.
Homeowner’s Insurance – Also known as Hazard Insurance. This insurance covers the damage to a property in the event of fire, flood, theft and other unexpected events
Home Possible Program – Freddie Mac’s program allowing only 3% down. Borrower must meet certain income requirements. In general, Home Ready serves towns where home-ownership is underserved.
Home Ready Program – Fannie Mae’s program requiring only 3% down. It’s their competitive product to Freddie Mac’s Home Possible.
Impound (Reserve) Account – When buying a property, the client has a choice to either personally pay taxes and insurance when they are due, or they can impound their taxes and insurance into their monthly mortgage payment, which most clients do. Borrowers putting down 5% or less cannot waive an impound account, nor can one waive an impound account on an FHA or VA loan. Think of this impound account like a savings account, where the mortgage company will collect a certain amount of funds at closing, then collect a certain amount of money through the total monthly mortgage payment… when taxes are due in December and April, and when the annual home insurance bill is due, that mortgage servicer pays that bill for the client.
Income – Proof of income is required to obtain a loan. An Underwriter will typically want to see the most recent (30) days-worth of paystubs, along with 2 years most recent W2 and Federal Tax Return statements. If the client is self-employed, other documents such as 1099 forms, K1s, and/or Business Tax Returns may be required.
Income Property – A property that is owned for the sole purpose of bringing in income, and not used as the owner’s primary residence. Income properties are also known as Investment properties.
Installment Debt – Debt broken out into monthly payments based on an agreed upon rate, loan amount and term. Examples of installment debts include car loans, private loans, and student loans. Installment debts show up on an individual’s credit report and used in calculating debt-to-income ratios.
Intent to Proceed – In the Loan Estimate (LE), signing the Intent to Proceed allows the mortgage company to submit the loan into underwriting and order the appraisal.
Interest Rate – See Note Rate and Annual Percentage Rate.
Lien – In the event of non-payment of a debt, a legal claim on one’s title of property may be imposed until that debt is fulfilled.
Loan-to-Value – The ratio between the mortgage balance and the value of one’s property, in terms of percentage. For example, if the mortgage balance is $400,000.00, and the appraised value is $500,000.00, we divide the balance into the value, and the ratio is created, which in this case is 80% loan-to-value.
Loan Estimate (LE) – These are upfront disclosures provided to the client disclosing various loan processes, authorizations, and loan details including term, note rate, annual percentage rate, estimated closing costs, etc. This LE is to be sent out within (3) days from the when a full application was executed and is meant to be signed by the client. Most documents can be digitally signed, but some documents may need to be wet-signed and returned to the mortgage company.
Locking-in – At the time a Residential Purchase Agreement is accepted, the client can lock-in an agreed upon rate based on a certain term (30,45,60-day rate locks are typical). On a refinance, the rate can be locked-in as soon an application and the client’s documents have been provided. See Floating to understand the reverse of locking-in.
London Interbank Offered Rate (LIBOR) – A variable rate widely used by banks for short-term loans. In many cases, banks will combine the Libor rate with a fixed index rate (bank’s profit) to produce an Adjustable Rate Mortgage.
Market Value – The value of a home determined by what a buyer is willing to pay for that property matched by how much a seller is willing to sell that exact property for.
Mortgage – An installment debt secured to a property with terms of repayment over a certain period.
Mortgagee – The institution lending money to an individual or entity for the purchase or refinance of a property.
Mortgagor – The individual or entity borrowing money for the purchase or refinance of a property.
Mortgage Servicer – The company that manages the monthly payment of your mortgage (PITI) payment. In many cases, the Lender that initially funded your loan is not the Mortgage Servicer. Typically, the original mortgage company will sell-off the servicing rights because they aren’t in the business to service loans.
Negative Amortization – A loan balance that goes up, versus going down. This happens when the required principal and interest payment is less than the necessary amount to buydown principal. The non-paid interest is continuously added to the principal loan balance.
Notary – A licensed individual that must be physically present during the signing of important loan and property ownership documents that will be provided to the Lender and the County Recorder.
Note – Also known as a Promissory Note. This is a written promise to pay an amount of money with interest based on a rate and repayment period.
Note Rate – This rate is how a principal and interest payments are calculated. For example, a 4% note rate amortized over 30 years on a $300,000.00 loan amount equals $1,432.24. See APR for more info.
Offer Letter – Also known as a Residential Purchase Agreement. In many cases, the buyer will offer a seller a certain price and terms to buy their property. In return, the Seller will counter-offer with either an accepted offer, or a higher priced offer with their terms. This will go back and forth until the offer and all counter-offers have been approved by both parties.
Origination Fee – The compensation collected by a Loan Officer for originating a mortgage for a client. In most cases, the lending institution that provided the loan will pay that compensation.
Owner Financing – The seller offers financing to the buyer to purchase the property. In some cases, a client will obtain a first mortgage from a traditional mortgage lender, then obtain a second mortgage from the seller in the form of owner financing.
PITI – An acronym that stands for: Principal, Interest, Taxes and Insurance. Sometimes an A is added to the acronym ‘PITIA’ standing for HOA. When a monthly mortgage payment is quoted, typically PITI is what is quoted.
Point(s) – A point is an added closing cost, which amounts to 1% of the total loan amount. In many cases, a fraction of 1% can be charged. The extra point charge must be agreed upon by the client. The goal to paying points is to reduce the note rate in anticipation of a lower principal and interest payment.
Prepayment Penalty - An agreed upon charge by the lender if the loan is sold/closed prior to a given period. For example, a lender may charge a 2yr prepay penalty, and if the loan is closed prior to that anniversary date, the client will be charged for closing that loan early. Prepay penalties were popular before the Great Recession that began in 2007. After regulations were put in place in 2009, prepay penalties are no longer popular, and almost non-existent on traditional Conforming, FHA, and VA loans.
Pre-Approval - This the mortgage company’s agreeance and commitment to offering the client desired financing for the purchase of a home. This Pre-Approval is typically backed up with a Pre-Approval Letter that can be provided to the Selling Agent along with the Offer Letter. To get a strong Pre-Approval Letter, the client will likely need to provide income and asset statements, a full application, along with a credit report.
Pre-Qualification – This is a commitment from a mortgage company to provide financing based on a non-authenticated analysis of one’s income, assets, and credit. In today’s market, Pre-Qualifications aren’t strong enough to attach to an Offer Letter because there wasn’t documentation provided to determine if that individual is truly qualified to purchase a home.
Prime Rate – This is the rate commercial banks charge their most credit-worthy clients, typically other corporations. Lending institutions will use the prime rate for car loans, credit cards, or equity lines of credit. In most cases, they’ll calculate a client’s rate based on the prime rate plus a desired percentage based on various risk factors such as credit scores or loan-to-value. For example, a client may be charged Prime + .25%. In many cases, these loans are variable, so they are not fixed-rate mortgages.
Principal – The mortgage balance owed to the Lender. Principal is the portion of ‘Principal and Interest’ that pays down the loan balance monthly. In the beginning of the loan term, less principal is paid versus interest. Over time, those equal out, and eventually towards the end of the loan term, more principal is paid monthly versus interest.
Private Mortgage Insurance (PMI) – This insurance is required by the lender when the client does not have more than 20% to put down on a property, or 20% equity on a refinance. This insurance protects the Lender in case the client goes into default on the loan. In certain circumstances, the mortgage company can waive PMI by raising the interest rate. This is called Lender-Paid Mortgage Insurance.
Processor – The middle person between the Loan Officer and the Client, Underwriter, Escrow, Title, and the Listing Agent. They make sure the loan meets the necessary guidelines before sending the loan package to the Underwriter. Works with the Underwriter to provide the necessary conditions to obtain a Clear-to-Close Approval. The processor will continuously communicate with the client, mortgage officer, agent, escrow, title, and other 3rd party agencies until the loan is officially closed.
Qualifying Ratios – A borrower’s debt-to-income ratios cannot exceed certain percentage limits determined by Loan Agency guidelines. For example, Conforming Fannie Mae and Freddie Mac guidelines don’t allow a client’s debt-to-income ratios to exceed 45%. In some cases, depending on a client’s compensating factors, that ratio can exceed 45%.
Rapid Rescore of Credit – If a derogatory mark is on one’s credit, and the client’s Creditor will write a letter explaining that the derogatory mark is officially ‘deleted’ and they will notify the (3) repositories, we can take that letter and order a rapid rescore to improve a client’s credit score within (3) business days.
Recorder – Important loan and property ownership documents are registered and filed with the County Recorder. When these documents are officially recorded, ownership of a residence is official.
Refinancing – Obtaining a new mortgage that replaces the existing mortgage loan. Reasons for doing this may be to change the loan term/structure (i.e. ARM to a Fixed Rate Mortgage), get a lower rate and/or pulling cash out from the equity in the property for home improvements.
Revolving Debt - Debt charged monthly based on an interest rate and that month’s balance. Credit cards are good examples of revolving debt.
Second Mortgage – A loan that piggybacks the first mortgage and resides in 2nd lien position. Some borrowers want a second mortgage on top of their first mortgage to avoid PMI. If the first mortgage on a loan is less than 80%, then there is no PMI, even if the second loan increases the client’s combined loan-to-value ratio higher than 80%. Other borrowers will obtain a second mortgage after the purchase for various reasons, including paying debt off, remodeling, or to take a family vacation.
Secondary Mortgage Market – Most loans are sold on the open market to investors, including Fannie Mae, Freddie Mac, and other institutional investors that then bundle mortgages and sell them as mortgage-backed securities. Many investors invest in these mortgage-backed securities depending on their risk grades and forecasted return on investment.
Title – The official ownership of a specific property. Outstanding liens or encumbrances is known as a ‘cloud’ on title… title void of liens or encumbrances means the title is ‘clear’.
Title Insurance Policy – An insurance policy pulled at the beginning of the purchase transaction and executed when the purchase closes. It’s designed to protect the buyer and lender in the event of a cloud on title after the deal closes.
Title Search – An internal check of public records to view ownership history of a property.
Transfer Tax – The tax imposed on a buyer purchasing a new property… charged typically by the state government.
Treasury (Bills) – Government released short-term securities that are used as investments and loan purposes.
Underwriter – A licensed individual that reviews, critiques, and eventually approves one’s loan based on a set of specific guidelines. Many conditions must be submitted to achieve the Clear-to-Close Approval status provided by the Underwriter
VA Loan – VA loans are some of the most favorable, lenient, and easy to transact loans for those that qualify. Active Duty Service Men and Woman, Veterans, and surviving spouses are eligible. 0% down deposit and low 500 range credit scores are allowed. VA loans are offered by private banks, and a portion of the loan is warranted by The Department of Veterans Affairs. An upfront VA Funding Fee is charged to each borrower. Normally, that fee is wrapped into the loan to prevent the Borrower from having to pay for that cost out of their pocket. Funding Fees are waived depending on whether the borrower has a high enough disability rating.