Loan Lingo

Below is a list of terms most commonly used throughout the loan process. You may want to print this out and refer to it throughout your loan process.

1003  Uniform Residential Loan Application.

ANNUAL PERCENTAGE RATE (APR)  The yearly cost of a mortgage, including interest, mortgage insurance, and the origination fee (points), expressed as a percentage.

ADJUSTABLE RATE MORTGAGE (ARM) A mortgage whose interest rate is raised or lowered at periodic intervals according to the prevailing interest rates in the market. Also called variable-rate mortgage.

COMBINED LOAN-TO-VALUE (CLTV) The overall mortgage debt, expressed as a percentage of the home's fair market value. This is calculated by dividing the combined loan amount by the purchase price or the appraised value. Example: Someone with a $50,000 first mortgage and a $20,000 home equity loan secured against a $100,000 house would have a CLTV ratio of 70%. Also known as TLTV; Total Loan-to-Value ratio.

CONSTANT MATURITY TREASURY (CMT) This index is an average yield on United States Treasury securities adjusted to a constant maturity of 1 year, as made available by the Federal Reserve Board.

COST OF FUNDS INDEX (COFI) The 11th District Cost of Funds Index is the weighted average of the cost of borrowings (funds) to member banking institutions of the Federal Home Loan Bank of San Francisco (the 11th District).

CREDIT APPROVAL The borrower's information has been verified and the loan has been approved by the underwriting department subject to an appraisal, and other conditions as they apply.

DEBT-TO-INCOME RATIO (DTI) or Back-end Ratio: The total of all monthly financial obligations, divided by the total gross monthly income.

DOCUMENT Physical evidence, such as a written contract, that explains the responsibilities, rights, and duties of each party.

ENCUMBRANCE A lien, charge or liability against a property that affects or limits the ability to file a fee simple title, or affects the value of the property, for example, mortgages or easements.

FANNIE MAE (FNMA) Fannie Mae; Federal National Mortgage Association.

FREDDIE MAC (FHLMC) Freddie Mac; Federal Home Loan Mortgage Corporation.

FRONT-END RATIO Total monthly primary housing expense divided by the total gross monthly income.

FUNDING The documents and “prior to funding” conditions are checked in and the loan is funded.

HOLDING TITLE Title to real property in California may be held by individuals, either in Sole Ownership or in Co-Ownership. Co-Ownership of real property occurs when title is held by two or more persons. There are several variations as to how title may be held in each type of ownership.

Sole Ownership: A man or woman who is not married. Example: John Doe, a single man.

An Unmarried Man/Woman: A man or woman, who having been married, is legally divorced. Example: John Doe, an unmarried man.

A Married Man/Woman, as His/Her Sole and Separate Property: When a married man or woman wishes to acquire title as their sole and separate property, the spouse must consent and relinquish all right, title and interest in the property by deed or other written agreement. Example: John Doe, a married man, as his sole and separate property.

Co-Ownership

Community Property: Property acquired by husband and wife, or either during marriage, other than by gift, bequest, devise, descent or as the separate property of either is presumed community property. Example: John Doe and Mary Doe, husband and wife, as community property. Example: John Doe and Mary Doe, husband and wife. Example: John Doe, a married man.

Joint Tenancy: Joint and equal interests in land owned by two or more individuals created under a single instrument with right of survivorship. Example: John Doe and Mary Doe, husband and wife, as joint tenants.

Tenancy in Common: Under tenancy in common, the co-owners own undivided interests; but unlike joint tenancy, these interests need not be equal in quantity and may arise at different times. There is no right of survivorship; each tenant owns an interest, which on his or her death vests in his or her heirs or devisee. Example: John Doe, a single man, as to an undivided ¾ ths interest, and George Smith, a single man as to an undivided 1/4th interest, as tenants in common.

Trust: Title to real property in California may be held in trust. The trustee of the trust holds title pursuant to the terms of the trust for the benefit of the trustor/beneficiary. The preceding summaries are a few of the more common ways to take title to real property in California and are provided for informational purposes only. There are significant tax and legal consequences on how you hold title. We strongly suggest contacting an attorney and/or CPA for specific advice on how you should actually vest your title. 

HOMEOWNERS ASSOCIATION (HOA) An elected group that governs a subdivision or planned community. It collects fees from owners to maintain common areas and enforce covenants, conditions and restrictions set by the developer and the association itself.

IMPOUNDS/ESCROWS A trust-like account established by a lender to accumulate funds for payment of property taxes, hazard insurance, and mortgage insurance. The funds are collected monthly with the mortgage payment and the taxes/insurance are paid, when due, by the lender.

IN PROCESS A complete loan application has been taken, and the processing department has ordered a credit report, appraisal, verifications of mortgage, rent, employment, deposit, and all other required documentation.

LIBOR London Inter-Bank Offered Rate; It is based on rates that contributor banks in London offer each other for inter-bank deposits.

LIEN A form of encumbrance which usually makes specific property security for the payment of a debt or discharge of an obligation, e.g., mortgages, judgments, taxes, deed of trust, etc. One who holds a lien has the right to sell the property to obtain the money, or to recover the money when the property is sold. Valid liens are filed with county recorder's offices.

LOAN APPROVAL The full package, including appraisal has been reviewed and the loan has been approved subject to certain specific conditions. These conditions are usually routine. Some of these conditions may be “prior to documents” or “prior to funding”.

LOAN-TO-VALUE RATIO (LTV) The percentage of the home's price that is paid for by a mortgage. This ratio is calculated by dividing the loan amount by the purchase price or the appraised value. Example: On a $100,000 house, if the buyer makes a $20,000 down payment and borrows $80,000, the mortgage is 80% of the price of the house. Therefore, the loan-to-value ratio is 80%. When refinancing a mortgage, the loan-to-value ratio is computed using the appraised value of the home, not the sale price.

MORTGAGE INSURANCE (MI) A policy that protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. Although mortgage insurance protects the lender, it is paid monthly by the borrower. Mortgage insurance usually is required if the down payment is less than 20 percent of the sale price. Also known as PMI; Private Mortgage Insurance.

MONTHLY TREASURY AVERAGE (MTA) This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. In plain English, this index is calculated by averaging the previous 12 rates of the 1 Year CMT.

PRINCIPAL AND INTEREST (P&I) The portion of a borrower's monthly mortgage payment that represents repayment of the amount borrowed plus interest charges.

PAYMENT SHOCK A term used to describe the difference between a borrowers current housing expense and the proposed housing expense, when the proposed expense constitutes an increase in monthly debt obligation for housing.

PITI Acronym for the elements of a mortgage payment: principal, interest, taxes and insurance, representing the total sum of these components. This amount would also include any HOA dues.

PRIVATE MORTGAGE INSURANCE (PMI) See Mortgage Insurance.

PREPAID INTEREST (1) The amount of interest paid at the time of closing to cover the period from the day the loan is funded through the end of that month. (2) Interest that a borrower pays before it is due, usually to save taxes.

PREQUALIFIED The loan consultant has verbally checked with the borrower on items such as: income, credit, and cash available to close. Based off the information that the borrower has provided, the loan consultant calculates the borrowers’ income to debt ratios. Ratios are the percentage of income in relation to the mortgage payment, (front-end ratio) and the total debt (rear-end ratio).

PRIME The interest rate banks charge to large corporations for short-term loans.

PLANNED UNIT DEVELOPMENT (PUD) A real estate project in which individuals hold title to a residential lot and home while the common facilities are owned and maintained by a homeowners' association.

RECORDING The lien on the property is recorded at the County Recorders office by the title company.

TRUST Trust Account; A legal entity set up to transfer assets/property/income from the Trustor (creator) to the beneficiary. The administration of the transfer is done by a third party (Executor or Trustee).

VERIFICATION OF DEPOSIT (VOD) A form completed by a banking institution to confirm a borrower's account balances and history, including information such as the current account balance, average balance, the date the account was opened.

VERIFICATION OF EMPLOYMENT (VOE) A form completed by a borrower's employer to confirm the borrower's employment history and salary, including information such as the borrower's rate of pay, current year-to-date earnings, position and date of hire.

VERIFICATION OF MORTGAGE (VOM) A form completed by a lender to confirm information regarding a borrower's mortgage, including the borrower's payment history, monthly payment, interest rate, etc.