is a PARTIAL selection of mortgage terms you should understand before
you apply for a loan. They are from
Steiners Complete How To Talk Mortgage Talk
which defines all the terms bankers, brokers, and loan officers may
throw at you.
The following terms are in alphabetical order for ease of use when you
come across a word or concept you don’t know. If this is the
first time you’ve gotten a loan or you haven’t talked to a lender
for several years, it’s a good idea to browse the list for an overview
before starting your interviews.
words in bold are cross-referenced in this list, so if the definition of
one term isn’t enough, you can check the other terms involved.
Rating—An “A” credit loan applicant has borrowed in the past
and shown a consistent pattern of responsible (i.e., on time) repayment.
If you’ve been late on payments, even a $29 credit card bill, you can
have a Ding On Your Credit. If you’ve
been late more than twice, it’s considered a major Ding, and
you’ll have some explaining to do to meet many lender’s
The more Dings,
the lower your rating, the worst being a “D”—when you’ve
been through a bankruptcy and/or foreclosure during the last seven
years. If you find you’re in the “B” or “C” rating,
try the higher Rate lenders that advertise on the Internet and in
large newspapers. If you’re a “D,” set up a repayment plan
with any remaining outstanding debts, establish a regular payment
history, and expect that most lenders
will be reluctant to talk home loans with you until at least three years
after either a bankruptcy or foreclosure.
currently experimenting with finetuning these Credit Ratings to “_____A-,”
“B+,” etc., so that
they can also adjust their Rates when making loans.
See also Credit
Report, Credit Rating, and FICO Rating.
Loan—Other common names include an “Adjustable
Rate Mortgage Loan (ARM)” or
a “Variable Loan.” Your monthly loan payments fluctuate according to
an underlying Index. There are many varieties, but only two major
types—those with and those without Negative Amortization. If
there is no Negative Amortization, the loan is often called a No
Lenders prefer Adjustables
to Fixed because the borrower bears a major part of the risk of
rising Rates. To promote them, they offer lower Initial Rates,
higher Loan Amounts, and lower Origination Fees. When
money is tight, many banks only offer Adjustables.
your Adjustable payment changes can wreck your budget, you need
to be particularly careful about signing on for this type of loan. Be
sure your Loan Advisor writes out a Maximum Payment Scenario,
so you have a complete idea of the risk you’re taking.
Lenders with Adjustable Loans will
often allow somewhat higher Ratios. This means that if you’re
willing to spend as much as 40% of your income on your reoccurring
expenses, and your credit is good, the lender might qualify you for a
larger Loan Amount.
We advise considering an Adjustable only when you plan to
leave or Refinance within three to five years or you need it in
order to Qualify for the Loan Amount you want. An Adjustable
should start off at least 4% cheaper than a Fixed (including all Loan
Fees). It absolutely should not have Negative Amortization.
Stick to your schedule of leaving or refinancing within a maximum of
five years. By that time your Rate will almost certainly be on
par or even higher than a market Fixed Rate Loan.
Companies—Companies offering services connected with your
obtaining your loan, which are owned by or otherwise Affiliated
to your lender. The lender is required to Disclose possible Affiliations
with their Truth in Lending documents
when you make out your loan Application.
Some services, like Appraisal, tax
notification, or Flood Insurance certification, can be automatically charged with your Closing
Costs. Others, like Hazard or Flood Insurance, can
only be charged if you fail to provide your own policy.
Always ask what services you can obtain separately, and shop several
providers for those services. You can almost always save money
with an outside provider.
process by which the Principal Loan Amount you borrowed
“dies off” a little with each month’s payment until the entire
amount is paid off—most commonly after 30 years. The Principal
portion of your monthly payment is small in the first years, with most
of the payment going to Interest. Later, the Principal Amortization
dollars slowly become a larger part of the payment, even though, with a Fixed,
the actual payment amount remains the same. The result is that in later
years you have less tax deductible interest, but more of your payment is
going to Amortize—pay off—the loan.
Schedule—The columns of numbers that tell you and the lender how
much of your payment each month is allocated to Interest and how
much to Principal. There are many Online Amortization Schedule
programs listed in our National Money$ource Directory. The best
ones include “cumulative cost” columns,
which tell you the total amount you will have spent over time.
On our Loan Evaluation Worksheet, we ask you to total
up your expenses for the first five years as you’re evaluating
which loan is best for you. You may want to modify this question to
three years—if you’re planning on
moving soon—or longer than five years, if that’s your intent.
refers to the lengthy Uniform Residential Loan Application (URLA)
questionnaire that nearly all lenders currently require a borrower to
fill out as the first step in applying for the loan. It used to be that
there were as many different Application forms as lenders, but
with the strength of the Secondary Market, which
requires a URLA, even Portfolio lenders have gone
to the standard form.
See also CLO
and Online Application.
Get a URLA form from a Loan Advisor (or Online) and
fill it out very early in the loan hunting process, so that you know you’ve
assembled all the required information. You should always work
from the same original draft form if you decide to Double App
more than one lender.
Always keep your own copy of the Application that you’ve
given a lender. You’ll need to refer to it as questions come up
during the Underwriting/Processing stage, and even after you’ve
been granted the loan, it’s wise to keep the Application along
with the other Loan Agreement
papers you’ll receive, If you ever have
a disagreement with a lender as to how the loan is to be
administered, you’ll need to know everything said on all signed
Fee—Lenders don’t like you to apply to more than one institution
at a time. When money is tight and it’s hard to get a loan, they often
insist on an Application Fee,
which is forfeit if you don’t take their loan. This Fee
usually runs between $100 and $200. Almost always the Fee is
fully refundable if they don’t grant you the loan they’ve offered
you, although sometimes they insist on keeping the portion they’ve
already spent on the Credit Check and the Appraisal. The
amount and policy differs widely from bank to bank, so always include
questions about their Application Fee in your Loan Evaluation.
also Market Value. The written assessment of the Market
Value of the home. The appraiser usually works full time for the
lender, but can be an outside consultant.
In either case,
you typically pay an Appraisal Fee as a borrower Closing Cost,
but you don’t always automatically get a copy of the Appraisal—apparently
because there’s a fear you’ll use it to press for a revision. Ask
for it. The law now guarantees you can have it, if you pay
for it, but the tradition of not giving it dies hard.
Don’t be afraid to press for a revision if something seems
wrong. Appraisers make mistakes, just like anybody else. We’ve
seen appraisers reconsider which comparables to select or even admit
they missed an entire section of the house being appraised.
the Market Value of your home goes up. Reasons for Appreciation
include work you might do to improve your home’s condition, changes in
the neighborhood, or a rising economy, which affects all home prices.
for the Annual Percentage Rate.
The APR formula takes the basic Interest Rate and
adds in the lender’s Closing Costs.
By law, all lenders must quote you their APR
as well as their Interest Rate. APR—in concept—makes
it easy to compare the costs of different loans. It does work fairly
well when comparing different lender’s Fixed Mortgages.
Unfortunately, the APR formula is not sophisticated enough
to reflect the wide variations possible with Adjustable Loans,
so today’s comparisons need real Maximum Payment calculations
by your Loan Advisor.
See the Loan Evaluation Checklist in the Appendix.
Interest Rates are high in the lending market when you go to
sell, your buyer may want to Assume
the existing loan. Most Adjustable Loans are Assumable if
the buyer Qualifies and pays an Assumption
Fee. Most Fixed Loans and Seconds are not Assumable.
Underwriting Service—The big, Secondary Market financing
pools now offer this service to Mortgage Brokers and lenders, who
can do their paperwork on a mainframe computer directly hooked up to the
Stock Market pools.
means that Underwriting your loan for resale to the pools can be
done far more quickly and effectively than the old, paper system,
although it’s not nearly as efficient or instantaneous as the credit
card processing terminals you now encounter in the supermarket.
Despite the fact that this computerization cuts costs for the Secondary
Market and the Mortgage Broker or lender underwriting your
loan, the Fee for this service (sometimes as much as $100+) is
often passed on to you as one of your borrower Closing Costs.
Switch—Sadly, we’ve known a number of Loan Advisors who
apparently believe that lying about low Rate Loan Program
availability will build their business. Recently, we even spent six
weeks with a Mortgage Broker dangling a wonderful Low Rate
Program before us...who then Switched to a high Rate,
10% Fee Program at the last minute. Our surveys confirm
that this tactic is common nationwide.
We’re happy to
report that we escaped from our lying person (we can hardly call her a Loan
Advisor) by activating a Double App with another Loan
Advisor, who’d been honest about her Rates and Fees.
Although there are ways to complain to the OCC (see the National
Money$ource Directory for information) about Bait and Switch
tactics, they are hard to prove, and, as far as we know impossible to
use as a lever to force a lender into revising your Loan Program.
This is the major reason we recommend a Double App.
Payment—Perhaps more appropriately, this is sometimes called a “Bullet
Loan.” This is a loan that has to be paid off before the Principal
is fully Amortized. Almost all Seconds have Balloon
Payments at the end of five or seven years.
institutions offer lower Rates on Fixed Rate Firsts with a
Balloon Payment coming due in five, seven, ten, or fifteen years,
but the monthly loan payments calculated as though the loan Amortization
term was still 30 years.
These loans are
often called “a 30 due in 10,” etc. They may also carry a Prepay
Penalty for much of the life of the loan, so that there is only a
period of six to twelve months during which you can pay off this loan
and replace it with another.
This loan is not for the faint of heart, but, because the Rate
can be very competitive, we do recommend it if you know you’ll be
moving, or be able to Refinance, as the Balloon comes due.
Ask if the
lender has an “automatic Rollover
proviso” to guarantee a Refinance for you when the Balloon
comes due. They may refuse to put a guarantee into the mortgage contract
itself, but still write you a letter stating that Rollovers
have been their general policy.
very tight markets, they will usually Refinance—at the going
market Rate—so long as you have a clean payment history. Ask
what the rollover Fee is. It should be less than your current Origination
Fee, because they already know your good credit. Unfortunately, it’s
common for the lender to stipulate that the Fee will be set at
the time of the rollover. If money is tight at that time, the Fee
can be higher.
Payment Mortgage—Some Adjustables have the borrower make
payments every two weeks instead of once a month. The advantage to you
is that paying Principal more often results in faster Amortization,
thus saving you significant Interest payments over the Life
of the loan.
We don’t recommend this Loan Program, unless you are
a very disciplined bill payer or you set this schedule up as a
direct deposit to your lender from your regular checking account.
Paydown Payments for a more flexible, less stressful, Interest
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Selecting the lender and the loan is as important as deciding on the
house. The wise buyer will start his loan arrangements before
beginning the house search.