203(k) - what is it?
The 203(k) is an FHA loan program that permits funds for repairs, renovations, additions or other modifications to be financed all in the same loan used to buy (or refinance) a property.
There are two versions of the loan available: the Streamline 203(k) and the Full 203(k).
More information on both is available in
Adjustable Rate Mortgage (ARM)
An Adjustable Rate Mortgage (ARM) is a loan with an interest rate that can change. Because you are, in effect, sharing the risk of higher future interest rates with your lender, you will generally get a lower initial interest rate on an ARM than you will on a fixed rate mortgage.
We cover this subject in much more detail in
The amortization of a loan is the process by which the balance is reduced over time. The payment schedule for your loan is called its amortization schedule.
We cover amortization in much more detail in
Annual Percentage Rate (APR)
An Annual Percentage Rate (APR) is a measure of the total cost of a loan, expressed as a nominal yearly rate. Think of it as an aggregate of all loan-related costs—interest (of course), but also certain closing costs and any mortgage insurance. The logic: if some of the closing costs you pay when you close on your mortgage are loan-related, you should consider these costs in addition to the interest that you pay when assessing the total cost of a loan and comparing one loan to another.
When it comes to the APR, the devil is in the details. For the whole story, please take a look at
And if you want to peek under the hood and tinker with the math behind an APR, check out
An appraisal is a professional opinion of the value of the home you are buying. Your lender will order the appraisal from an independent, licensed appraiser. The appraisal is the most time-consuming step in the loan process. We will let you know the date by which we need to order your appraisal. Expect to pay a deposit equal to the anticipated cost when we order it. Although the appraisal report technically belongs to your lender, we will provide a copy to you as soon as we receive it.
An assumption of mortgage is a transfer of liability from one borrower to another on an already-existing loan. When permitted, an assumption allows a buyer to take over the seller’s mortgage. Although most fixed rate mortgages must be paid upon the transfer of title, FHA, VA and Oregon State Bond loans often allow for an assumption under specific circumstances.
We have a lot more information in
A balloon payment is a lump-sum payment, over and above the regular, minimum monthly installments due on a loan. Most loans are what is called “fully amortizing”, which is to say, the minimum monthly payment matches the loan term loan. Pay the minimum payment every month and your loan will be paid down to zero over the specified time frame. When a loan has a balloon payment, the monthly payment and loan term don’t match. At some point the balance of the loan comes due in full in a balloon payment.
We have a lot more information in
A bi-weekly payment plan is sets you up to pay half of your mortgage payment every other week. Some thoughts on bi-weekly payment plans can be
“Conventional mortgage” is a catchall term for any mortgage that is not some other type of mortgage. If your loan is not insured by FHA or guaranteed by USDA or VA, it is likely a conventional loan. The vast majority of conventional loans are sold to Fannie Mae or Freddie Mac and are called “conventional conforming” loans. Loans that, in some way, do not fit into Fannie Mae’s or Freddie Mac’s underwriting guidelines are (rather unimaginatively) called “non-conforming” loans. Loans that exceed Fannie Mae and Freddie Mac’s loan limits are called (rather goofily) “jumbo” loans.
Please see the entry under “Occupancy”.
Debt-to-Income Ratio (DTI)
When assessing the amount a person is eligible to borrow, lenders rely heavily on a ratio of the borrower’s monthly debt to monthly income. This ratio, called a “debt-to-income” ratio or DTI. We calculate two ratios, called the “front” and “back” DTI. The math is quite simple. Your total primary housing expense (including the loan, taxes, insurance, mortgage insurance and HOA dues) divided by your monthly pre-tax income is your front DTI. Add all of your other minimum payments to your total primary housing expense and divide by your income again. That’s your back DTI.
DTI ratios of 33/43 are acceptable for most loan programs (that’s a total house payment of no more than 33% of your income and total monthly payments of no more than 43%), but exceptions abound.
Discount points are the most variable of all closing costs. (In fact they may be either a cost you pay or a credit you receive.) One discount point equals 1% of your loan amount. Although discount points are paid at closing, just think of them as part of the interest cost for your loan. If you elect to pay discount points, you are prepaying interest at the closing table. In exchange for this pre-payment of interest, you receive a reduction (discount) on your interest rate.
When we lock your rate, you’ll need to make a decision about discount points.
Additional helpful information can be
Early Issue Title Insurance
Early Issue Title Insurance is a type of title insurance that protects against liens from contractors and suppliers. If you are purchasing a new or remodeled home and closing shortly after completion of work, your lender may require early issue title coverage. To learn more about this and other aspects of buying a new or substantially remodeled home,
Earnest money is a deposit you’ll pay at the time you enter into a contract to show the seller you have both the intention and ability to perform on the offer you’ve written. Your contract will specify the amount (1-3% of the price is typical). At closing, your earnest money will be credited toward your down payment.
If you cancel the transaction for a reason permitted by your contract, your earnest money will be refunded to you. If you fail to close for a reason outside of your contractual rights (say, a late case of cold feet), the seller gets your earnest money as liquidated damages for the harm you caused. Talk to your Realtor for help understanding the contingencies and timelines that protect your earnest money.
Earnest Money Agreement (EMA)
When you find a home you like, you and your Realtor will get together and write an offer to present to the seller. In Oregon, most often, you’ll hear the offer you write called an Earnest Money Agreement, or EMA, for short although the actual title on the form is “Residential Real Estate Sale Agreement”.
Once accepted by the seller, this document becomes the roadmap to the transaction. The price, down payment, financing, who pays for what costs, inspections permitted, timeline for inspections, closing date, date you get your keys and much more are all included. Your Realtor will guide you through it and make sure you understand it.
The equity in a piece of real estate is the difference between what you owe and what it is worth. You can think of your equity as the part of your home value that you “own”. As your home value increases and your loan balance decreases your equity increases.
You can turn a portion of your equity into cash by borrowing against it, either by refinancing or taking out a second mortgage or home equity line of credit. Generally, the only way to liquidate all of your equity is to sell, but a portion of your equity will go to paying Realtors and transaction costs. When selling, remember that your equity (on paper) is more than the amount of cash that you net from the sale.
An escrow is any arrangement where two parties agree to have a third party receive, hold and disburse funds and execute mutually agreed-upon instructions. In the context of buying your home, you’ll encounter two escrows. One begins when your offer is accepted by the seller and ends when you close. The other begins when you close and ends when you pay off your mortgage.
Lots more about escrow in
Family Opportunity Loan
Please see the entry under “Occupancy”.
Fannie Mae was charted by the US Congress in 1938 as part of the New Deal. Fannie’s cousin Freddie Mac was created in 1970. Both do the same thing: buy mortgages from lenders, package them into bundles (pools) of loans and then sell them into the secondary market as mortgage-backed securities (MBSs). Until Fannie and Freddie came along, mortgage lending was done, almost exclusively, by savings & loans. A small, local S&L fits a certain romantic vision of banking (picture Jimmy Stewart’s bank in It’s a Wonderful Life), but it’s not a very efficient source of money for mortgages. For one thing, it can only lend the money it has on deposit (“Gosh, we’d love to finance that home you want to buy…come back at the end of the summer when Farmer Bob sells his corn.”). For another, once an S&L makes a loan, its money is tied up in that loan.
Fannie and Freddie gave S&Ls, banks and other types of lending institutions a steady source of liquidity. A lender can fund a mortgage this month, sell the loan next month and free up their money to lend again. This modern mortgage marketplace makes for a steady flow of money from investors on Wall Street to mortgage lenders like us to lend to borrowers like you.
FHA stands for Federal Housing Administration (FHA). Through approved lenders, FHA provides mortgage insurance, protecting lenders from losses due to default. FHA and HUD have insured over 34 million home mortgages.
This pdf has a bunch more about the FHA and what it offers.
FICO is to credit score as Kleenex is to tissue or Xerox is to photocopy. Fair, Isaac and Company was founded by an engineer (Bill Fair) and mathematician (Earl Isaac) in 1956. What do you get when you cross an engineer with a mathematician? Turns out, you get credit scoring.
We have more information in this pdf.
If your home or any outbuildings are in a Special Flood Hazard Area you will be required to carry flood insurance. Most listings include flood zone information, but if in doubt give us the address and we’ll check for you. Your regular insurance agent will write the policy through the National Flood Insurance Program (NFIP). Start talking about flood insurance as soon as you find out you need it, a survey or elevation certificate may be required and can take extra time. Floodsmart.gov has lots of additional information and a handy risk profile lookup/cost estimator.
Please see the entry under “Fannie Mae”.
Good Faith Estimate (GFE)
The Good Faith Estimate (GFE) is a disclosure we’ll provide to you within three business days of your loan application. Application, for purposes of this form is usually defined by when you find a property. The GFE form has been evolving over the past several years. The current iteration (example here) provides basic loan information and a summary of your costs.
We have more information in this pdf.
Hazard Insurance (aka Homeowners, aka Fire)
Pretty interchangeably, you’ll see this insurance referred to as “homeowner’s” “hazard” or “fire” insurance. All refer to exactly the same thing. Most loans require that you cover 100% of the cost to reconstruct your home or at least the loan balance with no more than a 5% deductible, but different loan loans carry different insurance requirements.
You can get more detail on this in this pdf.
A Homeowners’ Association (HOA) is a non-profit entity incorporated by the developer when a community is being built. The purpose and function of an HOA is defined by its Covenants, Conditions and Restrictions (CC&Rs), which are in public record and run with the property. When you buy a home that is part of an HOA, you automatically become a member of the HOA and are bound by the CC&Rs (read them!). You will also owe dues to your HOA.
HOAs vary widely in function and dues. Some have dues of $100 per year and just mow the grass at the entrance to a subdivision. Dues for a high-rise condo with 24-hour concierge service can be many hundreds of dollars a month. Dues for condos generally include water, sewer, garbage, exterior insurance and exterior maintenance. Some even include cable TV, internet and hot water or heat.
If your property is part of an HOA, the HOA must meet loan guidelines. We will get copies of the CC&Rs, financials and any other necessary information as soon after your offer is accepted and let you know if we have any concerns.
Home Equity Line of Credit
Picture a credit card with a really high limit. Now imagine that card uses your home for collateral. That’s pretty much a Home Equity Line of Credit (HELOC). For an initial “draw period” you can draw against and repay the loan repeatedly. When the draw period ends, you must pay back what you owe, either over a specified period or in a balloon payment.
HELOCs are usually in second lien position. The rate is typically variable monthly and based on the Prime Rate. Prime + 0% to Prime + 2% is typical. Minimum payments during the draw period are usually interest-only but may be a percent of the outstanding balance. A few offer the option to lock in one or more fixed-rate amortizing loans under the umbrella of the HELOC.
Although most often a HELOC is used to borrow against the equity in a home you already own (usually to fund a big-ticket item such as home improvements or college), we can set up a HELOC as a part of a purchase transaction. Commonly this is to avoid mortgage insurance or to keep your first mortgage below the jumbo loan limit. A HELOC can also help fund the transition from one home to another.
HUD-1 (Settlement Statement)
The HUD-1 is the official accounting of all transaction costs and credits, including a to-the-penny figure for the funds you need to pay to close. Upon receipt of your loan documents, your escrow officer will prepare your HUD-1, a three or four page spreadsheet. You’ll sign an estimated HUD-1 but keep an eye out for the final version. It will come in the mail a few days after closing. Keep the final HUD-1 in a safe place—you’ll need it to prepare your tax return and third page includes a easy-to-read chart with key terms of your loan.
A loan with an interest-only payment does not amortize—the minimum payment due is the interest accrued on the outstanding balance over the prior month.
There are two (quite opposite) reasons to seek out a loan with an interest-only payment. If you want the lowest possible monthly payment, an interest-only payment is about as low as you can go. On the other hand, if you plan to prepay your loan it can be nice to have your payment refigured monthly. Whatever you pay beyond the minimum payment reduces the principal balance, which, in turn, reduces the minimum payment due next month.
This flexibility is a key benefit of an interest-only loan, but you do need to plan ahead. Eventually the loan will need to be paid back. If you’ve elected to pay minimum payments, at some point the loan will either convert to an amortizing loan with a higher payment or a balloon payment will come due. A home equity line of credit will commonly have an interest-only minimum payment due during its “draw” period.
First mortgages with interest-only minimum payments, although quite common during the 2000s, have dwindled in availability. Qualified Mortgage (QM) rules have made them even harder to come by, as an interest-only payment excludes a loan from being considered a QM.
“Jumbo” is one of the sillier bits of mortgage jargon, really. A jumbo loan is any conventional mortgage with a loan amount above the maximum that Fannie Mae and Freddie Mac will buy. In general, a jumbo loan requires a higher down payment, better credit and more assets and may come at a higher interest rate than a loan that can be sold to Fannie or Freddie. Jumbo loans are also notably less uniform in their underwriting guidelines due to the diverse array of funding sources for them—every jumbo lender makes up its own rules.
Lien: what exactly is that?
A lien is the public notice of a debt against a person or a thing. Most liens are recorded on a first-come, first-serve basis. The order in which liens are filed is called “lien priority”. A lender in first lien position has no barrier to foreclosure. A debt in second or third lien position and can only foreclose by paying off the liens ahead of it.
Your preliminary title report will itemize all liens recorded against the home you are buying and all parties involved in the transaction. Expect to see liens for the seller’s mortgage(s) and property taxes. Other possible liens: attorney’s fees, divorce settlements or liens for work performed on the property. The IRS can lien an individual for unpaid taxes.
All existing liens must be released for your purchase to close, so that your new loan will be in first lien position.
Loan-to-Value Ratio (LTV)
To calculate your loan-to-value ratio (LTV), divide your loan amount by the lesser of your appraised value or your sales price. If you borrow $80k on a $100k purchase, you’re at an 80% LTV. You can think of the LTV as the inverse of your down payment.
Lenders also calculate two other cousins to the LTV called a “combined loan-to-value” (CLTV) and “high combined loan-to-value” (HLTV). The CLTV takes into account the balance on a second mortgage. To calculate a CLTV add together the first and second mortgage balances and divide by the value. If you have a first mortgage of $80k and a second mortgage of $10k on a $100k property, you are at a 90% CLTV.
The HLTV takes into account the potential debt on a home equity line of credit (HELOC). To calculate the HLTV, add together the balance on the first mortgage and the credit limit on the HELOC and divide by the value. If you have a first mortgage of $80k and a home equity line of credit with a $20k limit on a $100k home, you are at a 100% HLTV (even if you owe zero on the home equity line).
Mortgage Credit Certificate
Take a look at this pdf for more information on this fabulous program.
Mortgage insurance (MI) provides lenders with coverage against financial losses in the even of a default and foreclosure. If you put less than 20% down, your loan will most likely require mortgage insurance. MI can feel like a raw deal—you pay for coverage that protects your lender. But consider the alternative: without it, all loans would require at least a 20% down payment, putting homeownership out of reach for many.
This pdf goes into more detail.
A loan with Negative Amortization (NegAm) has a minimum monthly payment that does not cover all accrued interest. Each month’s deferred interest gets added to the principal. The result is in an increasing loan balance and interest due on interest. A NegAm loan is typically a monthly adjustable rate mortgage (ARM) with built-in triggers that will cause the payment to rise significantly if too much negative amortization accrues. Sounds great, right?
NegAm ARMs have been around for decades, but originally, underwriters looked for borrowers making a large down payment with the financial wherewithal to balance the inherent risks. They had a cult following with real estate investors and others who could benefit from a highly flexible payment plan.
As real estate boom of the 2000s took off, NegAm ARMs grew in popularity and availability. Marketed as “pick-a-payment” loans, the idea was that although you could pay a payment with negative amortization, you wouldn’t always do so. When the mortgage crisis hit and housing prices started to tumble these loans became exhibit A for the excesses of risky lending.
NegAm ARMs are likely a relic of the past. So many of them wound up in foreclosure that lenders are unlikely to offer them again. If they do ever become available again, they will not eligible for the liability protections offered to lenders under the Qualified Mortgage rules, making them even risker.
The note rate is rate at which you pay interest on your home loan. At closing you will sign a promissory note, containing all of the terms of your loan. The note rate is quite literally the interest rate on this document, used to calculate your monthly payment.
Whether or not and how you intend to occupy the property you are buying is an important part of your loan application. Your planned occupancy affects amount you are required to put down, interest rate, loan costs and even the availability of certain loan programs.
Please see this pdf for more information.
Oregon Department of Veterans Affairs (ODVA)
Did you know Oregon Department of Veterans Affairs (ODVA) has a home loan program? Well it does. It is not what you might traditionally think of as a VA loan. Rather it is a conventional loan offered at below-market rates to qualifying Veterans.
Take a look at this pdf for more details.
Oregon Bond Program
If you are a low- or moderate-income buyer and interested in more information about this fabulous, below-market rate loan option, read on this pdf for more details.
PITI is an acronym for “Principal, Interest, Tax and Insurance”. Your PITI is your total monthly payment including the loan payment, property taxes and homeowners’ insurance, mortgage insurance (if applicable) and homeowners’ association dues (if applicable). Lenders use your PITI to calculate your debt-to-income ratio (DTI)—a big part of underwriting your loan.
Paying taxes and/or insurance in with or separately from the loan doesn’t change your PITI. The costs are what they are, regardless of when and how you pay them.
Oh and, not sure why, but we say “pee-eye-tee-eye”, not “pity”
Power of Attorney
Let’s say you are going to be climbing Mount Everest the week you are supposed to close on the purchase of your home. Or maybe your 90-year-old grandmother in Florida has agreed to cosign on your home purchase. If it is not physically possible or would be terribly inconvenient for someone party to a real estate transaction to sign closing documents in person at the title company, a Power of Attorney (POA) can be the solution.
A POA is a written authorization, giving one person (the “attorney-in-fact”) the legal authority to act on behalf of another (the “grantor”). For a POA to be acceptable for mortgage documents it must be Specific. Really specific—naming a particular address and a particular transaction.
It is important to make arrangements for a POA as far in advance as possible. Your loan documents cannot be prepared until the POA has been prepared and cannot be signed before the POA is signed and notarized. Oh and, buy your attorney-in-fact a nice bottle of wine or something—signing as a POA is a PIA.
A pre-approval is preliminary mortgage approval. Securing a pre-approval is an essential first step when you are thinking of buying a home. It provides you with a solid understanding of the loan terms and amount of loan available to you, proof of your ability to buy as an aide to negotiations and the ability to close as quickly as possible, having completed as much of the initial paperwork and process as possible.
To get pre-approved, you must submit financial documents and authorize a credit check. These documents are presented to an underwriter who reviews them and issues a written statement of loan approval. You do not need to know what property you are buying to get pre-approved.
The term pre-approved is used very casually at times (don’t get us started). Only an underwriter has the authority to issue a loan approval. Until you have made a loan application and an underwriter has reviewed it, you can only be prequalified, not pre-approved.
At closing, the title insurance company is going to issue insurance policies, insuring that your ownership and your lender’s lien are legally valid. Before they can issue insurance, however, they must determine current state of the title. So, the title company quizzes the seller, digs into public record, finds all that they can and issues a preliminary title report or “prelim”.
This report includes all available information on the title, listing liens and exceptions and providing copies of any relevant documents (neighborhood bylaws, covenants, conditions and restrictions or CC&Rs, easements and more).
The prelim also contains a judgment and lien search on you and the seller. Any financial obligations that are a matter of public record become part of the title report. Child support and IRS or state tax liens are common examples.
If you have questions about any part of your prelim, talk to your real estate agent and your title officer.
A prepayment penalty is a lending provision that, if triggered, requires the payment of extra interest or a fee due to paying your loan off early. Most prepayment penalties run for an initial period of years—typically expiring after one, three or five years.
If triggered, the penalty is usually a percent of the loan or a certain number of months of interest. Prepayment penalties can be “hard”, triggered no matter what brings about the prepayment, or “soft”, waived if you prepay due to selling. Even loans with a prepayment penalty usually allow you prepay up to 20% of the loan balance (over and above your minimum payments) before a penalty kicks in.
Prepayment penalties are pretty rare, but if we talk about one of the few loans that have one, we will describe it to you in detail.
A prequalification is the first step on the path toward a loan approval. If you’ve provided information to a lender and the lender has told you “looks good”, you are prequalified. The exchange of information can be very informal, involving as little as a brief phone call or email exchange. A more in depth prequalification involves gathering financial papers and authorizing a credit check.
We have a strong preference for a more thorough prequalification. We’ll always do our best with whatever information you provide, but the more you share, the more accurate and thorough we can be. (The computer programming expression
Be careful not to confuse a prequalification with a pre-approval. Regardless of how thoroughly you are prequalified, your loan is not pre-approved until an underwriter reviews it. Only an underwriter has the authority to issue a true pre-approval. We strongly recommend getting pre-approved (not just prequalified) before beginning to shop for a home.
To pro-rate is to calculate something proportionately. A number of items may be prorated when you close on real estate transaction. You and the seller pay a prorated share of property taxes. If the seller keeps possession of your property after closing, you will usually receive a credit for a pro-rated amount of your total payment. If the property you are buying is rented, the seller will owe you a prorated amount of the current month’s rent. And finally, your lender will charge you a prorated amount of interest at closing—from the day you close until the end of the month.
Lots of math to be done. Helpfully, as a part of their escrow services, the title company will do the figuring and make sure you pay and are paid all of the pro-rates due.
Qualified Mortgage (QM)
Qualified Mortgage (QM) rules went into effect January 2014. A Qualified mortgage is a loan that has substantially equal monthly payments, has no interest-only, balloon payment or negative amortization features and (if it has an adjustable rate) uses the highest possible rate for the first 5 years when qualifying. Lenders must also establish a borrower’s Ability to Repay using documented income and assets and abide by certain fee limitations. Finally, QM rules call for a maximum ratio of a borrower’s monthly debt payments to income of 43%.
To a large extent, these rules are a solution to a problem that no longer exists. The risky lending QM is intended to curb? Banks stopped making most of those types of loans in 2008. The vast majority of loans funded before QM rules kicked in already met QM rules. And, until January 2021 (or until Fannie or Freddie come out of receivership), Temporary QM rules exempt loans that are sold to Fannie Mae or Freddie Mac, insured by FHA or guaranteed by the VA or the USDA from the 43% DTI rule.
And, for those loans that don’t meet the debt-to-income (DTI) ratio limit, there is an exception, called Temporary QM. Running for 7 years or until Fannie or Freddie come out of receivership, Temporary QM exempts loans that are sold to Fannie Mae or Freddie Mac, insured by FHA or guaranteed by the VA or the USDA (which happens to be the majority of loans) from the 43% DTI rule.
The only time you’ll hear us talk about the QM rules will be if you are doing one of a few inherently higher-cost loans. If you want to pay up-front for mortgage insurance, buy a condo, a 2-4 unit property or a rental or if you have lower credit scores, Fannie Mae and Freddie Mac charge risked-based fees that can wind up exceeding QM limits.
It is worth noting that lenders can choose to make loans that don’t meet QM standards, but are at greater legal risk when doing so. As of this writing, it remains to be seen how many lenders will chose to offer non-QM loans.
An interest rate lock is a commitment from your lender to close your loan at a certain rate and cost so long as closing occurs within a certain period of time. You are eligible to lock in a rate as soon as you know two things: 1) the address of the property you are buying and 2) your closing date. In most cases, this means you can lock your rate as soon as you and the seller come to mutually accepted terms. As soon we know you are eligible to lock, we’ll be in touch to discuss the options.
This pdf discusses the details and some of the possible uses.
Refinancing is the process by which you replace an existing mortgage with a new one (or take out a mortgage secured to a property you own outright). You can only refinance a home that you already own.
Reasons to refinance include:
• Lowering your interest rate
• Reducing your monthly payment
• Changing loan type to reduce risk, such as fixing in an adjustable rate
• Consolidating debts
• Taking cash out for home improvements, investing or other purposes
• Buying out a partner or ex-spouse
To refinance your loan, you will pay a new set of closing costs. Before spending good money on a new loan a little analysis is in order—you want to be sure the benefits of the new loan outweigh the costs of setting it up.
If you are thinking about refinancing, we’d be happy to assist you. We’ll gather some information, discuss your plans and goals, crunch some numbers and provide you with an analysis and some advice.
A rescission period gives you the right to back out of a refinance loan before closing with no penalty. Think of it as your Right to Get Cold Feet. Federal law requires a 3-day rescission period whenever you refinance a primary residence.
To satisfy the law, three “business” days must pass between the day you sign papers and the day your loan closes. The definition of a business day is a bit odd—it is any day mail is delivered. So, if you sign papers on a Monday, the soonest your loan can close is Friday (assuming Tuesday, Wednesday and Thursday are not national holidays). If you sign on the Friday before, say, Veterans’ Day, your loan can’t legally close until the next Thursday. Your rescission days would be Saturday, Tuesday and Wednesday.
When you sign your closing papers, your escrow officer will notify you of your right to rescind and provide a form you’d use to do so. Sign and return this form before midnight of the third day and your loan won’t close. When working on a refinance, we’ll keep these dates in mind and make sure you sign in time to close before your interest rate lock expires.
The money you have left over after you’ve paid your down payment and all closing costs are your Reserves. Kind of your “In Case of Emergency: Break Glass” money. Many loans require a minimum amount of reserves. Jumbo loans and loans for investment properties, tend to require more reserves.
Reserves are measured by dividing the dollar amount of reserves by your monthly payment. For example, you have $6000 in savings after closing and your new house payment is $1500, you have 4 months of reserves.
Different types of assets are tallied differently for purposes of figuring reserves. Funds in checking, savings or money market accounts are liquid and stable and counted at 100%. Stocks, bonds, mutual funds and other publicly traded securities are counted at 70%, to allowing for fluctuations in market value. Retirement funds can also be counted for most loans, but only to the extent that they are accessible in the event of a financial hardship. Retirement funds are counted at 60% to allow for market fluctuations and penalties.
A second mortgage is a loan that is in subordinate lien position to another mortgage. In other words, another mortgage came first and recorded an interest in the property in public record. The lender who got there first, is in first lien position and has no barrier to foreclosure. Additionally, if they foreclose, any second mortgage loses its security interest in the property. A second mortgage lender can only foreclose by paying off the first mortgage.
Second mortgages, are riskier loans and, as a result, usually cost more or require an adjustable interest rate. They often carry shorter terms (5 to 20 years) and are generally inexpensive to set up (low-to-no closing costs). A home equity line of credit is a common type of variable-rate second mortgage, but many banks and credit unions also offer fixed rate second mortgages.
These loans are a popular way to free up equity in a home you already own, usually to fund a big-ticket item like college, a remodel or a business venture.
Two assets are created at the time that you close on your loan. The first is the obvious of the two: at closing you sign a promissory note agreeing to pay back what you’re borrowing, plus interest. As you make payments, the owner of that note (most often Fannie Mae or Freddie Mac) will make money off of the interest that you pay.
The other asset created is a little less obvious: it is called servicing rights. Servicing rights exit because, well, your note holder wants nothing to do with you. Sure Fannie Mae wants your interest payments and all, but the logistics of managing your loan and dealing with you? They hire a servicer for that. The servicer tracks payments, manages your escrow account for taxes and insurance, sends tax statements, verifies insurance, and more. For their trouble, the servicer gets to keep a sliver of every payment you make. When you think of your “lender”, you are really thinking of your “servicer”.
If you have any questions about the servicing of your loan after closing don’t hesitate to ring us. The Consumer Financial Protection Bureau has assembled an excellent FAQ on servicing.
In order to hand over ownership of a property to you, your seller must first clear all debts secured to the property. So what happens when a seller accepts an offer that isn’t high enough cover all selling costs and pay off the seller’s debts? Assuming they have the money, the seller could write a check for the shortage at closing. But what if they don’t? Then you’re involved in a short sale.
A short sale is a transaction where the seller will not clear enough to pay off the mortgages and other debts secured to the property. The seller can only sell by convincing their lender to accept a short payoff and releasing all liens even though the debts are not fully paid.
Download this pdf for more information.
Let’s say you have a first and second mortgage. You want to refinance your first mortgage, but you don’t want to pay off your second mortgage. Or maybe your second mortgage is a home equity line of credit and you want to pay it off, but you don’t want to close it.
When you pay off your old first mortgage with a new loan, your second mortgage will automatically slide into first lien position becoming, in effect, a first mortgage. But to refinance, you new mortgage wants be in first lien position, so this is a problem. The solution: a subordination.
We will send a subordination request with the terms of your new loan, a copy of your appraisal and a check from you (expect to pay $100-300) to your second mortgage lender. If the request is approved, your second mortgage lender will send back a subordination agreement, formally consenting to remain in second lien position behind your new first mortgage.
So long as your new first mortgage is just big enough to pay off your old loan and cover closing costs, approval is almost guaranteed. But if you are taking cash back (even to pay off other debts), your request may be denied.
Processing a subordination adds to the time it takes to close your refinance. We’ll do our best to find out the current turn times for your second mortgage lender and allow adequate time when we lock your interest rate.
Title insurance is, quite literally, insurance covering losses due to any defects found in the title to your property. At closing, the title company will issue two policies—an Owners’ policy, paid for by the seller and protecting you, and a Lender’s policy, paid for 50/50 by you and the seller and protecting your lender. If a claim or lawsuit arises, the title insurance company will defend you and your mortgage company or cover any financial losses.
What’s Covered? Claims are quite rare, but can arise. Examples of possible covered issues include discrepancies in the legal description, unpaid liens missed during the title search, issues with lien priority, identity fraud, legal incapacity of a buyer or seller, issues to right of access, undisclosed covenants or easements, invalid power of attorney, ownership claims from undisclosed or missing heirs, leases, contracts or options not disclosed to you. In short, lots of stuff. Check the schedule of exceptions on your title policy to see what’s not covered.
If you are purchasing new construction, be sure and check out the topic on Early Issue title insurance—a type of title insurance that protects against liens from contractors and suppliers.
Truth in Lending Statement (TIL)
Download this pdf for a breakdown of a TIL statement.
Underwriting is the process your application goes through to determine whether or not you are eligible for the loan you’ve requested. Each loan program has a set of guidelines. These include things like the minimum credit score, maximum debt-to-income ratio, minimum down payment and reserves. To qualify for a loan, you must fit within its rules.
There is also a subjective component to underwriting a loan. Underwriters are trained assess the “4 C’s”:
• Character – Your financial history, particularly your credit report, but more than that. Does your financial history show you are likely to repay this loan?
• Capacity – Your ability to pay. Do you have enough income to afford the loan payment, your other bills and support yourself?
• Capital – Your assets. Do you have the ability to pay the down payment? Will you have a cushion of savings left after closing?
• Collateral – The security for the loan. Is the property you are buying of an acceptable type and condition, worth what you are paying and marketable?
Most mortgages go through two rounds of underwriting: Automated and Manual. Automated underwriting systems (AUS) are good at verifying a file meets all objective guidelines and offer a statistical measure of the risk profile of a loan, but the final credit decision always rests with human underwriter.
The US Department of Agriculture was established in 1935 to bring electricity to rural areas during the Great Depression. Gradually its mission expanded to include a bunch of things, including extending credit for rural development.
Through the Single Family Housing Guarantee Loan program, the USDA acts as a loan guarantor for buyers of non-farm rural properties. The property must be in an eligible area, residential in nature and may not have income-producing potential.
Applicants must have a household income of no more than 115% of area median income and meet fairly conservative debt-to-income ratio requirements. USDA loans require an acceptable credit history, but can be generous about a less-than-perfect credit history. Loan guarantee fees are required, but are much lower than the FHA mortgage insurance costs. Qualified buyers are not required to make a down payment and guidelines allow the seller to contribute toward closing costs. USDA loans can close with very little (to no) cash from the buyer.
Income and maps of eligible areas are available on the USDA’s loan eligibility site.
VA (Department of Veteran’s Affairs)
In 1944, as World War II was nearing an end, Congress passed the G.I. Bill, extending an array of benefits to returning servicemen and women. At the heart of this law was a loan guarantee program. Through it, the Department of Veteran’s Affairs (VA) insures home loans to qualifying Veterans. As of this writing, the VA has insured 18 million loans.
The VA program is open to active duty members of the armed services and Veterans who meet minimum service requirements. Surviving Spouses, members of the National Guard and Reservists may also qualify.
Upon request, the VA issues a Certificate of Eligibility with an “Entitlement” amount. This entitlement is used to insure the loan. The entitlement generally only guaranties one loan at a time, but can be reinstated and used for multiple home purchases. At closing, the Veteran must pay a Funding Fee, the cost of which is usually financed. The fee varies depending on the down payment amount, whether it is the Veteran’s initial or a subsequent use and the type of service (regular military versus Guard/Reserves). Funding fees are generally waived for Veterans with service-related disability
For home purchases up to $417k, most VA loans do not require a down payment. The VA allows the seller to contribute toward closing costs. As a result, VA loans can close with little-to-no cash from the buyer.
Vesting is how you take title to the property that you are buying. A deed will be recorded in public record to convey ownership of the property from the seller to you. Your vesting is how you are listed on this deed.
Vesting is particularly important when multiple parties take title to a property. The interests of each owner and legal relationships between owners are determined by the vesting you use. Common types of vesting include:
• Joint Tenancy with Rights of Survivorship – This vesting gives each owner equal ownership, equal rights of possession and undivided interest in the property. If one party dies, ownership automatically passes to the other joint owner.
• Tenants in Common – This vesting allows for different interests, usually stated as percentages on the deed. Tenants in Common can have different rights of possession. If one party dies ownership passes to that owner’s heirs.
• Tenants by the Entirety – This is a special vesting for married people. It allows spouses to take title together as a single legal entity. It’s a lot like joint tenancy, providing for equal rights of possession and rights of survivorship upon the death of one spouse. Not all states recognize Tenants by the Entirety—Oregon does.
Decisions about your vesting are important and should be made with advice from a real estate lawyer. We’d be more than happy to recommend one—just ask.