Mortgage Glossary
Mortgage Broker
An individual or company that works with borrowers to obtain a loan from a lender that is willing to provide a mortgage to you. A Mortgage Broker does not lend their own money, but they have agreements in place with lenders so they can arrange for a mortgage based on the actual lender’s terms and conditions.
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Mortgage Banker
A company that has its own funds available to lend to a borrower. The Mortgage Banker decides the terms and conditions for the money they will lend in the form of a mortgage. Providential Bancorp is both a Mortgage Broker and Mortgage Banker.
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Debt to Income Ratio (DTI)
Compares the amount of gross monthly income a borrower makes to the amount the borrower will owe each month with their mortgage payment (including taxes and insurance) and other debts. The other debts may include but are not limited to car payment(s), credit cards, alimony, child support, and personal loans. This ratio is commonly used to see if the borrower has the capacity to repay the debt.
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Credit Score (FICO)
A credit evaluation score developed by Fair, Isaac, and Co., used by lenders as one factor in making a loan decision. Scores are determined by analyzing credit history and current standing.
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Loan to Value Ratio (LTV)
The relationship between the amount of the mortgage loan and the value of the real property expressed as a percentage. For purchase loans the value of the property is the appraised value or the purchase price, whichever is less. For refinance loans the value used to determine LTV is the appraised value on seasoned properties (owned more than one year). For example a $90,000 mortgage on a $100,000 house is 90% LTV.
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Pre-payment Penalty
The amount of money a lender will charge a borrower to pay a loan in part or in full before it is due to be paid off. Pre-payment Penalties are usually expressed as a percentage of the outstanding principal balance. Prepayment penalties often exist during the first 2-5 years of a mortgage and thereafter cease to exist.
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Adjustable Rate Mortgage (ARM)
These loans have rates that are fixed for a specified period of time and then adjust once per year thereafter. An ARM will allow the borrower to get into a loan with a much lower rate and payment than a fixed rate loan. ARMs are the way to go if you plan to be in your home for a short period of time.
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Maximum Permissible Interest Rate during Term of Loan
Pertaining to ARMs, this is the proverbial ceiling that cannot be penetrated by the interest rate on your ARM. Rates are generally capped at 6% above the initial start rate.
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Frequency of Rate Adjustments and Maximum Adjustments Allowable
Pertaining to ARMs, rates normally adjust once per period (year) and are capped at 2% above the rate at the beginning of the period.
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No-origination/Closing Cost Pricing
Zero point loans and No closing cost loans.
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Zero Closing Costs
There are always closing costs involved in obtaining a mortgage. However, many lenders will add those costs to the loan amount so the borrower doesn’t have to pay them at closing. The increased loan amount will then be paid off during the term of the loan.
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Little/No Documentation Loans
Where the lender accepts your stated income with little/no verification. They typically require a higher interest rate, but are ideal for business owners who do not want to provide the extensive documentation necessary to qualify for a full-document loan.
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Balloon Payments
Lump sum payments due at the end of the term of a loan.
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Escrow Services as Elective or Mandatory
Lenders want to ensure that each borrower pays their property taxes and homeowners insurance, so their mortgage is protected. Some lenders will add an amount to the loan payment to cover the taxes and insurance cost and take responsibility for paying these expenses for the borrower. This is usually mandatory if the borrower has a history of making payments late.
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Late Payment Penalties
Information provided in your loan closing documents and on the Truth-In-Lending (TIL) disclosure explains these costs. Most lenders allow 15 days to get your payment in or face a penalty of 5% of the amount due.
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Foreclosure Terms and Conditions
These vary widely and are explained in the mortgage agreement. In general, if a borrower does not pay their mortgage on time, the lender possesses the right to foreclose on the property and take ownership from the borrower.
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Type of Title in which Property will be Held
Title to the property being financed can be held in many forms: Tenants in Common, Joint Tenancy, etc. For information regarding advantages and disadvantages of each, you should consult an attorney. Most lenders will mandate a specific type of title ownership before they will provide a mortgage.
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Mortgage Types
Fixed Rate and Fixed Term (15 year, 20 year, 30 year, and 40 year)
These loans have rates that are fixed throughout the life of the loan. The rates and payments will not change. Fixed rate loans are recommended for those people who plan to remain in their home for an extended period of time (over 10 years).
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Adjustable Rate Mortgages (1-year ARM, 3-year ARM, 5, 7, or 10-year ARM)
These loans have rates that are fixed for a specified period of time and then adjust once per year thereafter. An ARM will allow the borrower to get into a loan with a much lower rate and payment than a fixed rate loan. ARMs are the way to go if you plan to be in your home for a short period of time (less than 7 years for example).
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Conventional Loan to Value
A Loan to Value (LTV) ratio of 80% or less, which is the amount of the loan divided by the home’s appraised value. The lower the LTV of a loan, the lower the risk for that loan. Most lenders only offer Conventional Loans. Providential provides many Conventional Loans to clients, as well as Jumbo Loans and Government Loans.
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High Loan to Value (LTV)
Loans with high LTV are riskier than those with lower LTV. These loans usually require a stronger credit history and stable employment. Providential has many specialists in this area who even help people with low credit scores to obtain ideal mortgage rates and conditions.
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Interest Only
Interest only loans allow you to borrow money the way banks borrow money from each other. An interest only loan is a great way to free up monthly cash flow since you will not be required to make principal payments to pay down your loan principle. Presuming you believe the value of your home will continue to grow during the foreseeable future, Interest Only Loans can be a great way to obtain a more expensive home without the burden of high monthly payments.
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Cash-out Refinance
This type of refinance loan allows a borrower to pay off other debts or finance home improvements by using the equity in their current home as a savings account – of sorts.
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Home Equity Loans
Home Equity Loans are usually a Second or Third Mortgage obtained to pay off other debts or pay for additional improvements to your home. They are provided without having to pay off the primary mortgage on your home and can be in the form of either a Line of Credit, or Fixed Amount and Fixed Term.
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Construction Financing
A loan for 12-24 months where the money is used to build a new home. These loans can either be converted into a more traditional mortgage at the end of construction or paid off by obtaining a more traditional mortgage (called an End Loan).
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Commercial Loans
A loan for non-residential real estate and residential properties with 4 or more units. Providential is a experienced provider of Commercial Loans.
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Pre-qualification/Mortgage Commitment
This is a binding agreement for a lender to provide a mortgage to someone who still has not found the home they want to buy. If you are planning to buy a home, Providential recommends you obtain a mortgage commitment even before you have found the home you want. This ensures you can search for your dream home with the confidence that you will obtain financing to the limit agreed. A mortgage commitment is more powerful than a pre-approval, because it is the lender’s commitment to lend money to purchase a property. Those making an offer to buy a home with a mortgage commitment will beat their competitors’ offer ninety percent of the time because the Realtors and seller have a higher level of confidence in their ability to qualify for a loan.
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