What do all of these mortgage terms mean?

In this Blog, Mary Brabner, Vice President, Mortgage Loan originator, at Bank Plus provides valuable insight into the mortgage process.  This Blog seeks to explain the terms you’ll hear through the process of getting a mortgage.

As in any industry, there are acronyms and jargon that insiders use that outsiders don’t understand.  Mortgage lending is no different.  Borrowers need to understand these terms so they can wade through the mortgage lending process with minimual confusion.

Some of the most commonly used acronyms and jargon include:

1003:  The borrower’s application for a mortgage

Appraisal:  This is a report ordered by the lender and serves as an independent valuation of the home.  The report compares the contract price of the home being purchased with comparable sales in a nearby radius.  This report shows the value of the home for lending purposes. The appraisal can only be ordered by the lender.

APR: (Annual percentage rate) APR is the annual cost of borrowing money expressed as a percentage.  APR differs from your intrest rate because it includes the closing costs and prepaid items.  APR is a good way to compare lenders to see the closing costs along with the intrest arate before making your decision on a lender.

Asset Docs:  2 months full bank statements on every account that is being used for down payment and closing costs and reserves if needed.  This means every single page, not just the ones that have deposits and transactions on it.  The lender must verify that on the very last page you didn’t withdraw funds or omit something that may affect the approval process.  If a statement shows 1 of 3 then the lender needs all 3 pages of that statement.

Closing Disclosure (CD):  Lenders are required to send you this document 3 days before closing.  The CD details the term of the loan including loan amount, intrest rate, length of loan, type of loan, and escrow account information.  The CD also details all the fees paid by the borrow and seller and total amount of money due at closing.  Fees on this final document cannot change unless a “cure” paid by the lender.

Credit Score:  Each borrower should hav 3 credit scores, one from Equifax, Experian, and Transunion.  Lenders are not allowed to randomly select which credit score to use so all lenders use the middle score.  If there are 2 borrowers on the application, then the lowest  middle score is the score being used for pricing the loan.  Only borrowers with acceptable credit scores can go on the loan and their income used for qualifying purposes.

DPA (Down Payment Assistance): There are programs that will allow for someone to assist you  with your down payment funds for closing.  Alabama Housing Authority is just one example of a program lenders in Alabama can use to pay your down payment and ruduce the amount of money needed for closing.

DTI (Debt to income ratio): This is one of the most important factors that will determine your intrest rate and loan program.  The lender takes the total amount of you monthly debt that shows up on the credit report and divides it by the total amount of income that is verified.  Acceptable DTI varies by loan program but typically will be in the 41%-45% range.

Escrow: Escrow is a sepearate, non-intrest bearing account, that lenders set up to pay your homeowner’s insurance and taxers each year.  Escrows are included in your monthly payment and the lender pays these two bills for you so you don’t have to remember to set that money aside yourself and get a shock when the bills come due.

Gift Funds:  You have the opportunity to use gift funds from family members, employers, and acceptable organizations as funds for closing.  A form letter is filled out and signed by all parties.  Basically, the letter is saying that someone is giving you money for down payement and closing costs and funds are not required to be paid back.

Home Inspection: Your realtor may recommend that you schedule a home inspection as part of the process.  This is a detailed report about the structure, systems, roof, etc. and lets you know the potential problems you may have with the home.  This is a different report than the appraisal.

Income docs:  Lenders will ask for 30 days of paystubs, 2 years W2’s and 2 years of federtal tax returns.  This information is used to calculate your various forms of income to prove that the level of income is likely to continue for at least 3 years after closing on the mortgage.

Initial Closing Disclosure (ICD):  This document is very similar to the CD.  Some lenders send out this document to give the borrow an idea of the fees being charged for the mortgage, interest rate, and terms of the mortgage.  Fees on this document can change since it is typically sent before the last 3 days before closing.

Intrest rate lock:  30-45 days before closing, your lender will ask you if you want to lock in your interest rate on your mortgage.  This protects you from rising interest rates while the file is being underwritten.  Each lender has their own rules for how to re-lock your interest rate if the rates drop after you have locked in your rate.

Loan Estimate: Once you go under contract, the lender issues this document which shows your expected closing costs.  Not all fees are actually charged to the borrower but lenders are required to disclose to you the fees that could potentially be charged to you at closing.

Loan Program: There are many loan programs on the market and your lender should take your financial goals in mind when determining which loan program best suits you based on how much downpayemnt you have available, closing costs, DTI, LTV, and credit score,  convential, FHA, VA, USDA and more.

LTV (Loan to value):  The lender will dividide the loan amount by the sales price of the home to get this number.  LTV is very important when determining which loan program best suits your financial goals.

Pre-Paid items:  At closing your lender will collect a full years worth of insurance and the property taxes plus a few extra months.  Your first year of insurance is paid out of these funds along with a few months for the escrow account because the annual renewal will be due before you will have made 12 payments.

Pre-Qualification: The lender will input your income and assets based on your calculations, run the automated system, and know if you are conditionally approved.

Pre-Approval: The lender will collect all income and asset docs from you, run the automated system and send your file for underwriting and know that you will be approved within a certain price range.

For more information, Mary Brabner can be reached at 251-591-0695 or marybrabner@bankplus.net

Thanks to Mary for providing this insight into the mortgage process.

Carl Gustafson – Real Estate Broker

251-533-8028

carl@thegustafsonproperties.com