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The Definitive Guide to Lending Terms

Are you a home buyer looking for financing?  Would you like to know "the lingo" that the lenders and your agent are using while they work on your loan?  You've come to the right place.  This is the definitive guide to lending terms for consumers. 

A friend of mine, who I feel knows an incredible amount about the mortgage industry, sent this to me a couple of days ago.  This guide is published with permission of Greg Vanslow of Princeton Capital.  Thanks Greg!

 

 

Lending terms

LO – loan officer. Your representative and advocate (hopefully) in the lending process.

OO – Owner occupied residence

NOO – Non-owner occupied = rental property. This is not a vacation home that you sometimes  rent out for a week. That is a second home and we don’t count the rent (with some exceptions).

PITI – principal, interest, taxes and insurance (and HOA dues, if applicable). It’s the cost of home ownership, as far as a lender is concerned. We always calculate it, even if the loan does not have impounds.

Impounds – the lender collects taxes and insurance in the mortgage payment and pays them when due. Required with some loans in California (and on all loans in most states).  Also known as escrows.

 

DTI – debt to income ratio – it’s debt divided by income.

Housing ratio – not always used, but it’s the PITI/income. Also known as the front end DTI ratio.

Back-end ratio – it’s the total debt (PITI + car loans + credit cards, etc.) / income. Normally synonymous with DTI. 45% is the standard maximum DTI, but it can be higher or lower depending on a multitude of factors. The new QM loan regulations will drop this to 43%. Some lenders are even lower.

DP – down payment

LTV – loan to value = loan amount divided by price (or appraised value, whichever is lower).

CLTV - combined loan to value = first loan plus second loan divided by price (or appraised value).

HVCC – those confounded regulations for appraisals

RESPA – Real Estate Settlement Procedures Act –You know what it is, I know. For us it’s rules, rules and more rules. “Can you close in 9 days?” No. “Why not?” RESPA is why not. Our costs are up, profits are down and turn times have grown because of RESPA.

GFE – Good Faith Estimate – used to be our estimate of fees. The government, as part of RESPA, had the good idea to standardize the GFE and enforce it. In principal, it really is a good idea. As implemented it fails to achieve its goals and actually is often a detriment to the borrower. Anyway, the thing to remember is fees can go down from what is on the GFE, but they cannot go up, which means the GFE is usually inflated. Also, the gov wants you to know about fees you don’t have to pay. So they want us to disclose them. That’s fine, but they want us to disclose them as the borrower’s fees even when they aren’t. This results in GFEs with massive numbers on them.  Some loan officers choose not to disclose those fees. That is great from a sales perspective, but it can kill the deal later. I was told of one example where the real estate agents ended up paying the escrow fee and owners title insurance because the lender hadn’t disclosed them in the GFE and the LO convinced the agents it was their fault.

Residential – 1-4 unit residential property. A 5-plex is commercial property.

Mixed use – condos and commercial space intermixed, like Santana Row. If the commercial space is a small part of the project, then residential lending is probably OK. Otherwise you will need a commercial loan even for the condos.

Townhouse – An architectural style, like Tudor or Ranch, NOT a legal description. If your lender asks you what property type it is the answer is PUD or Condo, and there are important differences.

 

PUD – Planned unit development

 

Coop – You know what it is, but you should also know they are very hard to get loans for. Converting from Coop to condo is possible, but has special challenges.

 

Portfolio – For the last 5 years or so “portfolio” has been synonymous with “jumbo” and means a loan that will not be re-sold, regardless of loan amount. We are just beginning to see a few jumbo loans sold, but not many. The lender will keep the loans in its own portfolio, and are underwritten to the lender’s own guidelines, assuming Congress is OK with the guidelines. These can also be known as “niche” loans, as they are not uniform and we go to these looking for homes for loans that Fannie, Freddie and FHA can’t fit in their rigid little cookie cutters. Niche and portfolio do not normally mean “easier.” To the contrary, they are usually more difficult to get done, normally having bigger down payments, lower DTI’s and usually more conditions.

 

Niche – see portfolio

 

Jumbo – A term that is temporarily going away in favor of portfolio, it means big loan. “True” jumbo is currently over $626,000.

 

Agency – refers to Fannie Mae (FNMA) and Freddie Mac (FHLMC), the government agencies that buy loans

 

FHA – a government owned mortgage insurance company (MI, with no “P”). All FHA loans have mortgage insurance, by definition, regardless of down payment. The agencies buy FHA loans. Trivia: FHA was the first mortgage insurance company, established back in the 1930’s.

 

PMI – Private mortgage insurance - mortgage insurance not offered by the government. Came into existence in the 1950’s.

 

Conforming – a loan that conforms to Fannie & Freddie guidelines and can be purchased by them is a conforming loan.

 

Non-conforming – Fannie and Freddie won’t buy them. Generally interchangeable with “portfolio” and “jumbo”.

 

Conventional – Not a government insured loan. Also not private money.

 

Government loan – a government insured loan like FHA, USDA and VA.

 

Agency Jumbo = high balance conforming = jumbo conforming = high balance agency =  loans over $417,000 and under $625,500 that meet Fannie or Freddie guidelines. They have different rates and guidelines than loans under $417,000. Also, the loan amounts I reference are for Santa Clara and San Mateo counties. They will be different in lower cost counties.

 

Secondary mortgage market – this is where a lender can sell the loan they fund. Currently limited to Fannie and Freddie, with some recent exceptions that are so small they are barely notable.

 

Hard Money or Private Money – It’s someone lending his own money or some other guy’s own money. Some are big, regional lenders, some are one person. One guy I work with is literally gone fishing half the time, or more, and returns calls inconsistently, but if you can get his attention he can get things done. These all have points (3-6 points is typical) and rates are much higher than conventional financing (2 to 7% higher, normally). They don’t have rate sheets and they don’t have much in the way of guidelines, and no pre-pay penalties.  They assess risk and come up with the rate and points they need to make a loan attractive enough to take on the risk, and that rate is exponentially more volatile than with institutional loans. So if you think loan officers try to dance around the question “what are rates like” on normal loans, ask about hard money rates. They now have stricter government oversight than they used to and have narrowed what they do, but are still the ultimate niche lenders. 40% equity is a requirement they are now required to meet on many loans and these days they have to qualify income on most loans, too, but they have a lot more exceptions and work-arounds. They can typically cross-collateralize (place liens on multiple properties to get to the 40% equity requirement) in their sleep, if that’s an option for your buyers. Sean, Alan and I work with hard money lenders if you have any questions on them.

 

Overlay – it is a guideline that lenders add to investor requirements. For example, FHA allows 580 credit scores, but nearly all lenders have overlays limiting credit scores to 620+, or 640+. There are also pricing overlays in addition to guideline overlays.

 

MCC – Mortgage Credit Certificate program. It’s a tax CREDIT for first time homebuyers. When it’s funded, and if the borrower qualifies, it’s free money (well, there’s a $200 app fee). Great program. $103k/year and $570k price.

 

Typical for the area – an appraisal term. If a property is not “typical for the area” financing will not be easy. Most of you old pros know this instinctively and talk your clients out of it before you get to financing. Geodesic dome? Get familiar with hard money. Log cabin? Charming, but un-lendable. Less than 650 square feet? You had better have some good comps. A 10 acre prop in Woodside? No problem. A 10 acre prop in the middle of Cupertino? Good luck. Luxury condo in Palo Alto? Of course. Luxury condo in East PA? Not so easy.  I had a client who found a lovely old home on the main street in a small town, the edge of the business district. I could have got them a loan, but not one they wanted.

Every time I drive by that igloo/caveman looking place off 280 I wonder how that thing gets financed.

 

Habitable – this has a changing definition, but it means someone can live there. Working stove, sink, bathroom. Roof that appears to keep water out. Ditto the walls and windows. Interior walls need to have at least sheet rock on them, meaning remodels don’t necessarily need to be completed, but they need to be completed to a point it is habitable. If there’s a slot for a dishwasher, a dishwasher needs to be in it. No one is going to turn the dishwasher on, but it needs to be there. If the appraiser sees something he thinks should be inspected a clearance will be asked for. So if he sees possible termite damage the underwriter will ask for clearance. If he thinks the house might be sinking, there will be a foundation clearance called for.

 

Un-inhabitable - What about an un-inhabitable home? You need a rehab loan and those are not so easy to find. FHA has a couple rehab loans. We do those.

 

Lot loan – Usually, you need a bunch of dirt with ready access to electricity and plumbing, or in some cases a septic. Ready to build. No structures. No foundation.

 

Construction loan – can be for a lot, or remodel. Must have approved plans and be ready to build. Can be used to buy a home, if there are approved plans. Always pays off any existing liens. The key to qualifying these days seems to be the ability to get a take-out loan.

 

Take-out loan – when construction is done these days construction lenders want their money back immediately. You have to refinance and pay off the construction loan. Called a take-out loan. We used to have “lock and build” loans, meaning you locked in the take-out rate when you started construction. Those loans are history, to the best of my knowledge.

 

Safety hazard – Anything the lenders sees as a potential safety issue will have to be repaired before funding. No flexibility here. Appraiser notes a bannister is broken? Fix it. A light was removed and there are open wires? Electrical outlet has no cover? Fix it. Detached garage has big crack? Call in the relevant inspector. And if he says it is a safety issue? Tear it down. If you see a safety hazard, fix it before the appraiser sees it.

 

1004D – we used to call this a 442. It’s when we send the appraiser back out to verify the bannister has been repaired. Or any time we send him back out to verify something. Usually costs about $100. Sometimes lenders are more flexible on some things and will take a photo from an agent, but it’s better to nip it in the bud and fix things before the inspection. I have asked listing agents, before I send the appraiser if there are any defects I should know about. Sometimes they are helpful, sometimes they are offended, sometimes they try to downplay poor condition. Don’t downplay. If you think I should go look at it, tell me. I’ll drive out there.

 

Points – a point means 1%. That’s it. However, when a mortgage lender is talking about points we are usually talking about discount points (or points in fee, or points in cost). It is basically interest that a borrower pays to a lender up front and in exchange the lender lowers the interest rate. On average, one point lowers an interest rate .25% and takes 48 months to recoup in saved interest payments. And how much does one point cost? Since a point means one percent, one point costs one percent of the loan amount.

 

MBS – mortgage backed securities. Most mortgages go into securities and are traded on the open market, same as stocks and other bonds. The price of these securities drives mortgage rates. I could write volumes on these, but I’ll stop there.

 

Rate – the rate of interest a lender charges on a loan. An obvious one, I know. The most common loan officer seminar topic is how to avoid answering questions about current rates.  Why? For one, because RATES CHANGE. If you asked me what Google stock was selling for and I said $700.1245 per share you wouldn’t expect to be able to buy Google for that exact price even 15 minutes later. You know stock prices change constantly. But if someone asks me to quote a mortgage rate, they think that rate is set in stone. They are not. They change up to 5 times a day. Some lenders change rates more often than others, and the lender with the best rate changes, too. I will also add that there are about 33 data points we plug in to calculate an interest rate, any one if which can change the rate. And we have hundreds of loan products. If you catch me at the water cooler and ask me how stocks are doing I might be able to tell what the Dow has been doing, but I won’t be able to give you an exact price for Home Depot stock. “Can you guess?” Sure, but the guess will be wrong. Same goes for rates. I can tell you in detail what the MBS has been doing, in 10 minute increments, but if you want a rate quote I need to break out some software and send a query to our server. Imagine someone walked up to you and asked, “What are homes selling for? Just a ballpark. Give me a guess. I won’t hold you to it.” What do you say? So, you give them the median price in Santa Clara county. Later you find out the person listed with another realtor. Why? Because your quote was low. This other realtor said she could get them a higher price on their estate in Los Altos Hills, and you didn’t even know you were doing a listing presentation. Or you quote them the median price in Los Altos and then they are mad when you can’t sell their condo in Campbell for that price. Those are real hazards with rate quotes. Having said that, if you want a rate quote, you need to be clear you want a rate quote and not try and trick a loan officer into spitting out a rate.

 

Add – this is something a lender adds to the price or rate of a loan. Some adds are to points (what you have to pay to get a specific rate) and some adds directly increase the rate .

Lenders have adds for all kinds of things: LTV, credit score, zip code, title in an LLC, using rental income on an outgoing property, more than 4 financed properties, interest only, condo, waiving impounds, and on and on and on it goes. Adds are not standard. They vary from lender to lender, loan program to loan program.

 

Lock – this is when we set the rate on a loan. It’s like when you send in the buy order on a stock. You can’t lock until you are in contract.

 

No cost/No fee – a type of loan where the lender pays the closing costs. You will often hear this spun as a FREE loan, or something like that. This is great salesmanship. All loans have fees associated with them. The lender is paying them by taking a higher rate and using a credit to pay the fees. Don’t believe me? Keep pushing for a lower rate. Eventually, the LO will inform you they can go lower, but you will have to pay the fees. I guarantee it. And yes, we do no cost/no fee loans. Everyone does, but not necessarily on every loan.

 

Guidelines – these are the rules that underwriters follow when deciding if a loan is approved. Some loans fit the guidelines, but are declined anyway, because they push the limits in too many places.

 

UW – underwriter – the person who goes through the guidelines and approves the loan

 

Investor – the person who will buy the loan and has final say on what will be approved. The investor may or may not be involved in underwriting, and usually is consulted on exceptions.

 

Pre-qualify – it’s when we talk to a borrower and come up with an idea of what they might get approved for.

 

Pre-approval – we take a complete loan profile, income documentation, assets, credit and so on and get them approved pending a property. Also known as a TBD approval.

 

Conditional Approval – When a borrower goes into contract we send the live loan to an underwriter who approves it. ALL approvals are “conditional” until they have been funded and the transaction closes, meaning we always have conditions to satisfy before the UW will allow the loan to go to docs or to fund. The lack of open conditions is the signal to fund the loan. There are always conditions that involve no changes to the credit profile. That means if the borrower quits their job, spends their money, takes out a car loan, gets a big deposit we can’t source, misses a payment, or anything else the lender might be interested in, the loan can be suspended or declined because of that change. Right up until the very last minute. Conditions can be added at any time for any reason. Sometimes when we satisfy one condition, we create new ones. Sometimes lenders miss something they catch later.

 

PTD – prior-to-documents approval – a list of conditions that must be satisfied to get loan docs drawn.

 

PFT – prior-to-funding approval – a list of conditions that must be satisfied to get a loan funded.

 

Suspense – you don’t have an approval. We have to satisfy the UW on one or more conditions to get them to approve the loan. Sometimes, a condition isn’t listed as a suspense condition, but an experienced loan officer will identify it as such.

 

Final approval – not really a lending term. You’re never going to hear it come out of my mouth. It’s more of a real estate agent and borrower term. You will know when a loan approval is final because the money is in escrow, and even then...

 

Contingency removal – This is not really a lending term because Buyers remove contingencies, not LOs or lenders. However, we are asked for our opinion, and rightly so. For this purpose we group conditions into two types: those that scare us and those that don’t. That’s probably not how your LO will present them to you, but that is what we are thinking. Deciding which conditions to be afraid of is part of the skill of the job. Sometimes a condition doesn’t scare the LO when it should. That doesn’t often happen to me as I am easily scared, but I get a lot of business rescuing transactions from people who underestimate their conditions. The point is, if we don’t see any conditions that scare us, we … um… how do I phrase this…won’t stop you from removing contingencies.  I tend to call the remaining conditions paperwork. Paperwork can and will delay close, but it won’t prevent it. It can delay it a really long time, though. Why won’t a competent LO come right out and tell you to remove contingencies? I have had borrowers quit their job after removing contingencies; laid off; fired; filed for divorce; got married; bought a car with a loan; filed a lawsuit; bought another house; co-signed for a student loan; made giant cash deposits; and done 100s of other things that changed their credit profile (and I am almost always told by their RE agent or find out on my own, rarely does the borrower tell me). I have had borrowers repeatedly lie to me about relevant facts, and done things I have explicitly told them not to do (“I didn’t think you meant it”), and once escrow refused to insure title at the last minute. I closed every single one of them, but if I hadn’t closed they could have come back and said, “You said it was OK to remove contingencies!” If the borrower wants to wait until there is no risk to remove contingencies they have to wait until the loan has funded.

 

Exception – We have general rules and we have guidelines, both may have exceptions. A general rule is something like lenders don’t lend to people with more than 4 financed residential properties. But there are a few lenders who will. Also called a niche.  Guidelines may also have exceptions. Like if a guideline says “minimum credit score of 720” and you have 719, we might ask for an exception. Sometimes we get them, sometimes we don’t, sometimes they won’t even consider them. Sometimes they put the exception in the guidelines. Exceptions used to be routine, but we don’t get a lot of them anymore, and they aren’t normally free when we do get them.

 

LOE – letter of explanation – means “please explain this thing to the UW.” Must be signed. My rule is use the fewest words possible to satisfy the condition. Not one extra word. Extra words can create extra conditions. I mean it. “BMW ran our credit when we test drove a car. We did not open any new credit, because our company is going out of business.” That last part isn’t necessary. Unless the condition asks for your motivation we don’t need your motivation.

 

Appraisal – an estimate of market value of real estate.

AMC – appraisal management company – Appraisals need to be ordered through them. They also tend to do a quality control review of the appraisal, which may or may not help you, but always add to the turn time. Princeton has its own AMC, which makes a difference.

Appraisal inspection – when an appraiser visits the property and measures it.  He also takes pictures and notes any obvious defects.

Desk Review – an appraiser reads the appraisal and decides if he agrees with the value.

Field Review – like a desk review, there is an inspection of the property.

Appraisal dispute – when one challenges the value derived in an appraisal. It requires specific comps or specific errors in the appraisal.  One AMC told me their dispute success rate was around 2%, but one lender we work with said theirs was 10-15%. The biggest lenders don’t allow disputes, period.

 

 

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 Bryan Robertson, CEO | T: 650.799.9951 | Email: bryan@catarra-re.com | Website: http://www.BryanRobertsonHomes.com |CA BRE# 01191946 | Catarra Real Estate, Inc  | 171 Main St #220 | Los Altos, CA 94022

 

 

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Comment balloon 4 commentsBryan Robertson • June 16 2013 06:57PM
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