| Definitions
3/1, 5/1, 7/1 and
10/1 ARMs
Adjustable-rate mortgages where the rate is fixed
for three-year, five-year, seven-year and 10-year
periods, respectively, and than can adjust
annually after that.
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Adjustable
rate mortgage (ARM)
A mortgage where the interest rate is adjusted
periodically based on a pre-selected index. Also
synonymous with renegotiable rate mortgage or
variable rate mortgage.
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Amortization
Is the process of loan payment by equal periodic
payment calculated to pay off the debt at the end
of a fixed period, including accrued interest on
the outstanding balance.
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Appraisal
A written estimate of the value of property, made
by a qualified professional certified as an
"Appraiser".
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Appraised
Value
A professional assessment of a property's fair
market value, based on an appraiser's analysis of
the property, and neighboring properties'
comparisons when available.
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Broker
An individual who conducts business to arrange
funding from lenders, or to negotiate contracts
for clients/borrowers. Since a broker does not
loan the money, they normally charge a fee or
receive a commission for their services.
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Closing
The meeting between the buyer/borrower, seller
and lender or their consultants where the
property and funds legally change hands. Also
synonymous with settlement. Closing costs
typically include an origination fee, discount
points if applicable, credit report fee,
appraisal fee, title search and insurance, escrow
costs, survey, property taxes, deed recording
fee, and additional costs assessed at
closing/settlement. The closing cost typically
ranges from 3 percent to 6 percent of the
mortgage amount. Closing costs vary depending on
the geographic location and lender involved.
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Credit
Report
A detailed report that documents the current
status of a borrower's credit standing, and their
credit history.
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Credit
Risk Score
A statistical summary of the information
contained in a consumer's credit report. The most
common credit risk score used is the Fair Isaac
or FICO score. FICO utilizes a mathematical
summary calculation that assigns numerical values
to the range of items detailed in the credit
report. The credit risk score carries significant
weight during the credit underwriting process for
a mortgage loan.
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Escrow
An account held by the lender into which the home
buyer/borrower pays money for tax or insurance
payments. Escrow disbursements use the escrow
funds to pay hazard insurance, mortgage
insurance, real estate taxes, and other property
expenses as they become due.
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First
Mortgage
The primary lien against a property.
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Fixed
Rate Mortgage
For this type of mortgage the interest rate
remains the same throughout the term of the
mortgage for the original borrower.
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HUD-1
statement
A legal document that records an itemized listing
of the funds that are payable at
closing/settlement. The statement itemizes the
real estate commissions, loan fees, points, and
initial escrow amounts. Each item on the
statement is assigned a respective number based
on a standardized numbering system. The bottom
portion of the HUD-1 statement includes totals
that define the seller's net proceeds and the
buyer's net payment at closing.
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Impound
The portion of a borrower's monthly payments held
by the lender or servicer to pay for lease
payments, hazard insurance, mortgage insurance,
taxes, etc. as they become due. Also known as
reserves.
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Jumbo
Loan
A loan amount which is larger than the limits set
by the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation
($417,000 as of 5/1/2006). Since Jumbo loans
cannot be funded by these two agencies, they
usually have a higher interest rate.
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Lien
The claim on a property for the payment or
satisfaction of a debt or obligation.
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Loan-to-Value
Ratio
The relationship between the amount of the
mortgage loan and the appraised value of the
property expressed as a percentage. This impacts
which loan packages are available.
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Mortgage
Insurance
Money paid to insure the mortgage when the down
payment is less than 20 percent.
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Origination
Fee
The fee charged by a lender to prepare loan
documents, perform credit checks, inspect and
sometimes appraise a property. Typically computed
as a percentage of the face value of the loan.
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Points
(loan discount points) Prepaid interest assessed
at closing/settlement by the lender. Each point
equals 1 percent of the loan amount (e.g., two
points on a $100,000 mortgage would cost $2,000).
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Pre-Approval
The process of determining how much money you
will be eligible to borrow before you formally
apply for a loan.
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Principal,
Interest, Taxes, and Insurance (PITI)
The four components that combine to make up a
monthly mortgage payment. Principal is the part
of the monthly payment that reduces the remaining
balance of the mortgage. Interest is the fee
charged by the lender for borrowing money. Taxes
and insurance are the monthly costs of property
taxes and homeowners insurance, regardless of
these amounts being paid into an escrow account
each month or not.
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Private
Mortgage Insurance (PMI)
If the borrower cannot afford a 20 percent down
payment, lenders will allow a smaller down
payment in some cases. When a smaller down
payment applies, the borrowers are typically
required to carry private mortgage insurance.
Private mortgage insurance usually requires an
initial premium payment and may include an
additional monthly fee depending on the
respective loan's structure.
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Rate Lock
A written commitment issued by a lender to a
mortgage originator (loan consultant) that
guarantees a specified interest rate and related
lender costs for a specified timeframe (Typically
ranges from 15 to 60 days). The longer the
timeframe that a rate is locked than the higher
the interest rate or points required. This is
designed by the lender to offset their increased
risk for guaranteeing a certain rate for a longer
timeframe. You cannot close a mortgage loan
without locking an interest rate.
There are five variables to a rate lock:
- Length of the rate lock period
- Interest rate
- Points, or no points
- Loan program
- Lender funding the loan
The loan consultant uses their expertise to
optimize these variables to obtain the best loan
package for a given borrower's situation. A major
reason to promptly respond to loan consultant's
requests for information and documents is to
support the timely processing of your loan
package prior to the rate lock deadline.
Time is of the essence here. This being the
case, the loan consultant must provide all the
required documents to the lender within 10 days
of the lock date in order to ensure that your
transaction will be completed before the end of
the lock period.
If the rate lock expires before the loan
transaction is completed, it may be necessary to
pay greater fees or have a higher interest rate
or both. Consequently, it is generally
recommended that the borrower request the longest
rate lock period available.
Once a loan package is processed and approved,
the documents must be formally signed, which
enables the lender to disburse the funds. All of
these steps must be completed prior to the rate
lock period deadline. Otherwise the rate lock
would expire and the fees and interest rate are
subject to changes.
In order to complete the loan transaction,
loan consultant's are relying on the efforts of
3rd party lenders, title companies and
appraisers. As a result of this, the loan
consultant cannot guarantee their timely
processing of the loan transaction. The loan
consultant makes their best effort to ensure that
the loan transaction is processed in a timely
manner.
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Refinance
The process to obtain a new mortgage loan on a
property already owned. Usually to replace
inferior existing loans on the property.
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Second
Mortage
A mortgage made subsequent to the first mortgage
and is considered subordinate to the first one.
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Title
A legal document that provides evidence of an
individual's or parties' ownership of property.
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Underwriting
The process to decide if a loan can be made to a
potential home buyer/borrower based on assets,
credit standing, employment, and other relevant
factors. It also involves the matching of this
assessed risk to the appropriate rate and term,
or loan amount offered.
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Truth
in Lending statement
The Real Estate Settlement Procedures Act (RESPA)
requires mortgage lenders to give prospective
borrowers a truth in lending (TIL) statement
containing information on the annual percentage
rate, the finance charge, the amount financed,
and the total payments required. Within 3 days of
the time you apply for a mortgage, the lender is
required to provide you with a "good faith
estimate of settlement costs," or TIL, based
on their understanding of your home
purchase/refinance contract. This estimate gives
the borrower a good idea of how much cash will be
required at closing to cover pro-rated taxes,
first month's interest, and other
settlement/closing costs.
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