Mortgages are probably the most crucial piece to buying and selling a property. Preparation and doing a little homework can help you make the best financial decisions.
What is a mortgage?
A mortgage is a loan, with your house and land used as security; if you don’t pay back the loan, the lender forecloses on your home. The loan is secured by a lien against the property. The lender doesn’t own the house, you do. They just have the lien with your house as their collateral. A lender looks at your income, your debt, your job history, your payment history and behavior, as well as your savings. The property/home you are planning to purchase also makes a big difference and is a big part of the loan process. An appraisal will be done to determine if the risk the lender is willing to make on your property matches the loan.
Is there just one type of loan?
No... there are many times of loans from different types of lenders. It will be very important to learn about them and see which ones match your financial goals and boundaries.
What’s the difference in an Adjustable Rate Mortgage and a Fixed Rate?
Fixed rate mortgages mean the principal and interested owed on the loan are fixed over a specified amount of time, usually 15 or 30 years, and they don’t change. Taxes and Insurance rates may still change over time. These types of loans insure the same fixed rate over the life of the loan.
Adjustable rate mortgages have lower interest rates and have a specified amount of time the rate will stay the same. Then the interest rate can adjust up or down based on a specific money index it is tied to. These types of loans offer much lower interest rates to begin with and may save you enough money over the first few years to justify the risk of the rate changes over time. Especially if you don’t think you will live in the new property for a long time. There are lender fees attached to obtaining a mortgage and they differ from one lender to another and the type of lender you choose.
Where can I find today’s rates?
There are plenty of ways to determine the current interest rate range. Be careful not to get caught up in choosing a lender on rate alone. Fees, serve and advice are extremely important when choosing a qualified lender.
Why are some rates shown as a percentage and as an Annual Percentage Rate (ABR) too?
The APR is what you will actually end up paying in addition to the principal. It includes the interest and fees over the life of the loan and adjusts the rate to reflect expenses. When a lender quotes you a rate, it will be for interest only, so ask to see the APR. Lenders have very specific requirements to offer good faith estimates which will include the APR.
What is amortization?
It is a breakdown of all payments that will be made on the loan over the life of the loan. The life of the loan is based on the type of loan you chose- 15-year, 30-year, or other. The amortization schedule will show you how much is owed or paid off at any given point during the term of the loan.
What is a prepayment penalty?
Prepayment penalties are fees attached to a loan by the lender for paying it off early. Most FHA and VA mortgages do not have them but it is important to always ask before you take out a loan.
What is mortgage insurance?
If you default on a loan, the lender uses mortgage insurance that the borrower pays for to insure that a portion of the owed amount can be paid back. If you have less than 20% invested in the property, mortgage insurance or Private Mortgage Insurance (PMI) will apply. Currently there are two ways fees are applied, a one type fee at the time the loan is set up and a monthly charge.
(Veterans Administration) loans are guaranteed by the government and are only offered to qualifying veterans and surviving spouses. A VA loan offers several advantages to borrowers who qualify. For example, the VA streamline refinance (also known as a VA to VA loan, or an Interest Rate Reduction Refinancing Loan, or IRRRL). Borrowers who have a VA loan and meet certain criteria can refinance at a lower interest rate when the new rate hits the market. The borrower may roll the closing costs into the loan. Cash-out refinance options are available on VA loans for borrowers who live at the property and have sufficient equity.
Income restrictions do not apply, and VA loans do not require a down payment or private mortgage insurance (PMI). Loan fees are typically rolled into the loan.
VA loans are great for borrowers of limited income, with no cash reserves and with average or lower credit scores.
FHA (Federal Housing Administration) loans are available to all borrowers and are guaranteed by the government. The mortgage itself is issued by traditional lenders, but the government insures the loan against default. FHA loans require PMI (premium mortgage insurance). PMI benefits the lender and is not a safety net for the borrower. It is a cost related to risk. Fees for FHA loans are paid at closing and rolled into the loan. Sellers can contribute up to 6% toward closing costs if negotiated as part of the contract. FHA loans sometimes allow a higher debt-to-income ratio than conventional mortgages, but the actual number will depend on the lender you’re working with.
A conventional loan is a mortgage offered by a lender to borrowers who meet specific criteria, including a minimum credit score, stable employment, cash reserves, a down payment, a healthy debt-to-income ratio and review of assets among other things that are lender specific. The best interest rates are offered to borrowers who have the best credit scores. Conventional loans are free from the additional fees charged on FHA and VA loans, but sellers cannot contribute more than 3% toward closing costs. Conventional loans with a loan-to-value ratio of more than 80% require private mortgage insurance until the borrower has at least 20% equity in the home. Conventional loans are best for borrowers who have great credit scores and a down payment equal to at least 20% – the combination that garners the lowest possible interest rates.
In all cases, ultimate approval of the loan rests in the hands of the lender.
Is also a Conventional loan and picks up where a Conventional loan maxes out. If your in the market for a luxury or high end home and want a loan greater than the chart maximum shows, you would want to qualify for a Jumbo loan. Large (jumbo) loans may require a down payment of more than 20%.
There is an income maximum of up to 115% of the median income for the area. Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance. Applicants must have reasonable credit histories. The subject property must be located within the USDA Home Loan "footprint." The loan is 100% financed to qualified buyers, allows for all or some of the closing costs to be paid for by the seller or financed into the loan.
Lenders are the ones who give you the money — either directly or through a third-party — to fund your loan. Lenders have various names based on how they acquire their clients and what they do with your loan after it is funded.
Loan officers find new clients, counsel borrowers on how to choose the best mortgage and fill out loan applications.
Mortgage brokers match you, the borrower, with a lender. They review your personal financial information and look over many lenders to match you with one who will give you the best rate and terms.
Mortgage Bankers vs. Portfolio Lenders
(What Happens to Your Loan)
- Mortgage bankers fund loans but often turn around and sell them in the secondary market to investors or agencies. Mortgage bankers borrow money from banks to fund the loans and then repay the money when the loans are sold.
- Portfolio lenders include many community banks, credit unions, and savings and loans companies.
Retail vs. Wholesale vs. Correspondent Lenders(How Customers Are Acquired)
- Retail lenders reach out directly to consumers. Retail lenders are sometimes referred to as “Direct Lenders.” Retail lending can be done face-to-face in a bank branch, online or on the phone.
- Wholesale lenders fund mortgages acquired through brokers who work outside of their company. The brokers find customers and take loan applications and then sell the loan applications to wholesale lenders to fund.
- Correspondent lenders are a mix between brokers and retail lenders. They technically fund loans with their own borrowed money but typically lock in rates with other lenders at the same time.
In general, a lender who prequalifies a buyer discusses a buyer’s credit, income and assets with them. It is only a discussion that brings up important points and info. but bears no weight in actually getting a mortgage; a very weak letter that brings no comfort to a seller.
A lender who preapproves a buyer runs their actual credit and verifies their income and assets. Your loan would be submitted for preliminary underwriting, which normally takes about 24 hours. “Your mortgage consultant would then provide you with a preapproval letter that defines the loan amount you are approved to receive. Preapprovals are normally good for a 120-day period.
Getting approval on a mortgage is a process with no shortage of moving parts but
a necessary first step in buying the home of your dreams
The following information is usually required during the loan process:
- Your Social Security number
- Current pay stubs or, if self-employed, your tax returns for the past two years
- Bank statements for the past two months
- Investment account statements for the past two months
- Life insurance policy
- Retirement account statements for the past two months
- Make and model of vehicles you own and their resale value
- Credit card account information
- Auto loan account information
- Personal loan account information
If you currently own Real Estate:
- Mortgage account information
- Home insurance policy information
- Home equity account information (if applicable)
Have you declared bankruptcy, foreclosed on a home, or taken a hit on your credit score because of late or missed payments? If you have credit problems, do not despair: It is possible to improve your credit score and eventually qualify for a new mortgage loan.
Boosting your credit score is not the only means for getting a home loan. The Federal Housing Administration (FHA), has made it easier for people with damaged credit histories to qualify for a mortgage loan. Under certain circumstances, people who have foreclosed or declared bankruptcy can obtain an FHA loan several years earlier than a conventional loan, and can buy a home with a smaller down payment.
How Lenders View Credit Scores- Get a copy of your own credit score and learn how to read it.
Credit scores indicate to lenders how well you manage money. You can improve bad credit by demonstrating that you can now handle money more responsibly. Furthermore, since a poor credit score translates to a high interest rate on a home loan, an improved score will help you get lower interest rates.
How to Improve Your Credit Score
Here are a few ways to raise your score and ultimately qualify for home financing:
- Make payments on time
- Make payments in full
- Do not open new lines of credit
- Use credit cards sparingly and do not overextend your line of credit
- Show evidence of steady employment for a period of one to two years
- Come up with a budget and stick to it
- Build savings
- Pay student loans
- Pay on medical bills
Speak with a credible lender who has experience and they will be able to help explain how a lender will view all elements of your credit as it relates to a mortgage.
A clause in your mortgage which allows the lender to demand payment of the outstanding loan balance for various reasons. The most common reasons for accelerating a loan are if the borrower defaults on the loan or transfers title to another individual without informing the lender.
adjustable-rate mortgage (ARM)
A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. All ARMs are tied to indexes.
The date the interest rate changes on an adjustable-rate mortgage.
The loan payment consists of a portion which will be applied to pay the accruing interest on a loan, with the remainder being applied to the principal. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified time.
A table which shows how much of each payment will be applied toward principal and how much toward interest over the life of the loan. It also shows the gradual decrease of the loan balance until it reaches zero.
annual percentage rate (APR)
This is not the note rate on your loan. It is a value created according to a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. It works sort of like this, but not exactly, so only use this as a guideline: deduct the closing costs from your loan amount, then using your actual loan payment, calculate what the interest rate would be on this amount instead of your actual loan amount. You will come up with a number close to the APR. Because you are using the same payment on a smaller amount, the APR is always higher than the actual note rate on your loan.
The form used to apply for a mortgage loan, containing information about a borrower’s income, savings, assets, debts, and more. .
An individual qualified by education, training, and experience to estimate the value of real property and personal property. Although some appraisers work directly for mortgage lenders, most are independent.
The increase in the value of a property due to changes in market conditions, inflation, or other causes.
The valuation placed on property by a public tax assessor for purposes of taxation.
The placing of a value on property for the purpose of taxation.
A public official who establishes the value of a property for taxation purposes.
Items of value owned by an individual. Assets that can be quickly converted into cash are considered “liquid assets.” These include bank accounts, stocks, bonds, mutual funds, and so on. Other assets include real estate, personal property, and debts owed to an individual by others.
When ownership of your mortgage is transferred from one company or individual to another, it is called an assignment.
A mortgage that can be assumed by the buyer when a home is sold. Usually, the borrower must “qualify” in order to assume the loan.
The term applied when a buyer assumes the seller’s mortgage.
A mortgage loan that requires the remaining principal balance be paid at a specific point in time. For example, a loan may be amortized as if it would be paid over a thirty year period, but requires that at the end of the tenth year the entire remaining balance must be paid.
The final lump sum payment that is due at the termination of a balloon mortgage.
By filing in federal bankruptcy court, an individual or individuals can restructure or relieve themselves of debts and liabilities. Bankruptcies are of various types, but the most common for an individual seem to be a “Chapter 7 No Asset” bankruptcy which relieves the borrower of most types of debts. A borrower cannot usually qualify for an “A” paper loan for a period of two years after the bankruptcy has been discharged and requires the re-establishment of an ability to repay debt.
bill of sale
A written document that transfers title to personal property. For example, when selling an automobile to acquire funds which will be used as a source of down payment or for closing costs, the lender will usually require the bill of sale (in addition to other items) to help document this source of funds.
A mortgage in which you make payments every two weeks instead of once a month. The basic result is that instead of making twelve monthly payments during the year, you make thirteen. The extra payment reduces the principal, substantially reducing the time it takes to pay off a thirty year mortgage. Note: there are independent companies that encourage you to set up bi-weekly payment schedules with them on your thirty year mortgage. They charge a set-up fee and a transfer fee for every payment. Your funds are deposited into a trust account from which your monthly payment is then made, and the excess funds then remain in the trust account until enough has accrued to make the additional payment which will then be paid to reduce your principle. You could save money by doing the same thing yourself, plus you have to have faith that once you transfer money to them that they will actually transfer your funds to your lender.
Usually refers to the daily buying and selling of thirty year treasury bonds. Lenders follow this market intensely because as the yields of bonds go up and down, fixed rate mortgages do approximately the same thing. The same factors that affect the Treasury Bond market also affect mortgage rates at the same time. That is why rates change daily, and in a volatile market can and do change during the day as well.
Not used much anymore, bridge loans are obtained by those who have not yet sold their previous property, but must close on a purchase property. The bridge loan becomes the source of their funds for the down payment. One reason for their fall from favor is that there are more and more second mortgage lenders now that will lend at a high loan to value. In addition, sellers often prefer to accept offers from buyers who have already sold their property.
Usually refers to a fixed rate mortgage where the interest rate is “bought down” for a temporary period, usually one to three years. After that time and for the remainder of the term, the borrower’s payment is calculated at the note rate. In order to buy down the initial rate for the temporary payment, a lump sum is paid and held in an account used to supplement the borrower’s monthly payment. These funds usually come from the seller (or some other source) as a financial incentive to induce someone to buy their property. A “lender funded buydown” is when the lender pays the initial lump sum. They can accomplish this because the note rate on the loan (after the buydown adjustments) will be higher than the current market rate. One reason for doing this is because the borrower may get to “qualify” at the start rate and can qualify for a higher loan amount. Another reason is that a borrower may expect his earnings to go up substantially in the near future, but wants a lower payment right now.
Similar to the acceleration clause.
Adjustable Rate Mortgages have fluctuating interest rates, but those fluctuations are usually limited to a certain amount. Those limitations may apply to how much the loan may adjust over a six month period, an annual period, and over the life of the loan, and are referred to as “caps.” Some ARMs, although they may have a life cap, allow the interest rate to fluctuate freely, but require a certain minimum payment which can change once a year. There is a limit on how much that payment can change each year, and that limit is also referred to as a cap.
When a borrower refinances his mortgage at a higher amount than the current loan balance with the intention of pulling out money for personal use, it is referred to as a “cash out refinance.
certificate of deposit
A time deposit held in a bank which pays a certain amount of interest to the depositor.
certificate of deposit index
One of the indexes used for determining interest rate changes on some adjustable rate mortgages. It is an average of what banks are paying on certificates of deposit.
Certificate of Eligibility
A document issued by the Veterans Administration that certifies a veteran’s eligibility for a VA loan
Certificate of Reasonable Value (CRV)
Once the appraisal has been performed on a property being bought with a VA loan, the Veterans Administration issues a CRV.
An additional individual who is both obligated on the loan and is on title to the property.
In a home loan, the property is the collateral. The borrower risks losing the property if the loan is not repaid according to the terms of the mortgage or deed of trust.
When a borrower falls behind, the lender contacts them in an effort to bring the loan current. The loan goes to “collection.” As part of the collection effort, the lender must mail and record certain documents in case they are eventually required to foreclose on the property.
common area assessments
In some areas they are called Homeowners Association Fees. They are charges paid to the Homeowners Association by the owners of the individual units in a condominium or planned unit development (PUD) and are generally used to maintain the property and common areas.
A short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses.
Refers to home loans other than government loans (VA and FHA).
An adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-rate mortgage within a specific time.
cost of funds index (COFI)
One of the indexes that is used to determine interest rate changes for certain adjustable-rate mortgages. It represents the weighted-average cost of savings, borrowings, and advances of the financial institutions such as banks and savings & loans, in the 11th District of the Federal Home Loan Bank.
An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.
A record of an individual’s repayment of debt. Credit histories are reviewed my mortgage lenders as one of the underwriting criteria in determining credit risk.
A person to whom money is owed.
A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.
An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit.
An amount owed to another.
Failure to make the mortgage payment within a specified period of time. For first mortgages or first trust deeds, if a payment has still not been made within 30 days of the due date, the loan is considered to be in default.
Failure to make mortgage payments when mortgage payments are due. For most mortgages, payments are due on the first day of the month. Even though they may not charge a “late fee” for a number of days, the payment is still considered to be late and the loan delinquent. When a loan payment is more than 30 days late, most lenders report the late payment to one or more credit bureaus.
In the mortgage industry, this term is usually used in only in reference to government loans, meaning FHA and VA loans. Discount points refer to any “points” paid in addition to the one percent loan origination fee. A “point” is one percent of the loan amount.
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
A homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one’s credit record.
Fair Housing Laws
prohibits discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions, based on race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents of legal custodians, pregnant women, and people securing custody of children under the age of 18), and handicap (disability). http://www.justice.gov/crt/about/hce/title8.php http://www.tdhca.state.tx.us/housing-center/fair-housing/
Fannie Mae (FNMA)
The Federal National Mortgage Association, which is a congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds. For a discussion of the roles of Fannie Mae, Freddie Mac (FHLMC), and Ginnie Mae (GNMA), see the Library.
Fannie Mae’s Community Home Buyer’s Program
An income-based community lending model, under which mortgage insurers and Fannie Mae offer flexible underwriting guidelines to increase a low- or moderate-income family’s buying power and to decrease the total amount of cash needed to purchase a home. Borrowers who participate in this model are required to attend pre-purchase home-buyer education sessions.
Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.
A mortgage that is insured by the Federal Housing Administration (FHA). Along with VA loans, an FHA loan will often be referred to as a government loan.
A lender’s agreement to make a loan to a specific borrower on a specific property.
The mortgage that is in first place among any loans recorded against a property. Usually refers to the date in which loans are recorded, but there are exceptions.
A mortgage in which the interest rate does not change during the entire term of the loan.
The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
An employer-sponsored investment plan that allows individuals to set aside tax-deferred income for retirement or emergency purposes. 401(k) plans are provided by employers that are private corporations. 403(b) plans are provided by employers that are not for profit organizations.
Some administrators of 401(k)/403(b) plans allow for loans against the monies you have accumulated in these plans. Loans against 401K plans are an acceptable source of down payment for most types of loans.
government loan (mortgage)
A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Mortgages that are not government loans are classified as conventional loans.
Government National Mortgage Association (Ginnie Mae)
A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD). Created by Congress on September 1, 1968, GNMA performs the same role as Fannie Mae and Freddie Mac in providing funds to lenders for making home loans. The difference is that Ginnie Mae provides funds for government loans (FHA and VA)
Home Equity Conversion Mortgage (HECM)
Usually referred to as a reverse annuity mortgage, what makes this type of mortgage unique is that instead of making payments to a lender, the lender makes payments to you. It enables older home owners to convert the equity they have in their homes into cash, usually in the form of monthly payments. Unlike traditional home equity loans, a borrower does not qualify on the basis of income but on the value of his or her home. In addition, the loan does not have to be repaid until the borrower no longer occupies the property.
home equity line of credit
A mortgage loan, usually in second position, that allows the borrower to obtain cash drawn against the equity of his home, up to a predetermined amount.
A decision made by a court of law. In judgments that require the repayment of a debt, the court may place a lien against the debtor’s real property as collateral for the judgment’s creditor.
A type of foreclosure proceeding used in some states that is handled as a civil lawsuit and conducted entirely under the auspices of a court. Other states use non-judicial foreclosure.
A loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits, currently at $227,150. Also called a nonconforming loan. Freddie Mac and Fannie Mae loans are referred to as conforming loans.
The penalty a borrower must pay when a payment is made a stated number of days. On a first trust deed or mortgage, this is usually fifteen days.
A way of holding title to a property wherein the mortgagor does not actually own the property but rather has a recorded long-term lease on it.
An alternative financing option that allows home buyers to lease a home with an option to buy. Each month’s rent payment may consist of not only the rent, but an additional amount which can be applied toward the down payment on an already specified price.
A person’s financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others.
Insurance coverage that offers protection against claims alleging that a property owner’s negligence or inappropriate action resulted in bodily injury or property damage to another party. It is usually part of a homeowner’s insurance policy.
A legal claim against a property that must be paid off when the property is sold. A mortgage or first trust deed is considered a lien.
For an adjustable-rate mortgage (ARM), a limit on the amount that the enterest rate can increase or decrease over the life of the mortgage.
line of credit
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time to a specified borrower.
A cash asset or an asset that is easily converted into cash.
A sum of borrowed money (principal) that is generally repaid with interest.
Also referred to by a variety of other terms, such as lender, loan representative, loan “rep,” account executive, and others. The loan officer serves several functions and has various responsibilities: they solicit loans, they are the representative of the lending institution, and they represent the borrower to the lending institution.
How a lender refers to the process of obtaining new loans.
After you obtain a loan, the company you make the payments to is “servicing” your loan. They process payments, send statements, manage the escrow/impound account, provide collection efforts on delinquent loans, ensure that insurance and property taxes are made on the property, handle pay-offs and assumptions, and provide a variety of other services.
The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower).
An agreement in which the lender guarantees a specified interest rate for a certain amount of time at a certain cost.
The time period during which the lender has guaranteed an interest rate to a borrower.
The difference between the interest rate and the index on an adjustable rate mortgage. The margin remains stable over the life of the loan. It is the index which moves up and down.
The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable.
merged credit report
A credit report which reports the raw data pulled from two or more of the major credit repositories. Contrast with a Residential Mortgage Credit Report (RMCR) or a standard factual credit report.
Occasionally, a lender will agree to modify the terms of your mortgage without requiring you t refinance. If any changes are made, it is called a modification.
For a more complete discussion of mortgage banker, see “Types of Lenders.” A mortgage banker is generally assumed to originate and fund their own loans, which are then sold on the secondary market, usually to Fannie Mae, Freddie Mac, or Ginnie Mae. However, firms rather loosely apply this term to themselves, whether they are true mortgage bankers or simply mortgage brokers or correspondents.
A mortgage company that originates loans, then places those loans with a variety of other lending institutions with whom they usually have pre-established relationships.
The lender in a mortgage agreement.
mortgage insurance (MI)
Insurance that covers the lender against some of the losses incurred as a result of a default on a home loan. Often mistakenly referred to as PMI, which is actually the name of one of the larger mortgage insurers. Mortgage insurance is usually required in one form or another on all loans that have a loan-to-value higher than eighty percent. Mortgages above 80% LTV that call themselves “No MI” are usually a made at a higher interest rate. Instead of the borrower paying the mortgage insurance premiums directly, they pay a higher interest rate to the lender, which then pays the mortgage insurance themselves. Also, FHA loans and certain first-time homebuyer programs require mortgage insurance regardless of the loan-to-value.
mortgage insurance premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company.
mortgage life and disability insurance
A type of term life insurance often bought by borrowers. The amount of coverage decreases as the principal balance declines. Some policies also cover the borrower in the event of disability. In the event that the borrower dies while the policy is in force, the debt is automatically satisfied by insurance proceeds. In the case of disability insurance, the insurance will make the mortgage payment for a specified amount of time during the disability. Be careful to read the terms of coverage, however, because often the coverage does not start immediately upon the disability, but after a specified period, sometime forty-five days.
The borrower in a mortgage agreement.
Properties that provide separate housing units for more than one family, although they secure only a single mortgage.
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment, which is why this is called “deferred interest.” The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.
no cash-out refinance
A refinance transaction which is not intended to put cash in the hand of the borrower. Instead, the new balance is caculated to cover the balance due on the current loan and any costs associated with obtaining the new mortgage. Often referred to as a “rate and term refinance.”
Many lenders offer loans that you can obtain at “no cost.” You should inquire whether this means there are no “lender” costs associated with the loan, or if it also covers the other costs you would normally have in a purchase or refinance transactions, such as title insurance, escrow fees, settlement fees, appraisal, recording fees, notary fees, and others. These are fees and costs which may be associated with buying a home or obtaining a loan, but not charged directly by the lender. Keep in mind that, like a “no-point” loan, the interest rate will be higher than if you obtain a loan that has costs associated with it.
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
The interest rate stated on a mortgage note.
notice of default
A formal written notice to a borrower that a default has occurred and that legal action may be taken.
original principal balance
The total amount of principal owed on a mortgage before any payments are made.
On a government loan the loan origination fee is one percent of the loan amount, but additional points may be charged which are called “discount points.” One point equals one percent of the loan amount. On a conventional loan, the loan origination fee refers to the total number of points a borrower pays.
A property purchase transaction in which the property seller provides all or part of the financing.
A payment that is not sufficient to cover the scheduled monthly payment on a mortgage loan. Normally, a lender will not accept a partial payment, but in times of hardship you can make this request of the loan servicing collection department.
payment change date
The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the interest rate adjustment date.
periodic payment cap
For an adjustable-rate mortgage where the interest rate and the minimum payment amount fluctuate independently of one another, this is a limit on the amount that payments can increase or decrease during any one adjustment period.
periodic rate cap
For an adjustable-rate mortgage, a limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
This stands for principal, interest, taxes and insurance. If you have an “impounded” loan, then your monthly payment to the lender includes all of these and probably includes mortgage insurance as well. If you do not have an impounded account, then the lender still calculates this amount and uses it as part of determining your debt-to-income ratio.
A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months.
planned unit development (PUD)
A type of ownership where individuals actually own the building or unit they live in, but common areas are owned jointly with the other members of the development or association. Contrast with condominium, where an individual actually owns the airspace of his unit, but the buildings and common areas are owned jointly with the others in the development or association.
A point is 1 percent of the amount of the mortgage.
power of attorney
A legal document that authorizes another person to act on one’s behalf. A power of attorney can grant complete authority or can be limited to certain acts and/or certain periods of time.
A loosely used term which is generally taken to mean that a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved. A pre-approval is usually done at a certain loan amount and making assumptions about what the interest rate will actually be at the time the loan is actually made, as well as estimates for the amount that will be paid for property taxes, insurance and others. A pre-approval applies only to the borrower. Once a property is chosen, it must also meet the underwriting guidelines of the lender. Contrast with pre-qualification
Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner’s decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized.
A fee that may be charged to a borrower who pays off a loan before it is due.
This usually refers to the loan officer’s written opinion of the ability of a borrower to qualify for a home loan, after the loan officer has made inquiries about debt, income, and savings. The information provided to the loan officer may have been presented verbally or in the form of documentation, and the loan officer may or may not have reviewed a credit report on the borrower.
The interest rate that banks charge to their preferred customers. Changes in the prime rate are widely publicized in the news media and are used as the indexes in some adjustable rate mortgages, especially home equity lines of credit. Changes in the prime rate do not directly affect other types of mortgages, but the same factors that influence the prime rate also affect the interest rates of mortgage loans.
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
The outstanding balance of principal on a mortgage. The principal balance does not include interest or any other charges. See remaining balance.
principal, interest, taxes, and insurance (PITI)
The four components of a monthly mortgage payment on impounded loans. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance.
private mortgage insurance (MI)
Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
A written promise to repay a specified amount over a specified period of time.
A meeting in an announced public location to sell property to repay a mortgage that is in default.
Planned Unit Development (PUD)
A project or subdivision that includes common property that is owned and maintained by a homeowners’ association for the benefit and use of the individual PUD unit owners.
Calculations that are used in determining whether a borrower can qualify for a mortgage. There are two ratios. The “top” or “front” ratio is a calculation of the borrower’s monthly housing costs (principle, taxes, insurance, mortgage insurance, homeowner’s association fees) as a percentage of monthly income. The “back” or “bottom” ratio includes housing costs as well as all other monthly debt.
A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time at a specific cost.
real estate agent
A person licensed to negotiate and transact the sale of real estate.
The process of paying off one loan with the proceeds from a new loan using the same property as security.
The amount of principal that has not yet been repaid. See principal balance.
The original amortization term minus the number of payments that have been applied.
rent loss insurance
Insurance that protects a landlord against loss of rent or rental value due to fire or other casualty that renders the leased premises unavailable for use and as a result of which the tenant is excused from paying rent.
An arrangement made to repay delinquent installments or advances.
replacement reserve fund
A fund set aside for replacement of common property in a condominium, PUD, or cooperative project — particularly that which has a short life expectancy, such as carpeting, furniture, etc.
A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods and services. The borrower is billed for the amount that is actually borrowed plus any interest due.
A mortgage that has a lien position subordinate to the first mortgage.
The buying and selling of existing mortgages, usually as part of a “pool” of mortgages.
A loan that is backed by collateral.
The property that will be pledged as collateral for a loan.
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage.
An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Contribution to the construction or rehabilitation of a property in the form of labor or services rather than cash.
A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.
An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or is derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
An adjustable-rate mortgage (ARM) that has one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term.
A fiduciary who holds or controls property for the benefit of another.
A mortgage that is guaranteed by the Department of Veterans Affairs (VA).
Having the right to use a portion of a fund such as an individual retirement fund. For example, individuals who are 100 percent vested can withdraw all of the funds that are set aside for them in a retirement fund. However, taxes may be due on any funds that are actually withdrawn.
Veterans Administration (VA)
An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans.