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Why Can’t I Get the Best Mortgage Rate?

Why Can’t I Get the Best Mortgage Rate?

So you heard your neighbor brag about his new 4% thirty-year rate? Or maybe you just read an article describing how rates have dropped to historic lows, or you heard a local mortgage company advertise 4% rates.

But when you call to apply you’re offered a rate of 4.125%. You’re shocked. After all, you have excellent credit. You have a solid job history. And you owe less than seventy-percent of your home’s value.

So why can’t you get the lowest mortgage rate advertised?

Best Case Scenario vs. Risk-Based Pricing

First, the lowest mortgage rates are typically reserved for best case scenario loans. These are loans that carry the smallest risk of default. A best case scenario loan typically has:

  • Loan-to-value (LTV) under 60%
  • Credit score over 740
  • Loan amount under $417,000
  • Debt ratios under 41%

Mortgage companies and banks usually advertise rates based on this best-case scenario or one similar. Once a lender takes your application they will access price hits for anything outside these parameters. This is called risk-based pricing. These hits can negatively affect your rate.

Different Rates for Different Programs

Your loan program can also affect your final rate. Conventional programs (Fannie Mae, Freddie Mac) have different risk-based price adjustments than government programs (FHA and VA).

For example, a credit score of 680 combined with an 80% LTV on a conventional loan will result in a higher rate than a FHA loan with the same criteria. While 680 is considered “A” credit, it is a third-tier score on the conventional score-card. And while having an LTV of 80% might allow you to avoid mortgage insurance, it is the highest LTV allowed on cash-out conventional loans. Therefore, risk-based price hits are accessed.

FHA programs simply don’t have the same price hits as conventional programs. They require mortgage insurance which helps to offset a lot of risk. So in the example above, an FHA loan will most likely have a lower rate.

Many banks and lenders offer their own portfolio programs too. These programs are usually created to help fill a niche in the market place. They typically expand beyond the conventional and government guidelines. Consequently, the rates can be a little higher than conventional and government loans.

Different Rates from Different Lenders

Finally, rates can differ from lender to lender. Lenders and banks all have money built into their rates. They all start at basically the same point, but then increase their rates in order to collect a service release premium (SRP) when they sell the loans on the secondary market. This is why bank rates can differ from one institution to another.

Brokers have the distinct advantage of being able to offer rates from multiple banks and lenders. This allows them to compare lender rates daily and offer their clients the best possible rates available.

A Word of Advice

In this post- meltdown environment, risk-based pricing is more strict than ever. With a back-log of foreclosures still on their books, lenders and banks want to ensure that new loans perform well (payments are made on time). This is one reason why it’s tough, even for “A” credit borrowers, to obtain credit at the lowest rates.

It’s important not to split hairs here, though. Often the difference in a 4% rate and a 4.125% rate is negligible. While you might lose out on bragging rights with your neighbor, you can still obtain a lower rate today than at any time in history. In fact, rates are so low that you may never need to refinance again.

Our advice is to apply with a couple lenders, compare rates and programs, and make a decision. Shopping or holding out until you get that one rate you heard advertised on the radio just doesn’t make sense. There is such a thing as paralysis by analysis. Don’t let these rates pass you by. Act now.

Self-Employed and Can’t Qualify for a Mortgage?

Self-Employed and Can’t Qualify for a Mortgage?

The mortgage crisis has had a disproportionately negative impact on self-employed borrowers. In retrospect, it’s easy to see how this happened. And it’s important to understand who’s to blame, how the blame has shifted, and what can be done to adapt to the new lending standards in today’s market.

What Happened?

Some of the first program casualties of the mortgage meltdown were the stated income, stated asset (SISA), and no income, no asset loan (NINA) programs. These programs were initially created to assist self-employed borrowers with great credit and good equity.

Since the majority of self-employed borrowers legally write-off a good portion of their income, they are not allowed to use all of it to qualify. Instead, underwriters use their adjusted gross income (AGI) to qualify.

The SISA and NINA programs allowed self-employed borrowers to state their actual income without having to prove it with tax returns.

Soon, in keeping with the now infamous greedy big bank mentality, these program guidelines were expanded to include W-2 wage earners, sub-par credit worthy borrowers, borrowers with little equity, and un-proven first-time home buyers.

Borrowers were qualifying for loan amounts that they could never afford. Needless to say, the more the qualifying criteria loosened, the worse these loans performed. Soon, defaults began to pile up and the rest, as they say, is history.

Who’s to Blame?

The federal government’s (Fannie, Freddie) misguided policies and the greed of Wall Street and big banks were initially to blame for allowing such lax underwriting guidelines. Opening up the SISA and NINA programs to less qualified borrowers eventually spoiled things for credit-worthy self-employed borrowers.

Smaller lenders and mortgage brokers also contributed by writing loans that they knew were unaffordable. Without question there were some shady individuals and companies that took advantage of these programs. They were negligent in their duties to both limit the amount of income borrowers were stating, and to warn borrowers of the consequences of buying homes they could not afford.

However, the majority of small lenders and brokers were simply following the guidelines that were encouraged by the federal government and written by the big banks. While this is not wholly excusable, it does offer perspective on the rampant “blame-the-broker” theme that the politicians, banks, and the press ran with in the months following the meltdown.

Borrowers who knew they couldn’t afford these homes cannot escape their share of the blame either. Exaggerating or lying about income to buy a new home is at best irresponsible, and at worse criminal.

Still, this doesn’t explain why credit-worthy self-employed borrowers are still being left out in the cold. After all, the majority of SISA and NINA programs performed well when they were limited to the original qualifying criteria.

We still hear the complaints from self-employed applicants today:

  • I’ve always paid my bills on time
  • I’ve got perfect credit
  • I’m being punished for being self-employed
  • It’s not fair

All of these complaints were probably valid three or four years ago when borrowers were caught off guard and struggling to understand the new lending reality that was blanketing the country.

But today’s hard truth is that these borrowers now share in the blame by failing to adapt to the new lending standards. If a borrower needs to show a specific amount of income to qualify for a home, they have to pay taxes on that amount.

CPA’s aren’t doing their self-employed clients any favors by soley focusing on how much they can write off or how they can get away with paying the least amount of taxes.

CPA’s should be focusing on their client’s over-all finances. They have a fiduciary duty to inform them about how their taxes will affect their borrowing ability. Too often they fail to do so.

Moving On

Meridian Home Mortgage understands that there is a real need for stated income programs in today’s market. After all, tax write-offs are legal. And these programs actually worked before the guidelines were expanded.

While stated-income programs might begin to pop up at some point to fill the void, they will undoubtedly be very restrictive. Therefore, the only real full-proof solution lies with the borrowers themselves.

Ultimately, it’s the borrower’s responsibility to initiate a dialogue with their CPA. Discussing write-offs and future mortgage related plans has never been more important. Writing everything off or showing a loss just won’t work anymore – even if those write-offs are legitimate.

Adjusting tax deductions to improve their AGI is really all that’s needed. In other words, borrower’s have to stop writing-off so much and pay more taxes on the income they earn.

Why Tax Returns Matter in Mortgage

Why Tax Returns Matter in Mortgage

Have you ever applied for a mortgage and wondered why your lender asked for your tax returns for the previous two years?

Debt-To-Income Ratio

One of the main qualifying factors used to approve a mortgage is your debt-to-income ratio (DTI). This number is calculated by dividing all of your debt by your income.

Your DTI helps the lender determine if you can afford the new loan, per their guidelines. And it gives the lender an idea of how much money you have left over after your minimum bills have been paid.

Lenders first determine your monthly debt by pulling your credit report and adding the payments on all open debt. Then, they determine your income. If you are a salaried or hourly employee, your income is calculated using the last 30 days of pay stubs and your last two W-2 statements.

So Why Tax Returns?

Lenders also ask for your tax returns (1040) because unlike paystubs and W-2s, tax returns help to explain the entire story about your income.

The lender needs to know if you are writing anything off. Tax write-offs may pose a problem with your mortgage application. The general rule is that if you are not paying taxes on it, the lender is not going to allow you to use it as income.

Losses, Unreimbursed Expenses, and Depreciation

The most common tax write-offs are unreimbursed business expenses, Schedule C losses, and Schedule E losses.

Unreimbursed business expenses are shown on Line 21 of the Schedule A, and can include mileage, uniforms, dry cleaning, cell phone bills, industry publications/journals, job trainings, etc.

If you have a self-employment business you might file a Schedule C or a Schedule E depending on how you structure the business. A Schedule E may also be filed if you own rental property or receive royalties. Both Schedule C and Schedule E may show losses.

Anything listed on line 21 of the Schedule A and any losses from Schedules C or E may be netted out of your income.

On your Schedule C, however, any depreciation that you claim may be added back into your income. The same applies if you file S-Corp returns for your Schedule E self-employment business. Any depreciation filed on those returns may also be added back in to your income.

More to the Story

The story of your tax returns does not end there, however. Your tax returns will also tell the lender if your home has any farm income, if you pay alimony, or if you have received unemployment income.

If you file a Schedule F (farm income) on the property you are refinancing, it may make you ineligible for certain mortgage programs.

If your tax returns list alimony paid to an ex-spouse, that alimony payment may need to be listed as a liability when calculating your debt to income ratio. This can affect your approval.

Your returns will also show if you have received any unemployment compensation, which might require a letter of explanation about your employment history. This can also affect your approval.

Your tax returns play an integral role in the qualification process of your mortgage. If you have any questions or concerns about whether or not you will qualify, a Meridian Home Mortgage Loan Officer is available to answer your questions. Please do not hesitate to contact us.

5 Ways to Simplify the Mortgage Application Process

5 Ways to Simplify the Mortgage Application Process

If you are in the process of a mortgage application and are looking to close as soon as you can, there are steps you can take to help ensure there are no delays.

Here are five tips that can help you:

1. Continue to pay all of your bills on time

Your credit history is one of the most vital elements of your mortgage application. Sometimes it’s necessary for lenders to re-pull credit before the loan process is complete.

For example, if you are applying for a conventional loan your credit will likely be pulled again before your loan funds so that the lender can verify that you have kept your credit clean throughout the course of your application.

A drop in your credit score could increase your rate, or even make you ineligible for a loan.

2. Try to avoid opening any new liabilities after you begin your application

New credit cards, auto loans or other lines of credit will need to be disclosed to your lender just like old accounts. Any new liabilities will need to be verified and added into your debt-to-income (DTI) ratio, which could affect your qualification.

3. Call the appraiser back and make an appointment ASAP

The appraisal process can take up to a week or more to complete. An appraiser has to make an appointment to see your home, perform research on your home from the appraiser’s office, and then prepare the appraisal report.

Try to call your appraiser back and make an appointment for the appraisal as soon as you can to help collapse this time frame.

4. Submit whatever the lender asks for in a timely fashion

If the underwriter asks for documentation, it is pretty certain your loan will not close until they sign off on it. The faster you are able to submit that documentation, the quicker the mortgage process will be.

5. If you switch jobs, inform your lender ASAP

Your lender will verify your employment before funds are issued on your loan. If you switch jobs, the underwriter will need to see at least one pay stub and verify that your new employment will continue.

Be sure to tell your mortgage representative before accepting a new offer so they can let you know how it might affect the process.

As your mortgage broker, Meridian Home Mortgage is committed to keeping the mortgage process smooth and simple. We encourage you to follow these tips to help ensure that your loan closes on time. We are here to help you every step of the way.

Hints for Saving Money on Your Mortgage

Hints for Saving Money on Your Mortgage

It is estimated that mortgage payments account for up to 35% of the average homeowners’ income. In a struggling economy people are pinching pennies, but most are unaware of the simple ways to save money on their largest monthly expense: their mortgage. There are many ways in which homeowners can save both monthly and over the life of their mortgages. With just a little effort and research, you might be able to lower your housing expense and save.

Make One Extra Mortgage Payment Annually

If you have the means to do so, making extra payments on your mortgage is the quickest way to reduce the remaining balance. The more you pay, the less you owe (it’s as simple as that!). These payments are applied to your principal (not interest) so you will not be required to pay monthly interest on that principal for the remainder of the term.

Making one extra mortgage payment a year on a 30-year term can potentially cut up to 7 years off the life of the loan. This essentially does the same thing as a bi-weekly payment plan but allows you the flexibility of choosing when to make the extra payment.

Set up Bi-weekly Mortgage Payments

Consider setting up a budget where you put half of your monthly mortgage in a savings account or separate checking account every 2 weeks. When your monthly mortgage is due, use this money to make the payment. At the end of 12 months you will have made 26 half mortgage payments, which equals 13 full mortgage payments. This means you’ve made an extra payment to be applied to your principal. This option is especially convenient for those who get paid bi-weekly.

Most mortgage servicers offer bi-weekly payment plans for your convenience. This option can be a bit pricier since you will be paying for the service. Be sure to ask about “set-up” fees and monthly fees before deciding whether to join your lender’s plan or go it alone.

Eliminate Private Mortgage Insurance

Private mortgage insurance is required for homeowners who obtain conventional home loans worth more than 80% of their home’s value. You can avoid having to pay PMI right off the bat if you make a down payment of at least 20%. Or once you’ve paid the loan balance down to 80% of the property value (LTV), the PMI should automatically terminate. You may be required to have a new appraisal to prove the appreciation of your home, but eliminating PMI will reduce your monthly expenses right away and save thousands in the long run.

Also, those homeowners who currently have FHA loans can eliminate their monthly mortgage insurance. They must carry the insurance for a minimum of five years. At that point, they must be under 78% of the home’s value before requesting the removal.

Property Assessment

If you believe your home’s value has decreased within the past year and was improperly accounted for in your property tax assessment, you can challenge the assessed value. Contact your state department of assessment and taxations for any concerns and you may be issued a refund.

Refinance to a Lower Mortgage Rate or Higher Mortgage Term

You may want to take advantage of historically low mortgage rates by considering a mortgage refinance while the time is right. Refinancing to a lower mortgage rate will reduce your monthly mortgage payments and save you hundreds or thousands of dollars a year on interest payments.

Also, increasing your mortgage term can reduce your payment dramatically. There is no point in struggling with a 10, 15, or 20 year term. Refinancing to a 30 year term provides you with options. You can either pay the minimum 30 year payment, or pay extra when and if you are able to do so. The key is that you will never be obligated to pay extra.

Homeowners looking to lower their payments or increase their long term mortgage savings have many viable options available to them. A few of these options don’t involve refinancing at all. It is important to understand your options so that can maximize your savings.

Call a loan officer today to discuss.

FAQs

Mortgage Glossary

Mortgage Glossary

Mortgage terms in plain English

ABCDEFGHIJLMNOPRSTUVW

A

Abstract of Title
A complete historical summary of all recorded documents affecting the title of a designated parcel of real estate.

Acceleration Clause
A provision in a mortgage or note providing that the entire principal balance shall become immediately due and payable in the event of default or another predetermined event.

Adjustable Rate Mortgage (ARM)
A mortgage instrument in which the interest rate adjusts periodically according to a predetermined index and margin.

Adverse Action
Under the Equal Credit Opportunity Act, adverse action occurs when a completed application is submitted to a lender and the credit request is denied or not approved for the amount or term requested by an applicant.

Amortization (Positive)
Repayment of a debt in periodic installments of principal and interest resulting in payment in full at the end of the loan term.

Annual Percentage Rate (APR)
Total finance charges—including interest, loan fees, points and other charges—expressed as a percentage of the total amount of the loan. Under the Federal Truth-In-Lending Act (Regulation “Z”), the APR must be disclosed to the borrower within 3 business days of receipt of a loan application.

Anti-Coercion Statement
A state provision that prohibits a lender from requiring an applicant to obtain hazard insurance through a particular company.

Appraisal
The act of preparing a report by a qualified appraiser setting forth an opinion or estimate of value. The most common type of appraisal for residential properties is the Comparable Sales Approach. Two other appraisal techniques are the Cost Approach and the Income Approach. An appraisal is usually ordered by the lender or the Mortgage Broker.

Appreciation
An increase in property value caused by economic factors; the opposite of depreciation.

Arrears
Payment of an obligation at the end of the period for which it is due or levied; the opposite of payable in advance. Mortgage interest and real estate taxes are generally paid in arrears.

Assessed Value
The value placed on property for the purpose of real estate taxation.

Assessment
A levy placed against property for a special purpose.

Assignee
The party who receives an ownership interest in a mortgage.

Assignor
The party who transfers an ownership interest in a mortgage.

Assignment of Mortgage
A document that evidences a transfer of ownership of a mortgage from one investor to another.

Assumption of Mortgage
An agreement by a purchaser of real property to assume liability on an existing debt secured by a mortgage with its original terms left intact. An assumption of mortgage does not automatically release the seller of the property from liability on the accompanying note.

Attorney-in-fact
A competent party having written power of attorney to legally perform certain acts for another.

B

Balance Sheet
A financial statement showing assets, liabilities, and the net worth of a specific date.

Balloon Mortgage
A mortgage with periodic installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at the end of the term.

Bankruptcy
A condition of financial insolvency in which a person’s liabilities exceed assets and the person is unable to pay current debts. Generally, a person must wait four years following the discharge of the bankruptcy to be eligible for a mortgage loan. Bankruptcy is reported by most credit agencies for a period of ten years.

Basis Points
A unit of measurement used to describe yield. A basis point is 1/100 of 1.0%. Example: 100 basis points = 1.0%; 75 basis points = 0. 75%; 50 basis points = 0. 5%.

Binder
A commitment to insure; a temporary report effective for a limited time until a permanent policy is issued. A title insurance binder lists all the known liens and defects affecting the title.

Biweekly Mortgage
A mortgage with payments due every two weeks totaling 26 payments a year thus reducing the cost of a 30-year mortgage to that of a 21-year mortgage.

Blanket Mortgage
A mortgage lien securing several parcels of property, frequently used by developers who have purchased a single tract of land intending to subdivide into individual parcels. The developer normally requires a “partial release” clause so that individual parcels can be released from the blanket mortgage as they are sold.

Bridge Loan (Swing Loan)
Borrowing against the equity in one’s present home to enable the purchase of another home before the existing home sells.

Buy-Down
A cash payment to a lender to reduce the interest rate a borrower must pay. Buy-downs are usually temporary and help the borrower qualify at a lower rate.

C

Certificate of Eligibility
A document used by the Department of Veteran’s Affairs (DVA) to certify a veteran’s eligibility for a VA loan.

Certificate of Reasonable Value (CRV)
A VA appraisal.

Chattel Mortgage
A mortgage on personal property.

Closing
Final settlement between the buyer and seller; the date on which title passes from the seller to the buyer.

Closing Costs (Loan)
Money paid by the borrower to affect the closing of a mortgage loan. This normally includes an origination fee, title insurance, survey, attorney’s fees, and prepaid items such as taxes and insurance escrow payments.

Closing Statement
A financial disclosure accounting for all funds received and expected at settlement. The HUD-1 settlement statement shows how costs are allocated between the buyer and the seller. The HUD-1 is not required if the buyer has no closing costs.

Cloud on Title
Any condition that adversely affects the title to real estate or curtails an owner’s rights.

Commitment
A written promise to make or insure a loan for a specified amount and on specified terms.

Conforming Loan
A mortgage loan in compliance with the underwriting criteria and current loan limits of “Fannie Mae” and “Freddie Mac”.

Construction Loan
A short-term loan where the proceeds are used to finance the actual construction of a structure. The loan is typically made in partial disbursements called “draws” as construction progresses.

Construction/Permanent Loan
A loan where proceeds will be used to finance the construction of a one-to-four family structure where the lot is already owned by the borrower.

Constructive Notice
The recording of a document or an instrument in the public records in the county where a property is located that is designed to give adequate notice to everyone.

Contingency
Something that requires competition of a certain act or the happening of a particular event. Example: financing “contingency” in a real estate contract.

Contract for Deed (Land Contract, Agreement for Deed, Installment Sales Contract)
A method of selling and financing property whereby the buyer obtains possession but the seller retains the legal title.

Conventional Mortgage
A private mortgage loan neither government insured (FHA) nor government guaranteed (VA).

Conveyance
The transfer of the title to land from one person or class of persons to another.

Covenant
A legally enforceable promise or restriction in a mortgage or deed.

Credit Report
A report of an individual’s credit history prepared by a credit bureau and used by the lender in determining a loan applicant’s credit worthiness.

Credit Scoring
A numerical measurement that reflects the ability of a borrower to manage credit.

D

Debt-to-Income Ratio (DTI)
The percentage of the borrower’s gross monthly income that is used for paying debts. The front end ratio is the percentage of your total PITI housing payment divided by your total gross monthly income. The back end ratio is the percentage of your total monthly liabilities (including housing payment) divided by your total gross monthly income.

Debt Service
The periodic payment of principal and interest as specified in a promissory note.

Deed
A written document that transfers an ownership interest in real property from a seller (grantor) to a buyer (grantee).

Deed in Lieu of Foreclosure
A deed given by a mortgagor to a mortgagee to satisfy a debt and avoid foreclosure.

Deed of Trust
An instrument used in some states in place of a mortgage. The borrower conveys legal title to a trustee who holds the title as collateral for the benefit of a lender and subsequently re-conveys the title to the borrower upon payment of the debt.

Deed Restriction
A limitation placed in a deed limiting or restriction the use of real property.

Default
Breach or non-performance of a clause in a note or mortgage which, if not cured, could lead to foreclosure.

Defeasance Clause
Upon payment in full to the lender, this clause in a mortgage requires the lender to “give back” his security interest in the property and issue to the borrower a recordable Satisfaction of Mortgage. This clause also prohibits the lender from foreclosing as long as the borrower complies with all the terms and conditions of the mortgage.

Deficiency Judgment
A personal judgment levied against the borrower for the balance of the mortgage debt when a foreclosure sale fails to generate funds sufficient to satisfy the debt.

Depreciation
A loss of value in real estate brought by age, physical deterioration, functional or economic obsolescence. Broadly, a loss in value from any cause; the opposite of appreciation.

Desktop Underwriter
Fannie Mae’s automated underwriting system designed to enable mortgage lenders to process loan applications efficiently and objectively.

Direct Endorsement Program
Authorization provided to an approved lender to originate and underwrite FHA insured loans without obtaining approval from the FHA prior to funding the loan.

Discount
The sale of a note for less than its face value. The purpose of a discount is to adjust the annual yield on the note.

Discount Point
One percent of the face amount of the loan. Discount points are a one-time charge assessed at closing by the lender to increase the lender’s yield to a competitive level.

Disintermediation
The flow of funds out of savings institutions into short-term investments in which interest rates may be higher. This shift normally results in a net decrease in the amount of funds available for long-term real estate financing.

Documentary Stamps
A tax by the Florida Department of Revenue on deeds of conveyance and mortgage notes.

Due-on Sale (Alienation) Clause
A form of acceleration clause that gives a lender the option to call a mortgage loan due upon the sale or transfer of the property. A mortgage with a Due-on-Sale clause is not assumable.

E

Easement
A right or interest in the land of another entitling the easement holder to a specific limited use, such as installing power and telephone lines, or crossing over the property. Ingress is the right to enter upon another’s land, whereas egress is the ability to move about and exit unchallenged from that land. While size and location are important aspects of an easement, the age is immaterial.

Encroachment
A physical intrusion upon the property of another. It is usually revealed by a survey.

Encumbrance
Items that affect or limit the fee simple title such as mortgages, leases, easements, and restrictions.

Equal Credit Opportunity Act (ECOA)
A federal law that deals with discrimination (Regulation “B”).

Equity (Owner’s Equity)
The difference between a property’s fair market value and the current indebtedness.

Escheat
The reversion of property to the state is the owner dies intestate and without heirs.

Escrow
Documents entrusted to a disinterested third party who assumes responsibility for disbursement of paperwork and funds.

Escrow Impounds
That portion of a mortgagor’s monthly payment held by the lender to pay for real estate taxes, hazard insurance, and mortgage insurance, as they become due.

Estate
The ownership interest of an individual in real property which is measured by its potential duration; the degree, quantity, nature, and extent of interest that a party has in real property.

Estoppel Certificate (Letter)
A written statement that bars the signer from making a claim that is inconsistent with that party’s prior statement. An estoppel certificate verifies the loan balance and is sometimes referred to as a “payoff letter”.

Exculpatory Clause
A provision in a mortgage or note in which the lender waives the right to a deficiency judgment against the borrower and the borrower is relieved of personal liability to repay the loan.

Execute
To sign or to ratify a document.

F

Fair Isaac
The developer of a credit scoring system used by many credit-reporting agencies.

Fannie Mae
A privately owned corporation created by Congress in 1938 to support the secondary mortgage market by purchasing and selling government underwritten residential mortgages. Today, Fannie Mae purchases more conventional mortgages than FHA or VA and their stock is publicly traded.

Federal Emergency Management Agency (FEMA)
A federal agency that provides assistance to victims of natural disasters. FEMA publishes Flood Insurance Rate Maps.

Federal Housing Administration (FHA)
A division of HUD. Its main activity is insuring residential mortgage loans made by private lenders.

Fee Simple Absolute
The most complete ownership in land with indefinite duration, freely transferable, and inheritable.

FICO Score
A credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Scoring has becoming widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrower’s credit history into a single number.

Fiduciary
A party in a position of trust and confidence for another.

First Mortgage
A mortgage having priority over all other voluntary liens against certain property, as evidenced by recording; the earliest recorded mortgage remaining unpaid.

Fixed Rate Mortgage (FRM)
A mortgage in which the interest rate and monthly payments remain constant over the life of the loan.

Flood Certification Fee
A fee paid to an independent third party to determine whether or not property improvements are located in a flood zone.

Flood Insurance
Insurance subsidized by the federal government required for property improvements located in federally designated flood areas (A & V zones).

Forbearance
The act of refraining from taking legal action despite the fact that a mortgage is in default.

Foreclosure
The legal procedure undertaken by a mortgagee for the purpose of having property sold and the proceeds applied to the payment of a defaulted debt.

Freddie Mac
The disbursement of funds to complete a transaction that occurs when a lender provides money to close a loan, or an investor provides funds to the lender to purchase a mortgage loan.

Funding
The disbursement of funds to complete a transaction that occurs when a lender provides money to close a loan, or an investor provides funds to the lender to purchase a mortgage loan.

Funding Fee
A fee paid by the veteran to the Department of Veteran’s Affairs to provide for a partial guarantee of the veteran’s mortgage loan.

G

Ginnie Mae
A government agency (Division of HUD) that administers the mortgage-backed securities program which channels new funds into residential financing through the sale of privately issued securities carrying a Ginnie Mae guarantee.

Ginnie Mae Mortgage-Backed Securities
Securities guaranteed by Ginnie Mae that are issued by mortgage bankers, commercial bankers, savings associations, savings banks, and other institutions. The GNMA security holder is protected by the “full faith and credit of the U.S.” Ginnie Mae securities are backed primarily by FHA and VA loans.

Graduated Payment Mortgage (GPM)
A residential mortgage loan which has initial low monthly payments that increase gradually and then level off for the duration of the loan term. A GPM with an adjustable interest rate may result in initial negative amortization.

Grant
A generic term applicable to transfers of real property.

Grantee
The party who receives a deed; the buyer.

Grantor
The party who signs and gives the deed; the seller.

H

Hazard Insurance
A contract whereby an insurer, for a premium, undertakes to compensate the insured for a loss on a specific property due to fire, windstorm, and other natural hazards.

Highest and Best Use
A principle of value that focuses on the most profitable, legal use to which a property can be put.

Home Equity Line of Credit
A revolving line of credit against the equity in one’s home allowing the homeowner to borrow as needed, up to a predetermined maximum amount.

Homeowner’s Protection Act
A federal law requiring automatic cancellation of Private Mortgage Insurance (PMI) when the loan-to-value ratio is reduced to 78%.

Housing and Urban Development, Department of (HUD)
Established in 1965 to implement and administer government and urban development programs. The range of programs includes community planning, equal opportunity in housing and FHA mortgage loans.

I

Index
An economic measurement of the cost of funds used as a base to determine the periodic interest rate adjustments for Adjustable Rate Mortgages. Common indexes include Treasury Bills, both the 4th and 11th Federal Home Loan Bank District Cost of Funds, and the London Interbank Offered Rate (LIBOR).

Institutional Lender
A financial institution that invests in mortgages typically carried in its own portfolio, such as savings associations, commercial banks, life insurance companies, and pension and trust funds.

Intangible Tax
A state tax on certain items of intangible personal property such as mortgages.

Interest
Rent paid for the use of borrowed money, usually expressed as an annual percentage.

Involuntary Lien
A lien imposed against property without an owner’s consent.

J

Judgment Lien
A lien placed on property involuntarily as a result of a court action.

Junior Mortgage
Any lien subsequent to the claims of the holder of a prior senior mortgage as evidenced by the time and date of recording.

L

Leverage
The use of borrowed funds to finance the purchase of an asset; the use of another’s money to make more money.

Lien
A legal hold or claim of one person on the property of another as security for a debt or charge. A mortgage, once recorded, is a voluntary lien.

Loan
A sum of money provided by a lender to be repaid with or without interest.

Loan Processing
The assembling of a mortgage loan application and related documents for consideration by a lender.

Loan Submission
Documentation delivered to a prospective lender for review and consideration for the purpose of making a mortgage loan.

Loan-to-Value Ratio (LTV)
The relationship between the mortgage amount and the appraised market value (or sales price if lower) of the security property, and expressed as a percent.

M

Margin
The number of basis points a lender adds to the index to determine the interest rate for an Adjustable Rate Mortgage.

Metes and Bounds
The most accurate method of land description; “metes” means measurements and “bounds” means boundaries.

Mill
The measure used to express a real estate property tax rate; one-tenth of one percent.

Mortgage Insurance Premiums (MIPs)
Fees paid by FHA borrowers to obtain a loan (upfront and annual).

Mortgagee
The party in a mortgage transaction who receives and holds the mortgage as security; the lender.

Mortgage Insurance
An insurance policy to protect a lender against loss caused by a borrower’s default.

N

Negative Amortization
A situation where the loan balance increases over time, rather than decreases. Monthly mortgage payments may be less than required to pay both the interest and the principal and the unpaid interest is added to the loan balance.

Net Worth
The value of all assets less total liabilities.

Non-Conforming Loan
A conventional mortgage loan that does not comply with the underwriting criteria established by “Fannie Mae” or “Freddie Mac”.

Note (Promissory)
A written promise to pay a sum of money at a stated interest rate during a specified term; legal evidence of a debt; sometimes referred to as a “mortgage note”.

Note Endorsed with Recourse
A mortgage note assigned in the secondary market with the right of the note holder (assignee) to seek payment from the endorser (assignor); not limiting recovery solely from the property.

Note Endorsed with Non-Recourse
A mortgage note assigned in the secondary market without the right of the new note holder (assignee) to seek payment from the endorser (assignor) limiting recovery solely from the property.

O

Open-End Clause
Permits the mortgagor to re-borrow funds which had been previously repaid, up to the original face amount of the loan, upon agreement of both lender and borrower; a clause allowing future advances.

Origination Fee
The fee for the work involved in the evaluation, preparation, and submission of a proposed mortgage loan from individual borrowers.

P

Package Mortgage
A mortgage which includes personal property (chattel) together with the real property.

Par
The face amount of a mortgage or charge with no premium or discount.

Participation Loan
A mortgage originated with funds provided by multiple lenders, each being a participant in the total amount loaned.

Prepayment Penalty Clause
A provision in a mortgage that requires the borrower to pay a monetary penalty if the mortgage payments are made in advance of the normal due date or if the mortgage is paid in full ahead of schedule.

Prepayment Privilege Clause
The right given a borrower to pay all or part of a debt prior to maturity without penalty. A penalty is not permitted on any government-underwritten law.

Primary Mortgage Market
The market where loans are funded by institutions or investors directly to borrowers.

Principal
The amount of a debt, not including interest; the outstanding balance of a loan.

Private Mortgage Insurance (PMI)
Insurance provided by a private company protecting conventional mortgage lenders against loss resulting from a mortgagor’s default.

Purchase Money Mortgage (PMM)
A mortgage given (in lieu of cash) by the purchaser of real property to the seller as part of the consideration in the sales transaction; often considered “seller financing”.

R

Real Estate Sales Contract
A written agreement whereupon a seller commits to sell and a buyer commits to purchase certain real estate. Provisions include: price, terms, financing, down-payment, and responsibility for property settlement expenses. Most contracts provide for buyer or seller to cancel the contract and permit return of buyer’s deposit if diligent efforts to meet financing contingencies have been unsuccessful.

Real Estate Settlement Procedures Act (RESPA)
A federal law requiring that all closing costs be disclosed on a Good Faith Estimate within 3 business days, use of a HUD-1 Settlement Statement, requires lenders disclose the likelihood that the servicing rights may be transferred and limits the amount held in escrow to pay for taxes and insurance.

Retail Lender (Banks)
A lender who offers mortgage loans directly to the public.

Reverse Mortgage
A mortgage in which a lender may make scheduled monthly payments to the borrower using mortgage-free property as collateral.

Right of Rescission
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner 3 business days to cancel a contract in some cases, once it is signed, if the transaction uses equity in the home as security.

S

Secondary Mortgage Market
The market where existing mortgages are bought and sold. It contrasts with the primary mortgage market, where mortgages are originated.

Security Interest
An interest that a lender takes in the borrower’s property to assure repayment of a debt.

Servicing
The collection for an investor of periodic payments of principal, interest, and trust items (hazard insurance and taxes) in accordance with the terms of the note and mortgage.

Servicing Fee
The compensation a lender receives from an investor for servicing loans on its behalf.

Setback
Restrictions established in a deed or by zoning on the space required between lot lines and building lines.

Shared Appreciation Mortgage (SAM)
A mortgage in which a lender charges a below-market interest rate in exchange for a share of the property’s appreciation upon the sale or maturity of the loan.

Simultaneous Issue
The act of a title insurance company providing both an owner’s title policy and mortgagee’s title policy at the same time.

Stand-By Commitment
A commitment to purchase a loan whereby both parties understand that delivery is not likely unless circumstances warrant.

Stand-By Fee
The fee charged by an investor for a stand-by commitment. The fee is earned upon issuance and acceptance of the commitment.

Subject to the Mortgage
A purchaser acquires real property with an existing mortgage, upon which purchaser makes payments but does not take personal liability for the promissory note.

Subordination
Voluntary acceptance of a lower mortgage priority than one would otherwise be entitled to have in that property. A subordinated mortgage is inferior to a senior mortgage.

T

Taxable Value
The assessed value less allowable exemptions resulting in an amount to which the millage rate is applied to determine property taxes due.

Term Mortgage
A mortgage wherein only interest is periodically paid, with the entire principal amount due in one lump sum upon maturity.

Title
The evidence of the right to ownership of property.

Title Insurance Policy
A contract by which the insurer agrees to pay the insured a specific amount for any loss resulting from certain defects in the title to real estate.

Title Search
An analysis of the abstract of title on a specific piece of property in order to determine the present condition of title.

Truth-In-Lending Act (Regulation “Z”)
A federal regulation requiring disclosure of the APR, certain finance charges, the 3-day right of rescission when refinancing a primary residence, and certain additional disclosures when advertising financing terms.

U

Underwriting
The analysis of information relating to risk and making a decision whether or not to accept that risk. The underwriter evaluates the borrower’s ability and willingness to repay the obligation and establishes that the property represents adequate security for the debt.

Unencumbered Property
A property the title to which is free and clear of mortgage liens.

Utilization Ratio
The ratio between the credit limits on your accounts and the outstanding balances. This ratio shows lenders how much of your available credit you are using overall.

V

VA Loan
A loan partially guaranteed by the government made by a DVA approved lender to a qualified veteran.

W

Warranty Deed
A deed in which the grantor warrants or guarantees title against any and all claims.

WDO Inspection Report
A report from a certified pest control inspector determining the presence or absence of visible current termite infestation, or any visible evidence of structural damage from prior infestation or wood rot.

WDO Clearance Letter
Certification that no visible current termite infestation or any visible evidence of structural damage exists.

Wholesale Lender (Mortgage Broker)
A lender who provides loans through mortgage brokers or correspondents. The mortgage broker or correspondent initiates the transaction, takes the borrower’s application, and processes the loan.

Wraparound Mortgage
A junior mortgage, which secures a debt that includes the balance due on an existing senior mortgage plus an additional amount due to the wraparound mortgagee. The wraparound mortgagee thereafter receives all payments and then remits the payments on the senior mortgage. In most cases, the purchase price minus the down payment will equal the wraparound mortgage amount.

Y

Yield
The annual return on an investment stated as a percentage of the equity invested.