RE 101 Ch. 10: Lesson 10: Applying for a Residential Loan - Terms

Commercial Banks

the largest source of investment funds in the United States. Customers deposit their money in the bank and the bank uses those deposits to make loans and other types of investments.

Credit Union

A nonprofit financial institution that is owned by its members and organized for their benefit, generally serve only members of a particular group.

Mortgage Companies

financial institutions that provide loans specifically for buying a home or business

Loan Servicing

refers to collecting and processing the loan payments, and then passing them on to the investor.

Mortgage Broker

A person who brings together the user of capital (borrower) and the supplier of capital (lender). For this service, a finder's fee is usually paid by the borrower.

Mortgage Banker

A financial middleman who, in addition to bringing the borrower and the lender together, makes loans, packages them, and sells the packages to both primary and secondary investors. Also services loans.

SAFE Act

Mortgage loan originators must comply with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, known as the SAFE Act.

Under the SAFE Act, a mortgage loan originator is any individual who, for compensation or gain, takes a residential mortgage loan application or offers or negotiates the terms of a residential mortgage loan.

MLOs must be licensed or registered through the Nationwide Mortgage Licensing System and Registry.

Origination Fee

A loan origination fee covers the administrative costs the lender incurs in processing the loan.

An origination fee is charged on nearly every institutional loan used for residential financing.

An origination fee is also known as a loan fee, a service fee, or an administrative charge.

Typically between 1% and 3% of the loan amount.

A 1% fee is referred to as one point; a 2% fee is referred to as two points; and so on.

Like other charges connected with the buyer's loan, the origination fee is ordinarily paid by the buyer rather than the seller.

Discount Points

Like the origination fee, discount points charged on a loan are a percentage of the loan amount. Again, one point is 1% of the loan amount.

Discount points are used to increase the lender's upfront yield, or profit, on the loan.

If discount points are paid at closing, the lender will charge a lower interest rate on the buyer's loan than it otherwise would have.

The discount points make up for the reduced amount of interest the lender will collect over the loan term.

Buydown

In some cases, a seller will offer to pay discount points on a buyer's loan to decrease the buyer's interest rate.

This helps the buyer qualify for financing and makes sure the sale goes through.

This type of an arrangement is called a buydown, since the seller "buys down" the buyer's interest rate.

Truth in Lending Act

To address this loan comparison problem, Congress enacted the Truth in Lending Act (TILA).

TILA is a federal consumer protection law that requires lenders to make a clear disclosure of the total cost of a loan to anyone applying for a consumer loan.

It also requires that certain information appear in advertisements for consumer loans.

The Truth in Lending Act is implemented by Regulation Z, a regulation which is enforced by the Consumer Financial Protection Bureau, banking regulators, and the Federal Trade Commission.

Total Interest Percentage (TIP)

The total interest percentage (TIP) expresses the total amount of interest that the borrower will pay over the loan term, as a percentage of the loan amount.

This includes only the interest, and not the other fees and costs that are taken into account in calculating the APR.

The TIP helps the borrower understand how much of the total amount paid over the life of the loan will take the form of interest.

Zero Tolerance Limitation

Loan costs that are imposed directly by the lender, such as the origination fee and discount points, have a zero tolerance limitation, which means the borrower can't be charged more than the amount originally disclosed.

The zero tolerance limitation also applies to charges paid to a service provider affiliated with the lender.

Triggering Terms

Under the Truth in Lending Act, certain financing terms are referred to as triggering terms, because they trigger a full disclosure requirement in advertising. Triggering terms include:

the amount of any finance charge,

any payment amount(s),

the number of payments,

the repayment period, or

the downpayment amount or percentage.

An ad can list a property's cash price or a loan's annual percentage rate without providing additional information.

But if it includes any triggering terms, then it must also disclose the APR, the downpayment, and the payment schedule (with the number, timing, and amount of the payments).

Arranger of Credit

A person who is not a party to the transaction, but will be compensated for arranging the credit, negotiating the credit terms, completing the credit documents, and facilitating the transaction.

Underwriting Standards

The underwriter is guided by the underwriting standards (also called qualifying standards) that apply to the type of loan in question.

As you may recall, lenders making conventional loans often follow the standards established by Fannie Mae and Freddie Mac, so that it will be easy to sell the loans on the secondary market.

The FHA and VA loan programs each have special standards of their own, as we'll discuss later on.

Housing Expense to Income Ratio

A housing expense to income ratio expresses the proposed monthly housing expense (including principal and interest, property taxes, and hazard insurance) as a percentage of the applicant's stable monthly income.

When applicable, it also includes mortgage insurance and homeowners or condominium association dues.

Automated Underwriting

Within industry standards, underwriters often draw on their own experience and judgment in deciding whether to approve or deny a particular loan. For this reason, underwriting is sometimes described as an art.

However, the introduction of automated underwriting (AU), which uses statistics and computer programs to evaluate the merits of a loan application, has added some more science to the process.

Supreme Lending

Loan-to-Value Ratio (LTV)

the maximum percentage of the value of a property that the lender is willing to loan

Hybrid ARM

An adjustable rate mortgage loan that provides for an initial period of fixed interest charges, hence fixed payments, before the interest rate becomes adjustable. The fixed interest rate period typically ranges from three to ten years.

Noncomforming Loan

A conventional loan that doesn't meet the standards set by Fannie Mae and Freddie Mac is called a nonconforming loan.

Conforming Loan Limit

A loan generally won't be eligible for purchase by Fannie Mae or Freddie Mac if the loan amount exceeds the applicable conforming loan limit.

The conforming loan limits are based on median housing prices and subject to annual adjustment. In areas with especially high housing prices, the limits are higher than they are in the rest of the country.

Jumbo Loan

A conventional loan that exceeds the conforming loan limit is called a jumbo loan.

Lenders may charge higher interest rates, and typically apply stricter underwriting standards, when making jumbo loans.

Private Mortgage Insurance (PMI)

As you've seen, with a high-LTV loan the borrower has less of an investment in the property and the risk of default is greater.

The purpose of private mortgage insurance (PMI) is to protect the lender from this additional risk.

When a home buyer with a conventional loan puts less than 20% down, the lender almost always requires PMI for the loan. Fannie Mae and Freddie Mac don't purchase conventional loans that have loan-to-value ratios over 80% without PMI.

Federal Housing Administration (FHA)

A federal agency established in 1943 to increase home ownership by providing an insurance program to safeguard the lender against the risk of nonpayment. Currently part of HUD.

Mutual Mortgage Insurance Plan

The plan works essentially like private mortgage insurance: the FHA collects premiums from borrowers and pays off claims from lenders who have suffered losses due to default and foreclosure.

Mortgage insurance is required on all FHA loans. (That's in contrast to conventional loans, which require mortgage insurance only if the loan-to-value ratio is over 80%.)

Direct Endorsement Lenders

Lenders that have been authorized to underwrite FHA loan applications are called direct endorsement lenders.

Rural Housing Service

The Rural Housing Service (RHS) is a federal agency within the U.S. Department of Agriculture that makes and guarantees loans used to purchase, build, or rehabilitate homes in rural areas.

A rural area is generally defined as open country or a town with a population of 35,000 or less.

Predatory Lending

Predatory lending refers to practices used by lenders or mortgage brokers to take advantage of unsophisticated borrowers.

Real estate agents, appraisers, home improvement contractors, and even home sellers may participate in predatory lending schemes as well.

Predatory Steering

Directing/Steering a buyer toward a more expensive loan (one with higher loan fees or a higher interest rate), when the buyer could obtain a less costly one.

Fee Packing

Charging interest rates, points, or other fees that far exceed market rates and aren't justified by the level of service provided.

Loan Flipping

Encouraging homeowners to refinance repeatedly when there's no advantage to doing so.

Impound Waivers

Not requiring borrowers to make monthly deposits into an impound account. (Impound accounts are used to accumulate funds that are then available to pay for property taxes and insurance.)

When the impound account requirement is waived, a borrower is able to qualify for a larger loan amount. A larger loan amount without provisions for the payment of taxes and insurance increases the likelihood of foreclosure.

Balloon Payment Abuses

Making a loan with low payments that is either partially amortized or interest-only, without disclosing to the borrower that a balloon payment will be due in a few years.

If refinancing is very expensive or even unobtainable when the balloon payment comes due, the borrower is likely to wind up in foreclosure.

Fraud

Misrepresenting or concealing unfavorable loan terms or excessive fees, or using other fraudulent means (such as falsifying documents) to get a borrower to agree to a loan.

Excessive Prepayment Penalties

Imposing an unusually large prepayment penalty, failing to limit the penalty to the first few years of the loan, and/or charging the penalty even when the loan is being paid off because the borrower is selling the house.

High prepayment penalties can be used to discourage a borrower with a high interest rate from refinancing.

Home Ownership and Equity Protection Act (HOEPA)

In an effort to reduce predatory lending, the federal Home Ownership and Equity Protection Act (HOEPA) was passed in 1994.

It added special provisions concerning "high cost" mortgage loans to the Truth in Lending Act.

When a loan is covered by the HOEPA provisions, the lender is required to make additional disclosures and refrain from certain practices.