Mortgage Term Glossary
A federal requirement that lenders must ensure borrowers can afford to repay their loans, based on their income, debts, and assets.
Amortized Loan payments
An Amortized Loan is one with a set loan duration usually 10-years, 15-years, or 30-years and which a calculated amount of principal is paid every month so that the entire loan is paid off in full at the end of the loan duration.
A type of non-QM mortgage that typically offers more flexible underwriting guidelines than traditional mortgages but still require some level of income and asset verification.
An appraisal is a document that is created by a licensed appraiser who will come and evaluate the property for which the loan is being requested. They will evaluate the property and the surrounding comparable properties to give an estimate of the value for which the property could be sold.
Most lenders will require that an appraisal be completed before making a loan. This cost can range from around $400 to $1000 for single-family homes but can be more for multi-family or commercial buildings. Depending on the schedule of the local appraisers, it can take as little as 1-week and as long as 4 to 5 weeks to get an appraisal.
Adjustable-Rate Mortgage (ARM)
An ARM, or adjustable-rate mortgage, is a type of home loan in which the interest rate can fluctuate over time, usually based on a predetermined index such as the prime rate or the LIBOR. The interest rate on an ARM mortgage typically starts out lower than the interest rate on a fixed-rate mortgage, but it can change periodically, usually once a year.
ARM mortgages have an initial fixed-rate period, typically ranging from one to ten years, during which the interest rate remains fixed. After the initial period, the interest rate can change on a regular basis, often annually. The interest rate adjustments are typically subject to caps or limits to prevent sudden large increases in payment.
This is a term that describes accrued interest payments. Mortgages are paid in arrears meaning that when you make a mortgage payment on your loan you are really paying for the interest you accrued in the previous month. Unlike rent which is due on the 1st of the month and is paying for the renter to live in the property for that next month. Mortgages are paid in Arrears which means that the owner has control of the property for a month and when they make a payment on the 1st they are paying the interest that accrued from their loan for the previous month.
Interest paid in arrears is the reason that you get a month or so buffer between when you close the loan and when your first payment is due. It is also the reason that when you go to pay off your loan that there is still remaining interest due.
A type of mortgage in which the borrower makes small payments for a set period, after which the remaining balance is due in a large lump sum.
A Bankruptcy is allowed by the federal government and is a legal process in which a debtor can get varying levels of relief from their debts ranging from chapter 7, chapter 11, and chapter 13. A bankruptcy becomes public knowledge and will remain on a person’s credit history for a long period of time.
A short-term loan that provides financing until a borrower secures permanent financing.
A mortgage refinancing option in which the borrower takes out more than they owe on their existing mortgage, receiving the difference in cash.
Closing costs are the cost a borrower must pay to get a loan. Every time a loan is created, there are several parties that play a role in the process all of who will require payment to complete the transaction. These fees are paid at the close of the transaction. These fees will include:
Title insurance and Escrow fees
Collateral is the thing of value that is securing the loan. Most loans and all mortgages are loans that are secured by collateral which is called secured debt. A personal loan like a credit card is a loan that is not secured by collateral and is called an unsecured loan. Collateral can vary, but with a mortgage, the primary collateral is a cash down payment and a lien on a piece of real estate. Other loans can be collateralized by, a car, jewelry, or proceeds of a business.
Credit Score / FICO Score
A person’s credit or FICO score is the number that is given to a person and represents their creditworthiness. Creditworthiness is the consideration by a lender of a borrower’s ability to pay their bills and debt obligations based on their history of doing so. Credit scores range from nonexistent to 850. A credit score of below 620 is generally considered poor and would either mean a person is new to the system or has a history of not making their payment on time. A credit score in the range of 640 to 740 is considered average. A credit score of 750 is considered great credit and shows a pattern of consistent on-time payments across a varied range of bills and debt obligations over time.
Crowdfunding is a type of pooled equity fund that is focused on making loans. Crowdfunding combines individuals’ money to make larger loans than they can afford to make on their own. Instead of being a lender, each member is considered an investor. Crowdfunding has become more common and sites have been created to gather individual investors together.
Debt to Income Ratio (DTI)
A person’s debt-to-income ratio is a person’s total monthly debt payments divided by their gross (before taxes) monthly income. Most conventional mortgages will not allow a person’s DTI to be greater than 43% when the new mortgage is included in their monthly expenses.
Every loan will have loan terms or expectations or repayment. A delinquent loan is one in which the borrower has not met the terms of the loan agreement. They can include any aspect of the terms laid out in the loan agreement but are most commonly delinquent due to late payments or the inability to pay off the loan on time.
Default is a term in which a delinquent borrower has been notified by the lender as being in default of their agreement. A loan default is at the discretion of the lender and therefore a loan may be delinquent but not called into default by the lender. Notification of a loan default is generally the first step in the foreclosure process.
Equity is the value of the home minus the debt owed by the owner. Equity can come from either the cash down payment, the reduction of the loan from payments, or the increase of the value of the property over time.
A real estate transaction has multiple parties which can include a buyer, a seller, and a lender; all of whom have their own interests. Escrow a neutral 3rd party who oversees the transaction and insures that all parties are represented fairly and that all the documents are signed correctly. Escrow also manages all the receipt and disbursement of funds to all parties related to the transaction.
All loans have a duration in which the loan needs to be paid off. With an amortized loan the loan will be paid off through the monthly principal payments required in the monthly payment. Interest-only loans do not pay down the principal loan balance so at the end of the loan duration the loan needs to be refinanced or paid off. If the loan is not paid off the loan can be extended and is at the discretion of the lender. Many lenders charge an extension fee which can be an amount or a percentage of the loan balance that is being extended.
Fair Market Value (FMV)
The Fair market value is the estimated value a property could be sold in current market conditions. Because a property is really worth what a buyer is willing to pay for it, this is a subjective number. This value can come from a 3rd party appraisal company, an evaluation of comparable properties that have sold during a period of time or by a data aggregator like Zillow or Redfin. On a purchase, generally the FMV is dictated by the agreed upon sales price on a purchase and sales agreement. On a refinance, most lenders will require an appraisal to determine the FMV.
NWPL does not require appraisals or 3rd party evaluations and chooses to evaluate and internally determines a property’s FMV and can do so within 24 hours. This can save days or weeks in the loan process.
Forced Place Insurance
The insurance placed on a property by the lender (lien holder) in the event a borrower allows their own coverage to lapse. The premium is advanced by the lender and billed to the borrower to be paid within 30 days.
Foreclosure is the process in which a lender formally requests the forced sale of a property to repay a delinquent loan. Foreclosure is a process while a foreclosure sale is an event. The process of foreclosure can vary depending on the loan, the type of foreclosure, and collateral type. Foreclosures can take as little as 120-days, but commonly take much longer.
Foreclosure – Judicial
A judicial foreclosure involves the court system to review and approve the foreclosure. This process allows the lender to get a judgment against the borrower’s other assets to pay off the loan if the underlying asset does not fully cover the loan. Judicial foreclosures generally take more time and depending on the state there can be a redemption period given to the borrowers to redeem the property out of foreclosure.
Foreclosure – Non-Judicial
A Non-Judicial foreclosure is one in which the sale of the underlying asset is the only thing that will go towards the repayment of the loan. This type of foreclosure does not require the court system and does not allow a redemption period.
The costs (legal and other) incurred by a lender to foreclose on a property. These costs are the responsibility of the borrower.
The process of funds being disbursed to the borrower during the closing of a new loan transaction
The period between the due date (i.e. 1st of the month) and the date late charges will assess.
Hard money refers to a type of financing in which a loan is made using collateral, typically real estate property, as security. These loans are usually issued by private investors or companies, rather than traditional banks or credit unions. Hard money loans are generally short-term loans with high interest rates and fees, and they are often used by real estate investors who need quick access to funding for a property purchase or renovation project. The loan amount is typically based on the value of the collateral, rather than the borrower's creditworthiness or income.
The term "hard money" comes from the fact that these loans are secured by a tangible asset, rather than the borrower's promise to repay. As a result, hard money lenders are often more willing to take on higher-risk borrowers or projects that traditional lenders would not consider. However, the higher interest rates and fees associated with hard money loans reflect the increased risk involved for the lender.
A Foreclosure auction is the day and time a property will be sold by the county to repay a delinquent loan. A foreclosure auction is an auction of interested parties and real estate investors who will bid on the property. The highest bidder will then own the property for the amount bid. The starting bid is always what is owed by the lender.
Foreclosure sales have always required that the buyer have cash in hand. The sole purpose of a foreclosure is to have the bank’s loan repaid. If at the foreclosure auction the property sells for more than what is owed, the remainder of the funds go to the borrower. The starting bid at a foreclosure sale can be no more than what the bank is owed which creates the opportunity for an investor to purchase a property at a discounted price. In order to participate in this process, the person buying the property must have cash.
The money paid regularly at a particular interest rate for the use of money lent. Common types of interest include:
Interim (or Prepaid) Interest – The interest paid by the borrower at loan closing from the funding date to the end of that month.
Periodic Interest – The money owed each period as defined by the note, usually monthly.
The percentage rate that lenders charge for the use of their money. Also known as note rate.
A mortgage in which the borrower makes interest-only payments for a set period, typically five to ten years, before beginning to pay both principal and interest.
A mortgage in which the borrower pays only the interest on the loan for a set period, typically five to ten years, after which the borrower begins paying both principal and interest.
A non-owner occupied real estate property. Can be commercial or residential.
Jumbo Mortgage Loan
A type of mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac.
The amount of outstanding debt on a real estate property divided by the fair market value of the property.
A loan agreement are the terms of the loan set by the lender and agreed to by the borrower. The loan agreement will lay out the payment terms, timelines, fees, and loan duration. They will also describe the rights of the lender should a loan become in default. Northwest Alternative Mortgage is committed to clear, simple, and easy-to-understand loan terms.
The date when the full loan balance, accrued interest, and fees are due to be paid off as defined on a note or loan modification agreement.
The document that pledges collateral property(ies) as security. Also known as a deed of trust or trust deed.
A mortgage in which the borrower's payments are not sufficient to cover the interest due, causing the loan balance to increase over time.
A mortgage loan that does not require borrowers to provide documentation of their income, employment, or assets.
An abbreviation for promissory note. It discloses the interest rate and terms of the loan and is an obligation of debt.
A non-conforming loan is a loan that does not meet conventional financing guidelines or the guidelines of a conventional lender or bank. Loans that do not meet these requirements will need to be funded with alternative lending options. These types of loans are also called Jumbo, Alt-A or subprime loans.
The act of paying off a loan by paying the outstanding principal amount and any additional interest and/or fees due to completely satisfy the loan obligation.
The daily rate of interest as defined in the note.
A guarantee by an individual to a lender for the entire outstanding loan amount plus legal fees, accrued interest, and costs associated with collecting the loan. This type of guarantee entitles the lender to access the individual’s personal assets to repay the loan.
Finance charges paid at closing. Each point equals 1% of the loan amount. For example, one point on a $100,000 loan is equivalent to $1,000. Some lenders charge a flat fee rather than points. Also known as origination fees.
Pooled Equity Funds
A pooled equity fund is when a group of investors pool their money together to make an investment that they otherwise individually could not fund themselves. With pooled funds, groups of investors can take advantage of opportunities typically available to only large investors.
A mortgage that a lender holds in its own portfolio instead of selling it on the secondary market.
Preliminary Title Report (PTR)
A search performed by a title company to determine property ownership and the liens filed on the property. Includes an offer to insure title on a property. Also known as a binder or title commitment.
The penalty a lender may impose if a loan is paid off before it is due or before a specified time period, as defined in the loan’s note.
The outstanding balance of the principal on a loan, which does not include interest or other charges.
Private Money Lender
A private money lender is an individual or a non-institutional entity that provides loans to individuals or businesses. Unlike traditional lenders such as banks, private money lenders are not regulated by banking authorities and they often provide loans to borrowers who may not qualify for loans from conventional lenders.
Private money lenders typically lend their own funds or pool funds from a group of investors. They are often more flexible with their lending criteria, interest rates, and loan terms than traditional lenders. Private money lenders may also be referred to as hard money lenders, bridge lenders, or direct lenders. Although Northwest Alternative Mortgage specializes in non-QM loans, our parent company Northwest Private Lending is the top-rated private lender in the Pacific Northwest.
A promissory note is a formal document in which the borrower promises to repay the loan. A promissory note can also include the terms of the loan.
The process of obtaining a new loan on an already-owned property.
An ownership interest that a lender takes in the borrower’s property to ensure repayment of the debt. Typically through a mortgage or deed of trust.
A company that handles all payment-related transactions with borrowers, including accepting monthly payments, issuing monthly statements, providing year-end tax statements, and paying property taxes and insurance when due.
A mortgage given to borrowers with poor credit or a high level of risk, typically with higher interest rates and fees than prime mortgages.
An indemnity policy issued by a title company that insures an owner and/or lender against loss due to title defects, liens, or encumbrances. Also known as a title policy.
The process lenders use to determine the risks related to the property and the involved borrower for any given loan.
1031 exchange or reverse 1031 exchange
Real Estate like many assets gives the owner the opportunity to gain value over time. That increased equity in the property grows tax deferred until the property is sold. However, when you sell a property you will have to pay ordinary income tax or long-term capital gains tax…depending on length of time you have owned the property.
A 1031 exchange is a tax advantage given to investors who sell an investment property and use the funds to purchase another investment property of equal or greater value. If the sale and purchase of the new property is completed within a short window it can be done so, tax free.
If a property cannot be found and purchased inside that window the taxes on the profit from the sale will be due. Northwest Alternative Mortgage supports both 1031 and reverse 1031 exchanges. As an example, it is not uncommon for investors who are coming to the end of that 1031 exchange window to use a Hard Money loan to purchase the new property quickly. Once they completed the 1031 exchange and have ownership of the property, they will then refinance the loan when they have more time to get a conventional loan.