Mortgage & Homeownership Terms
We know firsthand how much mortgage industry jargon our clients encounter when buying or refinancing. We’ve compiled this guide for you as a reference point in case you come across any jargon you aren’t familiar with. Our team is happy to help answer any questions you may have too.
The availability of wealth or savings that can be easily liquidated – meaning converted to cash or cash-like assets. Someone might own 25 properties with over $10M in total assets yet have extremely low liquidity, simply because all their wealth is tied up in those properties. Selling a property takes time, hence it’s a relatively “illiquid” form of investment compared to a brokerage or money market account.
ROI (Return on Investment)
ROI is the profit earned on an investment divided by the cost of that investment. If you buy 10 shares of stock at $100 per share and later sell at $150 per share, the ROI is $500 (profit) / $1,000 (cost), or 50% ROI. (This example is simple on purpose – it becomes more complicated if you consider capital gains tax.)
Commonly used mortgage loan application (1003) and transmittal summary form (1008) developed by Fannie Mae. The 1003 is sometimes called the Uniform Residential Loan Application.
4506-T Request for Tax Return Transcript
An IRS Form that is sent to the IRS by mortgage lenders as a request for Tax Return Transcripts. The Transcripts are used to verify the authenticity of the tax returns used in a loan file.
Ability to Repay
Ability to repay is a rule from the Truth in Lending Act. Here’s how the CFPB defines it: “The reasonable and good faith determination most mortgage lenders are required to make that you are able to pay back the loan. Under the rule, lenders must generally find out, consider, and document a borrower’s income, assets, employment, credit history and monthly expenses.”
Adjustable Rate Mortgage, or ARM
A type of mortgage loan characterized by interest rates that automatically adjust or fluctuate in concert with certain market indexes. Generally, an ARM begins with an introductory or initial interest rate that is fixed for a period such as 5 or 7 years. After the fixed period, ARM rates may rise or fall, but they cannot exceed the “life cap” of the loan that is defined in the promissory note.
Purchases that are made without any associated financing or mortgage, meaning the buyer uses liquid funds to buy the home outright.
The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Initial payments include mostly interest and little principal, but as the loan matures principal increases and interest decreases until the loan is paid off.
An amortization chart is a table of periodic loan payments, showing the amount of principal and interest that comprise each payment until the loan is paid. Initially, the interest portion is far greater than the principal portion. As the loan matures, the amount of principal increases as the interest decreases until the last payment is made.
Annual Percentage Rate, or APR
The truest cost of a home loan. The APR, or Annual Percentage Rate, is a recalculation of a borrower’s effective mortgage interest rate that includes closing costs as well as the interest borrowers will pay on the loan. These closing costs can include origination fees, points, escrow fees and mortgage insurance. The APR may be somewhat misleading on loans that require large mortgage insurance premiums, like FHA loans. APR quotes are required, however, to prevent lenders from quoting artificially low interest rates to attract business and then charging substantial fees to cover the cost of the low rates. Per the Truth in Lending Act, all mortgage lenders must disclose their APR.
Appraisal Management Company, or AMC
A compensated liaison between the lender and appraiser that orders the appraisal, and any special reports, surveys or addenda, via a pool of certified, licensed appraisers. JVM has its own internal AMC comprised entirely of a panel of hand-picked, highly qualified appraisers.
Appraised value landing below the agreed-upon contract price is known as a shortfall, meaning the appraiser’s valuation is less than the home’s actual value.
See Property Inspection Waiver (FNMA), or Property Inspection Alternative (FHLMC).
Appraisal, Property Appraisal
An estimate of the fair market value of a property, as prepared by a licensed appraiser. Appraisers inspect, photograph, and measure structures on the property, and review all county records relating to the property. Appraisers compare subject properties to similar properties (“comparable sales”) in the area that have sold in recent months, subject to specific appraisal guidelines.
The measurable increase in market value of a property. Market improvements and home renovations are factors that increase appreciation.
Approval, Final Approval, Loan Approval
An “approval” can be verbal or in writing. Formal loan approvals are in writing, and they are typically documents provided by underwriters who have reviewed an entire loan file (income, assets, credit, collateral or appraisal). The approval documents lay out the terms of the loan and all the necessary additional “conditions” (documents, explanations, information) that are required to obtain the final approval that is necessary to fund a mortgage.
A type of mortgage that may be entirely assumed by a person other than the original borrower. FHA mortgages are typically assumable while most conventional mortgages are not. Most buyers need to qualify for an assumable loan. Assumable loans are more attractive in high interest rate environments after rates have climbed significantly (buyers have a desire to assume a loan taken out in years past when rates were much lower).
Automated Underwriting System, or AUS
Software developed by FNMA (Fannie Mae) and FHLMC (Freddie Mac) that is used to approve borrowers. FNMA uses DO (Desktop Originator) and DU (Desktop Underwriter), FHLMC uses LP (Loan Prospector). For FHA or VA loans, either is acceptable. Note that algorithms for FHA/VA are far more lenient.
A balloon payment is a larger than normal one-time payment structured at the end of a loan term. Loans with balloon payments are considered non-QM because there will be a lower than normal monthly payment for the life of the loan and then a large lump sum at the end that borrowers may have issues paying for.
Basic Entitlement Amount
As an eligible veteran, basic entitlement guarantees that the VA will pay your lender the lesser of up to $36,000 or 25% of your VA loan amount if you default. For loan amounts over $144,000, bonus entitlement kicks in.
Basis points (also known as BPs, and pronounced as “bips”) are a unit of measurement. They’re equal to one one-hundredth of one percentage point (0.01%). Basis Points are used to remove any ambiguity when referring to the specifics of an interest rate.
Benefit to Borrower
Every refinance loan requires us to show how the new loan benefits the borrower. In most cases, the benefit to a rate/term refinance is lowering the payment. But there are other reasons, such as reducing the loan’s term, refinancing from an adjustable-rate loan to a fixed-rate loan (considered less risky), removing mortgage insurance, combining a 1st/2nd combo into one loan, or adding/removing a borrower from the loan. In the case of a cash-out refinance, the benefit is receiving cash from the equity in the property. Each loan type has a specific guideline for the benefit to the borrower.
When there is substantial interest in a specific property, a bidding war could ensue. Bidding wars refer to situations where competing bids are presented to the seller, typically in rapid succession. The purchase price may increase as a result of a bidding war, and/or the closing timelines and loan terms might become more aggressive.
The individual or individuals extended a loan and mortgage for the purchase of a house and/or property. The borrower is responsible for making all payments and fees associated with the loan over the life of the loan. Legally, a borrower is considered a mortgagor.
Buyer's Agent, or Selling Agent
Real estate agent who works on behalf of the homebuyer. The selling agent typically does market research, shows houses to potential buyers, and helps write offers for properties. The selling agent should not be confused with the listing agent (who represents the seller).
Maximum interest rate, as defined in the promissory note, that a borrower may be expected to pay on an adjustable rate mortgage (ARM) over the life of the mortgage.
Cash Out Refinance
A mortgage refinance in which the borrower accesses equity in the property to increase the size of the loan to garner additional cash. E.g.; A borrower who owes $300,000, refinances into a new $400,000 loan, because the value of the home increased since date of original purchase. Interest rates are sometimes higher for cash out loans, depending on the amount of equity remaining in the home. An alternative way to access cash from home equity would be from a Home Equity Line of Credit (as a second mortgage).
A cash reserve, also referred to as a mortgage reserve, is the savings you’ve set aside for emergencies. Lenders can require you to have two months of mortgage payments on hand in case of emergency.
Cash to Close
Cash to close is the total amount of funds a buyer needs to bring into escrow before a transaction closes. These funds include the entire down payment and all closing costs. It is extremely important that buyers know where these funds are coming from before getting into contract, as all lenders require that every dollar that goes into the cash to close be sourced and paper-trailed.
Certificate of Eligibility (COE)
A Certificate of Eligibility (COE) is a document from the Department of Veterans Affairs that confirms your eligibility to obtain a VA home loan.
Chapter 13 Bankruptcy
A form of bankruptcy that allows individuals to repay all or some of their debt over time.
Close of Escrow
The close of escrow is the point in the real estate transaction when the buyer, seller, and all affiliated third parties have fulfilled their legal responsibilities to one another and the transaction can close.
Closing is when a borrower’s file is submitted to underwriting. A JVM Closing Specialist will review any conditions that the underwriter has. During closing, we will also order the final loan documents, and facilitate the signing appointment to ensure that the client’s loan funds and closes on time.
Closing Costs: Non-recurring and Recurring
Non-recurring closing costs include one-time fees paid at closing like the escrow fee, appraisal fee, notary fee, processing/underwriting fee, recording fee, title insurance, etc. Recurring fees are fees that will continue even after the close of escrow: mortgage interest, property taxes and insurance. These fees recur throughout the life of the loan.
Closing Disclosure, or CD
This disclosure is provided to the borrower(s) for signing prior to issuing their final loan documents. It offers a clear, concise picture of all fees and terms. The CD must be signed three days prior to signing loan documents. The waiting period is required by TRID to allow the borrowers time to review the fees and terms before signing their final loan documents.
Closing Statement (of fees)
The closing statement is prepared by escrow and given to the lender. It states the actual costs of the loan. The lender will use the closing statement to prepare the CD.
Closing timelines refer to the overall closing process (the number of calendar days) and the length of specific contingency periods within the process.
Collateral Desktop Analysis
A secondary review required to confirm the appraised value of the subject property. This is required by specific jumbo investors, or when the risk score of an appraisal is over 2.5.
A co-borrower is any joint borrower on the loan. If two borrowers are married, the co-borrower goes on the same loan application. If the borrowers are not married, there will be separate loan applications. The co-borrower takes on shared responsibility for the loan and their income/assets can be combined with the borrower’s. The co-borrower can occupy the property, or be a non-occupying borrower who doesn’t live in the property. In the case of the latter, a non-occupying co-borrower would be added to assist the primary borrower in qualifying for the loan.
Combination Financing/Combination Loan
See First/Second Combo Loan.
Comparable Sales (“comps”)
Similar properties in the area (usually within 1 mile of the subject property) used as a metric in the calculation of a home’s appraised value.
Additional information or documentation required by the AUS or an underwriter to finalize loan approval. Conditions can be PTD (prior to document) or PTF (prior to funding). PTD conditions can impact the borrower/property qualification whereas PTF conditions, although necessary, are more fundamental in nature.
A condominium (often referred to as a “condo”) is an individual unit within a complex of other units. Condo owners jointly share common areas such as pools, garages, elevators, etc. A homeowner’s association (or HOA) typically manages the common areas and oversees the complex’s rules. Most condos require that you pay monthly HOA dues that go towards maintaining the complex.
A conventional loan that “conforms” to Fannie and Freddie guidelines. Fannie and Freddie will not purchase loans that do not conform, which is why we call them “conforming loans.” There are limits for conforming loans that vary based on county. The conforming loan limit in Contra Costa County is currently $970,800 (for the year 2022). Any loan that exceeds the county loan limit or does not conform to Fannie/Freddie guidelines would be considered “non-conforming”. Non-conforming loans include FHA, jumbo, and portfolio products.
Construction loans facilitate the process of building a custom home on a plot of land. The construction lending program consists of 2 loans – a short-term construction loan, and permanent financing that kicks in once the home is complete.
A loan that is not insured or guaranteed by the federal government (like FHA or VA). A conventional loan will be bound to Fannie Mae and Freddie Mac guidelines.
A loan that is not insured or guaranteed by the federal government (like FHA or VA). A conventional loan will be bound to Fannie Mae and Freddie Mac guidelines.
A cooperative, or co-op, is an autonomous association of individual people united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned enterprise. Each person carries an equal share of the co-op.
Money extended from a lender to a borrower. Outstanding credit (debt) is documented on the borrower’s credit report and used in part to determine loan approval.
Credit scores (also referred to as “FICO” scores) predict how likely it is that consumers will pay back debt over time. The scoring is generated using information gathered from the three credit bureaus (Transunion, Equifax, and Experian). The credit bureaus collect information directly from creditors about repayment history and credit usage on a consumer level over time.
A DD-214 is a certificate of release or discharge from active duty that is issued to military service members upon retirement, separation, or discharge from active duty from the Armed Forces. For VA loan applicants, the DD-214 is needed to apply for the Certificate of Eligibility that allows veterans to obtain VA financing
DSCR stands for Debt Service Coverage Ratio. This metric compares monthly rental income against the total monthly mortgage payment, and measures whether a property is generating enough income to pay the mortgage. A debt service coverage ratio of 1:1 means that the rental incomes is equal to the mortgage payment (cash flow).
The amount of money a borrower owes to creditors. A metric used to calculate creditworthiness.
Debt to Income Ratio, or DTI
DTI is a primary factor in determining a borrower’s eligibility for a loan. It is used to establish what a client can afford to pay for a mortgage on a monthly basis. DTI is calculated by dividing monthly liabilities by monthly income, to get a percentage. You will typically see it look like this: 36/42 – two numbers divided by a slash. The first number is the “top end” or “front end” ratio, which divides only the new mortgage payment by the gross monthly income. The second is called “bottom end” ratio, or “back-end” or simply “DTI.” This is obtained by dividing the new mortgage payment plus all monthly existing debt by the gross monthly income. The ratios need to fall below certain thresholds, as laid out by each specific loan program.
An official and public document that establishes property ownership.
Deed of Trust
The document used to transfer legal title in real property to a trustee, which holds the property as security for the loan between the borrower and lender. The deed of trust remains in place until the borrower pays the loan in full. The borrower keeps the equitable title to the property, but the trustee holds the legal title to the property. Equitable title refers to a person’s right to obtain full ownership of the property. Legal title is the actual ownership of the land. The bank holds legal title which gives it the rights to transfer ownership of the property to another party (in the case of default).
A borrower defaults on a loan when they are unable to make regular and consecutive payments. Once a borrower is 90 days late, a notice of default (NOD) is issued.
A reduction in the value of an asset over the course of time, usually due to “wear and tear.” A borrower may depreciate their rental property or personal property used for a business on their tax returns. We can “add back” depreciation when calculating qualifying income since it’s not a true expense, but rather, a “paper expense”.
Discount Points, or Discount Fees
Borrowers can pay discount points to buy a lower interest rate on a home loan. A discount fee of 1 point = 1% of the loan amount. At JVM, we typically quote no points and no origination fees. The no points option will usually be associated with a slightly higher rate. Our entire commission is earned when we sell a loan to an investor for a premium on the secondary market. We typically do not recommend that borrowers pay points to buy down their interest rate because the return on investment is too small. If buyers do opt to pay points, a 1% discount fee will usually buy down an interest rate by approximately a .25%, depending on loan type and market conditions.
The percentage of the home value that a buyer puts towards the purchase using their personal funds (or gift funds). The remaining amount is typically financed with a mortgage – so if a buyer puts down 20%, they are financing 80% of the home value.
Earnest Money Deposit (EMD), or Good Faith Deposit
A deposit from the buyer accompanying an offer for a home purchase. The purpose of an earnest money deposit is to prove an offer is serious and in good faith. This money is held in escrow, and is typically required within 72 hours of offer acceptance. The EMD can be a wire, a personal check (in some cases), or a cashier’s check.
This appears on your Certificate of Eligibility and corresponds with the time period the veteran served. For example, entitlement code 10 indicates service during the Persian Gulf War.
Home equity is the measurable value of a property above and beyond that owed on a loan. This value grows as the property owner pays off the mortgage, and/or as the value of the home appreciates with the market.
An escrow company acts as the third-party buffer between buyer and seller during a real estate transaction. Because buying or selling real estate generally involves transferring a large amount of money, is it imperative to have a licensed and highly regulated neutral third party to coordinate the transaction. Escrow orders title insurance, collects and prepares loan/legal documents, arranges document signing, collects funds, and disperses to all parties in the transaction.
Escrow or Impound Accounts
An impound account is set up to allow the borrower to pay property taxes and home insurance on a pro-rata monthly basis, instead of on a semi-annual or annual basis. The taxes and insurance are simply added to the monthly mortgage payment by the loan servicer. The servicer will then keep these funds in the impound account until the bills come due. At that point, the servicer will pay these bills automatically on the borrower’s behalf. Impound accounts are usually required if you are putting less than 10% down, and are always required with FHA and VA loans.
Federal Housing Administration. The FHA is a U.S. government agency under the Department of Housing and Urban Development (HUD) that insures loans made by banks and lenders.
Mortgages insured by the FHA. These loans offer more flexible down payments and underwriting guidelines. They are not just for first time homebuyers, but are available for all borrowers who qualify – for both purchases and refinances. Mortgage insurance is required on all FHA loans.
The Federal Housing Finance Agency (FHFA) is an independent federal agency. The FHFA regulates the industry and sets the standard for government and government-sponsored entities (such as Fannie Mae and Freddie Mac). The FHFA also sets the annual county loan limits for conventional and FHA financing to conform to their underwriting guidelines.
See Credit Score.
Fair Market Rental Survey
This is a report generated by an appraiser which states how much rental income a property is likely to generate based on leases in the present market. The fair market rental survey is needed for investment and multi-unit purchases to see how much future rental income underwriters can consider for qualification
Fair Market Value
The price that a piece of property will bear in the current market. In other words, it is the estimated amount that a buyer would be willing to pay a seller for his property in the present market conditions.
Along with Freddie Mac, Fannie Mae is a leading government-sponsored enterprise (GSE), or “agency,” that buys loans from mortgage banks and either holds them in its portfolios or packages them into “Mortgage-Backed Securities.” Both Fannie and Freddie were created by Congress as ostensibly private companies to provide liquidity to the mortgage market in support of homeownership for Americans. They are now effectively controlled by the U.S. government, and they dominate the mortgage market. These agencies purchase mortgages that abide by strict criteria. They will only lend up to the conventional loan limit per county, which are set annually.
First Time Homebuyer (FTHB)
Technically, a first-time homebuyer is a home loan applicant who has not owned a home in the past three years.
First/Second Combo Loan
First/second combos are mortgages that fund concurrently or at the same time. The first mortgage is typically at a loan-to-value of 80% or less, and the second mortgage accounts for the loan-to-value portion above 80%. These loans allow buyers to avoid mortgage insurance (see JVM Buyer’s Guide) requirements as well as jumbo loan restrictions. For example, a 90% loan-to-value purchase of a $700,000 home can be structured as a $560,000 first mortgage and a $70,000 second mortgage. Because the first mortgage is at 80% loan-to-value, mortgage insurance is not required.
A fully amortizing mortgage that is outfitted with a fixed interest rate over the life of the loan. The note rate, in other words, will remain constant for the full term (no adjustments).
For Sale by Owner (FSBO)
The process of selling real estate without the representation of a real estate broker or real estate agent.
The repossession of a property by the bank or lending institution in the event the borrower defaults on mortgage payments.
A foreign national is not a resident of the United States. For mortgage purposes, foreign national loans are required if they wish to purchase investment real estate in the United States.
Along with Fannie Mae, Freddie Mac is a leading government sponsored enterprise (GSE) or “agency” that buys loans from mortgage banks and either holds them in its portfolios or packages them into “Mortgage-Backed Securities.” Both GSEs were created by Congress as ostensibly private companies to provide liquidity to the mortgage market in support of homeownership for Americans. They are now effectively controlled by the U.S. government, and they dominate the mortgage market.
The process of wiring (releasing) money from the mortgage lender to title or escrow prior to closing a real estate transaction.
See Upfront Funding Fee.
Future value (FV) refers to a method of calculating how much the present value (PV) of an asset or cash will be worth at a specific time in the future.
Funds gifted by a relative (occasionally a friend) towards a home purchase. Gift funds are allowable for most types of financing (with notable restrictions for investment purchases).
A gift letter is a written document stating that money received from your gift donor is in fact a gift. Gift letters are requested from a borrower if they are receiving gift funds to help with their down payment for the purchase of their home.
Good Faith Estimate (GFE)
The GFE was a disclosure requirement implemented under RESPA. The GFE is a disclosure required to be provided to a buyer within the first 3 days of a complete application (once the loan is locked or in contract). This is provided from the lender to the buyer, laying out an estimate in “good faith” of all fees due at closing. Depending on the fees, there are certain categories of fees that cannot increase from the initial disclosure, and others that have certain margins they can increase by. The GFE is no longer used, and was replaced by the Loan Estimate (LE). Despite this fact, many realtors still use the term “Good Faith Estimate” to refer to the loan estimate.
Loans backed by the federal government. FHA, VA, and USDA are the most common types of government loans within residential financing. Student loans are another major category, but these are unrelated to the housing market.
Government Sponsored Entities (GSE)
Privately held yet heavily regulated by the US government, GSEs facilitate the transfer of credit to the public by purchasing loans and guaranteeing third-party loans. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are perhaps the two best-known GSEs.
HUD-1 Form, Estimated or Final
This was a federally mandated disclosure provided to the buyer at closing of a purchase or refinance transaction. This form was provided to the consumer at closing to show all fees associated with the transaction. The GFE was provided as the estimate of fees upfront, and the HUD-1 was used to reflect the final fees at closing. Together, these forms were intended to provide the buyer with a clear representation of all charged fees, and any changes from the initial estimate. In attempt to be more user friendly, the HUD-1 was replaced by the Closing Disclosure (CD), and is no longer used.
Hard Money Loan
A type of financing that carries relatively high interest rates (compared to conventional, FHA, and jumbo loans) but allows for unique circumstances. For instance, a client in the midst of a divorce might choose to pursue a hard money loan, then later refinance into a conventional mortgage.
Hazard Insurance, or Homeowner's Insurance
Also known as homeowner’s insurance. Lenders require a borrower to have home insurance to adequately insure the property. This protects the borrower and lender in the event of damage. The insurance is considered adequate for lending purposes when dwelling coverage supports either a) the loan amount, or b) the projected replacement cost for the property based on either the appraiser’s determination or the insurance provider’s internal evaluation. Condominium insurance is a little cheaper, as it typically only requires coverage for the internal walls.
Home Equity Line of Credit (HELOC)
HELOCs are recorded behind the first mortgage on a borrower’s residence – they are subordinate to the first mortgage. Much like a first mortgage, a HELOC is made using the equity in one’s home as collateral. Unlike a typical mortgage, a HELOC acts much like a credit card. The borrower is approved for a given amount (the line limit), but is not required to take all those funds at closing. Once closed, the borrower can “draw” against the HELOC’s line limit as needed, often with a check book, or card similar to a debit card. Borrowers are free to draw on their HELOC, up to their line limit, and are free to pay it down at any time. The monthly payments are not fixed, but are adjusted monthly based on the current balance and rate. The rate is based on a pre-determined index, (PRIME) which can fluctuate. HELOCs are used often for 1st/2nd combo loans to avoid paying mortgage insurance, or help borrowers reach a higher purchase price and put as little as 5% down.
Homeowner's Association (HOA)
An association that manages a condo or townhome complex that establishes certain rules of ownership. Common, but not exhaustive, responsibilities of a homeowner’s association include collection of HOA dues for landscape maintenance or membership in recreation (pool, tennis, etc.) and clubhouse. You will most commonly see HOAs on condo and townhome properties, but small HOAs can also be present on single family homes. HOA dues are most typically paid monthly, and the expense must be included in our qualification. For condos and townhomes, we must include additional documentation surrounding the HOA in our qualification analysis to ensure the HOA is in good standing.
See Escrow Account.
The index rate is a benchmark taken from the short-term cost of borrowing between banks. This rate is determined by the market and not set by your individual lender. The index is added to the margin which gives the fully indexed rate for an adjustable rate loan (ARM) during the adjustable period. Most ARMs nowadays use the Secured Overnight Financing Rate (SOFR) as their index.
An asset that helps protect against inflation. Buying a house with a mortgage is seen as a fantastic inflation hedge since borrowed funds will be worth less in real terms following a period of inflation.
Any number of comprehensive examinations of a home by a licensed inspector including pest, roof, well, and septic inspections. These inspections are to help borrowers understand the current state of the home they are purchasing. If significant defects or health and safety concerns are “called out” by the inspector, the lender will require they be repaired prior to closing, sometimes regardless of the purchase transaction being “as is.” We are often unaware of many inspections that occur unless they are written in the purchase contract. Inspection arrangements are coordinated between the buyer and agent, and we are not involved. However, we will need to obtain copies of any inspections referenced in a purchase contract. Costs incurred by inspections and/or repairs are negotiable between buyer and seller.
The rate of interest charged on a mortgage. Monthly payments against a mortgage will be based on the interest rate. Mortgage rates are volatile, rising and falling with the market until they are “locked in.” Mortgage interest rates can be either fixed or variable.
Real estate bought for investment purposes, unlike owner-occupied (primary homes) or second homes (typically vacation homes). An investment property is purchased with the intention of creating profit. Profit can come in the form of rental income, value appreciation, or both. Any residential property can be considered an investment property (must be 1-4 units, 5 units or more is considered commercial property).
Investors are entities (often other large banks, credit unions, or funds) that buy and service jumbo mortgages from mortgage banks right after they fund.
A non-conforming loan, meaning the loan is greater than the limit allowed by Fannie and Freddie. In most Bay Area counties, jumbo loans are above the conforming loan limit. Jumbo loans are not bound to Fannie/Freddie guidelines and are thus subject to investor guidelines, which are often very stringent. Jumbo loans also require a slightly longer closing period (25 days at the time of this writing).
LTV/CLTV; Loan-to-Value/Combined Loan-to-Value Ratio
The LTV is a ratio taken by dividing the loan amount by the value of the home. If there are multiple loans being obtained then we also calculate the CLTV. The CLTV is a ratio taken by dividing the total combined loan amounts by the value of the home. The value of the home is defined as the lower of the purchase price or appraised value.
Borrowers can take a slightly higher rate to obtain a lender credit (up to 6% of the purchase price) to cover all or some of the closing costs. The credit can cover recurring and non-recurring closing costs so the borrower can keep more cash in his pocket. We need to ensure our credit does NOT exceed closing costs – once disclosed, our credit cannot be lowered.
Typically included in fees associated with closing costs, sometimes called underwriting and/or processing fees; designed to cover costs incurred by lenders during the loan process.
Lender, or Mortgage Lender
The bank or finance company that directly awards a home loan to a borrower based on borrower qualifications.
A formal, legal symbol of money owed on a major asset such as property. A lien is a form of security to the lender, securing a piece of property as collateral against payment of a debt or other obligation. A mortgage is a lien.
Funds held in checking, savings, or brokerage accounts in excess of down payment and closing costs. Specific loan programs (i.e. jumbo financing) require liquid reserves above and beyond “cash to close”. Non-liquid reserves typically refer to retirement account balances.
Listing Agent, or Seller’s Agent
A real estate agent that listed the home on behalf of the seller and is representing the seller’s interests in the transactions.
A loan is a borrowed sum of money to be paid back with interest. Financial institutions give loans to borrowers, who agree to pay it back over a specified period at a particular rate of interest.
Loan approval is a formal step in the funding process that occurs once the underwriter has reviewed all documentation provided by the borrower and the loan originator.
Loan Estimate (sometimes mistakenly referred to as the "Good Faith Estimate")
The Loan Estimate is a disclosure form that is required to be sent from the lender to the borrower within 3 days of receiving a formal loan application from the buyer. It is an estimate of the costs associated with obtaining the loan. It is intended to give the buyer an estimate of their costs so that they can compare loan products. It is also meant to prevent lenders from “bait and switch” tactics, as lenders are unable to change or increase most of the fees on the Loan Estimate without first providing a new Loan Estimate. The borrower cannot sign their loan documents until 7 days after they have been provided the Loan Estimate.
A loan modification is an alteration to an existing loan made by a lender in response to a borrower’s long-term inability to repay the loan. Loan modifications typically involve a reduction in the interest rate on the loan, an extension of the length of the term of the loan, a different type of loan, or any combination of the three.
The margin is a rate set by your individual lender, usually based on the overall risk level a loan presents. This will not change over time and is determined directly by the lender. When you add the index to the margin you can see the fully indexed rate for an adjustable rate mortgage during the adjustable period.
A legal document between a mortgagor and a mortgagee that establishes a home and/or property as security for a home loan. Colloquially, we use it to mean a loan secured by residential property. Also see Deed of Trust.
Mortgage insurance is a monthly charge the lender puts on certain loan products. Mortgage insurance is required on all FHA loans, and on conventional / conforming loans that exceed 80% LTV. The insurance provides a measure of protection to the lender if the borrower defaults on his loan.
Mortgage Insurance Premium (MIP), and Upfront Mortgage Insurance (UFMIP)
FHA requires borrowers to pay an upfront mortgage insurance premium (1.75% of the base loan amount) and a monthly mortgage insurance amount. Unlike conventional financing, the monthly insurance amount is at a set rate dependent upon the property type and LTV (not credit score). FHA has less stringent qualification requirements (high DTI, low down payment) but the borrower pays for it with the mortgage insurance. The UFMIP is usually financed into the loan amount rather than paid all at once at closing.
No-Cost Refinance (or, No-Cost Mortgage)
If the borrower does not want to pay the closing costs, they can instead take a slightly higher rate and get a lender credit for the costs. Once they have built some equity, they can then refinance out of the high rate. This is a great option to get income heavy but cash-strapped buyers into a home, but the risk is that rates will rise and they will not be able to refinance out of the higher rate they obtained at closing.
A non-qualified mortgage — or non-QM — is a home loan that is not required to meet agency-standard documentation requirements as outlined by the Consumer Financial Protection Bureau (CFPB). These riskier loan products have higher rates and less desirable loan terms, but allow for non-traditional buyers to buy a home whereas they may not qualify with traditional financing.
Prospective buyers will make a written or verbal offer to buy a home from a seller at a certain dollar amount and with certain purchasing parameters. The seller can accept, reject, or counter the offer.
Origination Fees, or Points
Lenders can charge borrowers origination fees and/or points. Origination fees can be expressed as a percentage of the loan amount, or as a flat fee amount. Points are always expressed as 1% of the loan amount. For example, one point on a $500,000 loan amount will be $5,000.
A loan program that allows borrowers to finance energy efficient products for their home, such as dual pane windows, solar energy, insulation and more. The loan payments are made through an increase in the property tax. These loans must be paid off when refinancing since the PACE loan will not subordinate to the new first loan. A PACE loan can typically be found on the Prelim of the property and/or on the property tax bill.
PITIA (Principal, Interest, Taxes, Insurance and Association Dues)
PITIA refers to the total monthly cost of principal, interest, taxes, insurance, and homeowner’s association dues, if applicable. In short, it’s the total monthly housing payment.
Power of Attorney (POA)
A legal document giving one person (called an “agent” or “attorney-in-fact”) the power to act for another person (the principal). In laymen’s terms, this means the agent can sign official documents for the principal. Many elderly people will give one of their children Power of Attorney, for example. We use POAs if one person needs to sign loan documents on behalf of another person. This usually occurs when one borrower is going out of town/country and we don’t want to delay escrow. We need to set up a “specific” Power of Attorney – i.e., one that references the property and loan, and has an expiration date. We cannot use a general Power of Attorney that has already been established; one must be specifically created for the transaction. Escrow will prepare the Power of Attorney form, and then the agent and the principal need to sign it in front of a notary. The Power of Attorney can only be used to sign the closing documents. It can’t be used throughout to sign the application or initial loan disclosures.
The process by which the credit of a potential homebuyer is pre-approved for a home loan with a lender. “Credit” includes the credit report as well as income and asset documentation. In the pre-approval process, a lender deems an applicant creditworthy (or not) up to a certain dollar amount, determined by the qualifying debt-to-income ratios. Only the credit portion of the application can be “pre-approved,” as there are is not yet any contract nor any property documentation to review.
Pre-Paid Costs, or Fees
Non-recurring closing costs include one-time fees paid at closing. These include the escrow fee, appraisal fee, notary fee, processing/underwriting fees, recording fees and title insurance, etc. Recurring costs include “pre-paid interest”, property taxes and insurance. These fees (commonly referred to as “Prepaids” are considered “recurring” because they will recur through the life of the loan. Pre-paid interest is paid from the day your loan funds through the month end, but you pay interest each month on the loan. Taxes are paid twice per year (though they may be paid through an impound account), and insurance is paid either annually or monthly.
The process in which a homebuyer may find out how high of a home loan he or she could be approved for by a lender, without the benefit of verifying all documents. Banks typically pre-qualify, not pre-approve. When pre-qualifying, typically lenders will look only at very minimal documents (e.g. paystubs and credit report, if that) to determine debt-to-income ratios. Assets generally are not verified, and many items that will potentially jeopardize lending are often missed.
This is the interest rate that major banks (e.g. Chase, Bank of America, Wells Fargo Bank) charge their most creditworthy clients. These clients are typically large corporations, not individuals.
The principal is the original amount of a loan, excluding interest charges.
Private Mortgage Insurance (PMI)
Conventional loans with a Loan-to-Value ratio of 80% or more usually require mortgage insurance. It is called “private” mortgage insurance to contrast it with the government issued mortgage insurance associated with FHA loans. The premiums can be paid in lump sums at close or on a monthly basis, or as a combination of both. The cost of private mortgage insurance depends on the down payment percentage, the loan amount and the borrower’s qualifying credit score.
Processing fees are typically a flat fee charged by a lender for processing a loan. The fees are “flat” in that they are not based on the purchase price or loan amount. Processing fees vary from institution to institution and are included in closing costs. They show up as a line item on the disclosures (LE and CD) and on the settlement statement prepared by escrow.
The physical street address of a home, required to lock in (guarantee for a specific period) an interest rate. The address will contain the street number, street name, street type (i.e. street, avenue, lane, etc.), city, and zip code.
Property Inspection Waiver (FNMA), or Property Inspection Alternative (FHLMC)
The automated underwriters that Fannie Mae and Freddie Mac allow lenders to use to help underwrite mortgage loans may allow for a Property Inspection Waiver (PIW) or a Property Inspection Alternative (PIA) based on a variety of criteria including overall risk evaluations and whether or not there is an existing appraisal of the subject property within Fannie Mae’s or Freddie Mac’s database. When there is a PIW or PIA finding, the appraisal requirement may be waived, thus eliminating the cost of the appraisal and the risk of an appraisal coming in under the contract price if associated with a purchase. PIW and PIA findings also allow transactions to close faster.
State and local taxes charged against the purchase price of a home. The property tax rate varies between counties and between cities. Property taxes are calculated by multiplying a city’s given tax rate by the purchase price of a home; that figure is divided by 12 to compute the monthly payment amount (though the payments are made twice per year). In addition to the standard taxes, most cities and counties have supplemental taxes that are also levied twice per year. Standard property taxes are applied toward services such as sewer systems, pest abatement, emergency services, and public schools; supplemental taxes are generally voted on as bond measures in local elections and applied towards services such as public transportation, city library services and city landscaping.
Purchase Agreement, Residential Purchase Agreement or Sales Contract
A Residential Purchase Agreement, or RPA, is a formal, written contract made between a homebuyer and seller. The document includes property address, condition, purchase price, inspections, contingencies, date of closing, date of possession and more, and notes the Earnest Money Deposit and loan type (conventional, FHA, VA). The RPA must be executed by the buyer, seller, agent and escrow.
A guarantee for a specific period (15 or 30 days typically, though a rate can be locked for up to 60 days) by a lender to “hold” a specific interest rate on a loan while the borrower obtains final loan approval and the loan funds.
Rate and Term Refinance
Process by which a borrower can obtain a lower interest rate or more beneficial terms on a mortgage, thereby lowering monthly payments. The borrower will obtain a new loan that is sufficient to pay off his current loan. The new loan must provide a benefit to the borrower. The benefit may be in a lower monthly payment amount due to the lower interest rate, or in the elimination of a balloon payment or adjustable rate feature. JVM monitors all our closed files and will reach out to the previous borrowers with offers to refinance as applicable.
Rebate or Yield Spread Premium
A yield spread premium (YSP), or rebate, is the money or rebate paid to a lender or loan officer for giving a borrower a higher interest rate on a loan in exchange for lower upfront costs, e.g. “no points.” Typically, the higher the rate, the higher the YSP.
We experience a refi boom when rates drop significantly, and many borrowers opt to refinance into a lower rate/payment. Because the time necessary to close a loan can increase dramatically, especially for refis since purchase transaction take priority, lock periods must be increased from 30 to 45 days, or even 60 days if subordinate financing is involved.
The process of replacing an existing mortgage with a new mortgage, either to lower the interest rate, reduce the monthly payment, reduce the term of the loan, pull equity from the home, or some combination thereof.
Reserves are funds that are required to be held in your account after closing. Reserves can be calculated from checking, savings, vested stocks, CDs, and retirement accounts. Reserve funds will be required for most jumbo loans and non-owner-occupied purchases. The amount of reserves required will be measured in a set amount of monthly PITI(A) payments – i.e. 12 months of reserves will be 12 times the monthly payment for the loan. Some investors also require reserves to be held in liquid, non-retirement accounts.
VA residual income is the discretionary income which remains after a homeowner has fulfilled their monthly credit obligations. To get mortgage-approved, applicants need to show a minimum VA residual income based on their geography and household size.
Restoration of Entitlement
Restoration of entitlement occurs when a VA borrower pays off their current VA loan. Since a veteran only receives enough entitlement for one VA loan ($36,000), this will need to be restored to qualify for a new purchase using VA financing.
Funds that have been in the borrower’s account(s) for at least two consecutive recent months (60 days).
See Seasoned Funds.
A second mortgage subordinates to a first mortgage. The funds from the second mortgage can be applied towards the down payment for the home purchase, allowing a buyer to keep more liquid funds in his account and to take advantage of the benefits of a smaller LTV ratio. For example, lenders do not require mortgage insurance when a borrower is putting down 20% (down payment + second mortgage) keeping the LTV ratio at 80%. If the borrower can qualify with both monthly payments and can meet the qualifications of the 2nd lender, a second mortgage can apply for up to 15% of that 20% down payment. The CLTV (Combined Loan-to-Value) ratio will include the 2nd loan. This type of second mortgage, called a Purchase Money Second, can also be used to avoid the more stringent jumbo guidelines—the first loan will be kept at the loan limit for the given county, and the second loan funds will be applied on top of the first loan. A HELOC, or home equity line of credit, is a type of second mortgage, but it is obtained after closing. This is called a Stand-Alone Second.
The secondary mortgage market is a marketplace where home loans and servicing rights are bought and sold between lenders and investors.
Secured Overnight Financing Rate (SOFR) Index
The Secured Overnight Financing Rate (SOFR) index refers to the rate used for adjustable rate mortgages (ARMs). SOFR is calculated as the average interest rate as estimated by the top banks in the United States, based on the rate they would expect to be charged if they were to borrow from other banks.
Sellers can pay for some or all of the borrower’s closing costs by giving a borrower a “seller credit.” Per federal guidelines, a seller credit can be up to 6% of the purchase price. However, this is often too much, as the credit cannot exceed the actual closing costs and “cut into” the buyer’s down payment. Regardless of credit, the borrower must always contribute their minimum down payment. The credit can cover recurring and non-recurring closing costs and will be applied in escrow, thus reducing the funds to close due from the borrower.
Seller Rent Back
An agreement between the buyer and seller where the seller is allowed to reside in a property after the close of escrow is complete, usually in exchange for paying rent (on a daily or monthly basis). Buyers must typically occupy the property within 60 days of closing (assuming they purchased a primary residence), so we generally recommend “rent back” periods of 59 days or less. Investment purchases can allow for longer rent back situations depending on the buyer’s comfort level.
In a short sale, lenders give homeowners permission to discount the home value (and in turn, outstanding loan balance) to ensure a quick sale, thereby averting foreclosure. The lender must agree to accept less than the amount owed on the debt.
Debts incurred by a spouse. Spousal liabilities (credit card debt, auto loans, etc.) are critical to keep in mind when pursuing FHA financing since guidelines require that spousal liabilities are considered when calculating debt to income ratios.
Also called an IRRRL (interest rate reduction refinance loan), this is an FHA loan that requires very little documentation. To obtain an FHA streamline the borrower can have no 30 mortgage lates in the past 12 months and the “benefit to borrower” requirement must be met.
When referencing loans, the loan that ranks as second or in a lesser position is subordinate to the first mortgage. The loan in first position would be paid first in the case of a default. The junior (or second) lien is paid if funds are remaining.
TILA/RESPA: Truth in Lending Act and Real Estate Settlement Procedures Act
The two main pieces of federal legislation that govern mortgage lending to consumers. TILA (Truth in Lending Act) requires lenders to provide borrowers with clear terms and costs of a loan. RESPA (Real Estate Settlement Procedures Act) required lenders to provide borrowers with a Good Faith Estimate disclosing the fees associated with a purchase within three business days of the completion of the loan application.
TRID: TILA-RESPA Integrated Disclosure
Per the most recent guidelines, there are new forms required that integrate the old TILA, RESPA and HUD-1 forms. These new forms are the Loan Estimate (replacing the Good Faith Estimate), provided within 3 days of competing a loan application, and the Closing Disclosure (the closing counterpart to the Loan Estimate) which is provided 3 days before signing. The fees reflected on the Loan Estimate and Closing Disclosure have 3 “tolerances” for variance. There are fees that have a 0% tolerance – they cannot change. These include lender and broker fees/charges. There are fees that have a 10% tolerance – they can change by up to 10%. These include the fees such as recording and notary fees. And, there are fees that can change, though lenders are required to use “best efforts” to estimate these charges. These include property insurance premiums and amounts placed in escrow.
Title Company, Insurance and Reports
A title company typically handles all tasks associated with the property title, including title search, insurance and reports. The reports show, among other things, the legal description of the property, all liens recorded against a property, and a “plat map.” Title companies also provide title insurance. ALTA Insurance is a guarantee that your lender requires to ensure there are no other liens against the property when your mortgage is recorded. CLTA insurance assures there are no claims for, or against, the property you are buying. CLTA ensures “clear title”. Many title companies also act as escrow companies, particularly in Northern California.
Tradelines are accounts that populate on your credit report, including credit cards, student loans, auto loans, personal loans, mortgages, and lines of credit. Most jumbo investors will require a certain number of total and open/active tradelines to qualify for their loans.
U.S. Department of Veteran Affairs (VA)
The Department of Veterans Affairs (VA) runs programs benefiting veterans and members of their families. Among the many services they provide is guaranteeing mortgages for eligible veterans.
The individual who evaluates a borrower’s creditworthiness (reviews a loan file) and approves, declines or suspends a loan (for more documentation). FHA and VA underwriters are specially certified to underwrite government loans.
Lender fees associated with underwriting the loan, usually part of closing costs and usually only collected when a loan funds and records. Underwriting fees can vary from $200 to $1,000, or more.
Upfront Funding Fee (VA)
Funding fees are typically financed. The fee ranges from 1.4-3.6% of the loan amount, and varies based on the down payment and whether you’ve had a VA loan in the past. Eligible veterans can have their funding fee waived – your Certificate of Eligibility will let you know whether the funding fee is required. This is not to be confused with Upfront Mortgage Insurance for FHA Financing.
Special home loans designed exclusively for military veterans which allow 100% financing in many cases. They also typically have excellent terms with low interest rates and no mortgage insurance.
Investment purchases generally require a 25% vacancy factor offsetting future rental income to account for periods of time where the property is in-between tenants. When purchasing a new investment home with an expected rent of $3K per month, the lender will consider only $2,250 of the rental income in their calculation.
Veterans Affairs (VA)
See Veterans Benefits Administration (VBA).
Veterans Benefits Administration (VBA)
A department of the federal government that provides a variety of benefits to veterans, including a unique form of residential loans (VA mortgages).
A tax form that reports an individual’s annual earnings. Mortgage lenders use the W-2 as the basis of their qualifying calculations for how much someone can borrow and afford to pay back on a mortgage.
A yield curve refers to the relationship of interest rates to the length of debt or loan maturities. Usually, the longer the maturity, the higher the rate. This is because there is more risk associated with a longer maturity, so investors demand higher rates of return (the higher the risk, the higher the return). In other words, a loan with a 30-year maturity should have a higher rate than a loan with a 5-year maturity.
Yield Spread Premium
A yield spread premium (YSP), or rebate, is the money or rebate paid to a lender or loan officer for giving a borrower a higher interest rate on a loan in exchange for lower upfront costs, e.g. “no points.” Typically, the higher the rate, the higher the YSP.
Lending requirements that underwriters and originators use as a rulebook for technical details. Guidelines vary by investor and loan program (i.e. VA underwriting guidelines differ from FHA underwriting guidelines).
Purchasing Power, or Purchase Power
A buyer’s ability to purchase across a sliding scale of home value. Example using hypothetical figures: If a client was previously pre-approved to purchase a home for $700K, then finances a new car with a monthly payment of $850, her purchasing power might decrease to $615K based on the new monthly debt. On the other hand, a buyer might intend to purchase a property for $500K when beginning the pre-approval process, but then she learns that her purchasing power actually enables her to purchase up to $750K if desired.