dictionary of home loan financing

7/30/2019 Dictionary of Home Loan Financing

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Dictionary of Home Loan Financing

AAmortization

Regularly scheduled installment payments calculated to pay off your debt by aspecific date. Amortization affects housing expense budgets more than anythingelse, so it pays to make certain your payments are calculated correctly and yourpayment obligations can be met.

Appraisal

A survey of a property completed by a professional appraiser to determine theestimated value of the property.

Approval

Conditional loan approval is based on information provided to Network Capitalverbally and as set forth on the application. The conditional approval is subject to theverification and/or receipt of additional information. Once all closing conditions andlender requirements are satisfied, the loan will receive final approval.

APR (Annual Percentage Rate)

The annual percentage rate is a measure of the cost of credit on a yearly basis. TheAPR allows you to compare various kinds of mortgages based on the yearly cost ofeach loan.

ARM (Adjustable-Rate Mortgage)

A mortgage that has an initial rate that adjusts periodically, in accordance with acurrent interest rate index (a predetermined margin is added to the index tocompute the interest rate). Payments can be low if interest rates are low and willincrease as rates rise. CAPS govern the limit an ARM loan's rate can adjust to at onetime and over the life of the loan. Generally, ARMs have lower rates than fixed-ratemortgages and are easier to qualify for - but because they're based on changinginterest rates, your payment amounts can be unpredictable. ARM types include Two-Step and Convertible ARM.

Arm's-Length Transaction

A transaction negotiated by unrelated parties, each acting in his/her own bestinterest. Back-end Ratio Your total debt-to-income ratio - That is, your total monthlyobligations (debt), divided by your gross monthly income. Your monthly obligationsinclude such items as your mortgage payment, property taxes, insurance premiums,installment loans, and revolving debt (credit cards). This ratio is used to determineyour capacity to repay the mortgage and all other debts. Your debt-to-income ratio isa crucial calculation in determining the loan amount for which you can qualify. In


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conjunction with your expenses-to-income ratio, it represents your financial capacityto assume and repay debt.

BBalloon Mortgage

A mortgage that has level monthly payments over a stated term but which providesfor a lump-sum payment to be due at the end of a previously specified time (e.g., fiveand seven- year balloon mortgages, where the payment is fixed for 5 or 7 years, thenthe remaining balance becomes due and payable at the end of the term).

Bankruptcy

A legal procedure petitioned either by the debtor (voluntary) or by creditors(involuntary) when the debtor is unable to make his or her payments, in which thecourt distributes the debtor's property to creditors to fulfill repayment of debts.

Base Income

The borrower's salary. If the borrower is self-employed, it is the net income - that is,your income after expenses.

Broker

A professional who does not lend money directly, but who arranges financing andcontracts for a client for a fee and commission. Brokers basically bring togetherborrowers and lenders.

Buy Down

An arrangement where a party pays a lender an up-front fee, or premium, to reduce

("buy down") a borrower's interest rate on a loan for a temporary time period,usually one to three years. By paying fees up-front to reduce a loan's interest rate,the borrower's monthly payments will be lower. This will also reduce the totalamount of interest paid over the life of the loan. The buy down arrangement isusually expressed as two numbers. For example, in a 2/1 buy down, the '2' representsa 2 percent interest rate buy down the first year and the '1' represents a 1 percentinterest rate buy down the second year; in the third year of the loan the interest ratewould revert to the straight note rate.

CCaps

Consumer safeguards on adjustable-rate mortgages that limit the increase ordecrease of interest rate changes per year or during the life of the loan, and/or a limiton the amount that monthly payments can change. These safeguards protect you asinterest rates rise.

Cash Reserves


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The amount of liquid assets the borrower has remaining after the mortgage loantransaction is completed.

Cash-out Refinance

A transaction that provides cash proceeds to the borrower in excess of 1 percent of

the mortgage amount or provides cash that is used to pay off non-mortgage debt.

COFI (Cost of Funds Index)

An index used to determine interest rate changes for certain ARMs. It represents theweighted average cost of savings, borrowings, and advances of the 11th Districtmembers of the Federal Home Loan Bank of San Francisco.

Closing Costs

Money paid by borrowers and sellers to affect the closing of a loan. These costsusually include such items as origination fees, discount fees, title search and title

insurance, survey fees, attorney's fees, appraisal fees, credit report fees, prepaiditems such as taxes and insurance. Closing costs generally run from 3 percent to 6percent of the loan amount. Most lenders generally quote a "good faith estimate" ofclosing costs - but it's only an estimate and almost invariably increases. NetworkCapital's unique Flat Fee Closing Cost, however, gives you your exact closing costs,the moment we give you a quote. And it WILL NOT CHANGE as long as your loanamount and selected loan program do not change.

CLTV (Combined loan-to-value)

The CLTV is the ratio of the total mortgage liens against the subject property to thelesser of either the appraised value or the sales price.

Co-borrower

A person who is jointly and equally liable for repayment of the mortgage obligation.A co-borrower completes an application and submits all documentation and may ormay not be on the security instrument.

Collateral

An object that a borrower offers as security to a creditor to guarantee repayment ofa loan. In the case of home loans, collateral is a piece of real property (land and/or abuilding). Borrowers are bound to repay loans (plus interest) to their lender(s). If

they fail to do so - or default - the lender can take possession of, or foreclose on, thecollateral.

Comparables

An estimate of value based on comparable sales (comps).

Conforming Loans


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Loans that conform to Federal Home Loan Mortgage Corporation (FHLMC) andFannie Mae (FNMA) requirement(s) and do not exceed the maximum loan amountand loan-to-value (LTV) limitations established by FNMA or FHLMC:

Property Type Loan Limits AK & HI ONLY

Single Family $417,000 $625,500

Two Family $533,850 $800,775

Three Family $645,300 $967,950

Four Family $801,950 $1,202,925

Construction Perm

Construction-to-permanent financing involves the granting of a long-term mortgagefor the purpose of replacing interim construction financing that the borrowerobtained to fund the construction of a new residence. The transaction may beconsidered to be a purchase or a refinance.

Convertible ARMA type of adjustable rate mortgage that includes an option for the mortgagor tochange the mortgage to a fixed-rate mortgage at specified intervals during apredetermined time.

Credit Bureau Company

An organization that prepares credit reports used by credit grantors to determine thecreditworthiness of an individual.

Credit Bureau Repository

An organization that compiles credit history data directly from lenders and creditorsto build in-file credit reports for individuals.

Credit Report

A report covering an individual's credit history and current credit standing. Thisreport is a very important measure used in the loan approval process, so maintaininga good credit rating should be a high priority for those who plan to buy a house.

D

Debt-to-Income Ratio

The ratio of the borrower's total monthly obligations - including housing expensesand recurring debts - to monthly income. It's used to determine your capacity torepay the mortgage and all other debts. Your debt-to-income ratio is a crucialcalculation in determining the loan amount for which you can qualify. It representsyour qualifying ratio - that is, your financial capacity to assume and repay debt. Seealso Back-end Ratio.


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Deed of Trust

A legal instrument used instead of a mortgage in certain states. This document allowslegal title to a real property to be vested in trustees to secure payment of a note.

Default

Failure to meet the legal obligations in a loan contract by not providing monthlymortgage payments.

Delinquency

Failure to make monthly mortgage payments on time. This is serious for theborrower since it can result in foreclosure on a property.

Discount Points

Payable to the lender by the borrower or seller to decrease the interest rate. Onepoint is equal to 1 percent of the loan amount.

Down Payment

Money paid by the borrower that is the difference between the purchase price of theproperty and the amount of the mortgage.

Drive-by Appraisal

An estimate of value from an independent appraiser that is based primarily on recentcomparable sales.

E

Earnest Money

Money the buyer pays to the seller to solidify an offer to purchase a property. Themoney is applied to the purchase price of the house.

EFT (Electronic Fund Transfer)

The monthly automated payments are processed through the Automated ClearingHouse (ACH) system. With proper authorization, the monthly mortgage payment iselectronically transferred from the borrower's account to Network Capital.

Equity

The value of a homeowner's unencumbered interest on real estate. Equity iscomputed by subtracting the total of the unpaid mortgage balance and anyoutstanding liens or other debts against the property from the property's fair marketvalue. A homeowner's equity increases as he or she pays off his or her mortgageand/or as the property appreciates in value. When a mortgage and all other debtsagainst the property are paid in full, the homeowner has 100 percent equity in his orher property.


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Escrow

Funds paid by one party to another (the escrow agent) to hold until the occurrenceof a specific event, after which the funds are released to a designated individual. Themoney is held in a trust fund, provided by the lender for the buyer. Such funds shouldbe adequate to cover yearly anticipated expenditures for mortgage insurance

premiums, taxes, hazard insurance premiums, and special assessments.

Escrow Account

An account in which a portion of the monthly payment is held by the lender on theborrower's behalf for the payment of future taxes, mortgage and hazard insurance,special assessments insurance, and other on-going payments as they occur. Alsocalled an Impound Account. Impound/escrow accounts allow one to make fractionalpayments for these charges as part of the monthly mortgage payments. The fundsare gradually collected in the escrow account, then paid out in full when the chargesbecome due.

Escrow Closing

The deposit of funds or documents with an attorney or escrow agent to be disbursedupon closing of the real estate transaction.

F

Fannie Mae

A tax-paying corporation, created by Congress to support the secondary mortgagemarket. It makes mortgage money more available. It buys and sells conventionalresidential mortgages, as well as VA-guaranteed and FHA-insured mortgages.

FHA (Federal Housing Administration)

A government mortgage insurance agency that sets requirements for underwritingmortgages and insures residential mortgages made by private lenders against lossfrom default of borrowers on residential properties.

Fixed-Rate Mortgage

A mortgage set up with one fixed interest rate for the entire term of the mortgage,so the borrower pays the same monthly payments for the life of the loan. This offerspredictability, an advantage for borrowers on fixed or limited incomes.

Foreclosure

The legal process by which a borrower in default under a mortgage or deed of trustloses all rights to, and interest in, the mortgaged property. This usually involves aforced sale of the property at a public auction, with the proceeds of the sale beingapplied to the mortgage debt. Foreclosure can result if mortgage payments are notmade on time.


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Freddie Mac (Federal Home Loan Mortgage Corporation)

A tax-paying corporation, created by Congress, that purchases conventionalmortgages in the secondary mortgage market from insured financial institutions andqualified mortgage bankers.

Front-end RatioThe ratio of house payment(s) - including insurance, PMI, and property taxes - toincome.

G

Gift Funds

Funds donated on behalf of the borrower from certain eligible sources to assist theborrower in meeting closing costs. Generally, eligible sources are relatives, churches,municipalities, or nonprofit organizations.

Good Faith Estimate

An estimate of the closing costs.

Gross Monthly Income

The total amount a borrower earns each month prior to any deductions.

H

Hazard Insurance

Insurance coverage that compensates for physical damage to the property caused byfire, wind, or other natural disasters.

HELOC (Home Equity Line of Credit)

A real estate loan, usually in a second lien position, allowing a borrower to withdrawequity in real estate owned with specific limitations. Basically, one can draw cashagainst his or her line of credit to use when needed.

HOA (Homeowners' Association)

A nonprofit association whose directors and officers are elected by the unit ownersof a condominium or PUD project. Primary responsibilities are to manage the

common areas, expenses, and services of the condominium or PUD project.

Home Equity Loan

A loan in which the lender acquires an interest in one's home up to the amount ofthis loan, giving the borrower the funds he or she needs for a purchase opportunity,home maintenance, debt consolidation, or major expenses.

Housing Debt-to-Income Ratio


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The sum of all monthly housing mortgage expenses, such as PITI, homeowners' dues,private mortgage insurance, and any special assessments, as a percentage of theborrower's gross qualifying income.

I

Impound Account or Escrow Account

An account in which a portion of the monthly payment is held by the lender on theborrower's behalf for the payment of future taxes, mortgage and hazard insurance,special assessments insurance, and other ongoing payments as they occur.Impound/escrow accounts allow one to make fractional payments for these chargesas part of the monthly mortgage payments. The funds are gradually collected in theescrow account, then paid out in full when the charges become due.

Income-to-Expenses Ratio

The ratio of your monthly income (gross unless self-employed - in which case netincome) to monthly expenses. It is used to determine one's ability to repay debt andthus is a crucial consideration in determining if, and for how large a loan, one canqualify to borrow.

Index

A published interest rate - such as the Prime Rate, LIBOR, T-Bill rate, or the 11thDistrict COF - against which lenders compare other investments. Lenders use anindex to establish and adjust interest rates on adjustable mortgages, or to compareinvestment returns. You can find these rates published in the real estate or business

portion of newspapers or on the Internet. To compute the interest rate on anadjustable-rate mortgage, a predetermined margin is added to the index.

Installment Debt

Borrowed money that is repaid in successive payments, usually at regular intervals;the monthly debt service is sometimes excluded for debt-to-income calculatorpurposes if 10 or fewer payments remain to be made.

Investment Property

A nonowner occupied residential property used to generate income.

J

Junior Lien

Any lien that is subordinate or subsequent to the claims of a prior lien. A secondmortgage is a junior lien.

K


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There are no Ks.

L

Lien

A claim on property to guarantee payment of a loan.

Limited Cash-out Loan

For Fannie Mae, a refinance transaction in which the mortgage amount is limited tothe sum of the unpaid principal balance of the existing first mortgage, closing costs,prepaid items, points, and the amount required to satisfy any subordinate mortgageliens that are more than one year old, and funds back to the borrower that do notexceed 1 percent of the principal amount of the new mortgage.

Loan Application

A document required by a lender before issuing a loan commitment. It includesinformation such as the name of the borrower, terms and amount of loan, and detailsof the property being mortgaged. It's the first and foremost measure of one's abilityto qualify for a loan, so it's crucial that one submit complete and accurateinformation.

Loan Commitment

An agreement to lend money, usually for a specific amount to be repaid by a specificdate. This commitment is contingent upon the accuracy of the information submittedby the applicant.

Lock-in RateThe interest rate percentage for the loan that will remain the same until funding.

M

Margin

The amount added to the index to create the mortgage interest rate for anadjustable-rate mortgage (ARM).

Market Value

The price of a property calculated by finding the seller's lowest acceptable price andthe buyer's highest acceptable bid.

Maturity

The date when the loan is repaid in full.

Mortgage


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A note or other evidence of real property being pledged as the security for a debt -also referred to as a Deed of Trust, Trust Deed, or Security Instrument.

Mortgage Insurance (MI)

Insurance that protects a mortgage lender against loss in the event of default by the

borrower. This insurance allows lenders to make loans with lower down payments(loan-to-value ratios above 80 percent - that is, when a down payment is less than 20percent of the total selling price of the property).

Mortgagee

The lender or the institution that holds one's loan.

Mortgagor

The borrower.

N

Negative Amortization

A gradual increase in the mortgage debt caused by unpaid interest that is added tothe mortgage principal because the payment is not sufficient to cover the fullamount of interest due.

Nonconforming Loans

Loans that do not conform to traditional Fannie Mae or Freddie Mac conditions.Generally, loans above $417,000 (for all states except Alaska and Hawaii) arenonconforming loans. They are also known as Jumbo loans.

Note

A legal instrument in which a borrower promises to repay his or her loan under aspecific set of circumstances (e.g., interest rate or late charge information).

O

Origination Fee

A fee charged by the lender to prepare loan documents, inspect and appraise thehouse, and arrange a credit check. The fee is computed as a percentage of the loan's

face value.

P

Payback Period

The amount of time it takes to pay back the fees for obtaining a loan on a property.

Piggyback


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Borrowers often use a "piggyback" second mortgage in conjunction with a firstmortgage so that they do not have to provide a 20 percent down payment in order toavoid PMI.

PITI (Principal, Interest, Taxes, and Insurance)

Principal, interest, taxes, and insurance - a term used to refer to the components ofone's monthly mortgage payments.

PMI (Private Mortgage Insurance)

Insurance coverage a lender requires the borrower to obtain to protect the lenderagainst loss in the event of a mortgage default. It's mandatory for higher loan-to-value mortgages (those above 80 percent LTV in most cases - that is, where the loanamount is 80 percent or more of the property's appraised value).

Points

A prepaid finance charge assessed by the lender at closing. Paying points willdecrease the loan's interest rate. One point equals 1 percent of the loan amount.They are also called discount points.

Preapproval

Mortgage preapproval specifies the actual amount a buyer is preapproved by alender to borrow before a house is purchased. The buyer has to apply and qualify forthe mortgage. Preapproval allows the buyer to negotiate like a cash buyer. Even ifthe buyer is not granted preapproval status, it's a helpful step to take, as itilluminates existing problems in securing a loan and allows the buyer to take stepstoward resolving them.

Prepaid Items

Items that generally must be paid for at the time of closing and are generallyrecurring charges. Prepaid items may include taxes; first-year premiums for hazard,flood, and mortgage insurance; prorated interest, any special assessments that mustbe prepaid (e.g., water/sewer connection); escrow account for any of the above.

Prequalification

Providing financial information (credit ratings, employment status and income, andoutstanding debts) to a lender in order to calculate a suitable mortgage for the

buyer. Prequalification grants no legal rights, but is helpful in showing how large amortgage one can handle and, by extension, how much house one can afford.

Principal

The remaining debt on a loan, not counting interest.

Property Value


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The value of a piece of real property - either the appraised amount or the purchaseamount, whichever is lower.

PUD (Planned Unit Development)

A real estate project in which each unit owner has title to a residential lot and a

nonexclusive easement on the common areas of the project.

Purchase Money Mortgage

A mortgage used to purchase real property where the title is conveyed from oneindividual to another.

Q

Qualifying Ratios

The percentage of payment-to-income (P/I) and debt-to-income (D/I - also called

Back-end Ratio) that is used to measure the borrower's capacity to repay themortgage debt.

R

Rate and Term Refinance

A refinance of any mortgage in which the new mortgage amount is limited to theunpaid principal balance of the existing first mortgage plus any closing costs.

Rate-lock Policy

A rate lock is an agreement between Network Capital and a borrower that specifies a

mortgage loan program, interest rate, discount points and an expiration date of theagreement. Network Capital guarantees that regardless of market condition theborrower will receive a loan with terms according to the rate lock-in agreement aslong as the rate lock-in agreement has not expired. Network Capital offers variousrate lock-in periods depending on the loan details. In consideration for locking in arate, Network Capital must receive a $500 lock-in deposit or credit card pre-approval.

Recording Fees

Fees charged by a county recorder's office to record a mortgage or deed of trust.

RefinanceThe process in which one replaces the original mortgage loan with a new one to takeadvantage of lower interest rates or better terms or to get cash. An alternative istaking out a second mortgage, which involves the same process as refinancing, butadds a junior lien on the property.

Revolving Debt


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A debt that does not have a fixed payment, although repayment is usually apercentage of the outstanding balance and made at regular intervals; most commonare credit cards issued by banks and department stores.

Rolldown

The interest rate on the loan is higher so that there are no closing costs.

S

Second Mortgage

A mortgage that is in a second position behind (or subordinate to) the original firstmortgage; see also Junior Lien. A second mortgage is a good alternative torefinancing when one has an original first mortgage loan with a low interest rate. Asecond mortgage will give the borrower a lump sum of funds to use as needed. Thequalification process and debt-to-income ratio requirement are the same as

refinancing.

Self-Employed Borrower

A borrower whose income is derived from a business source in which he or she hasan ownership interest of 25 percent or more.

Servicing

All the operations carried out by the lender to keep a loan in good standing, includingpayment of taxes and insurance.

SFR (Single-Family Residence)

A structure intended to house one family.

Subordinate Financing

Secondary financing secured by a lien that is junior to the first mortgage or seniorclaim - for example, a second mortgage.

Supplemental Income

Income derived from sources such as interest/dividends, capital gains, and rentalproperties; these sources require tax returns to support the qualifying income.

SurveyA report prepared by a registered land survey professional that shows the preciselocation of the property.

Sweat Equity

The exchange of labor or services in lieu of paying cash for the purpose of receivingcredit toward the down payment. Not generally an eligible source of down payment.


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T

Tax Service Contract

The lender's verification of payment of property taxes.

Temporary Buydown

A loan on which the interest rate has been "bought down" for a temporary period oftime at the beginning of the loan by escrowing funds at the time of closing, which willbe applied to the total monthly mortgage payment as each becomes due. See BuyDown.

Time-share

A real estate development in which a buyer can purchase the exclusive right tooccupy a unit for a specified period of time each year. Not eligible for financing with

Network Capital.

Title

A legal document that proves property ownership.

Title Insurance

A type of policy that insures a home buyer against any errors made in the title searchand defects in the title that were not listed in the title work or abstract. It is normallyissued by a title company.

Title Search

A process providing proof of legal ownership of a property by researching municipalrecord - usually performed by a title company.

Townhouse

An architectural type of construction; a row house on a small lot that has exteriorlimits common to other similar units; title to the unit and its lot is vested in theindividual owner with a fractional interest in common areas.

Truth in Lending

A federal law requiring lenders to disclose the Annual Percentage Rate, finance

charges, payment schedule, and other disclosures within three business days afterthe receipt of a loan application on certain types of loan transactions.

Two-step ARM

An ARM (adjustable-rate mortgage) that has a fixed interest rate for the first five orseven years of the mortgage term, then adjusts at the current market rate plus apredetermined margin, then remains fixed at that rate for the remainder of the term.See also ARM (Adjustable-Rate Mortgage).


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Two-to-Four Family Properties

A structure that provides dwelling units for two, three, or four families, althoughownership is evidenced by a single deed.

U

Underwriter

An analyst who reviews the supportive documentation to determine the riskassociated with the loan request. The person who gives final loan approval.

Underwriting

The process used by lenders in deciding whether to make a loan to the buyer. Thelender carefully examines credit history, employment, and assets to determine if andhow large a loan should be approved.

V

VA (Veterans Administration)

A government agency designed to encourage mortgage lenders to offer long-term,low-down-payment financing to eligible veterans by partially guaranteeing the lenderagainst loss from default.

VA Loan

A long-term, no-down-payment or low-down-payment loan guaranteed by theDepartment of Veterans Affairs. Individuals usually qualify by proof of militaryservice.

W

There are no Ws.

X

There are no Xs.

Y

There are no Ys.

Z


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Zoning

The creation of districts by local governments in which specific types of property usesare authorized (e.g., commercial, industrial, residential, high density, mixed use).

dictionary of home loan financing

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