A mortgage loan application (1003) and transmittal summary form (1008) developed by Fannie Mae. 1003 is sometimes called the Uniform Residential Loan Application.
A form used to request a transcript of tax returns and W-2’s from the IRS.
An independent administrative entity that selects the appraiser and delivers the appraisal report to the lender.
The annual percentage rate is a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of payments made. The costs included in the calculation include origination fees, discount points, escrow fees, prepaid interest, and mortgage insurance premiums. This rate must be disclosed along with an interest rate to allow borrowers to compare loans.
Amortization is the distribution of loan repayments into equal amounts for the duration of the loan. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal at the end.
A fair market value of property performed by a licensed appraiser. The appraiser takes into account not only condition, but also the value of similar local properties or comparable sales.
The measurable value that increases on a home or property. Market improvements and home renovations often drive appreciation value.
The decision to make a loan after review of credit, income, assets and property
A type of mortgage in which the outstanding mortgage and its terms can be transferred from the current owner to a buyer.type of mortgage that may be transferred, interest rate and all, from seller to buyer. Buyer usually needs to qualify.
An automated platform that processes the borrower’s information through a programmed process that instantly arrives at a loan decision.
The individual(s) extended a loan and mortgage for the purchase of a house and/or property. The borrower is responsible for making all payments and fees associated with the loan over the life of the loan.
Real estate agent that works on behalf of the homebuyer.
Maximum interest rate, as defined in the promissory note, that a borrower may be expected to pay on an adjustable rate mortgage (ARM) over the life of the mortgage.
A mortgage refinance in which the borrower accesses equity in the property to increase the size of the loan to garner additional cash. E.g.; A borrower who owes $300,000, refinances into a new $400,000 loan, because the value of the home increased since date of original purchase. Interest rates are sometimes higher for cash out loans, depending on the amount of equity remaining in the home. An alternative way to access cash from home equity would be from a Home Equity Line of Credit (as a second mortgage).
The formal documented sale of a home and/or property that includes signing all documents associated with the exchange and payment of required closing fees. An escrow agent usually oversees this process.
The person responsible for mediating the closing, documenting the process, and assuring all associated paperwork is complete.
- Non-recurring closing costs include one-time fees paid at closing like the escrow fee, appraisal fee, notary fee, processing/underwriting fee, recording fee, title insurance, etc.
- Recurring fees are fees that will continue even after the close of escrow: mortgage interest, property taxes and insurance. These fees recur throughout the life of the loan.
Disclosure provided to borrower three days prior to signing loan documents, to compare costs to the Loan Estimate. The CD offers a clear, concise picture of fees and terms of the mortgage loan. This form is a required step in the loan application process per TRID.
A required document prepared by escrow for lender that states the actual costs of the loan. The closing statement should match with the CD.
A borrower with good credit that agrees to take on shared responsibility for a home loan, so the primary borrower may purchase property. The co-borrower may be a non-occupant co-borrower who doesn’t live in/on the property.
Similar home sale prices in the region used as a metric in the calculation of a home’s appraised value.
Additional information or documentation required by the AUS or an underwriter to finalize loan approval. Conditions can be PTD (prior to document) or PTF (prior to funding). PTD conditions can impact the borrower/property qualification whereas PTF conditions, although necessary, are more fundamental in nature.
A conventional loan that “conforms” to Fannie and Freddie guidelines. Fannie and Freddie will not purchase loans that do not conform, which is why we call them “conforming loans.” There are limits for conforming loans that vary based on county. Any loan that exceeds the county loan limit or does not conform to Fannie/Freddie guidelines would be considered “non-conforming”. Non-conforming loans include FHA, jumbo and portfolio products.
Contingencies are common clauses added to purchase agreements that allow the buyers to back out of the deal without losing their good faith (or EMD) deposit. Common contingencies are loan, appraisal and inspection contingencies. A loan contingency expresses that the offer is contingent upon securing financing for the house. An appraisal contingency expresses that the offer is contingent upon the buyer’s review of the appraisal report. An inspection contingency expresses that the offer is contingent upon the buyer’s review of the inspection reports. The buyer will indicate in his offer the specific contingencies and the number of days that they will leave each contingency in place.
A loan that is not insured or guaranteed by the federal government (like FHA or VA). A conventional loan will be bound to Fannie Mae and Freddie Mac guidelines.
Money extended from a lender to a borrower based on that borrower’s credit history.
Date upon which all paperwork associated with a mortgage/property sales exchange is finalized.
Amount of money a borrower owes to creditors; a metric used to calculate creditworthiness.
DTI helps determine how much a borrower can afford to pay each month by dividing the borrower’s liabilities by monthly income (before taxes) and arriving at a percentage. The borrower needs to fall below certain thresholds to qualify.
An official and public document that establishes property ownership.
The document used to transfer legal title in real property to a trustee, which holds the property as security for the loan between the borrower and lender. The deed of trust remains in place until the borrower pays the loan in full. The borrower keeps the equitable title to the property, but the trustee holds the legal title to the property. Equitable title refers to a person’s right to obtain full ownership of the property. Legal title is the actual ownership of the land. The bank holds legal title which gives it the rights to transfer ownership of the property to another party (in the case of default).
Inability of borrower to make regular and consecutive payments on a loan. Once a borrower is 90 days late, a notice of default is issued.
A reduction in the value of an asset over the course of time, usually due to “wear and tear.” A borrower may depreciate their rental property or personal property used for a business on their tax returns.
A measure of interest; 1 point = 1% of the home loan value. Homebuyers may pay points up front (a type of buy-down) to lower their overall interest rate and mortgage payment.
A sum of money usually put up front by the buyer when an offer on a home or property is made. The purpose of earnest money is as a token of “good faith,” a symbol that the buyer is serious about pursuing purchase.
Home equity is the measurable value of a property above and beyond that owed on a loan. This value grows as the property owner pays off the mortgage, and/or as the value of the home appreciates with the market.
An escrow company acts as the third-party buffer between buyer and seller during a real estate transaction. Because buying or selling real estate generally involves transferring a large amount of money, is it imperative to have a licensed and highly regulated neutral third party to coordinate the transaction. Escrow orders title insurance, collects and prepares loan/legal documents, arranges document signing, collects funds, and disperses to all parties in the transaction.
An Impound Account is set up to allow the borrower to pay property taxes and home insurance on a pro-rata monthly basis, instead of on a semi-annual or annual basis. The taxes and insurance are simply added into the monthly mortgage payment by the loan servicer. The servicer will then keep these funds in the impound account until the bills come due. At that point, the servicer will pay these bills automatically on the borrower’s behalf. Impound accounts are usually required if you are putting less than 10% down, and are always required with FHA and VA loans.
The contact from the escrow company that is responsible for mediating the closing, documenting the process and ensuring that all associated paperwork is completed. (also see Escrow Company).
The price that a piece of property will bear in the current market.
A private mortgage corporation that began as a government subsidized entity in the late 1930s. Fannie Mae is a government sponsored enterprise (GSE) and is responsible for setting annual conforming loan limits and assuring that most Americans can finance a home (in addition to Freddie Mac). Fannie Mae is commonly known as a secondary mortgage market and lends to mortgage lenders which in turn extend mortgages to borrowers.
Federal Housing Administration. The FHA is a U.S. government agency under the Department of Housing and Urban Development (HUD) that insures loans made by banks and lenders.
Loans extended by FHA-approved lenders typically are designed to assist borrowers who are unable to get the necessary approval for conventional home loans. Since guidelines are more flexible, mortgage insurance is a requirement on all FHA loans because there is an additional risk.
A home loan borrower who has not had a mortgage in the past 3 years.
A conventional mortgage that has fixed, un-changing interest rate over the life of the loan. Monthly payments are the same from month to month.
The repossession of a home and/or property by a lender in the event of borrower loan default or the inability to meet mortgage agreements.
Along with Fannie Mae, Freddie Mac is a leading government sponsored enterprise (GSE) and is responsible for maintaining reasonable mortgage market stability to ensure Americans can purchase homes. Freddie Mac is a secondary mortgage market where the corporation lends to lenders, who in turn extend mortgage products directly to borrowers.
The process of selling real estate without the representation of a real estate broker or agent.
- The process of wiring (releasing) money from the mortgage lender to title or escrow prior to closing a real estate transaction. “Table Funding” means the funds must be “on the table” when the borrower signs documents. Table funding is synonymous with wet funding. Texas is a wet funding state, while only CA, AZ, WA, OR, ID, HA, AL, NV (all western states) are dry funding states.
- In a “Dry Fund” state, borrowers can sign loan documents with “prior to funding” conditions outstanding, and the loan does not necessarily have to fund at a set time or fund at all. When we start doing business in Texas, ALL conditions will be PTD conditions because when borrowers sign, we fund (no matter what).
The GFE was a disclosure requirement implemented under RESPA. The GFE is a disclosure required to be provided to a buyer within the first 3 days of a complete application (once the loan is locked or in contract). This is provided from the lender to the buyer, laying out an estimate in “good faith” of all fees due at closing. Depending on the fees, there are certain categories of fees that cannot increase from the initial disclosure, and others that have certain margins they can increase by. The GFE is no longer used, and was replaced by the Loan Estimate (LE).
HELOCs are recorded behind the first mortgage on a borrower’s residence – they are subordinate to the first mortgage. Much like a first mortgage, a HELOC is made using the equity in one’s home as collateral. Unlike a typical mortgage, a HELOC acts much like a credit card. The borrower is approved for a given amount (the line limit), but is not required to take all those funds at closing. Once closed, the borrower can “draw” against the HELOC’s line limit as needed, often with a check book, or card similar to a debit card. Borrowers are free to draw on their HELOC, up to their line limit, and are free to pay it down at any time. The monthly payments are not fixed, but are adjusted monthly based on the current balance and rate. The rate is based on a pre-determined index, (PRIME) which can fluctuate. HELOCs are used often for 1st/2nd combo loans to avoid paying mortgage insurance, or help borrowers reach a higher purchase price and put as little as 5% down.
Extra insurance taken out on a home that protects the borrower and lender in the event of damage. This usually covers the value of the home.
A comprehensive examination of a home by a licensed inspector. It is often required as part of a mortgage and home loan process.
A clause added to an offer letter that gives the buyer certain rights pending home inspection. A buyer may ask the seller to repair defects discovered during the home inspection or even request release from the offer to buy in light of a home inspection.
An association attached to a neighborhood, apartment, condo or town home complex that establishes certain rules of ownership. Common responsibilities of a homeowner’s association include the collection of neighborhood dues for landscape maintenance or membership in recreation and entertainment facilities.
Insurance that protects the value of the home for both the lender and the borrower. Homeowner’s insurance typically covers the cost of replacing the home and various parts of the same. Lenders require borrowers to carry a term of insurance.
This was a federally mandated disclosure provided to the buyer at closing of a purchase or refinance transaction. This form was provided to the consumer at closing to show all fees associated with the transaction. The GFE was provided as the estimate of fees upfront, and the HUD-1 was used to reflect the final fees at closing. Together, these forms were intended to provide the buyer with a clear representation of all charged fees, and any changes from the initial estimate. In attempt to be more user friendly, the HUD-1 was replaced by the Closing Disclosure (CD), and is no longer used.
The rate of interest charged on a mortgage. Monthly payments against a mortgage will be based on the interest rate. Mortgage rates are volatile, rising and falling with the market until they are “locked in.” Mortgage interest rates can be either fixed or variable.
Real estate bought for investment purposes as opposed to residential. Often the property will be used for rental purposes, such as rental home, apartments or other spaces. These give owners the opportunity to create profit and income over the long term.
A non-conforming loan in which the loan limit is higher than that of a FNMA or FHLMC.
Borrowers can take a slightly higher rate to obtain a lender credit (up to 6% of the purchase price) to cover all or some of the closing costs. The credit can cover recurring and non-recurring closing costs, so the borrower can keep more cash in his pocket. We need to ensure our credit does NOT exceed closing costs – once disclosed, our credit cannot be lowered.
Typically included in fees associated with closing costs, which are designed to cover costs incurred by lenders during the loan process. They are sometimes called underwriting and/or processing fees.
The bank or finance company that directly awards home loan or mortgage money to a borrower or homebuyer.
A formal, legal symbol of money owed on a major asset such as property. A lien is a form of security to the lender, securing a piece of property as collateral against payment of a debt or other obligation. Also, mortgage.
A loan is a borrowed sum of money to be paid back with interest. Financial institutions give loans to borrowers, who agree to pay it back over a specified period at a particular rate of interest.
The Loan Estimate is a disclosure form that is required to be sent from the lender to the borrower within 3 days of receiving a formal loan application from the buyer. LE offers a clear, concise picture of fees and terms of the mortgage loan. This is a legal, required step in the loan application process.
Key ratios that lenders use to assess the risk of a loan; the ratio is the mortgage divided by the purchase price or appraised value of the property (whichever is less). When a property has multiple mortgages, lenders use a combined loan-to-value ratio (CLTV) calculated as total of all mortgages divided by the purchase price or appraised value (whichever is less).
Index used for ARM loans, similar to U.S. Prime, but offered to major banks in Europe. Libor is calculated the average interest rate as estimated by the top banks in London, based on the rate they would expect to be charged if they were to borrower from other banks.
A legal document between a mortgagor and a mortgagee that establishes a home and/or property as security for a home loan.
If the borrower does not want to pay the closing costs, they can instead take a slightly higher rate and get a lender credit for the costs. Once they have built some equity, they can then refinance out of the high rate. This is a great option to get income heavy but cash-strapped buyers into a home, but the risk is that rates will rise and they will not be able to refinance out of the higher rate they obtained at closing.
- Mortgage insurance is a monthly charge the lender puts on certain loan products. Mortgage insurance is required on all FHA loans, and on conventional loans that exceed 80% LTV. The insurance provides a measure of protection to the lender if the borrower defaults on his loan.
- Mortgage Insurance Premium (MIP), and Upfront Mortgage Insurance (UFMIP)
- FHA requires borrowers to pay an upfront mortgage insurance premium (1.75% of the base loan amount) and a monthly mortgage insurance amount. Unlike conventional financing, the monthly insurance amount is at a set rate dependent upon the property type and LTV (not credit score). FHA has less stringent qualification requirements (high DTI, low down payment) but the borrower pays for it with the mortgage insurance. The UFMIP is usually financed into the loan amount rather than paid all at once at closing.
- Private Mortgage Insurance (PMI)
- Conventional loans with an LTV of 80% or higher will have monthly mortgage insurance. There is no upfront premium charge. The monthly mortgage insurance rate depends on the down payment and the borrower’s qualifying credit score.
- The monthly mortgage insurance can be paid for three ways: (1) the borrower can pay for it each month with his mortgage payment; (2) the borrower can take a higher rate from the lender, and in exchange the lender will pay the mortgage insurance; (3) the borrower can pay the mortgage insurance in totality when the loan is obtained.
A verbal and written offer to buy a home for a certain dollar amount made from a buyer to a seller.
Lenders can charge borrowers origination fees and/or points. Origination fees can be expressed as a percentage of the loan amount, or as a flat fee amount. Points are always expressed as 1% of the loan amount. For example, one point on a $500,000 loan amount will be $5,000.
PITI[A] refers to the total monthly cost of principal, interest, taxes, insurance and homeowner’s association dues, if applicable. In short, it’s the total monthly housing payment.
A legal document giving one person (called an “agent” or “attorney-in-fact”) the power to act for another person (the principal). In laymen’s terms, this means the agent can sign official documents for the principal. Many elderly people will give one of their children Power of Attorney, for example.
- Non-recurring closing costs include one-time fees paid at closing. These include the escrow fee, appraisal fee, notary fee, processing/underwriting fees, recording fees and title insurance, etc.
- Recurring costs include “pre-paid interest”, property taxes and insurance. These fees are considered “recurring” because they will recur through the life of the loan. Pre-paid interest is paid from the day your loan funds through the month end, but you pay interest each month on the loan. Taxes are paid twice per year (though they may be paid through an impound account), and insurance is paid either annually or monthly.
The process by which the credit of a potential homebuyer is pre-approved for a home loan with a lender. “Credit” includes the credit report as well as income and asset documentation. In the pre-approval process, a lender deems an applicant creditworthy (or not) up to a certain dollar amount, determined by the qualifying debt-to-income ratios. Only the credit portion of the application can be “pre-approved,” as there are is not yet any contract nor any property documentation to review.
The process in which a homebuyer may find out how high of a home loan he or she could be approved for by a lender, without the benefit of verifying all documents. Banks typically pre-qualify, not pre-approve. When pre-qualifying, typically lenders will look only at very minimal documents (e.g. paystubs and credit report, if that) to determine debt-to-income ratios. Assets generally are not verified, and many items that will potentially jeopardize lending are often missed.
The rate offered by US government to major banks (Chase, Bank of America, Wells Fargo Bank) in the USA.
The amount borrowed on a home loan that doesn’t include interest.
Flat fee from the lender for processing a loan. It is not based on the purchase price or loan amount. This fee varies from institution to institution, and are included in closing costs. They show as a line item on the disclosures (LE and CD) and on the Settlement Statement prepared by escrow.
The physical street address of a home or property that is required for mortgage application.
Annual local taxes charged against the value of a homeowner’s property.
A short-term agreement by a lender to “hold” a certain interest rate on a home loan while the buyer negotiates a sale transaction.
Process by which a borrower can obtain a lower interest rate or more beneficial terms on a mortgage, thereby lowering monthly payments.
A yield spread premium (YSP), or rebate, is the money or rebate paid to a lender or loan officer for giving a borrower a higher interest rate on a loan in exchange for lower upfront costs, e.g. “no points.” Typically, the higher the rate, the higher the YSP.
A formal written contract made between a homebuyer and seller. The document includes property address, condition, purchase price, inspections, date of closing, date of possession, and other details. The RPA must be executed by the buyer, seller, agent and escrow
- A second mortgage subordinates to a first mortgage. The funds from the second mortgage can be applied towards the down payment for the home purchase, allowing a buyer to keep more liquid funds in his account and to take advantage of the benefits of a smaller LTV ratio. For example, lenders do not require mortgage insurance when a borrower is putting down 20% (down payment + second mortgage) keeping the LTV ratio at 80%. If the borrower can qualify with both monthly payments, and he/she can meet the qualifications of the 2nd lender, a second mortgage can apply account for up to 15% of that 20% down payment. The CLTV (Combined Loan-to-Value) ratio will include the 2nd loan. This type of second mortgage, called a Purchase Money Second, can also be used to avoid the more stringent jumbo guidelines—the first loan will be kept at the loan limit for the given county, and the second loan funds will be applied on top of the first loan.
- A HELOC, or home equity line of credit, is a type of second mortgage, but it is obtained after closing. This is called a Stand-Alone Second.
A real estate agent that works on behalf of the home seller.
Sellers can pay for some or all of the borrower’s closing costs by giving a borrower a “seller credit.” Per federal guidelines, a seller credit can be up to 6% of the purchase price. However, this is often too much, as the credit cannot exceed the actual closing costs and “cut into” the buyer’s down payment. Regardless of credit, the borrower must always contribute their minimum down payment. The credit can cover recurring and non-recurring closing costs and will be applied in escrow, thus reducing the funds to close due from the borrower.
Useful tool for lenders and homeowners when foreclosure could be a worst-case scenario. In real estate, short-sale lenders give homeowners permission to discount the home value (an outstanding loan balance) to affect a quick sale.
The two main pieces of federal legislation that govern mortgage lending to consumers. TILA (Truth in Lending Act) requires lenders to provide borrowers with clear terms and costs of a loan. RESPA (Real Estate Settlement Procedures Act) required lenders to provide borrowers with a Good Faith Estimate disclosing the fees associated with a purchase within three business days of the completion of the loan application.
Per the most recent guidelines, there are new forms required that integrate the old TILA, RESPA and HUD-1 forms. These new forms are the Loan Estimate (replacing the Good Faith Estimate), provided within 3 days of competing a loan application, and the Closing Disclosure (the closing counterpart to the Loan Estimate) which is provided 3 days before signing. The fees reflected on the Loan Estimate and Closing Disclosure have 3 “tolerances” for variance. There are fees that have a 0% tolerance – they cannot change. These include lender and broker fees/charges. There are fees that have a 10% tolerance – they can change by up to 10%. These include the fees such as recording and notary fees. And, there are fees that can change, though lenders are required to use “best efforts” to estimate these charges. These include property insurance premiums and amounts placed in escrow.
The official document used in the real estate industry that specifies who owns a piece of property at any given time.
A title company typically handles all tasks associated with the property title, including title search, insurance and reports. The reports show, among other things, the legal description of the property, all liens recorded against a property, and a “plat map.” Title companies also provide title insurance. ALTA Insurance is a guarantee that your lender requires to ensure there are no other liens against the property when your mortgage is recorded. CLTA insurance assures there are no claims for, or against, the property you are buying. CLTA ensures “clear title”. Many title companies also act as escrow companies, particularly in Northern California.
Lender fees associated with underwriting the loan, which are usually part of closing costs.
Research on a property title usually conducted by a title company to determine if there exist any outstanding liens (claims) against the property prior to a sales transaction.
The individual who evaluates a borrower’s creditworthiness (reviews a loan file) and approves, declines or suspends a loan (for more documentation). FHA and VA underwriters are specially certified to underwrite government loans.
Special home loans designed exclusively for military veterans which allow 100% financing in many cases. They also typically have excellent terms with low interest rates and no mortgage insurance.