"A Paper"– Borrowers with clean credit, FICO scores no lower than 620, (580 if they have 20% down, good reasons for late payments on credit history, extra assets, 4 year window.) W-2’s, liquid money, biweekly pay stubs, low debt to income ratios, no recent bankruptcies.
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ARM – Adjustable Rate Mortgage. Product with fixed rate for 1, 3, 5, 7, 10 years. After designated fixed duration, rate adjusts 2 points per year with a maximum cap of 6 points higher than the start rate.
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Buy Down – Program that allows a borrower to have a start rate that is bought down by borrower or broker. This gives the borrower a lower qualifying ratio.
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Discount Points – A tax-deductible fee that allows a borrower to acquire a very low rate. The deduction is amortized over the life of the loan on refis, but is fully deductible on purchases. The borrower can buy down their rate with this discount point or points.
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Example: If par today is 6.500%, meaning that the yield to the broker is $0, a standard origination fee is required and so are full closing costs. If a borrower wants a rate of 5.500%, they have to pay the equivalent of the negative premium that the broker is required to pay for brokering that loan. The lender's negative premium yield may be –2 points. The borrower would have to pay 2 discount points, 1% origination fee, and full closing costs. On a $150,000 loan this amount is approximately $6000.
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Escrow – Property tax, homeowners insurance, mortgage insurance, association dues. The industry encourages you to include these fees into your monthly mortgage payment. You can make your own payments but the industry penalizes you for this; typically by a quarter of a point against your rate. It requires you to have a buffer of these amounts in a fund; six months of property tax with a two month buffer, six months of homeowners insurance with a two month buffer, two months of mortgage insurance. These fees are paid by your escrow fund biannually. With a refinance, you are required to reestablish your escrow for the new lender and to wait for your escrow account refund from your old lender. Many of the industry lenders are rolling escrow amounts out of the loan and collecting the refund themselves. If you refinance with the same lender they are starting to do escrow transfers.
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Example: ( by this date 12-4-98) : In current escrow there is: 5 months of taxes and a 2 month buffer ( $100 x 7 = $700), homeowners insurance premium is due in February 1999, there are 10 months of taxes at $40 = $400. There is currently $1100 in your escrow. For the refinance you have to reestablish that escrow amount for your new lender. |
Extendable - Fixed product for 5 to 7 years. After the fixed duration the borrower can pay a small fee to purchase a fixed rate. The fee is typically $250. They buy into a rate that is 1/2 point above par.
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FICO Scores – Credit bureau rating system. It looks at payment history, late payments, available revolving credit, lack of credit, and too much credit. Acceptable A Paper borrowers should have scores from as low as 620 to as high as 800.
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Loan Origination Fee – Generally is 1% of loan amount. It is a fee that the borrower pays when premium pricing to the broker does not yield enough.
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Mortgage Insurance (MI) – Mortgage insurance is a "loan to value" calculation. If a borrower has less than 80% equity in their home they are required to pay MI.
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Example: $175,000 purchase, $20,000 down, financed $155,000. = 88.57% LTV. MI payment of $65 a month. If the property value goes up and the principal goes down at the same time you can see that this ratio changes. This borrower can expect that in today’s market they can eliminate MI within 2 years. Home or neighborhood improvements change property value and LTV more quickly. |
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No Closing Costs – If a borrowers mortgage amount is above $100,000, a no closing cost loan is possible, provided that we choose a program that betters the borrowers current rate and offers us enough in premium for brokering the loan.
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Example #1: $150,000 principal, current rate of 8.000%, refinance down to 6.625%. Broker premium yields $0 dollars. Borrower must pay closing costs and origination fee. |
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Example #2: $150,000 principal, current rate of 8.000%, refinance down to 7.125%. Broker premium yields 2 points approx. $3000. Broker can cover all closing costs, not charge an origination fee. |
Par – The lowest rate on the sheet that yields 0 premium to broker.
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Example: 7.000% yields 1.125 points.
6.750% yields 0 points = par
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Pre Payment Penalty – A predetermined formula for 1, 2, or 3 year durations. Calculated by loan size multiplied by declining percentages. Typically a 3 year window. First year 7%, second year 5%, third year 3%. Most of the industry has moved away from pre payment penalty programs. In many cases a borrower can pay for a pre payment penalty during a refinance.
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PI – Principal and Interest
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PITI – Principal, Interest, Taxes and Insurance
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Qualifying Ratio –
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Front Ratio = mortgage PITI / monthly income. |
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Back Ratio = mortgage PITI + monthly bills / monthly income. |
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Example: PITI = $795 / $2000 monthly income = 19.88 % front ratio.$795 + $400 in monthly bills / $2000 = 27.38 % back ratio. (Acceptable parameters are 26% front 38% back) |
Rate Lock – Rate locks happen the day the lender faxes an official rate lock sheet for the borrower’s loan. This happens only after a borrower is fully approved and is available to close their loan within the rate lock window. Rate locks are usually set at 15 day increments (i.e., 15, 30, 45, 60 day locks.) A borrower's loan must close within their lock term. 15 day locks yield the most and are the most common practice.
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Standard Closing Costs Items – Usually the appraisal fee, credit report, tax related service fee, processing fee, underwriting fee, wire transfer fee, flood certification, closing escrow fee, document prep fee, notary fee, attorney fee, title insurance, and recording fee.
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"a paper" | ARM | buy down | discount points | escrow | extendable | FICO scores | loan origination fee | mortgage insurance (MI)
no closing costs | par | pre payment penalty | PI | PITI | qualifying ratio | rate lock | standard closing costs items
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