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.
An expert opinion on the value of a property
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 upfront costs.
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.
Mortgage characterized by level fixed payments for a predetermined time frame followed by either a refinance or adjustment in interest rate.
The tax paid upon certain types of real estate transactions. Contact accountant for specifics.
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.
Date stated on the purchase agreement that buyer and seller agree to finalize or close the transaction.
Various costs of setting up and funding the transaction - including closing fee, title insurance, appraisal fees, underwriting fee, mortgage registration tax etc.
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.
Standard, non-government financing.
Agencies that provide compilations of your credit history. The three main credit bureaus are Experian, Trans Union, and Equifax.
Report provided by the credit bureaus which shows the history, current status, and profile of an individual.
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.
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%.
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.
Difference between loan amount and purchase price.
Deposit toward down payment submitted with a purchase agreement as evidence of the buyers commitment.
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.
Short name for the Federal National Mortgage Association. 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.
Short name for Federal Home Loan Mortgage Corporation - see above.
Government backed minimum down financing program which has a lower mortgage insurance premium and greater credit leeway as compared to conventional minimum down programs.
Most common type of financing. Terms ranging from 10 to 30 years. Interest rate and P&I payment remains constant throughout life of loan.
Not locking in a rate, but rather choosing to float the interest rate as the market moves up or down.
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.
Financing provided from government agencies such as FHA , VA etc .
Home Equity Line of Credit. Second mortgage product, generally characterized by interest only payments and the ability to draw, pay back, and redraw.
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).
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.
Loan with an initial balance greater than $300,700
Refers to the fact that rates are generally slightly higher on jumbo loans.
Ratio of liens versus value of property or sales price. Ex. 80,000 owed on a property worth 100,000 equals an 80% LTV.
Time period that a rate is protected for during the loan process.
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.
This document signed at closing is the collateralization of the property to the note or loan.
Document. This document signed at closing is the promise by the signers to repay the loan.
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.
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.
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.
Monthly payment. Stands for Principal, Interest, Tax escrow, Insurance (both hazard and mortgage) escrow.
Based on documented income, assets, and credit.
Group of items paid at closing including monies to set up the escrow account and to pay prepaid or odd days interest.
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.
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.
Contract between buyer and seller outlining the terms of the agreement.
Single Family Residence
Standard, one unit home, as opposed to a Condo/Town Home with a homeowners association.
Company that prepares title work and is where the closing is held.
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.
Document prepared by title company which outlines the ownership of the property and other various details.
Act of approving a loan application. Underwriters are bound by guidelines set forth by Fannie Mae, Freddie Mac, FHA or VA as applicable.
Government backed financing available only for service veterans, characterized by no down payment, no mortgage insurance, but with a funding fee.