Glossary of Mortgage Terms

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Adjustable Rate Mortgage (ARM): A mortgage that has a fixed interest rate for a period of time (defined by the specific loan program) which then adjusts periodically. How much the interest rate is allowed to adjust and how frequently this happens are functions of the loan program. Generically speaking, ARMS are tied to an index (most frequently of late the LIBOR - the London InterBank Offered Rate). The adjustment mechanism is described the following way: index plus margin limited by the cap (all program specific). For example, if the current note rate is 7%, and at the time of the adjustment the index is 6% and the margin is 2.75% and the cap is plus or minus 2%, the new rate would be 8.75% (6 + 2.75 = 8.75 ... limited by an upper rate of 9% and a lower rate of 5% based on the caps, the new rate of 8.75% holds).

Amortization Schedule: The period of time over which the outstanding balance is paid. Also called the life of the loan (e.g., 30 years, 15 years, etc.). The specific principal and interest payment amount is a function of amount owed, note rate, and (typically) the number of years associated with the loan.

Application (Loan application): Initiates the mortgage process. At the loan application (typically by phone or in person) the mortgage consultant will ask the homebuyer questions about a two year work history, two year rental/homeowner history, current income and financial assets information, social security number(s), current address, and borrower's target monthly payment among other things. The specific questions asked may change depending on the type of mortgage applied for. Credit report(s) are pulled at the time of application (sometimes credit is pulled prior to application). The application process should be free.

Appraisal: Typically required as part of any mortgage transaction, the appraisal confirms the value of the subject property being purchased or refinanced. In Colorado, it is customary for the buyer to pay for the cost of the appraisal.

Automated Underwriting: The process most typically used for underwriting FHA, VA, and conventional loans. This process uses a computer model to evaluate borrower risk. The result of the process is an approved or denied loan, and a unique set of underwriting rules for each specific borrower. Check here for more information.

Bridge Loan: A second mortgage whose exclusive purpose is to pull equity from a current primary residence that is scheduled to be sold, to be used as cash to close for a new primary residence. Bridge financing is used when a homeowner is selling their home and buying their new home, but have not yet sold their soon-to-be former residence. It is considered a short-term financing solution.

Buydown: A mechanism for prepaying the interest associated with a mortgage, typically for the purpose of qualifying for a mortgage. The benefit of doing a buydown might be that the borrower qualifies at the boughtdown rate, but not at the permanent rate. Buydowns are most often lender paid or paid for by seller, as the cost of the buydown is the different between the permanent rate, and the bought down rate (there is nothing free in this process).

Some examples: Two/one buydown - this means that in year one the mortgage is two percent below the permanent interest rate, in year two - one percent below, and year three through the end of the loan, at the permanent rate. A one/one buydown would be one percent below for one year - then at permanent rate until the end of the loan.

Buying Down The Rate: Paying discount points for a lower interest rate.

Cash to Close: Describes the total investment required to purchase a home or complete a refinance. Includes down payment, closing costs, and prepaids.

Certified Funds: Funds that have been certified are guaranteed by the issuing bank which means the check cannot bounce. Examples of certified funds are a cashier's check or a wire transfer. If money is required at the closing of your home purchase or refinance, the funds must be certified to be accepted (cash is not permitted).

Closing: The last thing that happens before you get the keys to your new home! Closing is where funds are collected and disbursed, where the contract to buy a home culminates. Buyers and sellers generally are present, with all Realtors, the lender, and a closer from the title company. To prepare for closing your mortgage consultant should review your HUD-1 with you two to three days prior to closing. Loan documents that will be signed at closing should be reviewed at the same time to ensure that you've seen and understand all documents beforehand.

Closing Costs: Costs associated with getting a mortgage. Unlike prepaids, these costs are "hard costs" - money you spend to pay for the service of getting your mortgage. Check here for some examples of closings costs, and an explanation.

Combined Loan To Value (CLTV): The combination of the loan to value of the first mortgage and the second mortgage. An important underwriting consideration when putting a hybrid mortgage solution to avoid mortgage insurance.

Conventional Loan: Synonymous with Fannie Mae and Freddie Mac. The conventional loan limit is $322,700 (for single unit properties; 2 unit is $413,100, 3 unit is $499,300, 4 unit is $620,500) and tends to change in November of each year (this is current as of 11/2002). Check here for more information about conventional mortgages.

Credit Repositories: There are three companies that gather and report credit information in the United States. They are: Experian 701 Experian Parkway, PO Box 2002, Allen, TX 75013, 888-397-3742. TransUnion 2 Baldwin Place, PO Box 1000, Chester, PA, 19022, 800-888-4213. Equifax Information Services LLC PO Box 740241, Atlanta GA, 30374-0241, 800-685-1111. Mortgage companies use a variety of different companies to compile and prepare the raw information provided by these three repositories. For this reason, it may be helpful to speak with your mortgage consultant about obtaining a copy of your credit report, rather than ordering online directly from one of these outlets.

Debt-to-income Ratio (DTI): The percentage of a borrower's gross monthly income dedicated to the total house payment (front-end DTI) and the percentage of a borrower's gross monthly income dedicated to all recurring debts plus house payment (back-end DTI). Debt-to-income ratios are an important consideration in the underwriting process and are often used to prequalify a buyer.

Discount Points: One discount point is one percent of the loan amount. Discount points are either prepaid interest (as in buying down the interest rate), or penalties associated with the type of mortgage (e.g., a mortgage for an investment property) or resulting for options the borrower is choosing (e.g., waiving escrows).

Down Payment: The amount of money the borrower puts down when buying a home. Typically expressed as a percentage (e.g., 5% down) of the purchase price. Down payment is not the same as cash to close.

Earnest Money: A check that the buyer makes payable to the listing agent's company for (typically) one percent (though usually not less than $1,000) of the purchase price. This check is cashed and held in an escrow account until closing when it is credited to the buyer.

Equity: Typically expressed as a percentage or dollar amount, this is a description of how much of their home an owner actually owns free and clear (no debt is attached to this amount).

Escrows: An account dedicated to paying for something very specific. For example, a tax and insurance escrow account is set up to pay the property tax and hazard insurance bill each year. Typically paid into monthly (in the case of a tax and insurance escrow) as part of your mortgage payment, but also may be a one time occurrence (e.g., a paint escrow account might be established to complete a required or negotiated painting project in conjunction with a home purchase (if the painting couldn't take place due to weather)). Another example of an escrow account that exists for every real estate transaction is the account set up to accept the earnest money check.

Fannie Mae: One of two primary sources for conventional loans. Fannie Mae and Freddie Mac are synonymous with conventional loans. Each have their own set of underwriting rules (which are very similar) and loan limits (which are the same).

FHA: Government insured mortgage solution. The FHA loan limit for Larimer County is $201,372 for single family homes and for Weld County $195,165 for single family homes. Check here for loan limits for Colorado, and throughout the United States. Check here for more general information about FHA mortgages.

Financial Assets: Includes money in the bank (checking and savings, provided the money has been there for at least the last two statement cycles for these accounts; more recent deposit of more than five hundred dollars generally requires explanation), retirement accounts (including 401(k)), and stocks and bonds. Source of funds is an important consideration when evaluating financial assets.

First Mortgage: The mortgage that is in the first lien position. This means that should the property be foreclosed (or more typically when the property is sold), the first lien gets paid before any other liens. See also second mortgage.

Freddie Mac: One of two primary sources for conventional loans. Freddie Mac and Fannie Mae are synonymous with conventional loans. Each have their own set of underwriting rules (which are very similar) and loan limits (which are the same).

Gift Funds: Money that is gifted to the borrower from a close relative for the purpose of buying a home or refinancing. Very specific rules exist about whether gift funds are allowed, and under what circumstances, for virtually every mortgage type available. Please talk with a mortgage consultant to see if gift funds are allowed (and rules) for the programs you are evaluating. See also source of funds.

Gross Monthly Income (GMI): Not as clear-cut as it sounds. With a salaried employee, the answer is simple - divide annual salary by twelve for the GMI. With hourly, multiply the average number of hours worked (even better, the least number of hours worked) in a week by the hourly rate, by fifty two and divide by twelve. For commissioned and self-employed borrowers, specific rules exist for how income is derived, please talk with your mortgage consultant about your situation.

Hazard Insurance: Also known as homeowner's insurance. The insurance policy the borrower secures (that is paid for at closing) in conjunction with a home purchase. Hazard insurance is the second 'I' in PITI. Talk with your mortgage consultant if you need a recommendation for an insurance agent.

Homeowner's Association (HOA): The entity that charges typically a monthly homeowner's association fee to members. HOA's with fees can be expected for condominium and townhome projects, and in some cases single family developments that are also planned unit developments (talk with your Realtor for specific information about the homes you are interested in). The fees can pay for everything from exterior maintenance, common area maintenance, the insurance policy for the buildings, and more. Talk with your Realtor for the details of the HOA for the projects you are considering buying.

Home Equity Line of Credit (HELOC): A HELOC is a unique kind of second mortgage, where the interest rate adjusts (typically monthly). There is a draw period during which the HELOC behaves like a credit card where the security for the note is your home. You can pay it off, pull more money out, or make partial use of the total available money at any point. Once the draw period ends, the mortgage behaves like an adjustable rate mortgage that is amortized over a certain number of years. The monthly payment is typically based on a percentage of much you've borrowed rather than a set amortization schedule. Talk with your mortgage consultant about the HELOC options that may be available for you.

HUD-1: Also know as the settlement statement. This is the final accounting of all the costs and credits associated with the successful completion of any mortgage process (refinance or purchase). This document indicates how much money the borrower will be bringing to closing (always certified funds). Your mortgage consultant should review this document with you prior to closing.

Hybrid Mortgage: Also known as a combo mortgage, this mortgage solution involves a first mortgage and second mortgage to purchase or refinance a home. The purpose for the first and second is typically to avoid mortgage insurance, though it can also be used to avoid a jumbo loan when the loan amount exceeds the current conforming loan limit.

Interest Rate: Also known as the note rate, the cost of the credit. See also here.

Jumbo Loan: A loan that exceeds the current conforming loan limit.

Lender Paid: This typically means premium priced, or paid for by increasing the interest rate on the mortgage.

Listing Agent: A name for the Realtor who has a property listed for sale.

Loan To Value (LTV): The term that describes the loan amount as a percentage of the purchase price or, in the case of a refinance, appraised value . For example, a 95% LTV is the same as putting 5% down, or having 5% equity.

Locking Your Rate: This means you and your lender have committed to a specific rate. Once locked you are stuck at that rate if rates head higher or lower. In some cases a float down option may exist (meaning you could take a lower rate should one come available), please talk with your mortgage consultant about your options.

Mortgage Consultant: The professional who works with the borrower to learn about the financial goals, current financial situation, and housing goals of the borrower, in order to suggest and educate about mortgage options. Once the best mortgage solution has been identified, the mortgage consultant secures the loan, and works with the borrowers through closing, ensuring a smooth and happy transaction. Here are some minimum standards that the mortgage consultant you choose should provide to you: Regular, predictable updates about what is happening with your loan process and interest rates (until you lock); a review (in person if you're local, by Federal Express and phone if you're relocating) of your HUD-1 and entire loan package two to three days prior to closing. If you have questions for a mortgage consultant, click here for a form where you can ask your questions, or here to take the next step in your mortgage process.

Mortgage Insurance: Also known as private mortgage insurance (PMI). PMI is an insurance policy that the borrower takes out that benefits the lender (the lender is the beneficiary of the policy). PMI is generally required when the borrower puts down less then twenty percent. PMI is required on certain types of mortgages regardless of how much the borrower puts down (e.g., FHA). Click here for more information on avoiding PMI, or see hybrid mortgage.

Negative Amortization: A type of mortgage solution where the loan does not necessarily pay off on a fully amortizing term (meaning payment is spread out over a specific number of years, at the end of which, the balance is completely paid). Instead the borrower pays a "teaser rate" that may or may not be different from the actual note rate. The difference between the fully amortizing principal and interest payment (based on the note rate) and the actual payment made (if a negative amount) is added to the principal balance. Negative amortization loans have the potential to "go backwards" - where the borrower actually increases the amount owed on the home over time, rather than decreasing it. Many times these loans have prepayment penalties associated with them. They are risky loans, not always fully disclosed to borrowers in the process of getting a mortgage. Please talk with a mortgage consultant you can trust about neg am loans, and whether you should be considering this solution.

No Doc: This alternative mortgage solution is underwritten exclusively on the borrower's credit. No job information or asset information are listed on the application, consequently, there are no source of funds or length of time in job (for self-employed borrowers) rules. Check here for more information about alternative mortgages.

No Income No Asset (NINA): This alternative mortgage solution has typically had a minimum two years in business requirement for self-employed borrowers, but does not require income or assets be listed on the application.

Note Rate: The interest rate attached to any given note (mortgage). May be fixed (as in fixed rate mortgage) or adjustable (adjustable rate mortgage).

PITI: The total monthly mortgage payment (principal, interest, taxes, and insurance). Also known as PITIMH (add mortgage insurance and homeowner's association fees where applicable).

Preapproval: The result of a borrower completing the application process; once the loan has been approved by an underwriter the borrower is preapproved. Preapproval can only take place prior to the borrower looking for a home (after a home is under contract, this process is considered loan approval). Preapproval is always subject to the property appraising as well as property type approval, and there are typically additional conditions imposed by the underwriter. Preapproval means that the borrower can shop for a home with confidence, knowing that they are approved (subject to any conditions) for the financing.

Premium Pricing: This means increasing the interest rate of a mortgage for the purpose of refunding discount points to the purchase or refinance transaction to pay for closing costs. This solution is available for a broad range of mortgage solutions. Please talk with your mortgage consultant about whether this is available for the mortgage you are interest in.

Prepaids: Costs associated with setting up a new mortgage (as opposed to closing costs). Examples include prepaid interest (daily interest cost multiplied by the number of days from closing to the end of the month), your first year of hazard insurance paid in advance at closing, as well as escrows.

Prepayment Penalty: A financial penalty. The amount of the penalty is typically expressed as a percentage of the loan, or specific dollar amount, and typically based on a specific number of months or years for paying off the loan prematurely. [In the case of an FHA loan, the prepayment penalty is never more than one month's interest payment, but this is not typical of loans with a prepayment penalty.] Typical prepayment penalties range from six months of interest to two to three percent of the loan amount.

Prequalification: An opinion rendered by a mortgage consultant about the borrower's ability to qualify for a mortgage. Not a preapproval.

Principal and Interest (P&I): Typically either the complete monthly payment - or a portion of the monthly payment. Principal and interest amounts change depending on the term and type of mortgage utilized. The proportion of the monthly P&I dedicated to principal also changes over the life of the loan. Talk with a mortgage consultant about the the mortgage solutions that you are considering to see how principal and interest change over the life of the loan. See also negative amortization.

Property Taxes: Tax assessed by the county. Click here to look up property taxes in Larimer County, and here for Weld County. Search for additional county websites on google.

Realtor: The licensed professional who works with the current homeowner to sell an existing home and who works with a homebuyer to locate and negotiate for the purchase of a new home. Talk with your mortgage consultant for a referral to the Realtor that is best suited to meet your needs.

Recurring Debts: Debts evaluated in the debt-to-income ratio. Included in the evaluation: Credit cards, student loans, car payments, child support, alimony, etc. Not included in this evaluation: Car insurance, health insurance, current rent payment. In some cases student loans (if deferred) may not be included. In some cases debts that will be paid off in the next six to ten months may not be included. The critical number included from your recurring debts is not necessarily how much you pay, but your minimum payment.

A common misperception exists that the total amount of debt you carry affects your ability to qualify for a mortgage. This is not true. Many times prospective homebuyers utilize their financial resources to pay off debt, thinking they will qualify for a mortgage, or qualify for a significantly larger mortgage once the debt is eliminated. This is not always the case. If you are considering paying off debt in order to buy a home, please speak with a mortgage consultant first, and put together an informed plan for buying a home. Sometimes it makes more sense to save your money than it does to pay off debt. A mortgage consultant can help you figure out which path is right for your situation.

If you have a question about whether a specific debt qualifies as recurring, please ask a mortgage consultant.

Refinance: A new mortgage for a property that you already own. Motivation to refinance varies from lowering monthly mortgage payments, to tapping equity in a home for a variety of reasons, to removing a co-borrower from a mortgage and more. Check here for more information about refinancing. Please talk with a mortgage consultant about whether it makes sense for you to refinance and what your options are for your new mortgage.

Reserves: The total of your financial assets remaining after the purchase or refinance transaction is complete. Many mortgage solutions require a certain number of months of reserves (your total monthly payment multiplied by the number of months of reserves that are required) for loan approval. Please talk with your mortgage consultant about required reserves for the mortgage solutions you are evaluating.

Savings Feasibility Worksheet: A form the borrower can complete to prove that saving money from the time of application to closing is possible based on income, debts, and other financial obligations. In some cases this document is considered an acceptable proof for source of funds.

Seasoning of Funds: The length of the time that the borrower has had direct control of money intended for a purchase or refinance transaction. Funds are seasoned if they were deposited prior to the last two statement cycles (two months) for checking and/or savings. The reason this is such an important question is that, with few exceptions, every mortgage solution requires that the borrower's funds be seasoned if they are claimed to be the borrower's own money (many mortgage solutions have a minimum required investment that must be the borrower's own funds before gift funds are allowed, for example). An exception to this rule is money saved between the the time of application and closing, proved with a savings feasibility worksheet.

Second Mortgage: A mortgage in the second lien position. Some examples of second mortgages: purchase money seconds (used to avoid mortgage insurance and for other reasons, see hybrid mortgage), home equity lines of credit, as well as "straight" second mortgages (meaning a second mortgage taken out for the purpose of tapping equity in a home, where the amortization schedule and interest rate are fixed, not as part of a purchase transaction).

Selling Agent: A name for the Realtor who represents the buyer in a real estate transaction.

Source of Funds: The source of the money you're using to pay for closing costs and down payment With few exceptions, every loan program has very specific rules about source of funds (including seasoning requirements). Please talk with your mortgage consultant about the specific rules for the programs you are evaluating.

Stated Income: Stated income mortgage solutions allow the borrower to state their income, rather than document income. For self employed borrowers, this solution typically requires at least two years of self employment (must be proved). If proving two years in business is not possible, other solutions exist. Check here for an overview of alternative mortgage solutions.

Subprime: The term used to describe a portion of the mortgage business or available mortgage solutions dedicated to borrowers with less than perfect or "tough" credit. These solutions have traditionally come with higher interest rates, and in many cases, prepayment penalties.

Title Company: The company that issues the title insurance policy. Also traditionally the company that closes the real estate and mortgage transactions in Colorado. Closing may take place at the title company's office or at the listing agent's office. Talk with your selling agent or mortgage consultant to confirm the time and location of your closing.

Title Insurance: An insurance policy issued by the title company that guarantee free and clear title or ownership of a property. This means that there are no outstanding debts (also known as liens) associated with the property. For example an unpaid mechanics lien might exist for a property where a plumber has done work, but not been paid. Such an unpaid lien is the obligation of the current property owner (regardless if the debt was a function of something they asked be done) as the debt is attached to the property, not a person. Before a title insurance policy can be issued the title company completes a title search on the property to discover if any unpaid liens exist and requires that these debts be paid by the current owner prior to the issuing of the new policy. Title insurance is required by the lender. It is customary in Colorado that the seller purchase the buyer's policy, and the buyer purchase the lender's policy.

Total House Payment: see PITI

Underwriter: The underwriter is the person whose job it is to compare the loan application and credit profile and supporting documentation for any given borrower against the rules for the loan program of the mortgage being applied for and issue an approval or denial. The underwriter is paid to be skeptical. If the borrower has made claims about something not supported with appropriate documentation, the underwriter will request additional documentation. Also see underwriting.

Underwriting: The process of getting an approval for a mortgage. Each mortgage program has a set of rules that cover a broad range of potential concerns, from who is eligible, to property types that are allowed and not allowed, to how much may be borrowed, under what conditions, etc. The list of underwriting guidelines for any given loan program is quite long and objective. Underwriting guidelines are universal by mortgage type - they do not change from lender to lender. Also see underwriter.

VA: A government insured mortgage solution available only to eligible people. The current maximum mortgage amount is $240,000. Check here for more information about VA mortgages.

Waived Escrows: Choosing not to pay hazard insurance and property taxes in conjunction with the monthly mortgage payment. May be an option when the buyer has put at least twenty percent down in conjunction with the new mortgage or refinance.

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