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.
- 1003/1008 Form
1003 is a common term used to reference the ‘Uniform Residential Loan Application’ – this is the basic loan application you fill out when applying for a loan. It includes all your basic information, intended loan structure, employment history, income, assets, etc. The 1008 Form can also be referred to as a ‘Transmittal Summary.’ This form summarizes all the qualifying figures on a loan application (debt, income, loan terms, etc.) to help the underwriter quickly review a snapshot of qualification.
- 4506-T Request for Tax Return Transcript
The 4506-T (or 4506-C) is an IRS form used by mortgage lenders. Once completed and signed, the form is used as an electronic request for Tax Return Transcripts from the IRS. The Transcripts are used to verify the authenticity of tax returns used in a loan file. Sometimes, the mortgage lender is required to send this request form to the IRS during the closing process; other times, the form only needs to be signed and included in the loan file.
- 859 Liquidity
The availability of liquid assets – meaning assets that are easily accessible. For example, 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. On the other hand, assets held in savings accounts or stocks tend to be much easier (and faster) to access and are considered more liquid.
- Ability to Repay
The ability to repay is a rule from the Truth in Lending Act. Here’s how the Consumer Financial Protection Bureau (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 based on specific market indexes. An adjustable-rate mortgage will have terms associated with it, such as index, margin, and caps. Generally, an ARM begins with an introductory or initial interest rate that is fixed for a period such as 5, 7, or 10 years. After the fixed period, the rate will adjust based on current rates but will not exceed the ‘periodic’ or ‘life’ caps associated with your loan.
- Adjustment Period
On an ARM loan, the Adjustment Period determines how frequently the interest rate can adjust.
An “all-cash” purchase is one made without any associated financing or mortgage. The buyer uses liquid funds to buy the home outright. This tactic may be used in highly competitive markets or when the sellers need to close incredibly quickly. Buyers who purchase a property using “all cash” may qualify for “delayed financing” after closing.
A payment structure used to define monthly payments for a loan used to reduce the loan balance over a set period of time. Most often, with mortgage loans, you will see fully amortized loans, meaning the loan will be paid in full by the end of the loan term.
- Amortization Schedule
An amortization schedule is a chart displaying a breakdown of all payments for the life of a loan. The schedule will include a breakdown of each payment showing the portion going toward both principal and interest until the loan is paid.
- Annual Percentage Rate, or APR
The Annual Percentage Rate (APR) is the truest cost of a home loan. The APR 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
An independent entity hired by the mortgage lender to obtain an appraisal report. The Appraisal Management Company (AMC) acts as an intermediary between lender and appraiser, helping perform many of the administrative responsibilities along the way.
- Appraisal Shortfall
When the appraised value of the property lands below the contract’s purchase price, it is known as an “appraisal shortfall” because the value ‘fell short.’ The appraised value is simply an estimation, but a shortfall may indicate an inflated purchase price. JVM’s Appraisal Desk Manager will always examine the report for an opportunity to “rebut” the appraised value and help provide additional comps we believe can help increase the property’s valuation. If a rebuttal is not feasible, we will ask the buyer’s agent if a price reduction (to better match the appraised value) is possible. If the price renegotiation is unsuccessful, the loan may require restructuring in order to proceed since qualification depends on the loan-to-value (LTV) ratio (with “value” based on the lower of the purchase price or appraisal). Depending on the loan type and LTV ratio, an appraisal shortfall may require the buyer to come in with additional funds to cover some or all of the difference between the appraised value and purchase price. Or restructuring may instead involve adding or increasing monthly mortgage insurance. Whenever there is an appraisal shortfall, our team will let the buyer’s agent and buyer know their restructuring options in order to proceed.
- Appraisal Waiver
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 will photograph, measure, and review all county records relating to the subject property in order to complete their report after physical inspection. Appraisers are held to high standards in terms of quality as well as legal requirements. JVM utilizes its local panel of vetted appraisers whenever possible.
The measurable increase in the market value of a property. Market improvements and home renovations are factors that may increase appreciation.
- Approval, Final Approval, Loan Approval
There are several stages of a loan’s “approval,” including “conditional” and “final.” Both types are formal loan approvals in writing from the underwriter. “Conditional” is a loan approval received after the underwriter’s initial review of an entire loan file, including current income, assets, credit, property-specific documents, and/or the appraisal report. It is called “conditional” because the approval is dependent upon the satisfaction of all conditions associated with the transaction. Depending upon the number and nature of the requested conditions, the loan contingency may be lifted after conditional loan approval is granted. Once all conditions are reviewed and cleared, the underwriter will grant “final” loan approval, also known as the “clear to close.” Final loan approval normally indicates that only the final signing appointment, loan’s funding, and county’s recording are required to close the purchase.
- Assumable Mortgage
A type of mortgage that may allow a buyer to “assume” (or take over) an existing mortgage loan tied to the property. FHA mortgages are typically assumable if they have been formally approved by the lender, while most conventional mortgages are not. Assumable loans may be more attractive in higher interest rate environments when the seller already has a mortgage with a much lower locked rate.
- Automated Underwriting System, or AUS
Software developed by FNMA (Fannie Mae) and FHLMC (Freddie Mac) that is used to pre-approve borrowers for mortgage loans. Lenders utilize this software to pre-underwrite a buyer’s financial profiles and help determine their qualification before they’ve entered into contract on a specific property (which will require an underwriter’s manual review). FNMA uses DO (Desktop Originator) and DU (Desktop Underwriter), FHLMC uses LP (Loan Prospector). For FHA or VA loans, either is acceptable. FNMA and FHLMC yield similar results and qualifying parameters, while the Algorithms for FHA/VA loans are more lenient.
- Balloon Payment
A large payment due at the end of the loan’s term. In some cases, the final amount due may be the entire principal balance. Loans will balloon payments are considered “non-QM” and have extremely stringent qualification requirements, primarily based on creditworthiness. Many homeowners struggle to make the large payment if they have not already refinanced out of the loan before the final payment comes due.
- Base Loan Amount
On FHA loans, the original loan amount before the upfront mortgage insurance premium (UFMIP) is optionally rolled into the loan. For an FHA loan with 3.5% down, the base loan amount is 96.5% of the purchase price.
- Basic Entitlement Amount
As an eligible veteran, basic entitlement guarantees that Veterans Affairs (VA) will pay the lender the lesser of up to $36,000 or 25% of the VA loan amount if the borrower defaults. For qualification purposes, a $36,000 entitlement means the veteran can pursue any desired loan amount. If entitlement is less than $36,000 (which will occur if the veteran already has a VA home loan), the veteran must either demonstrate that full entitlement has been restored or proceed with a capped loan amount.
- Basis Points
Basis points (also known as BPs and pronounced as “bips”) are a unit of measurement. They are equal to one-hundredth of one percent (0.01%). Many in the financial sector utilize “basis points” as the standard unit of measurement when discussing interest rates.
- Benefit to Borrower
Every refinance requires the mortgage lender to show how the new loan will benefit the borrower, and each loan type has a specific guideline to define what qualifies as a “benefit.” In most cases, the benefit of a rate/term refinance is lowering the interest rate or payment by a minimum threshold (depending on loan type). There are other reasons, such as reducing the loan’s term (e.g., from a 30-year fixed-rate mortgage to a 15-year), refinancing from an adjustable-rate loan to a fixed-rate loan (considered less risky), removing private mortgage insurance, combining a 1st/2nd combo into one new 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 for debt consolidation or home repairs.
- Bidding War
When there is substantial interest in a specific property during a hot market, a bidding war may ensue. A bidding war refers to a situation where competing bids are presented to a 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 may become more aggressive. When bidding wars result in a substantial increase in the purchase price, it is not uncommon for an appraisal shortfall to ensue.
The individual or individuals extended a mortgage loan for the purchase of a residential property. The borrower is responsible for making all associated payments — including but not limited to principal & interest payments, homeowner’s (hazard) insurance, and property taxes – over the life of the loan. Legally, a borrower is considered a mortgagor.
- Buyer's Agent, or Selling Agent
The “Buyer’s Agent” is a real estate agent who works on behalf of the homebuyer. Also known as the “Selling Agent,” they typically do market research, show houses to potential buyers, and help write offers on properties of interest. The selling agent should not be confused with the listing agent, who represents the seller.
An interest-rate cap limits the amount your interest rate can increase on an adjustable-rate mortgage (ARM). There are two types of caps: a periodic adjustment cap and a lifetime cap. A periodic adjustment cap limits the rate’s increase from one adjustment period to the next. A lifetime cap limits the rate increase over the life of the loan. All ARMs must have a lifetime cap.
- 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, to access $100k of the equity in their home. Interest rates are sometimes higher for cash out loans, depending on the amount of equity remaining in the home, and guidelines tend to be slightly more stringent. An alternative way to access cash from home equity would be from a Home Equity Line of Credit.
- Cash Reserves
Cash reserves, commonly referred to as simply “reserves,” are considered by lenders as the savings set aside for making future mortgage payments, handling unexpected emergencies, etc. Documenting reserves on file is helpful in the lender’s risk assessment, as ample reserves historically indicate a lower probability of mortgage default. Some loan programs require anywhere from two to 24 months of reserves on file in order to secure mortgage financing. The “reserve requirement” is based on the projected monthly payment for the property being purchased and/or the actual monthly payments for properties already owned. Reserves are the documented “excess” funds that will remain in a borrower’s account(s) after the purchase is said and done. For jumbo financing, different investors have limitations on what accounts (and their percentages) qualify towards meeting the reserve requirement, but overall, the funds must always be held in the borrower’s own name.
- 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 some or all of their debt(s) to their creditor(s) according to a proposed repayment plan. Each loan product (e.g., Conventional, FHA, VA) has its own ‘seasoning’ requirements. These are the parameters outlining the minimum amount of time that must pass (and documentation required) between the bankruptcy and mortgage loan’s acquisition.
- Chapter 7 Bankruptcy
A form of bankruptcy that allows individuals to liquidate or sell a nonexempt property and use the proceeds to essentially pay back their creditor(s). Unlike a Chapter 13 Bankruptcy, no repayment plan is required. Each loan product (e.g., Conventional, FHA, VA) has its own ‘seasoning’ requirements. These are the parameters outlining the minimum amount of time that must pass (and documentation required) between the bankruptcy and mortgage loan’s acquisition.
- Close of Escrow
The close of escrow, commonly referred to as “closing,” is the point in the real estate transaction when the seller receives all funds due (from the buyer and lender), and the property is formally transferred to the buyer’s name on title. All affiliated parties have fulfilled their legal responsibilities to one another, and the transaction has closed.
- Closing Costs: Non-recurring and Recurring
Non-recurring closing costs include one-time fees paid at closing. Examples include escrow fees, appraisal fees, notary fees, processing/underwriting fees, recording fees, title insurance, etc. Recurring closing costs are fees that will continue, even after the purchase’s close of escrow. Examples include mortgage interest, property taxes, homeowner’s insurance, etc. These fees will recur throughout the life of the loan.
- Closing Disclosure, or CD
The Closing Disclosure (or CD) is the updated counterpart to the Loan Estimate (or LE) from initial disclosures. The CD provides a breakdown of the projected monthly mortgage payment, as well as the estimated cash-to-close figure (comprised of the remaining down payment due + estimated closing costs). The CD must be “acknowledged” (i.e., e-signed) at least three ‘business’ days (excluding Sundays and federal holidays) prior to signing the final loan documents. The mandatory waiting period is required by TRID to allow borrowers time to review the fees and terms before signing final loan documents.
- Closing Statement (of fees)
The closing statement is prepared by escrow and provided to the lender. It lists the estimated closing costs associated with title, escrow, and other third parties’ fees. The lender utilizes this estimated closing statement to prepare the Closing Disclosure (CD).
- Closing Timelines
Closing timelines refer to the time needed to close the transaction and to satisfy any contingency periods. These terms are written into your purchase contract with your offer.
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 borrowers. 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.
- Collateral Desktop Analysis
Also known as a “CDA,” the Collateral Desktop Analysis is a secondary review required to confirm the appraised value of the subject property. This is generally required for qualification on Jumbo loans, or when the appraisal report’s risk score exceeds a certain threshold.
- Comparable Sales (“comps”)
Comparable Sales are used by appraisers to help determine a property’s appraised value. “Comps” are similar properties in the area, normally within 1 mile of the subject property. For this reason, unique or remote houses are difficult for appraisers to determine estimated values for, as there are few-to-no similar or nearby properties to use as metrics for their calculations. In order for a similar or nearby property to be used as a “comp,” it must have already closed any ongoing transactions by the time of the subject property’s appraisal (i.e., a pending sale cannot be used as a comp in the appraiser’s report).
A “condition” is either an additional document or piece of information required by the underwriter to finalize a loan’s approval according to federal lending guidelines and/or investor overlays. The loan’s approval is contingent upon satisfying all conditions at a certain point of the closing process. Conditions may be needed prior to final loan approval (“PTAs” required earlier during the closing process) or prior to funding the loan (“PTFs” required later during the closing process). The loan’s approval is contingent upon satisfying “PTAs,” and the loan’s funding is contingent upon satisfying “PTFs.”
A condominium (often referred to as a “condo”) is an individual unit within a complex or project. 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 the homeowner to pay monthly or quarterly HOA dues that go towards maintaining the complex. If purchasing a condo, the HOA dues will be factored into the qualification.
- Conforming Loan
A conventional loan that “conforms” to Fannie Mae and Freddie Mac guidelines and falls within the published County loan limits. The conforming loan limit varies by both County and the number of units being purchased. The loan limits can be found here. Any loan amount that exceeds this limit or does not conform to Fannie/Freddie guidelines is considered “non-conforming.”
- Construction Loan
Construction loans facilitate the process of building a 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.
Contingencies are common clauses added to purchase agreements that allow a buyer to back out of the deal without losing their good faith deposit (or earnest money deposit “EMD”). Common contingencies are loan, appraisal, and inspection. A loan contingency expresses that the offer is contingent upon securing financing for the house. An appraisal contingency expresses that the offer is contingent upon review of a satisfactory appraisal report. An inspection contingency expresses that the offer is contingent upon the buyer’s review of the inspection report(s). In their offer, the buyer will indicate which contingencies they will maintain and the duration (number of days) that they will leave each contingency in place for. For example: if the loan contingency is 10 days, then the buyer has 10 days to secure formal loan approval and lift the contingency by day 10. Once the buyer removes all contingencies, they can no longer back out of the deal without the risk of forfeiting their EMD to the seller. In competitive markets, it is common to see extremely short contingency periods or contingencies waived altogether. Please chat with your agent carefully about the implications of short or waived contingencies.
- Conventional Mortgage
A loan that is not insured or guaranteed by the federal government (like FHA or VA). A conventional loan can be a conforming or non-conforming loan.
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 (“creditor”) to a borrower (“debtor”). Outstanding credit (debt) is normally documented on the borrower’s credit report and is used as one of the many components to determine qualification for mortgage financing.
- Credit Score
Credit scores (commonly referred to as “FICO”) are an indicator of how likely a consumer is to pay back the debt over time. The scores are generated using information gathered from the three Credit Bureaus: Transunion, Equifax, and Experian. Formal scores from these three bureaus are more precise than consumer credit-reporting platforms such as Credit Karma. The Credit Bureaus collect information – including repayment history, credit usage, derogatory events, etc. on a consumer level. Most often, the median score (of the three) is used to determine creditworthiness for a mortgage loan.
A DD-214 is a certificate of release or discharge from active duty issued to military service members upon retirement, separation, or discharge from the Armed Forces. For VA loan applicants, the DD-214 is required to obtain a Certificate of Eligibility needed to obtain VA financing.
DSCR stands for Debt Service Coverage Ratio. This metric compares monthly rental income to the total monthly mortgage payment for a property and measures whether a property is generating enough income to cover the mortgage. A debt service coverage ratio of 1:1 means the rental income is equal to the mortgage payment (the property is cash-flowing).
The amount of money a borrower owes to creditors. Examples of debt include auto loans, home loans, credit cards, IRS tax payments, installment loans, student loans, etc. Debt is used to calculate creditworthiness as part of a borrower’s Debt to Income Ratio.
- Debt-to-Income Ratio (DTI)
DTI is a primary factor in determining borrower eligibility for a home loan. It is used to establish mortgage affordability by comparing monthly gross income to monthly debts as a percentage. DTI includes two numbers, a front-end ratio, and a back-end ratio, and typically looks like this: 36/42. The front-end ratio divides the borrower’s new mortgage payment by their gross income. The back-end ratio divides all borrower debt, including the new mortgage payment, by their gross income. The ratios need to fall below certain thresholds determined by specific loan programs.
- Deed of Trust (DOT)
This formal document, signed at closing, is an agreement for loan repayment between the buyer and lender in a real estate transaction. The Deed of Trust transfers legal title to a third-party trustee (such as a bank) and equitable title to the borrower. Legal title is ownership to control the property according to the law; equitable title is a person’s right to obtain full (legal) ownership of the property. The bank (trustee) holds legal title, thus giving them the right to transfer ownership to another party if the buyer defaults on their mortgage loan. The DOT will remain until the loan is repaid in full and therefore holds the borrower to repay their mortgage loan.
A borrower defaults on a loan when they have failed to make regular and timely mortgage payments as formally agreed upon in the Deed of Trust or Promissory Note. Once a borrower is 90 days late on a mortgage payment, a notice of default (NOD) is issued. See “foreclosure.” Such a derogatory mark on credit can inhibit one’s ability to obtain standard mortgage financing.
- Delayed Financing
Delayed financing is essentially a ‘cash-out’ refinance into a more traditional mortgage financing product, which can put some cash back into the buyer’s pockets. To qualify for delayed financing, the buyer must prove that all the funds used for the purchase were entirely their own (i.e., no loans or gift funds from family), and the ‘cash-out’ refinance must close within 180 days of their initial purchase’s closing.
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.
- Discount Points, or Discount Fees
A discount point or “point” is a one-time fee — calculated as 1% of the loan amount — to lower the loan’s interest rate. Borrowers can pay discount points as a closing cost at closing to buy down the interest rate for the mortgage loan.
- Down Payment
The percentage of the home value that a buyer puts towards the property’s purchase, using their personal and/or gift funds. The remaining amount is typically financed with a mortgage. For example: if a buyer puts 20% down, then they are financing the remaining 80% of the home’s value with a mortgage loan.
- Earnest Money Deposit (EMD), or Good Faith Deposit
A deposit from the buyer accompanying an offer for a home purchase. The EMD amount is normally 3% of the purchase price but can vary if specified otherwise in the proposed purchase contract. 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 the offer’s acceptance. The EMD can be a wire, a personal check (in some cases), or a cashier’s check. Like all funds used in a purchase transaction, the EMD must be fully paper-trailed.
- Entitlement Code
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. Essentially, it is the difference between the home’s fair market value and all outstanding mortgage loan balances. Equity grows as the property owner pays off the mortgage and/or as the value of the home appreciates with the market.
- Escrow Company
An escrow company is a third party between buyer and seller during a real estate transaction. Because buying or selling real estate generally involves transferring a large amount of money, it is imperative to have a licensed and highly-regulated neutral third party to coordinate the transaction. In some regions, the Escrow Company and Title Company are the same entity. Escrow orders title insurance, collects and prepares loan/legal documents, arranges document signing, collects funds, and disperses the funds to the appropriate parties in the transaction. It is important to note that homebuyers should only contact their escrow officer to confirm their wire instructions and other transfer-related information before moving any funds.
- Escrow Officer
The contact from the escrow company that is responsible for mediating the closing, documenting the process, and ensuring that all associated paperwork is completed. See Escrow Company.
- Escrow or Impound Accounts
An impound account allows the homebuyer to pay their semi-annual (CA) or annual (TX) property tax and annual insurance bills in monthly installments to the mortgage servicer as part of their monthly mortgage payment. The servicer will then take care of automatically making the payments to the County (for property taxes) and Insurance Provider (for homeowner’s insurance) once the bills come due. Many buyers favor the budgeting mechanism of the impound account, while others do not favor the associated upfront costs. While there are no additional ‘fees’ from establishing an impound account, there are upfront closing costs (i.e., several months’ worth of homeowner’s insurance and property taxes) collected upfront to help cushion the account, helping to ensure the servicer never runs out of funds to make the payments on the buyer’s behalf. Impound accounts are generally required under federal lending law when if the borrower is putting less than 10.01% down (in CA) or 20% down (in TX) and are always required for FHA loans.
Federal Housing Administration (“FHA”). 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.
- FHA Loan
Mortgages insured by the FHA. These loans are associated with lower down payment requirements and more flexible underwriting guidelines but do require mortgage insurance throughout the life of the loan. An FHA loan is a great option for borrowers with lower credit scores and less funds readily available for closing. However, there are additional requirements to qualify for a condo or 3-4 unit home using FHA financing.
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 a buyer would be willing to pay a seller for his property in the present market conditions.
- Fannie Mae
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 limits per county, which are set annually.
- First-Time Homebuyer (FTHB)
Technically, a first-time homebuyer is any home loan applicant who has not had any ownership of a property within the past three years.
- First/Second Combo Loan
First/second combination loans (also known as “combo loans”) are mortgage loans that fund at the same time on the same property. 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%. This loan structure allows buyers to avoid mortgage insurance (see JVM Buyer’s Guide) 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.
- Fixed-Rate Mortgage
A fully-amortizing mortgage with a “fixed” interest rate over the life of the loan. In other words, the note rate is “fixed” and will remain constant (neither increase nor decrease) throughout the life of the loan. The interest rate can still be adjusted if the homeowner decides to refinance into another rate down the line, but the fixed rate itself will not independently adjust during its term.
- For Sale by Owner (FSBO)
“For Sale by Owner” describes a real estate transaction in which the seller is not represented by a real estate broker or agent (i.e., “listing agent”), but rather, represents themself.
The repossession of a property by the bank or lending institution in the event the borrower defaults on mortgage payments.
- Foreign National
A foreign national is neither a citizen nor a permanent resident of the United States. This individual must obtain alternative financing, known as a foreign national loan, in order to purchase an investment property in the United States.
- Freddie Mac
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 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 dominate the mortgage market in terms of volume.
The process of wiring (releasing) money from the mortgage lender to title or escrow prior to closing a real estate transaction. Once the loan is “funded” and all parties’ required funds are in escrow, title or escrow can then proceed to “record” the transaction with the county.
- Funding Fee
See Upfront Funding Fee.
- Future Value
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.
- Gift Funds
Funds gifted by a relative or friend (depending on the loan type) towards a home purchase to help cover the down payment and/or closing costs. Gift funds are allowed for primary and second home purchases, though there is a cap on the maximum gift contribution for a second home. Gift funds are not allowed on an investment purchase. To minimize the amount of documentation required for sourcing purposes under federal lending law, JVM recommends gift donors send their funds straight into escrow rather than into the buyer’s personal bank account. JVM Lending does not report gift funds to the IRS.
- Gift Letter
A gift letter is a written document confirming the gift “donor’s” (family/friend) relationship to the “recipient” (borrower), the gift amount, the source of the gift funds, as well as a signed statement confirming the funds are indeed a ‘gift’ with no expectation of repayment. The gift letter must be completed accurately and reviewed by the underwriter for loan approval.
- Good Faith Estimate (GFE)
The GFE disclosure requirement has been replaced by the Loan Estimate (LE). Despite this fact, many real estate agents still use the term “Good Faith Estimate” to refer to the LE.
- Government Loans
Loans backed by the federal government. FHA, VA, and USDA are the most common types of government loans for residential financing.
- Government Sponsored Entities (GSE)
Privately held yet heavily regulated by the U.S. government, GSEs facilitate the transfer of credit to the public by purchasing and guaranteeing third-party loans. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are perhaps the two best-known GSEs.
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).
- HUD-1 Form, Estimated or Final
A federally mandated disclosure formerly provided to the buyer at the closing of escrow. In an attempt to be more user-friendly, the HUD-1 was replaced by the Closing Disclosure (CD) and is no longer used. This form was provided 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.
- 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. Hard money loans rely primarily on property value as collateral instead of the borrower’s ability to repay. Typically, these loans are used as a short-term lending solution while borrowers improve their creditworthiness. 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
Lenders require a borrower to have homeowners 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 cheaper, as it typically only requires coverage for the internal walls. The condo’s HOA dues cover insurance for the ‘walls-out’ areas of the community.
- Home Equity Line of Credit (HELOC)
HELOCs are recorded subordinate to the first mortgage on a borrower’s residence. 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 draw the full line at closing. Once closed, the borrower can draw against the HELOC’s line limit as needed, often with a checkbook or card similar to a debit card. Borrowers can draw on their HELOC up to the 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 often used 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 and establishes certain rules of ownership. Typical responsibilities of a homeowner’s association include a collection of HOA dues for landscaping or recreation areas, building maintenance, common area property insurance, and creating and enforcing community bylaws. 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 obtain additional documentation regarding the HOA in our qualification analysis to ensure the HOA is in good standing.
- Homestead Exemption
Property tax exemption applied when individuals occupy a property as their primary residence. The amount and application of this exemption will vary by County and state.
- Impound Account
See Escrow Account.
- Index Rate
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 any individual lender. This index is used to determine the interest rate for an adjustable-rate mortgage (ARM) during the adjustable period.
- Inflation Hedge
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 whether the purchase transaction is “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 the buyer and seller.
- Interest Rate
The rate of interest charged on a mortgage loan, commonly referred to as “the cost of borrowing money.” The two main components of a monthly mortgage payment are principal and interest. The interest portion of the mortgage payment will be based on the interest rate. Mortgage interest rates are volatile; they rise and fall with the market until they are “locked in” on a property with a fully signed purchase contract. Mortgage interest rates can be either fixed or variable.
- Investment Property
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 (1-4 units) can be considered an investment property.
Investors are entities (often other large banks, credit unions, or funds) that buy and service mortgages from mortgage banks after they fund.
- Jumbo Mortgage
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 loan-to-value (LTV) is a ratio taken by dividing the loan amount by the value of the home. If there are multiple loans being obtained for the purchase, then the mortgage lender must calculate the combined loan-to-value (CLTV) ratio. The CLTV is 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.
- Lender Credit
Borrowers can take a slightly higher rate to obtain a lender credit to cover all or some of the closing costs. The credit, therefore, helps the borrower keep more cash in their pocket for closing and 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.
- Lender Fees
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.
- Liquid Reserves
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.
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.
- Listing Agent, or Seller’s Agent
A real estate agent who represents the seller’s interests in a purchase transaction. They are known as “listing agents” because they list the home on the market on the seller’s behalf.
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
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 approval can either be ‘conditional’ or ‘final.’ Conditional loan approval is contingent upon certain borrower or third-party conditions such as updated bank statements, escrow documentation, or an appraisal report. Final loan approval means that all ‘prior to doc’ conditions have been satisfied, and the borrower can sign final loan documents.
- Loan Estimate (sometimes mistakenly referred to as the "Good Faith Estimate")
The Loan Estimate (LE) is an initial disclosure that the lender must send to the borrower within 3 days of receiving a formal loan application for a specific property. It is a breakdown of the estimated closing costs and the down payment associated with obtaining the loan. This initial disclosure is also meant to prevent lenders from “bait and switch” tactics, as most of the Loan Estimate’s fees cannot increase without first providing a new Loan Estimate. The borrower cannot sign their final loan documents until at least 7 days after the Loan Estimate has been issued.
- Loan Limits
In order to be considered a Conforming Loan, the loan amount must fall below the County-specific loan limit. These are set by the Federal Housing Finance Agency and vary depending on the County and the number of units on the property. The loan limits typically adjust upward each year and can be found here.
- Loan Modification
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. If a borrower obtained a loan modification on a prior home loan, underwriting typically needs to review the loan modification documentation to ensure it doesn’t have a negative impact on qualification.
- Loan Servicer
The company that collects mortgage payments on behalf of the lender. Mortgages are sometimes serviced by the lender themselves and are other times serviced by a third-party company. This is the company borrowers make their monthly mortgage payments to.
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
Mortgage insurance is an insurance policy that protects the lender in case the borrower defaults on their mortgage loan. Monthly mortgage insurance is required throughout the life of the loan on all FHA (government) loans. Private Mortgage Insurance is usually required on conventional loans that exceed an 80% loan-to-value (LTV) ratio at the time of purchase. On conventional loans, mortgage insurance will not normally last the life of the loan — it can be refinanced off if the homeowner demonstrates a minimum of 20% equity in their property, or it will automatically fall off after the homeowner reaches a 78% LTV through normal amortization. Mortgage insurance is normally paid monthly, although it can be paid upfront in a ‘lump sum’ payment or some combination of the two.
- Mortgage Insurance Premium (MIP), and Upfront Mortgage Insurance (UFMIP)
FHA financing requires borrowers pay both an upfront mortgage insurance premium) at closing and monthly mortgage insurance throughout the life of the loan. The upfront mortgage insurance premium (UFMIP) is 1.75% of the base loan amount and is usually financed into the loan amount rather than paid out of the borrower’s pocket at closing. Unlike conventional financing, the monthly insurance amount is at a set rate dependent upon property type and the loan-to-value (LTV) ratio (rather than credit score). In exchange for the ongoing mortgage insurance, FHA financing has less stringent qualification requirements (e.g., higher debt-to-income ratios, lower down payment requirements, etc.).
- No-Cost Refinance
A no-cost refinance means the lender will cover all non-recurring closing costs associated with the transaction. To do so, the lender offers a lender credit covering loan fees, title fees, recording fees, etc. The borrower is still responsible for coming in with costs that would have been incurred regardless of refinance, such as impounds and pre-paid interest. When rates drop, a no-cost refinance is a great option to take advantage of lower interest rates without needing to come in with significant funds out of pocket.
A non-qualified mortgage (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. Borrowers typically obtain Non-QM loans in the short term and refinance into a conventional loan once their creditworthiness improves.
Prospective buyers will make a written or verbal offer to buy 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.
Lending guidelines required by a specific investor. These are typically above and beyond the requirements for a Fannie Mae or Freddie Mac loan and can include nitpicky items such as verification of rental history, additional years of income tax returns, detailed self-employed business documentation, etc.
- PACE Program
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 layman’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. A 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 is no contract or property documentation to review.
- Pre-Paid Costs, or Fees
Pre-Paid Costs or Fees are commonly referred to as “Pre-Paids” and are considered “recurring” costs because they will recur throughout 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. Pre-Paid Taxes are paid twice per year (though they may be paid through an impound account). Pre-Paid 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 verifying all documents. Pre-qualifications base qualification on verbal statements from the buyer or minimal documentation. Big banks typically complete pre-qualification. Since documentation is generally not reviewed with a pre-qualification, there is a risk that items will be uncovered during Underwriting that may jeopardize lending.
- Prime Rate
This is the interest rate that major banks Base rates on when lending money commercially. Prime rate is also used as a base rate when determining the rate charged for certain product offerings such as Home Equity Lines of Credit (HELOCS).
- 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
Processing fees are a 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.
- Promissory Note
A written promise by one party to make payment to another party according to specific terms. On a mortgage, the note is signed at the close of escrow and contains loan details such as loan amount, interest rate, payment schedule, and property address.
- Property Address
The physical street address of a home. A property address is required to lock in 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 (PIW), or Property Inspection Alternative (PIA)
The automated underwriters that lenders use to help underwrite mortgage loans (“DU” for Fannie Mae and “LP” for Freddie Mac) may yield a “Property Inspection Waiver” (PIW) or a “Property Inspection Alternative” (PIA) finding. This means that the appraisal requirement may be waived if the borrower agrees to do so. The benefits of a PIW include eliminating the cost of the appraisal, avoiding the possibility of an appraisal shortfall, and allowing the transaction to close faster (since the lender and other parties involved won’t be waiting for the appraisal inspection, report, or review to be completed). There is no set formula to determine how to successfully obtain a PIW or PIA finding through DU or LP, respectively. The results are 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. Additionally, any significant changes to a borrower’s financial profile during the closing process (e.g., a decline to qualifying income, a new debt incurred, etc.) may result in losing the PIW or PIA finding and having to proceed with an appraisal report instead. Although losing the PIW or PIA is a rare occurrence during closing, we do always put the possibility on our client’s radars before proceeding.
- Property Taxes
Property taxes are state and local mandatory charges against a property. The tax rate, exemptions, and special assessments vary between city, county, and state. In CA, for qualification purposes, the projected property tax payment is calculated by multiplying the city’s given tax rate by the home’s purchase price plus any special assessments from the property’s current tax bill. That total divided by 12 determines the projected monthly tax amount. If your loan is structured with an impound account, that calculated figure will be included in your overall monthly mortgage payment. If your loan is structured without an impound account, it will be your individual responsibility to pay the County Assessor the property tax bill as it comes due twice a year: on November 1st (considered ‘late’ and subject to penalties/fees if received after December 10th) and again on February 1st (considered late after April 10th). In addition to the “secured” tax bill, most properties in CA will be subject to a one-time “supplemental tax bill,” issued between 3-9 months after your home purchase. JVM Lending will provide more information on this bill after closing. In TX, for qualification purposes, the projected property tax payment is determined by the value listed on the currently existing tax bill minus any exemptions that do not apply to the prospective homebuyer (e.g., we will remove any deductions that result from the ‘homestead’ exemption for any investment purchase). If your loan is structured without an impound account, you are required to pay the tax bill as it comes due once a year in January. There are no “supplemental tax bills” in TX, although the property may still be reassessed by the County at any point to determine if property taxes should be increased.
- Purchase Agreement, Residential Purchase Agreement or Sales Contract
A Residential Purchase Agreement, or RPA, is a formal, written contract made between a buyer and seller for a specific property. The document includes the property address, purchase price, inspections, contingencies, closing date, various addenda, and more. Addenda may also be used to adjust the original terms if all parties agree to sign the revisions. The most common changes are to purchase prices (if the buyer’s agent negotiates for a reduction) or seller credits. The RPA must be fully signed by the buyer, seller, agent, and escrow. The date of the last signature is used as the ‘start’ date for the contractual closing period. For example, a contract signed by the last party on 1/1 for a 14-day closing period will be expected to close on 1/15 (14 days after 1/1).
- Purchasing Power, or Purchase Power
Purchasing power is a common way to reference a client’s maximum pre-approved purchase price. For example, if a client is pre-approved up to an $800,000 purchase price. Their purchasing power is up to $800,000.
- 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.)
- Rate Lock
A guarantee for a set period of time (15 or 30 days typically, though a rate can be locked for up to 60 days) to “hold” a specific interest rate on a loan for a property in contract (i.e., a buyer’s written offer has been formally accepted) through the date that the loan funds. Rate locks can normally be extended for a few days (and up to a few weeks, depending on the investor) beyond their original expiration date in order to preserve the rate if there are any delays to the closing timeline. The extension will be in exchange for a one-time “lock extension fee” added to closing costs. The benefit of a rate lock is, first and foremost, a hedge to protect borrowers from market rate hikes; as somewhat of a double-edged sword, this also prevents borrowers from holding out and regularly requesting their rate be lowered (i.e., a “rate rolldown”) whenever there’s a slight dip in the market. JVM does lock with investors who have the option to roll down a locked interest rate if there’s a significant enough dip in the marketplace among the mortgage bank’s pool of investors. We monitor the market for this opportunity from the moment a client locks in their rate until their loan docs are drawn.
- Rate and Term Refinance
The process by which a borrower can obtain a lower interest rate or more beneficial terms on a mortgage. With a rate and term refinance, the new loan must provide a benefit to the borrower and typically matches the balance of their current loan. The benefit to the borrower may be in a lower monthly payment or better loan terms (such as the elimination of a balloon payment or adjustable rate feature). JVM monitors all our closed files and will reach out to 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.
This is the final stage of a purchase or refinance transaction when the escrow or title agent records the new deed with the County. This step occurs after the loan funds and, for a purchase, is the last item needed for the borrower to officially own the property and ‘get their keys’.
- Refi Boom
We experience a refi boom when rates drop significantly, and many borrowers opt to refinance to take advantage of lower rates. During a refi boom, banks often see large increases in volume, causing turn times to slow slightly.
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 a portion or all of the reserves to be held in liquid, non-retirement accounts.
- Residual Income
VA residual income is the discretionary income that remains after a homeowner has fulfilled their monthly spending obligations. To get a VA loan approved, applicants need to show a minimum residual income amount (set by the VA) based on their geographic location and household size.
- Restoration of Entitlement
Restoration of entitlement occurs when a veteran pays off their current VA loan. Since the VA limits total entitlement in some instances (depending on the amount of entitlement previously used) we will need to show restoration of entitlement with the VA prior to proceeding with a new VA loan.
- Seasoned Funds
Funds that have been in the borrower’s account(s) for at least two consecutive recent months (60 days).
- Seasoning Period
See Seasoned Funds.
- Second Mortgage
A second mortgage sits in the second position behind a first mortgage. This is commonly worded as the “second mortgage” because it ‘subordinates’ to the first mortgage. A second mortgage can be originated at closing on a first loan transaction or opened as a ‘standalone’ down the line after the first loan has closed. When opened concurrently with a purchase or refi transaction, funds from the second mortgage can be applied towards the down payment for the home purchase, most often utilized to allow a buyer to avoid either jumbo financing or mortgage insurance. Alternatively, if the second mortgage is opened independently, it is called a Stand-Alone Second; under this scenario, the first mortgage is not impacted.
- Secondary Market
The secondary mortgage market is a marketplace where home loans and servicing rights are bought and sold between lenders and investors. It is in the secondary market where the loan servicer is determined after closing.
- Secured Overnight Financing Rate (SOFR) Index
The Secured Overnight Financing Rate (SOFR) index is used as a reference 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.
- Seller Credit
A seller credit is funds that are coming from the seller to the borrower to be used toward closing costs. Seller credits are negotiated by your Real Estate Agent and will be written into the terms of your contract. Federal lending guidelines limit the maximum credit the buyer is allowed to receive depending on transaction type, and we must ensure total credits do not exceed closing costs. When considering adding a credit, check in with your lending team to ensure the proposed amount does not exceed guidelines.
- Seller Rentback
An agreement between the buyer and seller where the seller is allowed to reside in a property after the close of escrow. The terms of the rentback are determined with your Real Estate Agent and written into your contract. As a general rule of thumb, investors do not allow rentbacks exceeding 59 days for owner-occupied purchases. This does vary some amongst lenders and products. With an investment property purchase, there is additional flexibility. Be sure to check in with your lender on timing if considering a longer rentback.
- Short Sale
A short sale is when a home is sold for less than is owed on the home. With this, the lender does not receive a full payoff for the debt they have tied to the subject property. Short sales can be a lengthy process and do require bank approval prior to sale.
- Spousal Liabilities
Debts incurred by a spouse. Spousal liabilities (credit card debt, auto loans, etc.) are critical to keep in mind when pursuing FHA or VA financing since guidelines require that spousal liabilities be considered when calculating debt-to-income ratios.
A type of refinance for FHA or VA loans when refinancing into a new government loan (ex: FHA to FHA or VA to VA). This is often called an IRRRL (Interest Rate Reduction Refinance Loan) for VA loans. Streamline refinances have very specific guidelines that must be met and require very minimal documentation from borrowers.
- Subject Property
Property for which the mortgage is being obtained on a purchase or refinance transaction.
When referencing loans, the loan that sits in a lesser position is subordinate to the first mortgage. The loan in the first position would be paid first in the case of a default. The junior (or second) lien is paid if funds are remaining.
- Supplemental Tax Bill
Property tax bill issued in addition to the regular ‘secured’ property tax bill. The County can issue a supplemental tax bill for various reasons, but these are most commonly seen in California after the purchase of a property. The County reassesses the property value based on the new purchase price and issues a supplemental bill to charge for the difference between the originally assessed value and the post-purchase value increase.
A loan is suspended when underwriting is unable to approve a loan based on the documentation in the file. If this occurs, JVM will work with all parties to provide the necessary documentation or explanations to garner loan approval. If it is not possible to obtain loan approval, the loan will be formally denied.
- TILA/RESPA: Truth in Lending Act and Real Estate Settlement Procedures Act
The two main pieces of federal legislation that govern mortgage lending. TILA (Truth in Lending Act) requires lenders provide borrowers with clear terms and costs of a loan following specific disclosure formatting and guidelines. RESPA (Real Estate Settlement Procedures Act) is in place to help prevent unnecessary settlement costs to the consumer.
- Title Company
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 property “plat map.” Title companies also provide title insurance to protect the borrower and lender against any undisclosed claims on the property.
- Title Insurance
Title companies offer two types of title insurance. ALTA Insurance is a guarantee for the lender to ensure there are no other liens against the property when your mortgage is recorded. This is required by the lender to protect their interest in the property. CLTA insurance is for the borrower’s benefit and ensures there are no claims for or against the property being purchased. While CLTA insurance is optional, it is highly recommended so borrowers can be sure they are purchasing a home with a “clear title.” Many title companies, particularly in Northern California, also act as escrow companies.
Tradelines are accounts that populate a credit report. Common examples of tradelines include credit cards, student loans, auto loans, personal loans, mortgages, and lines of credit. Most jumbo investors will require a minimum number of total and open/active tradelines to qualify for jumbo financing.
- U.S. Department of Veteran Affairs (VA)
The Department of Veterans Affairs (the “VA”) runs programs benefiting veterans and members of their families. Among the many services they provide is guaranteeing mortgages for eligible veterans.
An impartial third-party individual who reviews a loan application and submits financial documents to evaluate a borrower’s creditworthiness for a particular loan product, usually for a specific property. An underwriter will either approve, decline, or suspend a loan. Underwriters are licensed individuals and must adhere to both federal lending guidelines and investor overlays to maintain their licensure. FHA and VA underwriters are specially certified to underwrite government loans.
- Underwriting Fees
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.
- VA Loans
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 monthly mortgage insurance required.
- Vacancy Factor
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.
A tax form issued by employers that report an individual’s annual earnings. With the exception of self-employed borrowers, mortgage lenders use the W-2 as the basis of their income calculations to help determine qualification for a loan product. See Debt to Income (DTI) ratio.
- Yield Curve
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.