Glossary
Explanations of key mortgage related terms.
ABC's of your credit report:
"A Paper": this is the best classification you can get. You will usually get the best rates on an "A Paper" loan. Your FICO must be 680 or higher. Of course this is not written in stone, some lenders will give "A" pricing to someone with less than 680 if other criteria is exceptional.
"A- Paper" Also known as "Alt A" credit scores between 620-679 will usually fall into this category.
"B, C & D" Also known as Sub-prime loans. Credit scores below 619 will fall into this category.
Abstract: (Of Title) A summary of the public records relating to the title to a particular piece of land. An attorney or title insurance company reviews an abstract of title to determine whether there are any title defects which must be cleared before a buyer can purchase clear, marketable, and insurable title.
Amortization: The process of gradually reducing the loan amount through monthly payments. The monthly payments include a portion that goes towards paying interest and a portion that goes towards paying down the loan principle. In the early stages of the mortgage the amount going towards interest is far greater than the amount going towards principle. However as time goes by, and since you are paying down your principle, the amount going towards interest becomes less because you owe less.
Annual Percentage Rate (APR): A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including the cost of different mortgage plans.
Bridge Loan: An interim loan is made to finance a buyers new residence if the buyer is unable to sell his/her current residence but needs money to close the transaction.
CLTV: (Combined loan to value) This is the combined loan (first and any second or third position mortgages) as a percentage of the value of the property.
Conforming Loan: A conforming loan is one that conforms to Fannie Mae standards. There is currently a high limit of $417,000 for a conforming loan. Anything loan above that amount is considered a jumbo loan.
Conventional Loan: Conventional loans meet Fannie Mae and Freddie Mac guidelines and can be sold on the secondary market. Fannie and Freddie are the largest purchasers of loans on the secondary market therefore they set the guidelines. Loans that can not meet these guidelines are called portfolio loans and are sold to private investors.
Credit Report: See ABC's
Debt Ratio: Also known as DTI (Debt to income ratio). This is simply the percentage of your monthly bills versus your gross monthly income. If you earn $1,000 per month and your monthly bills total $300 your debt ratio would be 30%.
Debt ratio limits were more stringent years ago. Due to automated underwriting systems debt limits are now more flexible. The back end ratio (which consists of your housing and all other obligations such as credit cards and car loans) is the most important ratio to lenders. The front end ratio includes only home related expenses. Debt ratios are the most dominant factor in calculating wether you can afford a mortgage.
Deed: The written document that shows each transfer of ownership of the property.
Discount Fee: Discount Points: See Points.
Ernest money: This is money that you would deposit when making an offer to buy a house. It shows that you are making your offer in ernest.
Escrow: Escrow is money that the company servicing your loan will collect (from your monthly payments) and hold (in an escrow account) to make your property tax and hazard insurance payments. The lenders like it when you allow them to escrow your taxes and insurance because they know that the taxes and insurance will be paid no matter what. You may choose not to escrow (only if you have 80% LTV or less) but it will likely increase your interest rate to do so. The money in your escrow account is yours. When you finally pay off your mortgage, the money remaining in the account will be returned to you.
Equity: Ownership. Your share of ownership in a property. Equity is the difference between what you owe and the property value. For example the home is worth $200,000 and you have only one mortgage with a balance of $150,000, you have $50,000 in equity.
Grantee That party in the deed who is the buyer or recipient.
Grantor That party in the deed who is the seller or giver.
Income types and documentation:
Stated Income = Income is stated on the application but is not verified.
Employment including length of employment is verified. Income must be reasonable for the profession.Stated Assets = Assets are stated but not verified. No bank account documentation needed.
Stated Income/Stated Assets (SISA) See above.
No Income/No Assets (NINA) = Income and assets are not disclosed or verified.
No Doc = there is No listing of income, assets or employment in the application.
Indexes:
LIBOR: London Interbank Offered Rate
COFI: Cost of Funds Index (Fed hm Ln bnk of San Fran) Monthly weighted avg. Very stable.
MTA: Monthly Treasury Average (12 month avg)
COSI: Cost of Savings Index (Most stable index)
Prime Rate: Most volatile, changes anytime.
LIBOR: London Interbank Offered Rate
COFI: Cost of Funds Index (Fed hm Ln bnk of San Fran) Monthly weighted avg. Very stable.
MTA: Monthly Treasury Average (12 month avg)
COSI: Cost of Savings Index (Most stable index)
Prime Rate: Most volatile, changes anytime.
Interest Only: Interest Only loan payments do not pay off any principle, so with these loans everything goes towards interest and nothing goes towards principle. After years of payments you still owe what you started with.
Jumbo loan limits = Loans over $417k (as of 1/1/06). Jumbo limits are higher on 2, 3 & 4 unit buildings.
LTV: (Loan To Value) This is the loan (first mortgage only) as a percentage of the value of the property.
Lien: A claim against a property for the satisfaction of a debt. In other words, when you have a mortgage on your property, the mortgage company has a lien against the property, noted on the title, requiring that they get paid what they are owed before the property can be transferred to a new owner. Your first mortgage company will have their lien in the first position and your second mortgage will have their lien in the second position (see subordinate lien). If there is not enough value in the property to pay all that is owed on it, the mortgage lender in the first lien position is the first to get the money from a sale.
Manufactured Housing: Can include Modular, Mobile Homes & Pre-fab homes. These homes are regulated by the United States Department of Housing and Urban Development and as such avoid the jurisdiction of local building authorities. Manufactured homes are built entirely in a factory in accordance with a federal building code administered by the U.S. Department of Housing and Urban Development (HUD). Manufactured homes may be single- or multi-section and are transported from the factory to a site and installed. Homes that are permanently affixed to a foundation often may be classified as real property under applicable state law, and may be financed with a mortgage. Homes that are not permanently affixed to a foundation generally are classified as personal property, and are financed with a retail installment sales agreement.
Mobile Home will usually have wheels, axles or a frame (a chassis).
Modular Home: Manufactured in a remote facility typically transported to their site by means of flat-bed trucks. Must be permanently attached to the foundation and can be assembled over full basements and built to multi-story heights. Some hotels have been constructed of modular rooms and suites.
Mortgagee The lender in a mortgage agreement.
Mortgagor The borrower in a mortgage agreement.
Origination Fee: Origination Points: See Points.
PITI: Principle, Interest, Taxes & Insurance. This is what makes up your mortgage payment (unless you pay your own taxes).
PMI (Private Mortgage Insurance) This is an insurance that you are required to have (and pay for) on A and A- loans IF your LTV is higher than 80%. Sub-prime loans do not require PMI because they charge enough in their loan rates to compensate themselves for the risk. Most borrowers try to aviod the costly expense of PMI. PMI is not tax deductable. An alternative to PMI is to do a first mortgage for 80% of the home value and a second mortgage for the remainder needed. It usually works out that the monthly payment is lower for a 1st and 2nd mortgage than a single mortgage with PMI in addition to the tax benefits. The rate of PMI is baxed on the type of mortgage and your LTV. After you have ben paying PMI and your LTV has changed to 78% or less you can request to have it discontinued.
Points: A point is a percentage of the loan amount. Points are charged by the broker to pay for the cost of making the loan or to help reduce the interest rate. Points are negiotiable and ultimately optional. Paying points will help to reduce the interest rate of the loan and might make sense if the loan will be kept for a long period of time. There are origination points and discount points. Discount points are tax deductable.
Portfolio Loan: A loan that does not meet conventional guidelines and is sold to private investors.
Pre-paids: These are amounts you are required to pay at closing. These are payments in advance. They include per-deim interest, and tax and insurance escrows. With tax and insurance prepaids you are simply funding your escrow account in advance with enough money to meet your tax and insurance bills whern they come due. See Escrow.
Per-deim interest is paid, as an example, when you close in the middle of the month you will pay the interest for the remainder of the month. The good news is that you skip a mortgage payment.
PUD: Planned urban developement.
Quitclaim Deed: This is a form used to transfer ownership of a property.
Reverse Mortgage: Reverse mortgages have recently become popular. It basically pays you back the equity in your home over a long period of time. Reverse mortgages are somewhat similar to annuities in the respect that they pay you for the rest of the years you live in your home. There is a fair amount of fine print involved and should be carefully scrutinized. A reverse mortgage should be a last resort.
Standard Interest vs Simple Interest
The major difference between a standard mortgage and a simple interest mortgage is that interest is calculated monthly on a standard mortgage and daily on a simple interest mortgage.
Suppose the borrower pays on the 10th day of every month, for example. With a standard mortgage, he gets a free ride because of the grace period. I would select a traditional mortgage. If two loans are exactly the same but one is simple interest, you will pay more interest on it unless you systematically make your monthly payment before the due date.
The major difference between a standard mortgage and a simple interest mortgage is that interest is calculated monthly on a standard mortgage and daily on a simple interest mortgage.
Suppose the borrower pays on the 10th day of every month, for example. With a standard mortgage, he gets a free ride because of the grace period. I would select a traditional mortgage. If two loans are exactly the same but one is simple interest, you will pay more interest on it unless you systematically make your monthly payment before the due date.
Subordinate Lien: This is a lien that is secondary to a first lien. A HELOC would be a good example of a subordinate lien.
Titles:
Joint tenancy: This form of ownership is common between husband and wife, and parent and child, and in any other situation where parties want absolute ownership to immediately pass to the survivor.
In order for a JTWROS to be created, the co-owners must share the "four unities":
Time = the property interest must be acquired by both tenants at the same time.
Title = both tenants must have the same title to the property in the deed - if the deed places a
In order for a JTWROS to be created, the co-owners must share the "four unities":
Time = the property interest must be acquired by both tenants at the same time.
Title = both tenants must have the same title to the property in the deed - if the deed places a
condition on one tenant and not the other, they do not have the same title, and the attempt to create a JTWROS is invalid. Interest = both tenants must have the same interest in the property - e.g. three owners each having a
1/3 interest. Possession = both tenants must have the right to possess the whole property - if one owner can
prove that he or she has been improperly excluded from the property by the other, the JTWROS will be invalidated. If any one of the four unities is missing, the JTWROS is invalid, and becomes a tenancy in common.
Tenancy by the entirety
A type of joint tenancy of property that provides right of survivorship and is available only to a married couple. Must meet all four criteria of a Joint Tenancy AND the couple must be married.
A type of joint tenancy of property that provides right of survivorship and is available only to a married couple. Must meet all four criteria of a Joint Tenancy AND the couple must be married.
Tenancy in common: A type of joint tenancy of property without right of survivorship; each tenant's portion of ownership is distributable under will.
Tenancy in common is the default form of concurrent estate, in which each owner, referred to as a tenant in common, is regarded by the law as each owning separate shares which may differ in size. This form of ownership is common where the co-owners are not married or have contributed different amounts to the acquisition of the property. Also, if joint owners had attempted to use another form of joint ownership such as a joint tenancy with right of survivorship or a tenancy by the entirety, and the effort was for some reason invalid, the joint owners would then be tenants in common.
Yield Spread Premium (YSP): This is what the mortgage broker earns from the lender for originating the loan. It is basically a commission. The YSP does not come from the borrower. The lower the loan interest rate quoted the lower the YSP and of course the higher the rate the higher the YSP.
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