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A-Credit
A consumer with the best credit rating, deserving of the lowest
prices that lenders offer. Most lenders require a FICO score
above 720. There is seldom any payoff for being above the
A-credit threshold, but you pay a penalty for being below
it.
Adjustable rate mortgage (ARM)
A mortgage on which the interest rate, after an initial period,
can be changed by the lender.
Alt-A
A mortgage risk categorization that falls between prime and
sub-prime, but is closer to prime. Also referred to as "A
minus".
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.
Automated underwriting system
A particular computerized system for doing automated underwriting.
Mortgage insurers and some large lenders have developed such
systems, but the most widely used are Fannie Mae’s “Desktop
Underwriter” and Freddie Mac’s “Loan Prospector”.
Buy-down
A permanent buy-down is the payment of points in exchange for
a lower interest rate. A temporary buy-down concentrates the
rate reduction in the early years
Buy-up
Paying a higher interest rate in exchange for a rebate by the
lender which reduces up front costs
Conforming mortgage
A loan eligible for purchase by the two major Federal agencies
that buy mortgages, Fannie Mae and Freddie Mac.
Conversion option
The option to convert an ARM to an FRM at some point during
its life. These loans are likely to carry a higher rate or
points than ARMs that do not have the option.
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.
Fully indexed interest rate
The current index value plus the margin on an ARM. Usually,
initial interest rates on ARMs are below the fully indexed
rate. If the index does not change from its initial level,
after the initial rate period ends the interest rate will rise
to the fully indexed rate after a period determined by the
interest rate increase cap. For example, if the initial rate
is 4% for 1 year, the fully indexed rate 7%, and the rate adjusts
every year subject to a 1% rate increase cap, the 7% rate will
be reached at the end of the third year.
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
Housing expense ratio
The ratio of housing expense to borrower income, which is used
(along with the total expense ratio and other factors) in qualifying
borrowers
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.
Loan modification
A change in the terms of a loan, usually the interest rate
and/or term, in response to the borrower's inability to make
the payments under the existing term.
Loan-to-value ratio
The loan amount divided by the lesser of the selling price
or the appraised value. Also referred to as LTV. The LTV and
down payment are different ways of expressing the same set
of facts.
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.
Negative amortization
A rise in the loan balance when the mortgage payment is less
than the interest due. Sometimes called "deferred interest." It
is explained in detail in Negative amortization arises most
frequently on ARMs.
Negative points
Points paid by a lender for a loan with a rate above the rate
on a zero point loan. For example, a wholesaler quotes the
following prices to a mortgage broker. 8%/0 points, 7.5%/3
points, 8.75%/-3 points. On mortgage web sites, negative points
are usually referred to as "rebates" because they
are used to reduce a borrower's settlement costs.
No-Cost mortgage
A mortgage on which all settlement costs except per diem interest,
escrows, homeowners insurance and transfer taxes are paid by
the lender and/or the home seller.
No asset loan
A documentation requirement where the applicant's assets are
not disclosed.
No income loan
A documentation requirement where the applicant's income is
not disclosed.
Non-warrantable condo
A condominium that does not meet meet lender requirements
Nominal interest rate
A quoted interest rate that is not adjusted for either intra-year
compounding, or for inflation. A quoted rate of 6% on a mortgage,
for example, is nominal.
Option ARM
An adjustable rate mortgage with flexible payment options,
monthly interest rate adjustments, and very low minimum payments
in the early years. They carry a risk of very large payments
in later years.
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.
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. It is common today for lenders to offer a wide
range of rate/point combinations, especially on fixed rate
mortgages (FRMs), including combinations with negative points.
On a negative point loan the lender contributes cash toward
meeting closing costs. Positive and negative points are sometimes
termed "discounts" and "premiums," respectively.
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.
Qualification ratios
Requirements stipulated by the lender that the ratio of housing
expense to borrower income, and housing expense plus other
debt service to borrower income, cannot exceed specified maximums,
e.g., 28% and 35%. These may reflect the maximums specified
by Fannie Mae and Freddie Mac; they may also vary with the
loan-value ratio and other factors.
Rate/point breakeven
The period you must retain a mortgage in order for it to be
profitable to pay points to reduce the rate
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.
Secondary markets
Markets in which mortgages or mortgage-backed securities are
bought and sold.
Seller contribution
A contribution to a borrower's down payment or settlement costs
made by a home seller, as an alternative to a price reduction.
Short sale
An agreement between a mortgage borrower in distress and the
lender that allows the borrower to sell the house and remit
the proceeds to the lender. It is an alternative to foreclosure,
or a deed in lieu of foreclosure.
Stated assets
A documentation requirement where the borrower discloses her
assets but they are not verified by the lender.
Stated income
A documentation requirement where the lender verifies the source
of the income but not the amount.
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.
Sub-prime borrower
A borrower with poor credit, who can borrow only from sub-prime
lenders who specialize in dealing with borrowers who have poor
credit. Such borrowers pay more than prime borrowers, and are
sometimes taken advantage of. Not all borrowers who deal with
sub-prime lenders, however, are sub-prime borrowers. Some could
obtain loans from mainstream lenders if they properly shop
the market.
Sub-prime lender
A lender who specializes in lending to sub-prime borrowers.
Term
The period used to calculate the monthly mortgage payment.
The term is usually but not always the same as the maturity.
On a 7-year balloon loan, for example, the maturity is 7 years
but the term in most cases is 30 years.
Title insurance
Insurance against loss arising from problems connected to the
title to property
Total expense ratio
The ratio of housing expense plus current debt service payments
to borrower income, which is used (along with the housing expense
ratio and other factors) in qualifying borrowers
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.
Warrantable condos
A condominium project with features that lenders view as protections
against hazards that would threaten the value of condo units.
These features include the project being completed with most
units sold rather than rented, no one party owning more than
10% of them, adequate insurance coverage of common structures,
and an ownership association independent of the developer.
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