Friday, December 19, 2008

Mortgage Transaction Glossary

Now is absolutely one of the best times to purchase or refinance a home in the past two years. In spite of the gloom and doom talk about the stock market and our impending economic crisis, if you’ve even had a passing thought about buying or refinancing, you should at least check it out.
Rates are very low and there are some really good housing buys that have been on the market for several months and the sellers are ready to make a deal. So in anticipation of more people applying for home loans, I offer a brief glossary of mortgage terms. It is my hope that these definitions will help you understand the process a bit better.

Annual Percentage Rate (APR): This is a measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost associated with various loans. The APR is a higher rate than the simple interest of the mortgage.

Automated Underwriting: Is loan processing completed by the mortgage provider through a computer-based system that evaluates past credit history to determine if a loan should be approved. This system effectively removes the possibility of personal bias against the buyer.

Broker: a licensed individual or firm that charges a fee to the borrower and serves as the mediator between the buyer/borrower and seller. Mortgage brokers are in the business of arranging financing for a client, but who does not loan the money.

Certificate of Title: This document is provided by a title company, and shows that the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and free of all liens or other claims.

Debt-to-Income Ratio: a comparison or ratio of gross income to housing and non-housing expenses; With the FHA/VA loans, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income. For conventional loans, (non-government mortgages) the ratio’s can be higher. In all cases the presence of significant cash reserves can allow for higher debt to income ratios.

Deed-in-Lieu: in order to avoid foreclosure ("in lieu" of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt. This process does not allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.

Discount Point: normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.
Document Recording: after closing on a loan, certain documents are filed in the county where the property is located and made public record. Discharges for the previous mortgage holder are filed first. Then the deed is filed with the new owner's and mortgage company's names.

Escrow: are funds held in an account and used by the lender to pay the home owner’s property insurance and property taxes. The funds may also be held by a third party (usually a title company) until any contractual conditions are met and then paid out.

FICO Score: FICO is an abbreviation for Fair Isaac Corporation and refers to a person's credit score. Lenders and credit card companies use the number to decide if the person is likely to pay his or her bills. An individual’s credit score is evaluated using information from the three major credit bureaus and is usually between 300 and 850.

Good Faith Estimate: an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

HECM (Reverse Mortgage): the reverse mortgage is used by senior homeowners age 62 and older to convert the equity in their home into monthly streams of income and/or a line of credit to be repaid when they no longer occupy the home. A lending institution such as a mortgage lender, bank, credit union or savings and loan association funds the FHA insured loan, commonly known as HECM.

HUD1 Statement: may also known as the "settlement sheet," or "closing statement". This form itemizes all closing costs and must be given to the borrower at or before closing. Items that appear on the statement include real estate commissions, loan fees, discount points, and escrow amounts.

Joint Tenancy (with Rights of Survivorship): this is one way title to a property may be held. This term describes two or more owners who share equal ownership and rights to the property. If a joint owner dies, his or her share of the property passes to the other owners, without probate.

Loan to Value (LTV) Ratio: is a percentage calculated by dividing the amount borrowed by the price or appraised value of the home. The higher the LTV, the less cash a borrower is required to pay as down payment.

Mortgage: is a lien on the property that secures the Borrower’s promise to repay a loan. It is a security agreement between the lender and the buyer in which the property serves as collateral for the loan. The mortgage gives the lender the right to collect payment on the loan and to foreclose if the loan obligations are not met.

Mortgage Insurance: is a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan. Mortgage insurance is required primarily for borrowers with an LTV greater than 80% of the home's appraised value. The cost of mortgage insurance is usually added to the monthly payment and is maintained on conventional loans until the outstanding amount of the loan is less than 80 percent of the value of the house.

Negative Amortization: the term “amortization” means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost.

Origination: the process of preparing, submitting, and evaluating a loan application. This process generally includes a credit check, verification of employment, and a property appraisal.

Quitclaim Deed: a deed transferring ownership of a property but does not make any guarantee of clear title. May be used to add or delete ownership of a property.

Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc. Borrowers receive a copy of this diagram at time of closing.

Title Insurance: is insurance issued by the title company that protects the lender against any claims that may arise from arguments about ownership of the property. An insurance policy guaranteeing the accuracy of a title search protecting against errors.

Truth-in-Lending: a federal law obligating a lender to give full written disclosure of all fees, terms. This information is provided on a form that bears the same name; also referred to as the TIL.

Underwriting: is a process performed by a human and includes the analysis of all loan documents in order to determine the potential risk involved in making the loan.

Warranty Deed: a legal document that includes the guarantee that the seller is the true owner of the property and has the right to sell the property and there are no claims against the property.

I hope these definitions prove helpful to anyone in the market to purchase or refinance a home. If you are currently in that process, congratulations! If you are not, perhaps you should be. Now is a great time to buy or refinance a home.

Friday, December 5, 2008

Help for Home Owners?

$700 Billion, $300 Billion, $25 Billion, it seems that there is no end to the line of industry leaders standing before congress with their hands out. The banks got theirs and held onto it while others took advantage of the financial redistribution without making any changes to their business extravagance.

It's been several months now since the launch of the bail-out, and the only change we've seen in the news that impacts you and me is that it's gotten worse. More jobs lost, continued foreclosures and less money spent on Christmas shopping.

I like our economy and believe appropriate actions should be taken by our government to protect it. But isn't it time something is done to help those of us who work hard every day just to support our families and pay our mortgages? Yes steps must be taken to protect jobs and stem the rising tide of unemployment. But the answer is more specific than "bailing out" or "lending out" financial institutions, automakers, and no telling who else. It's time for a specific action plan to address issues that live on my street and your street.

In recent days there has been talk on "the hill" of making really cheap money available for homeowners. Just how cheap? How about 4.5% fixed for thirty? We haven't seen rates that low since the early 1960's.

Rates that low could make a significant difference in monthly payments. For example, a $125,000 30 year fixed mortgage at 6.5% would have a monthly payment of $790.08. That same amount financed for 30 years at 4.5% would have a monthly payment of $633.35, that's a monthly savings of $156.73 or $1880.76 per year!
So where does one line up for these great rates? Well, not so fast buster. You see this is still just in the "talking" stage. And there are no guarantees that any substance will emerge out of all this talk.

In fact dig deeper into the rhetoric and you'll find the consumers targeted for these historically low rates are new home purchasers. That's right, current intent is to make these rates available only to consumers purchasing homes, leaving the rest of us who already own a home out of the loop.

The national board of Realtors is pushing hard to get this legislation approved. They believe that the best way to protect our economy is to shore up home values, and the best way to do this is to reduce existing inventory. In their mind it's the law of supply and demand; fewer available homes translates into a stabilization of existing home values.

Okay, maybe this is true. But stabilizing home values does little to help slow the increasing number of foreclosures. And every family losing their home to foreclosure is one more family that finds themselves prohibited from buying a new home for up to 5 years.

It's time that some of these monies be used to help those who want to purchase new homes become responsible home owners. It's also time for some of these funds to be appropriated in ways that help home owners struggling to make their payments refinance to a low fixed rate they can afford. These are not easy answers with "point and click" applications pre-made, ready to un-box and implement.

There will be difficult decisions with equally problematic clarifications that will have to be made. But can these issues really be more complex than what we are already facing? For months leading up to the Presidential election we heard speeches about the importance of implementing new financial policies to protect Wall Street as well as Main Street. Well, we've seen Billions of dollars funneled into companies represented by cryptic symbols on Wall Street. And the effect of this cash infusion has done little to address the needs of Main Street.

I say if the government is going to make 4.5% available to consumers they should make it available for both purchases as well as refinances. And for those consumers who are already having difficulty making their monthly house payments, there should be a plan in place where they can find a workable solution with their current lender to renegotiate their existing mortgage into a rate and payment they can live with.