Adjustable Rate Mortgage (ARM). A mortgage loan that has an interest rate and monthly payments that adjust periodically according to a predetermined index and margin. These adjustments result in the monthly mortgage payment either increasing or decreasing on each adjustment date.
Adjustment Interval. The adjustment interval is the frequency with which the interest rate and/or the monthly payment amount can be reset on an Adjustable Rate Mortgage. Once the interest rate and the monthly payment are established, they cannot change until the beginning of the next scheduled adjustment interval. Adjustment intervals can range from several months to a number of years but the most common adjustment interval is 12 months.
Amortization. Amortization is the repayment of a loan in equal installments of principal and interest during an equal period of time.
Amortization Schedule. A table showing all scheduled loan payments, the portion of each payment that is interest and the portion that is principal and the remaining principal balance after each payment.
Annual Percentage Rate (APR). A rate that represents the relationship of the total finance charge (interest, loan fees, points) to the total amount of the loan.
Back-End Ratio. The total monthly housing payment plus the borrower's monthly debt obligation divided by the borrower's gross monthly income. The following are debt obligations that are included in the back-end ratio calculation:
Combined Loan-to-Value Ratio (CLTV). The Combined Loan-to-Value Ratio (CLTV) is arrived at by adding the outstanding principal loan amount of alls mortgages and lines of credit encumbering the property and dividing that sum by the lesser of the sales price or the appraised value of the property.
Conditions Prior to Docs. Items such as current paystubs or corrections to the appraisal report that are requested by the underwriter for review prior to drawing the loan documents.
Conditions Prior to Funding. Additional items needed by the lender prior to funding the loan but after "prior to docs" conditions such as quality control review, telephone verifications and updated credit report.
Conforming Loan. A mortgage loan that is within the maximum loan limits set by Fannie Mae and Freddie Mac and that meets all other requirements to be eligible for purchase by Fannie Mae or Freddie Mac.
Conforming Loan Limit. The Federal Housing Finance Agency (FHFA) publishes the conforming loan limits annually that apply to all conventional mortgages that are delivered to Fannie Mae, including both the general loan limits and the high-cost area loan limits. High-cost area loan limits vary by geographic location. The current general loan limit for a 1-unit single family residence is $417,000 in the continental United States and in certain high cost areas, the loan limit is up to $625,500. Loans in high cost areas such as Los Angeles County that are greater than $417,000 but not more than $625,500 are sometimes referred as "super conforming loans."
Conventional Loan. A conventional loan is any loan that is not a government loan. Specifically, a conventional loan is not insured or guaranteed by a government agency such as the Federal Housing Administration (FHA), the Department of Veteran Affairs (DVA) or the U.S. Department of Agriculture (USDA).
Credit Authorization. A document signed by the borrower which grants the lender authorization to check into the borrower's credit rating and payment history.
Debt to Income Ratio (DTI). The debt-to-income Ratio (DTI) is a term that encompasses both the Front End Ratio and Back End Ratio. The DTI is intended to quantify a borrower's repayment capacity. For conventional, conforming loans, there is only one overall DTI qualifying ratio (that is, the back-end ratio). Fannie Mae's lending guidelines no longer distinguish between or establish separate standards for the front-end ratio and back-end ratio. If the loan is underwritten through Desktop Underwriter (DU) rather than manually, the maximum allowable DTI ratio is 45% with flexibilities offered up to 50% for certain loan applicants with strong compensating factors such as excellent credit scores, substantial cash reserves and/or large down payment. FHA lending standards, however, do distinguish between the front-end and back-end ratios with borrowers being required to meet both ratios to qualify for the loan. The qualifying FHA front- end and back-end ratios are 31% and 43%, respectively, but both ratios can and often are exceeded when compensating factors exist.
Escrow Payment. That portion of the mortgage payment that is held back and placed by the lender into an escrow/impound account for the payment of real property taxes, hazard insurance and mortgage insurance as they become due.
Escrow or Impound Account. An escrow or impound account is an account maintained by the lender for payment of items such as real property taxes, hazard insurance and mortgage insurance. The Escrow/impound account is funded by that portion of the borrower's monthly mortgage payment that is allocated to those items. The lender pays the actual bills as they come due from the accumulated funds in the escrow/impound account.
Fannie Mae. The Federal National Mortgage Association (FNMA or Fannie Mae) is a government-sponsored enterprise (GSE) chartered by Congress with a mission to provide liquidity, stability and affordability to U.S. housing and mortgage markets. Fannie Mae is not a government agency and does not originate loans. Fannie Mae operates in the secondary mortgage market by purchasing loans originated by lenders if the loans meet Fannie Mae's lending criteria and thereby replenishes the funds available to these lenders to make new loans.
FICO. A credit score method developed by the Fair Isaac Corporation and used by lenders in determining the creditworthiness of borrowers.
Fixed Rate Loan. A loan that has an interest rate that remains fixed for the entire loan term.
Freddie Mac. The Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) is a government-sponsored enterprise (GSE) chartered by Congress to stabilize the nation's residential mortgage markets and expand opportunities for homeownership and affordable housing. To fulfill this mission, Freddie Mac conducts business in the U.S. secondary mortgage market. Freddie Mac uses mortgage securitization to fund millions of home loans ever year. Securitization is a process by which Freddie Mac purchases home loans that lenders originate, put these loans into mortgage securities that are sold in global capital markets and recycle the proceeds back to lenders. This recycling is designed to ensure that lenders have mortgage money to lend. Freddie Mac guarantees mortgage payments on the mortgage backed securities that it sells to investors and charges lenders who sell their loans to Freddie Mac a credit guarantee fee to mitigate losses from mortgage defaults. Freddie Mac only purchases conventional loans within conforming loan limits which in 2012 is $417,000 for most of the nation and $625,500 in certain high-cost areas such as Los Angeles County. The vast majority of the loans that Freddie Mac purchases are long term, fixed-rate mortgages.
Front-End Ratio. The total monthly housing payment (principal, interest, real property taxes, hazard insurance, mortgage insurance and HOA dues) divided by the borrower's monthly gross income.
Fully Amortized Loan. A loan that is paid in equal installments of principal and interest which will result in the loan being paid in full at the end of the loan term.
Fully Indexed Rate. The Fully Indexed Rate is the sum of the index rate at origination and the margin. For example, assume that a loan with an initial fixed rate of 7% will reset to the six-month London Interbank Offered Rate (LIBOR) plus a margin of 6%. If the six-month LIBOR equals 5.5% at origination, then the Fully Indexed Rate would be 11.5% (5.5% + 6%). For ARMs that have introductory fixed periods of 5 years or less, the borrower would have to qualify at the Fully Indexed Rate of 11.5% to be approved without regard to any interest rate caps that limit how quickly the fully indexed rate may be reached.
Gift Letter. A gift letter is required if any portion of the down payment does not come from the borrower's own funds. There are restrictions as to who can gift the borrower funds for the down payment (typically an immediate relative such as a parent or sibling) and the donor must attest that the funds gifted is a gift that does not have to be repaid.
Ginnie Mae. The Government National Mortgage Association (GNMA or Ginnie Mae) is a government agency whose mission is to help make affordable housing a reality for millions of low and moderate income households across America. Ginnie Mae does not make, buy or sell loans or issue mortgage-backed securities (MBS). What Ginnie Mae does is guarantee investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans, mainly loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veteran Affairs (DVA). Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of the United States government. The Ginnie Mae guaranty on a mortgage loan allows lenders to obtain a better price for their mortgage loans in the secondary market. These lenders can then use these proceeds to make new mortgage loans.
Hazard Insurance. Hazard or property insurance insures the home against loss from fire and other hazards.
Home Equity Line of Credit (HELOC). A revolving credit line on which a homeowner can draw for any purpose up to a certain amount that is no more than the equity in the home. A lien is placed on the property to secure repayment under the credit line.
Home Equity Combined Loan-to-Value Ratio (HCLTV). For first mortgages that have subordinate financing under a HELOC, the lender must calculate the HCLTV ratio. This is determined by adding the outstanding principal balances of all mortgage loans and the full amount of any HELOCs (whether or not funds have been drawn) and dividing that sum by the lesser of the sales price or appraised value.
Home Equity Loan. A home equity loan is different from a HELOC in that it is not a revolving account. Rather, a certain amount is loaned to the borrower at the outset. Like a HELOC, a lien is placed on the property to secure repayment.
Housing Expense. The monthly Housing Expense is the sum of the monthly payments for principal, interest, real property taxes, hazard insurance, mortgage insurance and HOA dues.
Index. An index is an economic measurement to which the interest rate on an adjustable rate mortgage loan is tied. The most commonly used indexes include the 1-Year Constant Maturity Treasury Rate (CMT), the 6-Month London Inter-Bank Offering Rate (LIBOR ), the 11th District Cost of Funds (COFI) and the Moving Treasury Average (MTA), a 12-month moving average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. These indexes are indicators of current economic conditions and are published regularly. Lenders do not set index rates.
Investment Property. An investment property is a property that is not occupied by the borrower as a principal or secondary residence.
Jumbo Loan. A jumbo loan is a loan with a loan amount that exceeds the maximum loan limits set by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac do not purchase or securitize jumbo loans. The interest rate on jumbo loans are typically more than 1 percentage point higher than their conforming counterparts and many lenders require a much larger down payment on a jumbo loan.
Lifetime Cap. A lifetime cap sets a ceiling on how high the interest can increase on an adjustable rate mortgage.
Liquid Assets. A liquid asset is an asset that can be easily, quickly and inexpensively converted to cash. Examples include:
Loan-to-Value Ratio (LTV). The loan-to-value ratio (LTV) on a purchase loan is arrived at by dividing the original amount of the loan by the property value. The property value is the lesser of the sales price or the appraised value. The LTV on a refinance transaction is arrived at by dividing the original loan amount by the current appraised value of the property. The maximum allowable LTV ratio is based on a number of factors including the borrower's credit score, the type of mortgage product, the number of dwelling units and the occupancy status of the property. If the LTV is more than 80%, the lender will require the borrower to pay mortgage insurance.
Margin. The margin is a fixed percentage that is added to the Index at each adjustment interval to determine the new interest rate to be paid by the borrower. Individual lenders set different margins based on their estimated expenses and profit goals. This formula applies each time the loan's interest rate is adjusted: Index rate + Margin = Interest Rate.
Mortgage Insurance. Mortgage insurance, whether government or private, reimburses a lender for certain losses it may incur if the borrower does not repay the loan as agreed. This insurance may cover a percentage or virtually all of the mortgage loan depending on the type of mortgage insurance. Mortgage Insurance is associated with FHA loans whereas private mortgage insurance is associated with conventional loans. A borrower who takes out a conventional loan with an LTV ratio greater than 80% is generally required to pay mortgage insurance typically in monthly installments. With regard to FHA loans, borrowers are required to pay mortgage insurance even if the LTV is less than 80%. The only exemption is if the loan term is 15 years or less and the LTV is 78% or less.
Mortgage Insurance Premium (MIP). The mortgage insurance premium (MIP) is the consideration that a borrower pays for mortgage insurance. With a conventional loan, the MIP will vary depending on the location of the property, the borrower's credit score, the loan-to-value ratio (LTV), the type of loan and other factors. An annual premium equal to a certain percentage of the outstanding loan amount is divided by 12 and collected by the lender monthly with the loan payment. With an FHA loan, the following mortgage insurance rates apply:
Loan Term more than 15 Yrs
Loan Term 15 Yrs or Less
Nonconforming Loan. Any loan that exceeds the Fannie Mae or Freddie Mac loan limits.
Non-Liquid Assets. A non-liquid asset is an asset not readily convertible to cash. Examples include:
Occupancy Affidavit. A document signed by the borrowers stating that they will occupy the property within a certain period of time after the loan is made.
Origination Fee. A fee for the work involved in the evaluation, preparation and submission of an application for a mortgage loan.
Periodic Cap. A periodic cap limits how much the interest rate can increase or decrease from one adjustment interval to the next.
PITI. The term "PITI" refers to the monthly housing expense consisting of principal, interest, taxes and insurance (including hazard and mortgage or flood insurance, if applicable). If the property is a condominium or is otherwise in a common interest development and there are association dues, then the term "PITIA" is utilized with the "A" referring to the monthly association dues.
Point. One point equals 1% of the principal amount of the loan. Points are one time fees that are paid at the closing of the loan transaction. Discount points may be paid to obtain a lower interest rate.
Prepaid Items. Certain expenses that are paid by the borrower at closing such as interest from the closing date to the first day of the following month, hazard insurance premiums, mortgage insurance premiums, real property taxes and special assessments.
Principal Residence. A principal residence is a property that will be occupied by the borrower for the majority of the calendar year.
Processing. The steps taken to prepare a loan file for submission to an underwriter, including ordering all verifications.
Quality Control. A system of safeguards to ensure that all loans are originated, processed, underwritten, closed and serviced according to the lender's or investors' standards.
Rate Lock. A rate lock obligates the lender for an agreed upon period of time (for example, 30, 45 or 60 days) to lend to you at the locked interest rate even if interest rates go up during that period. A Rate Lock is not a guarantee that the borrower will qualify for the loan or a commitment to lend.
Reserves. Liquid and near-liquid assets available to the borrower after closing.
Secondary Mortgage Market. A secondary mortgage market is a market in which existing real estate loans are bought and sold in contrast to a primary mortgage market in which mortgage loans are originated. The "secondary market" refers to Fannie Mae, Freddie Mac and Ginnie Mae.
Second Home. A second home is a property that a borrower occupies in addition to his or her principal residence. The following are Fannie Mae requirements for a property to qualify as a second home:
Servicer. An entity who for a fee collects mortgage payments, reports credit information, tracks and reports to investors any loan delinquencies and maintains impound account records. Many banks retain servicing rights when selling a loan in the secondary market .
Subprime Loan. A mortgage loan that does not meet all requirements to be eligible for purchase by Fannie Mae or Freddie Mac. The term "subprime" refers to the credit characteristics of the borrower. Subprime borrowers typically have weak credit histories that include payment delinquencies and possibly more severe problems such as charge-offs, judgments and bankruptcies. Subprime borrowers may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination. Such loans have a higher risk of default than loans to prime borrowers.
Tax Service Fee. A fee paid to a tax service agency that each year reviews the records of taxing bodies and reports any delinquencies to the lender.
Traditional Loan. A 30 year fixed rate loan.
Upfront Mortgage Insurance Premium (UFMIP). This UFMIP is only applicable to FHA loans and is a one-time fee equal to 1% of the loan amount that is paid when at loan closing. The premium can be financed and added to the loan amount.
Underwriter. The person who makes the final decision whether to approve the loan. It is the underwriter's job to determine a borrower's ability and willingness to repay the loan in order to limit the probability of default and collection actions. The underwriter is also tasked with examining the property offered as security to determine if it is sufficient collateral.
Underwriting. The process of approving or disapproving a loan application.
Uniform Residential Appraisal Report (URAR). One of the most common forms used in real estate appraisal which was created to allow for standard reporting and analysis of single family dwellings.
Uniform Residential Loan Application (URLA). Also known as the 1003 application, it is the standard loan application used for conventional, FHA and DVA loans.
Verification of Deposit (VOD). A document given to the borrower's bank to verify all monies on deposit.
Verification of Employment (VOE). A document given to the borrower's current and previous employers to verify employment.
Verification of Mortgage (VOM). A document given to the borrower's current mortgage lender to verify the borrower's payment record.
Verification of Rent (VOR). A document given to the borrower's landlord to verify the borrower's payment record.
Yield. The effective annual amount of income that is being accrued on an investment, expressed as a percentage of the price originally paid.
