The mortgage process is tough enough without being confused by industry lingo. We’ve compiled a list of words you may come across during the loan process, and we hope it will help you better understand.
Mortgage Definitions/Terms
AMORTIZATION: The number of months principal and interest payments are calculated for loan repayment.
APPRAISAL: The documents that are used to determine the exact market value of the collateral we will use on the loan. It is performed by a licensed real estate appraiser.
ARM: Adjustable Rate Mortgage. Mortgage payments will change or fluctuate based upon the adjustment cycle.
2/28 ARM: The loan is amortized for a term of 360 months. The payments are fixed for the first two years, and then the loan becomes a six month adjustable loan, causing the payments to fluctuate higher or lower. THE BENEFIT: The starting rate is lower that a straight fixed rate loan for the first two years. This allows the payments to also be much lower than a straight fixed product. Since you may refinance mortgage after the first two years anyway, then you will benefit by the lower payment (during the first two years).
3/27 ARM: The mortgage loan is amortized for a term of 360 months. The mortgage payments are fixed for the first three years, and then the loan becomes a six month adjustable loan, causing the payments to fluctuate higher or lower. THE BENEFIT: For the first three years, the payments and rate start off lower than a straight fixed product and you still get the benefit of having a fixed payment in the first three years.
BALLOON LOAN: When a loan is amortized over a thirty year term, however, the full balance will come due much sooner. THE BENEFIT: The monthly payments are much lower when you amortize over thirty years and the interest rate is lower than a straight fixed product.
EX: 30/15 balloon: amortized for thirty years but the balance comes due in fifteen years.
BANKRUPTCY: Legal protection for an individual against their creditors. All judgments filed prior to the bankruptcy that may have been awarded to lenders must be dropped. There are three types of bankruptcy:
* CHAPTER 7: Total liquidation of all creditors. Any accounts that are secured by collateral must be re-affirmed (a new account is opened and must be paid back), or you will lose the security (ie: car, house, personal property).
* CHAPTER 13: Payment schedule for all creditors owed. Typically, all credit card/signature loans that are owed are paid back at ten cents on the dollar and the secured accounts are paid back in full. Chapter 13′s are typically set up on a five year payback plan.
* CHAPTER 11: Bankruptcy protection for a business/corporation.
CASH OUT: Cash in hand given to you from the proceeds if a loan that appears on a HUD-1 closing statement.
CHARGE OFF ACCOUNTS: Accounts that appear on your credit report that the lender has deemed a total loss due to non-payment. It has been written off as bad debt. The money is still owed, and the lender can pursue legal action if they wish. However, it is important to always address charge offs and get the complete story.
CCCS: CONSUMER CREDIT COUNSELING SERVICES: A non-profit organization that assists people in financial difficulty. The individual cannot pay his debts according to schedule yet they do not want to file bankruptcy. The service will request that their lenders stop charging interest and accept a reduced payment. Lenders consider this one-step before filing bankruptcy, and may consider it as if it is bankruptcy. The counseling service actually is paid by your lenders (since they are trying to keep the customer from filing bankruptcy and costing the lender all the remaining balance owed).
CLTV: Combined loan-to-value. All mortgages combined divided by the market value. Normally, you will find this situation on the following:
* A purchase money deal where individual selling the home is carrying back a second mortgage.
* Current lien holder will subordinate their position and allow the new mortgage company to be put ahead of their lien on title.
CLOSING COSTS: The costs or fees associated with closing the loan. These fees include but are not limited to: appraisals, title, recording, mortgage broker fees, underwriting, processing, doc prep, credit, loan discount, and wire transfer.
COMPS/COMPARABLE PROPERTIES: Properties that have sold recently that are similar to the home that we are using as collateral on a loan. The properties are compared to determine the market value of our property.
COMPENSATING FACTORS: The strengths of a loan that are mentioned to counter the negative issues to obtain an approval. Compensating factors include but are not limited to:
* Long time in a home
* Long time on a job
* Pride in ownership
* Good disposable income
* Saving you a great deal of money with new loan
CO-SIGNER LOANS: When you sign or guarantee a loan for another individual. You (including the co-signer), are responsible for the payments on the loan. Vinson Mortgage will normally not add these payments into a debt ratio if you can prove that you are a co-signer (normally twelve months cancelled checks).
COST TO CURE: Pertains to appraisals. If deferred maintenance is noted on an appraisal, an estimate of the amount to fix the problem must be listed. Normally, the cost to cure figure cannot exceed 3% of the appraised value (unless the deferred maintenance is extremely important portion of the property. For example, a new roof would be extremely important and would have to be repaired prior to closing the loan)
CREDIT SCORES: Appear on a credit report. It is based upon different credit criteria set up by each credit reporting service. Vinson Mortgage normally requests a score of no less than 500 to qualify loans. However, we will still consider loans where the score is lower. The score provides the lender a tool to base their lending decision. Supposedly, the lower the score, the greater likelihood that the loan will default.
DEFERRED MAINTENANCE: Portions of the home that are in need of repair. These problems are listed on an appraisal. Normally, the deferred maintenance figure cannot exceed 3% of the market value. If the deferred maintenance is something extremely important to the property (such as a roof), then the problem areas must be fixed prior to the loan closing.
DEFERRED STUDENT LOANS: Payments on a student loan are put off for a specified amount of time. This normally happens while a student is still in school. For example: payments will not begin until six months after they graduate.
DISCHARGE DATE: The date the court files the final paperwork on a bankruptcy proceeding and the case is closed. Ending stage of a bankruptcy.
DISPOSABLE INCOME: The amount of money remaining once mortgage payments, homeowner’s insurance, real estate taxes, child support payments, and any unpaid bills have been subtracted from total gross monthly income.
DOWN PAYMENT: An amount of money a borrower is required to have in order to purchase a home.
ESCROWS: Money that is set up in reserve to pay real estate taxes and homeowner’s insurance.
FILING DATE: The date that a bankruptcy is recognized and filed by the courts. The beginning stage of a bankruptcy.
FIRST MORTGAGE/POSITION: The mortgage/deed of trust that appears on a title that has been recorded the longest has first position. It is solely based upon filing dates. Loan officers must payoff all the liens on a title search to be placed in first position.
FIXED RATE LOANS: Amortization of payments is set for a specific term and the payments remain the same throughout the entire loan term (the monthly payment does not adjust up or down).
FORECLOSURE: When you have failed to make payments. The lender pursues a legal action and is awarded the property. This is the worse entry that can appear on a credit report. The people residing in the home are also evicted. The home is resold, and any balance remaining is still owed by the borrower.
GOOD FAITH ESTIMATE: Initial document given to you that discloses all the fees that may be charged in connection with a loan.
GIFT OF FUNDS: Pertains to purchase money deals. When you are given funds to buy a home and the money does not have to be paid back. The gift must come from an immediate family member.
GIFT OF EQUITY: Pertains to purchase money deals. When you are given equity in a home to buy a home and the money does not have to be paid back. Normally, it is between relatives.
GROSS DEBT RATIO: Total remaining debts divided by the monthly income. Expressed in a percentage basis. The higher the percentage the more risk to the lender. The remaining debts include:
Mortgage payments, Homeowners insurance, Credit cards, PMI, Real Estate Taxes, Child support, Installment debts.
HUD-1 CLOSING STATEMENTS: The settlement documents that itemize all the closing costs and loan figures for the borrower at the closing table.
INSTALLMENT DEBT: Where loan payments are the same set amount each month regardless of the balance.
LIENS: Loans on a property. All liens must be paid that are owed on a property if it is being used as collateral or calculated into the loan-to-value ratios but they cannot be ignored. Examples of liens:
* Tax liens
* Mortgages
* Judgements
* Child support payments
* Divorce decrees
* Government loans
LTV: Loan-to-value. It is the loan amount or the mortgage balance divided by the market value. Expressed in a percentage basis. The higher the percentage, the greater the risk for the lender and the higher the rate. EX. $80,000 Loan amount request on a $100,000 market value. $80,000/$100,000= 80% ltv
MARKET VALUE: Value assessed to a property to determine its worth.
MORTGAGE: Liens or loans that are owed on a property. They must be calculated into the loan-to-value ratio or paid off but cannot be ignored.
NON-OBLIGATED BORROWER: Spouse or other individual who has a vested interest in a property and is not going to sign on the loan. By signing non-obligated, they are authorizing the other party to use the equity in the home as collateral for a loan. The non-obligated party is required to sign the following documents at closing: HUD-1, Deed of Trust, Notice of Right to Cancel, Truth-in-Lending. The non-obligated party is not responsible to make payments should you default the loan.
OWNER OCCUPIED: The home that you live in.
NON-OWNER OCCUPIED: An investment property for an individual. You do not live in this particular property but rent it out for an additional home.
PITI: Principal, Interest, Real Estate Taxes, and Homeowners Insurance.
PURCHASE PRICE: The amount of money paid to buy a property.
RECERTIFICATION OF VALUE: Results when an appraisal is 4-6 months old. An appraiser is required to go back to the home to make sure it still exists and then does an addendum stating that the value is still the same or has reduced since the last appraisal.
REVOLVING DEBT: Payments will fluctuate each month and are based upon the balance of the account.
RURAL PROPERTY: When the collateral being used on the loan is far from any large cities or in a remote area. The collateral becomes a higher risk since fewer people will want to live there (possibly). We will classify a property as rural if the appraiser has to use comparable properties that are greater than 4 miles.
SEASONING: There are two types:
* DOWN PAYMENT: Vinson Mortgage may require that your down payment money be in an account or in the possession of you for a period of SIXTY DAYS prior to the loan closing.
* OWNERSHIP OF A HOME: The amount of time you are supposed to own a home in order to use the market value instead of the purchase price.
SELLER CARRYBACK: Occurs on purchase money loans. Instead of the seller collecting all the money at the close of the loan, they accept to collect money over time and extend a loan to the buyers of the home. The loan is considered a second mortgage, and a lien is placed behind our loan. Normally, the loan is set up on five year balloon loan. The lender benefits from having the risk/exposure reduced by not lending then the full purchase price. The seller benefits by selling their home faster and generating additional income. The buyer benefits by getting the home with less money down.
EX. $100,000 sales price
$80,000 loan amount (80% ltv approved by lender)
$5,000 down payment (5% from buyer)
$15,000 seller carryback (15% second mortgage)
SELLER CONSESSIONS: Pertains to purchase money deals. When the seller is willing to pay some or all of the closing costs. Vinson Mortgage will allow up to 6% of fees for owner occupied purchases and 3% of fees on non-owner occupied purchases.
SOFT EQUITY: When the value of a home appreciates excessively in a short amount of time with little to no reason. Underwriters consider this an “overinflated market value”, and may reduce the value of the home or turn the deal down altogether.
STACK LOAN: Normally, when you need to use 100% of the value of a property, and the initial rate for the one loan 100% is too high to offer the customer. The loan amount is split into two separate loans (usually 80% ltv and 20% ltv). Benefits include:
* You usually save more money with the stack loans.
* Lower rate on the new first mortgage at an 80% than at the full 100%
SUBJECT PROPERTY: The home being used as collateral for the loan.
SUBORDINATIONS: When a current lienholder that appears on title will go behind or after the new loan, allowing Vinson Mortgage to be listed as the first lien holder. This is important when a loan defaults and goes thru the foreclosure process. Lien holders are paid off based upon their position on the title.
TITLE SEARCH/INSURANCE: This document shows who owns a particular property and what liens/mortgages are on the property. It also shows if the real estate taxes are paid, if you have any judgements against you, if you have filed bankruptcy, and also if there were any divorce proceedings that may effect the home.
TRADE LINES: Active accounts that appear on your credit report.
VESTING: Relates to title searches. Shows who the legal owners of a home are. Vinson Mortgage requires that you all be vested on a title for a minimum of twelve months in order to use market value.
VOE: VERIFICATION OF EMPLOYMENT: This form is completed by an employee if your current or former employer. The VOE supplies Vinson Mortgage with important information of you which would include but not limited to: hire date, salary, hourly income, position, likelihood of continued employment. Vinson Mortgage requires a VOE if you have been employed at your current position for one year or less.
VOL: VERIFICATION OF LOAN: This form is completed by a banking individual if you on a specific loan that may not appear on a credit report or requires further information.
VOM: VERIFICATION OF MORTGAGE: This form is completed by your current or former mortgage holder. The VOM supplies Vinson Mortgage with important information of you which would include but not limited to: the mortgage balance, monthly payments, pay habits/history, and next due date.
VOR: VERIFICATION OF RENT: This form is completed by your current or former landlord. The VOR supplies Vinson Mortgage with important information from you which would include but not limited to: monthly rent payments, pay habits/history, and next due date.
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