This glossary includes words and terms frequently used in the mortgage lending process. We are providing it to help you better understand your transaction with us and hope that it is informative. If you have any questions or need clarification on any of these topics, please contact us and we will be happy to address your inquiry.
Adjustable Rate Mortgage (ARM)
ARMs are subject to interest rate adjustments, as compared to a fixed interest rate for the duration of the loan. They come in many varieties, such as a one month, six month or yearly adjustable, as well as ARMs that can adjust whenever their index adjusts (for instance, HELOCs tied to prime. See “Home Equity Lines of Credit”). Hybrid ARMs begin to adjust after a fixed rate period expires, such as after three, five, seven or ten years. Hybrids are fixed for their initial payment schedule at rates that are more attractive than a true 30 year fixed rate loan and offer a home owner a reduced principal and interest payment during that time. The four factors comprising an ARMs interest rate are its Caps, Margin, Index and Start Rate. The Caps determine how much above the starting interest rate an ARM may adjust to. The Margin (which is a fixed value) and the Index (which is an adjustable value) are added together to determine the fully indexed rate, which is the rate that is applicable to the loan after the fixed rate period expires, subject to its caps. The start rate is simply the initial fixed interest rate for the loan during the period of time prior to its first rate adjustment.
This is the payment plan schedule that demonstrates how the mortgage loan will be reduced from a beginning principal balance to its ending balance of zero. The amortization of a loan shows the principal and interest components of each payment on a per-payment basis. Any principal portion of a payment is applied to the outstanding balance, reducing it accordingly, whereas interest is simply the expense associated with borrowing money at a set rate or terms. On loans that have a standard depreciation, the interest portion decreases and the principal portion increases over time. Some loans, like negatively amortizing loans, or interest only loans, don’t have a principal component and can, in fact, increase in balance over the first years of the loan.
The valuation assigned to the subject property that is compiled by a licensed appraiser after review of such market variables as the subject property’s sales price, sale prices of other closed sales of like properties within a relatively small geographical radius and that closed relatively recently to the date of the appraisal valuation, as well as other market conditions, such as appreciating or depreciating neighborhoods, planned construction or urban infrastructure development and other variables pertinent to the valuation of the subject property.
Annual Percentage Rate (APR)
Commonly misunderstood to be the actual note rate applicable to the loan, the APR represents the government’s attempt to standardize the method in which mortgage offerings are to be compared between one lender and another. The calculation takes into account some of the one-time fees associated with the closing process of a mortgage loan, as well as some of the recurring costs. Essentially, an APR will always be calculated at a rate that is higher than the actual rate applied to the balance of the mortgage loan. However, because many lenders choose to interpret what fees are included and what fees are not included within the APR calculation, comparing loan products from two different companies is a fairly complicated method. One simple method that many more borrowers are using today is to just compare the interest rate to the non-recurring closing costs.
Loans that are amortized over a period of time, say 30 years, may have a balloon payment option. In other words, the loan is like any other similar loan (without a balloon payment) until the balloon payment becomes due. There are 5, 7, 10 and 15 year balloon options for loans that are amortized over a 30 year period. At the time of the balloon payment, depending upon the specific loan parameters, the entire balance is due in full (in other words, the loan needs to be paid in full, refinanced or the property sold) or the loan converts to an adjustable rate from that point forward.
The closing process is typically described as the time of the borrower’s signing of the actual mortgage loan documents (the note, trust deed, final disclosures, etc.). Sometimes the term “Closing” is used to describe the actual completion of the transaction, which follows the lender’s review of the signed loan documents.
Closing Costs (non-recurring)
The term closing costs is sometimes confused to incorporate both the recurring and the non-recurring fees and expenses due at the closing of a loan. Closing costs are actually only those fees that occur a single time – transactional fees such as the appraisal fee, the credit report fee, underwriting fee, etc. See “Pre-paid Expenses” for recurring costs.
Closing Disclosure (CD)
The Closing Disclosure is a five page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments and how much you will pay in fees and other costs to receive your mortgage (closing costs). The CD replaces the Settlement Statement/HUD-1 for most transactions. The CD must be provided to the consumer 3 business days before they can sign their loan documentation.
A three digit number ranging from 350-850 that represents and summarizes information from your credit report, indicating your likeliness to repay your debt. Your credit score plays an important role in getting approved for a loan and the interest rate you are charged. The higher your score, the better!
This is the ratio of the proposed and any other existing mortgage financing (i.e. a first and a second mortgage loan on the same property) divided by the purchase price or the appraised value of the subject property, whichever is lower.
A debt-to-income ratio is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed. DTI is calculated by adding up all your monthly debt payments and dividing them by your gross monthly income.
Earnest Money Agreement (EMA)
The set of agreements and disclosures that have been negotiated between a home buyer and a home seller that represent all of the terms and conditions of the transfer of property. Also known as a “Purchase Agreement.”
Amounts of money that are set aside for future use, such as for future property tax payments, are set aside in an escrow account. This means that the funds are collected and held by an independent third party to the transaction, then released as is required when due. Deposits on a purchase and sale, such as an earnest money deposit, are also held in escrow until the transaction is either consummated or discontinued.
This is a third party company that assists in the mortgage transaction, often owned by or affiliated with a title company. They are staffed by escrow officers and their support staff. They handle the funds to and from the seller and buyer as well as any real estate agent commissions, lender fees, title fees, mortgage broker fees or other fees. They perform the same functions on a more limited basis for refinance transactions. Escrow officers also ensure that all loan documents and disclosures are properly executed and that all documents that must be recorded are properly handled.
The difference between how much your home is worth and how much you owe on your home. If you owe $150,000 on your home but it is worth $200,000, you have $50,000 of equity.
The most common type of mortgage. Fixed rate mortgages have a single interest rate applicable during the entire term of the loan. The rate is not subject to any adjustments after inception.
Grants can be used for purchase transactions in which the buyer is looking to close the transaction with little or no money out of pocket. They are funded by registered non-profit organizations. The terms of the “Grant” often require agreement by the purchasing and the selling party prior to issuance of the grant.
Interest Rate or Note Rate
The annualized rate that represents the cost of borrowing funds. For instance, an interest rate of 12% annually would equate to 1% monthly, applied to the principal balance of a mortgage over the prior month. This is not the ‘Annual Percentage Rate,’ or APR (See Annual Percentage Rate).
Gift funds from an acceptable source may be used, depending upon specific loan program parameters, for non-recurring closing costs and pre-paid items, as well as towards down payment. Lending programs have very specific guidelines when applied to the lender’s acceptance of gift funds, therefore applicants must speak with their loan officer for more details.
Good Faith Estimate (GFE) – Applicable to loan applications prior to October 3, 2015. See Loan Estimate for more information.
The GFE sets out all the costs that you will be required to pay to get your mortgage loan. The costs listed on the GFE are not allowed to change very much at settlement. In order to receive a GFE, you will most likely be required to provide your name, your social security number, gross monthly income, property address, estimate of the value of the property, and the amount of the mortgage loan you want. Some lenders may require you to provide more information, but a lender may not require you to submit documents at this stage to verify information you provide. A lender cannot require you to pay a fee for an appraisal or other settlement service in order to get a GFE. Any charge for a GFE must be limited to the cost of a credit report.
- The first page of the GFE provides you with expiration dates for the interest rate and the other settlement costs; an overview of the loan offered by the lender; and a summary of the estimated settlement costs.
- The second page of the GFE breaks down the estimated settlement costs into eleven categories. Lender charges and charges for the interest rate of the loan are listed in Section A, and all other settlement charges are listed in Section B. Total estimated settlement charges are listed at the bottom of the page.
- The third page of the GFE contains important information and instructions that will help you shop for the best loan for you.
Home Equity Lines of Credit (HELOC)
HELOCs are typically secondary mortgage loans (in second lien positions behind first mortgages) that are able to be used in similar fashion as a credit card tied to the subject property. They can be closed and recorded with a full balance, no balance or a partial balance depending upon the current needs of the borrowers. They are comprised of a draw period, or line of credit period, which is typically set for a five year period, with a renewable five year option, and a principal payback period, which is typically 10 or 15 years after the draw period expires. While in the draw period, the balance can go up and down as the line is used, with minimum required payments being interest only. Interest is often tax deductible on these loans so long as the liens on the subject property are equal to or less than the actual market value of the property.
A home inspection is a physical inspection of the subject home performed on behalf of the home buyer. It is paid by the home buyer and reviews such qualities of the subject property as water damage, pest infiltration, roof durability, siding aging and others. Typically home purchase agreements are subject to a successful home inspection, and repair provisions are made in initial agreements up to designated dollar amounts, with any higher cost repairs being subject to further negotiation.
The cost of funds is represented as Interest, and the terms of the interest, such as rate, whether it is fixed or variable, etc. are identified upfront in the mortgage transaction timeline. Each payment is comprised from an interest component and a principal component. As time passes, loan balances will slowly have principal portions decreased as each payment is being applied (unless the loan is interest only or negatively amortizing), resulting in a small but steady increase in the principal portion and a corresponding reduction in the interest expense represented in each payment, which serves to slowly compound the effect of principal reduction through the planned amortization schedule. Interest is prorated on a daily basis from the date of inception to the date of conclusion.
Some mortgage loan programs allow for payment options, such as full payments (principal and interest), interest-only payments (where just the interest is paid on the existing balance) and even negatively amortizing payment options (in which the minimum required payment is less than the actual interest due, increasing the principal balance). Home Equity Lines of Credit (see HELOC) have an interest only draw period. Certain Fixed and Adjustable Rate Mortgages (see above) have interest-only options that are used by consumers who wish to minimize their required outflow for a given period of time.
Lenders are the institutions that actually lend the money for the mortgage loan. Direct Lenders originate the mortgage transaction and close it in their name. Wholesale Lenders receive submitted files originated from Mortgage Brokers on a third party basis. In either case, the Lender accepts rate lock registrations, underwrites (approves or denies) each file, creates loan documents and finally initiates and funds the mortgage transaction.
The licensed Real Estate Agent that exclusively represents a home seller.
Loan Estimate (LE) – Applicable to most loan applications made on or after October 3, 2015.
The LE sets out all the costs that you will be required to pay to get your mortgage loan. The costs listed on the LE are not allowed to change very much at settlement. In order to receive a LE, you will most likely be required to provide your name, your social security number, gross monthly income, property address, estimate of the value of the property, and the amount of the mortgage loan you want. A lender may not require you to submit documents at this stage to verify information you provide. A lender cannot require you to pay a fee for an appraisal or other settlement service in order to get a LE. Any charge for a LE must be limited to the cost of a credit report.
- The first page of the LE provides you with expiration dates for the interest rate and the other settlement costs; an overview of the loan offered by the lender; and a summary of the estimated settlement costs.
- The second page of the LE breaks down the estimated settlement costs into specific categories. The anticipated required cash to close is broken down in a summary format.
- The third page of the LE contains important information and instructions that will help you shop for the best loan for you.
This is a ratio of the existing or the proposed loan amount divided by the purchase price or the appraised value of the subject property, whichever is lower.
A Mortgage Broker is sometimes referred to as a “Lender,” when in fact they do not actually lend money. Mortgage Brokers typically work with a variety of Wholesale Lenders (see “Lender”) who actually approve and fund mortgage loan transactions. Mortgage Brokers are often more competitive in product offering and pricing than are Direct Lenders due to offering the products of many Lenders under a single roof, or in essence one-stop-shopping.
Most home sales negotiations require that prospective buyers be “Pre-Approved” by a lender prior to making an offer on the property in question. Being Pre-Approved means that a Mortgage Broker or Lender has reviewed an applicant(s)’ credit, their income and their asset documentation and has determined that there are acceptable financing options that the applicant(s)’ are qualified for. Sometimes this is confused with a “pre-qualification,” which is simply a discussion on the topic. While a good loan officer can be quite accurate with their pre-qualifying, there is no replacement for a true Pre-Approval.
Also termed as “recurring closing costs,” these expenses include items such as pre-paid interest, hazard insurance premium and property tax pro-rations or escrow deposits.
Some loans either require or offer as an option a Pre-Payment Penalty. Those that offer it as an option do so in a trade-off for an improved interest rate. Those that require one do so in an attempt to ensure that the loan is in existence for a minimum period of time, typically two to three years. Pre-Payment penalties are typically in the amount of six months’ worth of interest, based upon the interest rate as applied to the original principal balance. Pre-Payment Penalties typically are triggered when either the loan is paid in full prior to the term of the penalty expiration, or when there is a principal reduction of more than 20% in any given year, over and above what would occur during the normal payment schedule. Depending on the loan program, some pre-payment penalties are not enforced if the home is sold (known as a “soft pre-pay”), while others do not make that distinction and enforce the penalty no matter what (known as a “hard pre-pay”).
The Principal Balance on a mortgage loan is the amount that is currently owed, less any interim interest due.
Private Mortgage Insurage (PMI)
A monthly premium required by your lender if your down payment is less than 20%, protecting the lender if you are unable to pay your mortgage.
The set of agreements and disclosures that have been negotiated between a home buyer and a home seller that represent all of the terms and conditions of the transfer of property. See also “Earnest Money Agreement.”
Locking the interest rate is an option on most mortgage loan programs. An agreement is made between an applicant and a loan officer, then subsequently the loan officer and the mortgage Lender with which the loan will be Locked. Unless significant terms of the transaction change, the Lender will guarantee the rate as long as the transaction closes within the specified period of time and on the program that was originally designated. Rate Locks are typically made for 15, 30, 45 or 60 day periods, but can extend past that for reasons such as new construction or other variables.
This is the act of removing a prior lien on the subject property, whether when a seller’s loan is paid off in a purchase transaction, or when an existing loan is paid in full (whether paid down or refinanced with a new loan). It is the process of making this final and recording it as such in the county records.
The recording of the trust deed with the county records office is the final stage of the mortgage transaction and quickly follows the receipt of all funds by the escrow office that handled the transaction. It is the process of identifying the mortgage loan as a lien on the property.
A Rescission Period is the timeframe in which a prospective borrower may notify the Lender, after having already signed final loan documents, that the borrower wishes to discontinue the mortgage transaction in process. It is available on a refinance transaction on an owner-occupied residence during a consecutive three day window, beginning the day after the final loan documents have been executed. Any day that mail is delivered is a valid Rescission day. The Lender may fund and record the mortgage transaction the next business day after the rescission period has expired.
Tax Assessed Value
The Tax Assessed Value is the value that has been assigned to a specific property by the county tax assessor’s office. While it is intended to represent the market value, it is not to be confused with what the market will bear in terms of actual sales prices. Tax Assessed Values are available electronically and are sometimes used for purposes of offering Home Equity Lines of Credit or for a Lender’s audit of a transaction to confirm that the proposed value (i.e. the Appraised Value) is not misrepresented when compared to overall market conditions.
The term of a loan is the duration in which it is to be amortized. For instance, a 30 year fixed rate mortgage has a 30 year term. A seven year balloon has a seven year term, even though it may be amortized for payment purposes during that seven year period as if it had a 30 year term.
Title Report (sometimes referred to as a ‘Prelim’)
A title report is required by lenders and investors on all home loan transactions. It is compiled by a title company from publicly available recorded documentation concerning the subject property as well as the current and/or proposed owner’s public records. Title reports demonstrate current ownership and lien (mortgage, tax, judgment, etc.) information so that in the transfer of a property (a seller to a buyer) or in a refinance transaction the home owner/buyer and the lender have a full understanding of each of their respective positions on the home.
The mutually accepted price of the home between the new home buyer and the home seller.
The licensed real estate agent that exclusively represents the home buyer.
Underwriters are employees of direct lenders or wholesale lenders who review and either approve or deny mortgage applications for credit. They look at the income, assets and credit of the applicant(s), in addition to the subject property’s characteristics, and determine if the proposed mortgage transaction meets with a lender’s guidelines. They are held to standards that require them to look at each application for credit in an objective fashion.