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Mortgage Terminology

Annual Percentage Rate (APR)
The APR is a complex formula. The APR shows the cost of a loan; expressed as a yearly interest rate; it includes the interest, points, mortgage insurance, and other fees associated with the loan. The APR will be higher then the actual note rate. This figure is reflected on your truth-in-lending.

Appraisal
A report that gives an estimate of a property’s fair market value. An appraisal is generally required by a lender to ensure that the mortgage loan amount is not more than the value of the property or exceeding the required loan to value. If the loan to value is low, some lenders will accept an automated valuation method (AVM), which is a computer program, designed for lenders by using similar sale comparables on public records. On higher loan to values, such as 100% financing, some lenders will do a “field review” in addition to the appraisal. A field review is an abbreviated appraisal to double check the original appraiser’s comparables.

Closing costs and/ or Pre-Paids:
Closing costs are customary costs above and beyond the sales price of the property that must be paid to cover the transfer of ownership at closing. These costs generally vary by geographic location and are typically detailed to the borrower’s mortgage loan program. Pre-paids are tied to setting up your escrow account for your property taxes and property insurance in addition to interest due and collected at closing.

Commercial Financing:
Any other property not classified as a one to four unit “residential” property.

Credit Bureau Score:

A number representing the creditworthiness of an individual. It is based upon the individual’s credit history and is used to determine the ability to qualify for a mortgage loan. There are 3 credit bureaus and each bureau has a score. Most lenders use the mid of the three scores to price your mortgage loan.

Debt to Income Ratio (DTI):
This ratio is calculated by dividing your total monthly debt (including your new mortgage payment) by your monthly gross income. Full documentation and stated income programs have a debt to income ratio requirement. No income and No documentation loans do not have ratios because income is not disclosed therefore ratios cannot be calculated. When there are no ratio requirements, there also will not be a “cap” on what you are qualified to purchase.

First adjustment Cap:
In the past, there wasn’t a separate cap for the first time an adjustable rate mortgage adjusts. But since the lending industry has become more aggressive in the recent decade, this feature was added. It is the same as the “interval cap” except the first time your rate is up for adjustment, it has a different cap. Instead of 1 or 2%, which is the normal change for your interval cap, it will be 5 or 6% allowable change. This higher adjustment is only on the first adjustment

Full documentation:
The lender will require you to provide proof of your income, employment and assets. Debt to Income ratios will be calculated and be required to fit within the guidelines, which is generally capped at 45 or 50%.

Good Faith Estimate:
An itemized list of estimated closing costs including Pre-Paids and escrow items. Your loan officer or mortgage broker should provide a good faith estimate within three days of your loan application.

Hard Money:
These types of loans are based on the equity and quality of the property solely. Therefore, these lenders are harder or “pickier” on appraisals. Generally, they do not have credit score requirements because the borrower’s credit profile is not reviewed or submitted. These lender's loan to value (LTV) ranges from 75% to 65% of the appraised value and the interest rates are in the 10 to 15% range.

HARD pre-payment penalty:
SEE “SOFT PRE-PAYMENT PENALTY” - Same as a SOFT penalty except the penalty DOES apply when the property is sold.

Index:
Indexes and margins are only involved in adjustable rate mortgages, not fixed rates. The most common known indexes are the LIBOR and PRIME. Indexes change daily and are tied to the “market”. When it is time for your adjustable rate mortgage to adjust which is typically every 6 months or once a year, your lender will add the current index to your fixed margin. Generally, it is rounded up by the eighths (.125%).

Interest Only:
An interest only minimum payment is not negative amortization. It simply means that the minimum payment does not cover any principal reduction. So if the borrower never makes any extra payments, the principal balance will not decrease or increase. Typically, extra payments are allowed unless your mortgage has a penalty restriction. Interest only is a feature that can be added to most principal and interest rate programs. This feature usually results in an increase of .125 - .375% to the rate.
 
Interval Cap:
Adjustable rate mortgages will adjust every 6 months or once a year after the initial fixed period. Typically, the cap is 1 or 2% over the most recent effective rate.

Landlord Experience:
Most investor programs require the borrower has two or more years experience owning rental properties. Meeting this guideline allows us to use the income off the subject property to wash all or part of the new mortgage payment when calculating your debt to income ratio. Usually, if the investor does not need the rental income from the subject property to qualify then the landlord experience requirement is waived.

Lifetime Cap:
Most of all adjustable mortgages have a lifetime cap, which dictates what is the highest allowed interest rate regardless of the increases on your market index on your loan. Generally, five or six percentage points on the interest rate over the original note rate are common. Typically, lines of credits do not have a lifetime cap but all loans are subject to state laws. State laws usually have a usury law capping the highest interest rate allowed to 18 through 21%.

Locking In:
“Locked in” means you have secured your rate, terms and points for a set period of time. Generally, most lock periods are for 30 days. Once you are locked in, you are not affected by the unpredictable changes either for the better or worse in the bond and economic markets. If the borrower has not closed and disbursed the mortgage loan when the rate lock expires then the borrower is vulnerable to the market or may be subject to extension fees to protect your locked terms.

Margin:
A margin is a fixed number that is negotiated prior to closing and applies only on adjustable rate mortgages. When your adjustable rate mortgage comes up for adjustment, your margin and current index will be added together to determine your new rate.
 
Mortgage Insurance (MI):
Mortgage insurance can either be paid monthly through the borrower’s payment or built into the borrower’s interest rate. The sole purpose of this type of insurance is to protect the lender and pay them a partial payoff of the loan if the borrower does foreclose

Negative Amortization:
When your monthly payment does NOT cover the full interest obligation so the difference is added to your principal balance. If you defer interest, your principal balance is increasing.

No Ratio / No Income:
Income is not stated nor verified but two years of employment is a must! Some programs will require two years in the same line or work or even the same employer. No Debt to Income Ratios is calculated. You can either combo this income type with stated assets or verified assets but typically most No Ratio programs want assets verified. 

Payment Factor:
A number pre-determined by your amortization term and interest rate that calculates your monthly payment which includes your interest obligation and the principal being paid off by the end of your amortization schedule.

Piggyback or Combo loan:
This is a technique to avoid mortgage insurance and/ or jumbo mortgage pricing. Generally, your lender will choose from a variety of combinations in splitting the first and second mortgage loan amounts, such as 80/15, 75/20 or 70/25 for 95% financing or 80/10, 75/15 or 70/20 for 90% financing. The first mortgage loan amount will never be higher then 80% because the first mortgage lender require a 20% equity position to avoid the mortgage insurance requirement. Typically, it will be the same lender with both the first and second mortgage but not always. If there is a significant improvement in the rate and terms, Venture Capital Mortgage will send you second mortgage to a different lender. Keep in mind, one of the biggest advantages in splitting the mortgage is once the second mortgage is paid off, your monthly mortgage obligation has been reduced without investing thousands of dollars to refinance and lower your payment

PITI:
Payment includes Principal, Interest, Taxes, and Insurance

Points:
There are different types of points but the most common is an origination or broker fee. One point equals one percent of the loan amount. The more points you pay, the lower the interest rate, also known as “buying down the rate”. The less the points you pay, the higher the interest rate.

Rapid Acquisition:
This guideline only applies when you are getting financing on investment properties. The lenders watch how many properties the borrower has purchased within the last two years. Some programs will waive this guideline, if you have two years landlord experience with multi-properties. Other programs simply will not lend to an investor with or without landlord experience that has purchased more then 4 properties in the last two years.

Rehabilitation Mortgage:
A mortgage that covers the purchase or refinance of the property PLUS the cost to rehabilitate the property. Generally, these mortgage programs mimic the construction to permanent loans. There is the construction phase during rehabilitation with interest only payments then the mortgage converts to the permanent phase once the house is complete and the mortgage has the traditional features with monthly pre-determined payments.

Reserves:
Most programs require the borrower have money “left over” after closing. In other words, closing does not wipe the borrower’s funds out. Generally, lenders require investors to have 6 months worth of the subject property’s mortgage payment (PITI) left after closing. At times but not often, underwriters can require 6 months of “payment reserves” on all the properties owned by the investor borrower. Another type of reserves that some programs are requiring is “income reserves”. This is more often on stated programs, which the lenders are looking for the buyer to have four months worth of the income stated, saved in the bank

Residential Financing:
One to Four unit properties. 100% financing is readily available.

SOFT pre-payment penalty:
A penalty (generally 6 months worth of interest) that occurs when a mortgage or a portion of a mortgage balance is paid down (usually 20% or more) through principal reduction or refinance only. Penalty is waived when property is sold through a bonafide sale.

Stated Income:
Income is stated and not verified. Debt to income ratio is still calculated. Stating your income does not allow you to “fluff” the income to a level that is not realistic or true. Lenders check salary.com and make sure what you stated is within an acceptable range for your trade or profession in your geographical area. Two years employment is still verified and required. You can either combo this with a stated asset or verified asset feature. This program first originated for self-employed borrowers. Some stated income programs do not allow “wage earners” or a “real estate investor”.

True No documentation:
Generally, this program is for borrower that cannot supply a steady two-year employment history. Income, employment and assets are not stated nor verified. This program requires the least amount of documents to be provided for qualifications. The income type will require the highest credit score requirement and highest rate structure. 

Vacancy Factor:
Used in investment real estate or financing. We all know that part of the risk in real estate is vacancy. When calculating the “rental income” the lender will give the borrower credit on the property’s income they own or the property they are buying but they will deduct 25% to allow for vacancies and repairs

Wage earner verses Self-Employed:
A “wage earner” is generally an employee of a company which the borrower has less then 25% ownership and he/ she is receiving a W-2. A “self-employed” individual is a sub-contractor or employee owning more then 25% or more of any one company. Stated income programs will specific which type of worker it will allow. About half of the stated income programs, do not allow “wage earners”.


 

 

© 2007 Venture Capital Mortgage, Inc.
Florida - “Licensed Mortgage Brokerage Business”, “Mississippi Licensed Mortgage Company”, Alabama - “Licensed Mortgage Brokerage Business”
Rates, programs, and guidelines are subject to change without notice.