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ARM - Adjustable Rate Mortgage. A loan in which interest rate is adjustable periodically according
to a preset group of rules. Start rates, margins, and indices can be negotiated between borrower and lender.
Amortization - How the loan is paid over time. The P & I is determined in part by the Amortization Period
(i.e. 30 years, 15 years, etc.)
Appraisal - Report completed by a licensed Appraiser to determine value of a property. This is a key
factor in your LTV.
APR - Annual Percentage Rate. "Effective" cost to borrow money which takes into account certain
costs such as prepaid interest, points, PMI and certain closing costs.
Back End Ratio - PITI + All reoccurring monthly debt/GMI. A number used to determine part of the
qualifying process. On a conventional conforming loan, this number should not exceed 38%. These guidelines are not
set in stone and may vary depending on your personal financial situation.
Balloon Mortgage - Mortgage with monthly payments of P & I that do not fully amortize a loan. The
balance of the mortgage is due in a lump sum at a predetermined date in the future.
Closing Costs - Costs associated with the closing of your loan. Including, but not limited to:
Appraisal fees, credit report fees, title insurance, city/state/local taxes, survey fee, pest inspection, etc.
Conforming Loan - Loan which is less than Federal loan limits. Currently $240,000. Also relating to
loans that "conform" to certain income, credit, and property guidelines.
Conventional Loan - A residential real estate loan that is not insured nor guaranteed by the Federal
Government.
Credit Score - Numerical value placed on a credit report, by credit agencies, to attempt to
assist in the lending process. Your score may determine your ability to obtain certain loans. There are 3 credit scores,
each used by a major repository: FICO score: Used by TRW, BEACON score: Used by CBI and the EMPIRICA score: Used
by TU.
Down Payment - Amount of money a buyer intends to pay toward purchase of a home. This
amount does not include closing costs, escrows, or reserves. Usually in 5% increments of the sales price.
Escrow Account - Also known as "impound account" or sometimes called prepaids. This is an account set
up by the lender for payment of taxes and insurances. Lender holds the portion of borrowers PITI in this
account until such a time as taxes and insurances are due. Usually required by lenders for all loans with less
than a 20% down payment.
Front End Ratio - PITI/GMI. Part of qualifying for a loan. On a conventional conforming loan guidelines
state this should be no more than 28%. Guidelines are not set in stone and may vary depending on personal
financial situation.
Government Loan - A Government Loan is guaranteed or insured by the Federal Government. FHA(Federal Housing
Authority), and VA(Veteran's Administration). These loans have different guidelines than FNMA and FHLMC.
GMI - Gross Monthly Income from your primary source. Certain alternate sources are used depending
on your situation.
Impounds - T & I in PITI. Taxes and Insurance that are included in a borrower's monthly payment.
These monies are held in an escrow account until tax and insurance bills are due, at which time the lender pays
the bills with money in the escrow account.
Indices - Are what the ARM is based on, for instance, 1 year T-Bill, LIBOR, COFI, etc.
Insurance - Policy purchased for protection of one form or another. Hazard insurance covers the
homeowner against damage to a property. Mortgage insurance covers the lender against failure of borrower to
repay. These costs are calculated in a borrower's monthly payment for qualification purposes.
Interest Rate - Rate used to determine monthly payment on a loan. This is also expressed as
"rate" or "note rate."
Jumbo Loan - A Jumbo loan is one which exceeds the "Conforming Loan Limit" in value.
Loan Amount - Actual amount of money borrowed.
Lock - A guarantee placed on a loan confirming an interest rate. Negotiated by borrower; a lock
guarantees what the final rate at closing will be, provided the lock doesn't expire. Lock periods range from 15-180
days.
LTV - Loan to Value. The extent to which a property is leveraged.
Margin - Amount added to the index to determine new interest rate at the specified
adjustment period.
Non-Conforming Loan - One that doesn't fit into guidelines set by FNMA or FHLMC. A non-conforming
loan allows for a different set of rules for qualifying.
P & I - Principle and Interest (same as Capitol and Interest in U.K.). Each loan payment on a fully
amortizing loan contains part principle, part interest. As years go on, more of the P & I is for principle according to
your mortgage amortization schedule which only shows P & I.
PITI - Principle, Interest, Taxes, and Insurances. Also known as total monthly payment. This figure is
used to qualify you for a mortgage.
PMI - Private Mortgage Insurance. Insures a lender against any loss arising from the borrower's
default (non-payment) on the loan. Required on most loans with less than a 20% down-payment. Same as FHA MIP.
With an FHA loan, it is known as MIP, and is included in all FHA loans regardless of the amount of down payment.
Principal - Amount of money borrowed, also the portion of the PITI that goes to reduce a loan
balance. A portion of monthly payments goes to reducing the principal.
Reoccurring Monthly Debt - Monthly obligations of the borrower used to qualify for a loan. For instance:
Car payments, monthly credit card obligations, student loans, any and all revolving and installment debt.
Start Rate - Initial interest rate of the ARM.
VOD - Verification of Deposit. A form sent to a bank or credit union to verify: account balance,
average balance, and date bank accounts were opened. All these play a role in qualifying.
VOE - Verification of Employment. Form sent to your employer to determine: Start date, position,
probability of continued employment, salary, etc. Basis for all calculations having to do with income.
VOM - Verification of Mortgage. Usually part of your credit report. Rating of your payment history on a
previous or current mortgage. For most loans, lenders require perfect payment history for the previous 12 months,
otherwise a non-conforming loan will need to be utilized.
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