DEFINITIONS
LENDING TERMS DEFINED
This means Alternative Income Documentation. Some lenders allow borrowers to use personal or business bank statements to verify income, rather than tax returns. Their loans fall into this category.
Amortized Loan
With an amortized loan, you pay principal and interest. This loan is designed to pay off completely within the time frame specified (i.e. 30 years). An interest only loan does not pay down principal.Â
ARM
Adjustable Rate Mortgage - The rate does not stand still. It moves along with the index to which it is tied. (See "Hybrid ARM")
CD
A CD is a Closing Disclosure. If follows the LE (below) and is also an estimate of closing costs and funds needed to close your loan.
Conforming Limit
The conforming limit is the Fannie Mae limit of loan amounts they will finance. There are 2 tiers, the conforming limit that applies nationwide, and the high cost area limit. The limits are higher for Alaska, Hawaii, Guam and the U.S. Virgin Islands. The limits increase for 2 to 4 unit properties. To find the limit for your property, go to this website https://www.fanniemae.com/singlefamily/loan-limitsÂ
CLTV
Combined loan-to-value ratio. It is the percentage of total loans on the property divided by the value. Typically you add the first loan amount and the second loan amount, then divide by the value of the property.
DTI
This is the debt-to-income ratio, also called the "back-end ratio". it is your total debt divided by your total gross income. This is the calculation used by all lenders.
Most jumbo loans require a DTI 43% or lower. Conforming loans allow a higher DTI. It is determined by their automated underwriting, but cannot go over 50%. FHA and VA loans allow higher DTI's. Call me or your lender for more detaills.
Fixed Rate Mortgage
The rate is fixed for the entire term of the loan (e.g. 30 years, or 15 years)
Full Doc
If you can verify all your income with tax returns and/or W-2's, the loan is considered "full doc". Some lenders allow other forms of income verification (e.g. bank statements). Those loans are called "Alt-doc" meaning alternative documentation.
Gross Income
Your income before taxes are taken out.
Housing Ratio
This is your total housing payment divided by gross income, also called the "front-end ratio". Lenders rarely care about this ratio anymore, but it is important to ask them if they use this ratio.
HUD-1
HUD stands for Department of Housing and Urban Development. The HUD is the form that lists the fees connected to the loan, the pay off amounts, taxes and insurance due, and the money expected either to or from the borrower at the end of escrow.
Hybrid ARM
The rate is fixed for a certain time period, then it adjusts. The fixed rate time periods typically are 1, 3, 5, 7 or 10 years.
Index
An index is a published measure of economic conditions. If you have an ARM loan, then when your rate adjusts the new rate is calculated by adding the value of the index to your margin. The most commonly used index is the 1-year LIBOR currently; but that may change. The second most used index is the Treasury. You can Google the index name and get its current value.
Jumbo Loan
Any loan that exceeds the Fannie Mae Conforming Limit for your area.
LE
This is a Loan Estimate. It replaced the HUD-1 as an estimate of fees for non-FHA loans on October 3, 2015.
LTV
LTV stands for Loan-to-Value Ratio. It is calculated by dividing your first loan amount by the value of the property.
Margin
The lender's profit margin. It is added to the index to calculate your interest rate if you have an ARM and the rate adjusts.
MI (Mortgage Insurance)
MI protects the lender in case you default. You pay the MI premium, but the insurance is for the lender, not you. MI is necessary if you have a loan that is greater than 80% of the value of the property.
Mortgage Banker
A mortgage banker is like a mortgage broker, in that they can shop many different banks and mortgage-only lenders for you. The difference is that mortgage bankers underwrite most of their loans in-house, draw their own loan documents, and control funding. This is an advantage because the loan officer can talk to the underwriter and get help positioning your loan so that it can be approved. Some brokers and retail bank loan officers have that ability, but not all.
Mortgage-only Lender
These are companies who mortgage loans on a wholesale level. Their loans are only available to you if you go through a mortgage broker or mortgage banker. They do not have retail locations like banks and credit unions, and do not offer any other services (e.g. checking and savings accounts).
Non-QM
"QM" means Qualified Mortgage. A Non-QM loan does not conform to the guidelines of QM loans for one reason or another. Common non-QM loans verify income with methods other than 2-year of tax returns; allow you to buy a home after a negative credit event sooner than QM lenders allow (e.g. foreclosure, short sale, BK); fund loans with lower FICO scores than most lenders allow. Essentially, they use broader criteria to qualify you for a home loan than standard lenders who follow QM guidelines. Their rates are typically higher.
Non-warrantable Condo
This is a condominium that Fannie Mae will not finance. Some of the issues that make a condo non-warrantable are litigation, a high percent of non-owner occupied units, and one person or entity owning more than 10% of the units. There are many other reasons a condo complex may not qualify as warrantable; but in most cases there are lenders willing to take the risk and approve the loan.
PITI
Principal + Interest + Taxes + Insurance - The total of all housing expenses for the property if you do not have HOA dues
PITIA
Principal + Interest + Taxes + Insurance + HOA - The total of all housing expenses for the property if you do have HOA dues.
Points
A point is 1% of the loan amount. Points are a fee paid to the lender or broker. Paying higher points should get you a lower interest rate.
Principal
Principal is the amount of money you owe the lender, outside of the interest due.
QM
QM stands for Qualified Mortgage. That is a loan that conforms to the Government's definition of a safe loan. There is an article on this website that fully describes QM and Non-QM.
Reserves
Reserves are funds remaining in your bank accounts after you close the loan. Jumbo lenders typically have high reserve requirements, often 6 to 12 months. For example, if your PITI is $5,000 per month, they will need to see $30,000 to $60,000 in assets after you close the loan.
SFR
Single family residence