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What Do The Mortgage Terms Mean? Appraisal: · An appraisal of real estate is the opinion of value or the act of processing estimated value. · An appraiser does not create value but rather, interprets the market to arrive at a value estimate. The appraiser compiles pertinent data, giving consideration to the site and amenities as well as the physical condition of the property. · Three common approaches are used to determine property value including: Cost Approach (what it would cost to replace or reproduce the improvements as of the date of the appraisal), Comparison Approach (the use of recently sold properties of similar size, quality and location as a comparison to the subject property) and Income Approach (used for income producing properties to ascertain what a prudent investor would pay based upon the net income the property produces).
APR = Annual Percentage Rate: · APRs are a way to calculate the annual cost of loans, taking into consideration loan origination fees (points) and any other costs associated with securing a loan such as appraisal, credit report, document and processing fees. · APRs protect consumers from companies who do not disclose fees upfront and provide consumers with a means to check the true cost of a loan.
Bankruptcy· An individual can restructure or eliminate debt and liabilities by filing for bankruptcy in federal bankruptcy court. · There are a variety of scenarios to handle debts that are out of control. The most common type being a “Chapter 7 No Asset” bankruptcy, which relieves the borrower of most types of debt. · A borrower will need to reestablish an ability to repay debt after the bankruptcy has been discharged (credit reports show BK for up to 10 years from the date of filing) in order to secure any additional loans.
C.L.T.V. = Combined Loan to Value · (First Mortgage + Second Mortgage) / Home Value · H.C.L.T.V.= High Combined Loan to Value (First Mortgage + Max Credit Line) / Value
C/O = Cash Out: · Giving cash in hand, consolidating debts, home improvement money, paying off 2nd mortgage (non-purchase money), or paying off a line of credit that has had more than a $2000.00 draw in the last year.
Compensating Factors: · Strengths on a loan application that can help an underwriter to approve a loan and overlook negative factors can include such factors as: long time at residence, liquid assets, low LTV, long job time, low debt ratio, high credit score.
Credit Report: · A report of an individual’s credit history prepared by a credit bureau using a statistical method of assessing the credit risk of a loan applicant. · A credit score is a number that rates the likelihood that an individual will pay back a loan based on past delinquencies, payment behavior, current debt level, length of credit history, types of credit and number of inquiries. · Credit scoring will determine a borrower’s ease in acquiring a mortgage. Scores of 680 or above are considered A+ loans, 620-680 scores may indicate that underwriters will take a closer look at the file to determine potential risks and scores below 620 may eliminate borrowers from the best loan rates and terms offered. Your Free Annual Credit Report
D.R. = Debt Ratio or D.T.I. = Debt to Income Ratio · Front End = Total housing expense (P.I.T.I.) divided by gross monthly income. · Back End or Total Debt Ratio = P.I.T.I. + All other monthly expenses divided by gross monthly income. · Self- Employed Borrower would be required to provide personal/ business tax returns
Escrow: · Mortgage Escrow accounts are special accounts set up in which money is held to pay for property taxes, insurance premiums etc. in a timely manner. · Escrow accounts insure that homeowners do not have to worry about coming up with large sums of money to cover property taxes. · Escrows protect the interest of investors of home mortgage loans by making them more attractive and secure as investments
Flood Insurance: · If there is a potential for flooding, a borrower needs to purchase a policy that covers the structure and loss of personal belongings. · Flooding is NOT covered by a standard homeowner’s insurance policy.
Homeowner’s Insurance: When a home is insured, a borrower should insure the home for the total amount it would cost to rebuild the home if it were destroyed or the insurance company may only pay a portion of the cost of replacing or repairing damaged items. · Replacement Cost: This form of homeowner’s insurance would pay the policyholder the cost of replacing the damaged property without a deduction for depreciation, but is limited to a maximum dollar amount. · Guaranteed Replacement Cost: Insurance that pays the full cost of replacing damaged property, without a deduction for depreciation and without a dollar limit. · Actual Cash Value: Insurance under which the policyholder receives an amount equal to the replacement value of damaged property minus an allowance for depreciation.
Jumbo Loans: Loan amounts over $359,650.00 · Rates are always slightly higher. · Also look for individual lenders to have higher escrow waiver fees.
L.T.V. = Loan to Value (Loan amount divided by home value, Loan Amount/Value) · Conforming lenders charge Mortgage Insurance over 80% LTV. · Non-Conforming lenders increase rates for loans over 80% LTV. · In most cases, if the LTV is under 65%, a non-conforming loan can be made.
Origination Fee: · This is one way a L.O. is compensated. It can range from 0-6% of the loan amount only. The client, usually out of the loan proceeds, pays this fee. This is commonly referred to as the “Up Front” fee or the “Points Charged”.
P.M.I. = Private Mortgage Insurance or M.I = Mortgage Insurance · PMI is insurance that protects the Lender against loss in case of default by the borrower and is added to loans over 80% LTV · PMI also enables mortgage companies to grant loans that would otherwise be considered too risky to be purchased by third party investors. · Mortgage insurance can usually be canceled by the home buyer after he or she has at least 20 percent equity in the home.
P.I.T.I. = Principal, Interest, Taxes, Insurance · For debt ratio purposes, calculate the payment with these included, whether or not the borrower is escrowing.
RESPA = Real Estate Settlement Procedures Act· RESPA is a consumer protection law that requires lenders to give borrowers advance notice of closing costs and enables them to be better-informed shoppers by requiring disclosure of costs of settlement services. · RESPA mandates a series of disclosures that prevent unethical practices by mortgage companies and provide consumers with the information to choose the real estate settlement services most suited to their needs.
R/T = Rate & Term Finance: · Loan to pay off existing lien only, max cash to borrower = $2,000 or 2% (lesser amt.) · Purchase money seconds can be paid as R/T · Hud-1 (Closing Statement) from purchase will be required to prove purchase money · FHA does not consider that 2nd mortgage payoffs be considered C/O
Rescission or Right to Rescission: · A customer has three business days to review closing documents after the loan closes. This is a federally mandated “cooling off” period. During this period the customer can change their mind and cancel their transaction. This applies to owner occupied refinances only, investment property and purchase money loans are exempt.
Residential Zoning: 1-4 unit buildings · In a situation where a 1-4 unit building is zoned other than R-1 there may be special conditions required for the appraisal to make the property acceptable to the end investor. Including but not limited to a full rebuild letter from the city or township. · In a situation where there is a “mixed-use” dwelling (storefront etc.) other special conditions may apply. Most lenders will not work with a mixed-use property and consider it non-traditional. · If there is a question about the way a property is zoned, contact either an appraiser or the municipality for more information. If a dwelling is more than 4 units, a commercial lender will need to be contacted, most residential lenders do not deal with commercial.
Seasoning: The length of time the borrower has owned the residence or been on title. · Conforming loans do not require seasoning to use appraised value for refinancing purposes. · Non-Conforming will have either a 6-month or 1 year seasoning requirement; otherwise you will use the initial purchase price. However, if there has been a significant value increase in a short period of time, the borrower will be asked to prove the reason for the increase.
Source of Down Payment and Cash to Close · Every dollar used for the purchase of a home must be documented. Cash on hand, recently deposited cash; cash gifts and unsecured loans are not acceptable sources of funds in all cases. · Documented verification of Savings, Checking, Stocks and/or Investments, Gifts, Proceeds from Sales of a Home, Auto, Boat etc or Secured Loans are acceptable sources of funds.
Title Insurance: · A Title Insurance Policy is a contract of indemnity between the insured and the insuring company, which protects the insured against loss of damage by reason of defects, liens or encumbrances of the insured title existing at the date of the policy. · Title policies are issued after a complete search and examination of the public records and shows the condition of the record title, including any money obligations outstanding against the property, easements and other matters which may affect the rights of ownership, possession and use of the property. · Title policies also insure against certain matters which do not appear on record such as; forgery, identity of parties, incompetence of former owners, interest of missing heirs and status of individuals not having the “right” to sell property.
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