Mortgage Keywords: A Quick Crib Sheet

Tuesday, March 6, 2012

Mortgage Keywords: A Quick Crib Sheet

March 2012

While there is no need for you to be a mortgage expert, having a basic understanding of certain key concepts will help you better answer your clients questions and get them closer to their goal of home ownership.
 
Here then is a brief overview of terms
 
Annual percentage rate (APR): The APR includes the base interest rate, points, and other loan fees. The APR is a great way to compare the cost of loans from different lenders because calculation of the APR is standardized.
 
Closing costs: Title search, origination fees, discount points, pre-paids, taxes and insurance, and real estate transfer taxes, which are fees paid outside of the actual loan, make up the closing costs.
 
Discount points: A point is 1% of the loan amount. Borrowers can pay points at closing as a way to buy down the overall interest rate and mortgage payment.
 
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLM): Fannie Mae and Freddie Mac help a wider range of people become homeowners by agreeing to purchase loans on the secondary market that may have lower credit score requirements or lower down payments. Fannie and Freddie loans are called conforming loans.
 
Foreclosure: When a borrower has defaulted or ceased payment on their mortgage, the lender can take possession of the home. Foreclosure laws vary from state to state.
 
Good Faith Estimate: This is a federally regulated estimate of all the fees associated with a loan’s closing costs, including pre-paids, escrow items and lender charges.
 
Loan-to-value (LTV) ratio: A mortgage lender divides the amount of the loan by the asking price of the home and that figure creates a percentage. A high LTV, such as 90%, means the borrower only has to contribute a small down payment [in this case 10%], while a lower LTV, such as 70%, requires with more cash to put down, but may negate the need for private mortgage insurance.
 
Mortgage insurance: When buyers take out a mortgage with a down payment of less than 20%, they must pay mortgage insurance, a monthly premium that is added to the mortgage. This protects the lender should a buyer default on the home loan.
 
PITI: principal, interest, taxes and insurance: These four elements make up a monthly mortgage payment. Payments of principal and interest go toward repayment of the loan, while the payment for taxes and insurance usually goes into an escrow account to cover those fees when they are due.
 
Pre-paids: Some costs, such as taxes, insurance, assessments, and interest, are paid before the first monthly mortgage payment is due.
 
Rate lock: When a lender locks in a rate, it constitutes a guarantee that the interest rate will not change for a set period of time while the purchase of a home is finalized.
 
REO: real estate-owned property: REOs are lender-owned properties that failed to sell as a foreclosure or short sale.
 
Short sale: In a short sale, the lender agrees to lower the price on the home in order to sell it, thus avoiding a foreclosure. Short sales involve a lot of paperwork and generally damage the homeowner’s credit.
 
Underwriting: An underwriter analyzes all the documents related to a loan and all the information the borrower has provided to determine if the loan is a good risk.
 
If you have questions about these or any other mortgage terms you’re coming across, just give us a call. We are happy to help you and your clients learn more about the mortgage industry. Contact us today for assistance!

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