Knowledge leads to Prosperity
Mortgage Glossary
Discover the Language of Home FinancingAccrued Interest
Accrued interest is the interest that has accumulated on a loan over time but hasn't yet been included in your monthly payments. In a typical principal-and-interest mortgage, as consistent payments are made over time, an increasing portion goes towards reducing the principal. This interest accrues based on both the outstanding loan balance and the set mortgage rate. It's always good practice to be aware of how your payments are structured, and should you ever have questions about your mortgage details, reaching out to your lender or Mortgage Consultant is recommended.
Adjustable-Rate Mortgage (ARM)
A mortgage type where the interest rate adjusts periodically in response to market conditions. It can be a suitable option for borrowers who are looking for lower initial payments or have specific intentions to sell their property or refinance their loan at a specific time in the future.
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At Prosperity Home Mortgage, we offer a range of adjustable-rate mortgage (ARM) products to meet your specific needs. Our ARM options include various adjustment periods where the initial fixed-rate period is followed by adjustments based on market conditions.
By choosing an ARM, you can potentially secure lower initial interest rates, which may result in lower monthly payments during the fixed-rate period. This can be advantageous if you plan to sell your property or refinance your loan before the adjustment period begins.
If you're interested in learning more about our ARM products and how they can benefit you, contact one of our mortgage professionals for personalized assistance.
Adjusted Basis
The adjusted basis of a property is determined by taking the original purchase cost, adding the value of any capital improvements made, and then subtracting any depreciation claimed. This value is essential for calculating potential capital gains or losses when a property is sold.
Adjustment Interval
The adjustment interval refers to the duration between changes in the interest rate or monthly payment for an Adjustable-Rate Mortgage (ARM). Common adjustment periods include 1, 3, 5, or 7 years, during which the interest rate remains fixed. Once this period concludes, the rate may adjust either upward or downward based on prevailing market conditions. However, there's a limit to how much the rate can change, ensuring protection against extreme fluctuations.
Amortization
Amortization is the process of gradually paying off a mortgage over time through regular payments. It's important to understand this process to plan your long-term finances.
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In simpler terms, when you have a mortgage, amortization means that you'll make regular payments to reduce your debt. Each payment includes two parts: the principal, which is the amount you borrowed, and the interest, which is the cost of borrowing the money. As you make more payments, the amount you owe gets smaller. Here are a couple of examples to help you see how it works:
These examples show that as you keep making payments, the total amount you owe decreases, and a larger portion of each payment goes towards reducing the principal rather than paying interest. Understanding amortization helps you make smart choices about your mortgage and plan for your future financial goals.
Annual Percentage Rate (APR)
This is the total cost of a mortgage for one year, including the interest rate and other loan expenses. It gives you a complete picture of how much you'll pay for your mortgage each year. The APR includes not only the base interest rate, also called the Note Rate, but also additional fees and charges. Understanding the APR helps you know the actual cost of your mortgage and make informed decisions about borrowing money for a home.
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The Annual Percentage Rate (APR) is an important metric to consider when comparing mortgage offers. It takes into account not only the interest rate but also certain fees and costs associated with the loan. These additional costs may include origination fees, discount points, mortgage insurance, and other closing costs.
By considering the APR, you can get a better understanding of the overall cost of the loan and compare different mortgage offers on an equal basis. Keep in mind that a lower APR doesn't necessarily mean a better loan; you should also consider other factors like the loan term, loan product requirements, and the overall client experience.
If you have specific questions about APR or would like personalized assistance in understanding your mortgage options, feel free to contact our team of mortgage professionals. We're here to help you make informed decisions and find the mortgage solution that best fits your needs.
Appraisal
A professional estimate of a property's market value. This is crucial in the mortgage lending process to ensure that the value of the property is accurate. This is why at Prosperity Home Mortgage we work directly with local appraisers.
Asset
Anything of value owned by an individual. Assets can be used in the mortgage process to demonstrate financial stability, and in the case of regular distributions potentially counted as income.
Balance Sheet
A balance sheet is a financial statement that provides a snapshot of an individual's or entity's financial position at a specific point in time. It details the assets owned, liabilities owed, and the net worth or equity, giving a comprehensive overview of financial health.
Balloon Mortgage
A mortgage that has a large, lump-sum payment due at the end of the loan term. This type of mortgage can offer lower initial payments, but requires careful financial planning.
Before-tax Income
Before-tax income represents the total earnings an individual or entity receives before any taxes are subtracted. It provides a raw view of earnings without considering the impact of taxation.
Bankruptcy
A legal process for individuals or businesses unable to repay their debts. It can impact your ability to get a mortgage, but there are pathways to homeownership after bankruptcy.
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Bankruptcy is a legal process that provides relief to individuals or businesses overwhelmed by debt. It allows them to eliminate or restructure their debts under the supervision of a bankruptcy court. While bankruptcy can have a significant impact on your credit and financial situation, it doesn't necessarily mean you can't become a homeowner.
After bankruptcy, it's important to rebuild your credit and demonstrate financial responsibility. This can involve taking steps such as establishing a solid payment history, maintaining a stable income, and saving for a down payment. There are mortgage programs geared towards individuals who have gone through bankruptcy, and working with a knowledgeable lender can really help
If you have questions about bankruptcy and how it may affect your ability to obtain a mortgage, we're here to help. Our team can provide guidance and discuss the available options to help you achieve your goal of homeownership.
Bi-weekly Mortgage
A mortgage payment plan where borrowers make payments every two weeks instead of monthly, resulting in an accelerated repayment schedule.
Bridge Loan
A temporary loan, typically used to cover a gap between buying one property and selling another. It can offer financial flexibility during the transition.
Broker
A broker, in the context of real estate, is a licensed professional who facilitates property transactions. They act as intermediaries, assisting both buyers and sellers to ensure the real estate process is carried out correctly and efficiently. This term often refers to real estate agents, differentiating them from loan brokers.
Buydown
The process of paying extra points in exchange for a lower interest rate. It can be an excellent strategy to reduce your interest costs over the life of the loan.
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Let us do the math! Contact us today to discuss your specific needs and find out if a buydown is a good option for you. Our mortgage professionals can provide personalized calculations and help you understand the potential savings.
Caps (interest)
Caps in the context of interest relate to the protective limits set on how much the interest rate on an Adjustable-Rate Mortgage (ARM) can change. These caps can apply both to a specific adjustment period and the entire duration of the loan. For instance, with a 1% per-period cap on a current rate of 7%, the new adjusted rate can only be between 6% and 8%, even if the index suggests a more significant change.
Caps (payment caps)
Payment caps act as protective measures for borrowers, setting boundaries on how much monthly payments can change on adjustable-rate mortgages. While they shield borrowers from sudden large increases in their monthly obligations, it's essential to note that these caps don't limit the interest earned by the lender. As a result, in certain situations, negative amortization—a scenario where the loan balance grows instead of decreases—may occur.
Certificate of Eligibility (COE)
A document issued by the Department of Veterans Affairs (VA) to eligible veterans or servicemembers, indicating their entitlement to VA home loan benefits.
Certificate of Reasonable Value (CRV)
The Certificate of Reasonable Value (CRV) is an official document provided by the Department of Veterans Affairs (VA). It sets the upper limit for both the value of a property and the loan amount that can be borrowed under a VA mortgage. Essentially, it ensures that veterans receive loans that reflect a property's true market value.
Closing
The final stage of a real estate transaction where the buyer and seller sign the necessary documents, and the ownership of the property is transferred.
Closing Costs
Fees and expenses, beyond the price of the property, that buyers and sellers usually incur to complete a real estate transaction.
Closing Disclosure
A form that provides final details about the mortgage loan. It includes the loan terms, projected monthly payments, and how much the extra fees will be.
Comparative Market Analysis (CMA)
A report prepared by a real estate agent that compares the prices of similar properties in the area to determine a competitive listing price or offer price.
Compound Interest
Compound interest is a bit like interest on interest. It's calculated not just on the starting principal but also on any interest that has piled up from earlier periods. While this can be great for savings, it means in borrowing contexts, the owed amount can grow more than expected, especially during negative amortization. This happens when monthly payments don't cover the full interest owed, leading the principal loan amount to grow. Notably, Prosperity Home Mortgage, LLC. does not provide loans that lead to negative amortization.
Collateral
An asset, like a home, used to guarantee the repayment of a loan. If the borrower defaults, the lender can take possession of the collateral.
Conforming Loan
A mortgage that meets the purchasing criteria used by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Construction Loan
A short-term loan used to finance the building of a home or another real estate project.
Consumer Reporting Agency
A Consumer Reporting Agency is a firm that collects, organizes, and sells information to creditors to help them decide whether to offer credit. This agency sources its data from credit repositories and various other channels to ensure that lenders have a comprehensive view of a borrower's creditworthiness.
Consummation
Consummation, often referred to as the settlement or closing, marks the final step in your home loan journey. It involves signing all the crucial legal documents, handing over the security instrument, and disbursing the funds required for the property's sale or for a loan refinance process.
Conventional Loan
A mortgage loan that's not backed by a government agency. Conventional loans are backed by Fannie Mae and Freddie Mac, and must meet their loan limits and requirements.
Conversion Clause
A Conversion Clause is a feature found in certain adjustable-rate mortgages (ARMs). It offers borrowers the flexibility to switch their ARM to a fixed-rate loan, typically after the first adjustment phase. When making this switch, the new fixed rate is determined by the prevailing market rates, and there might be a fee associated with using this conversion option.
Credit Report
A Credit Report offers a comprehensive look at your borrowing activities, detailing past and present credit accounts along with how timely you've been in making payments. When you apply for a loan, lenders obtain this report to evaluate your creditworthiness. You're entitled to request a free credit report from each of the reporting bureaus once annually. Regularly reviewing your report is a wise move, enabling you to spot any errors and gain insights into areas for improvement.
Credit Score
A Credit Score is a number that tells lenders how well you handle borrowed money. It's based on your credit card use, the amount of debt you have, and the types of loans you've taken out. Negative actions like late payments can lower your score. Lenders look at this score to see how reliable you are with money.
Debt Consolidation
The process of combining multiple debts, such as credit card debts or personal loans, into a single loan, often with a lower interest rate, to simplify payments and potentially save money.
Debt-to-Income Ratio (DTI)
A percentage that shows how much of a person's income is used to cover debt payments. It's an important factor in qualifying for a mortgage.
Deed
A legal document that grants the bearer a right or privilege, provided that he or she meets a number of conditions.
Deed of Trust
A legal document that secures a loan with a property, serving as evidence of the borrower's debt and granting the lender the right to foreclose on the property if the borrower fails to repay the loan.
Default
Default means not fulfilling specific duties set out in a contract, especially missing loan payments. When someone defaults, they've failed to meet the agreed-upon terms, which can lead to penalties or further actions.
Delinquency
Refers to a situation where required payments are not made on time, as outlined in a loan agreement. It indicates a lapse in keeping up with financial commitments, potentially leading to further complications if not addressed.
Deposit
A deposit is an amount of money presented to secure a real estate sale or to guarantee payment. In the context of loans, it can also be an advance of funds during the loan processing phase.
Discount Point(s)
Points are fees paid to the lender when obtaining a loan. One point is equivalent to one percent of the loan amount. Typically, the more points a borrower pays, the lower their interest rate will be. It's a trade-off: opting for more points means a reduced rate, but it also requires a larger initial cash payment during the closing process.
Distressed Property
A property that is in poor physical condition or facing financial difficulties, such as foreclosure or short sale.
Down Payment
The upfront payment made when buying a home, typically ranging from 3% to 20% of the purchase price.
Earnest Money
A deposit made to a seller indicating the buyer's seriousness about buying the home. It typically is refundable to the buyer if the deal does not go through.
Equity
The difference between the market value of a home and the amount the homeowner owes on the mortgage. It generally increases as the homeowner pays down the mortgage and the home's value appreciates.
Equity Loan
A loan that allows homeowners to borrow against the equity they have built in their property, using the home as collateral.
Escrow
An account held by a third party on behalf of two parties in a transaction. In mortgages, escrow accounts can hold funds for property taxes and homeowner's insurance.
Fannie Mae
Fannie Mae, the official name for the Federal National Mortgage Association, is a government-sponsored corporation backed by the Federal Housing Administration (FHA). Its primary role is to purchase mortgages from lenders and then sell them to investors. This activity helps ensure there's a continuous flow of money for new home loans. Another entity with a similar function is Freddie Mac, often seen as a competitor to Fannie Mae.
FHA Loan
A government-backed home mortgage loan with more flexible lending requirements than those for conventional loans. Because of this, interest rates for FHA mortgages may be somewhat higher, and the buyer may need to pay monthly mortgage insurance premiums along with their monthly loan payments.
FICO Score
The FICO score, also known as a Fair Isaac score, is a widely used credit-scoring model by lenders to assess an individual's creditworthiness. Scores range from 200 to 900, with higher scores indicating a lower risk of defaulting on a loan. This score is calculated based on various factors, including payment history, outstanding balances, length of credit history, new credit inquiries, and types of credit in use.
First Mortgage
A first mortgage holds the primary lien position on a property, meaning it has the top priority for repayment in the event of foreclosure. It takes precedence over any other subsequent mortgages or liens. If another loan is taken on the property, whether simultaneously or later, it is known as a second mortgage. This second loan typically has a smaller value and might come in forms like a home equity loan or a line of credit, but it is always secondary in priority to the first mortgage.
Fixed-Rate Mortgage
A mortgage with an interest rate that remains the same for the entire term of the loan.
Foreclosure
A legal process where a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the asset used as the collateral for the loan.
Freddie Mac
A government-sponsored enterprise that buys mortgages, pools them, and sells them as mortgage-backed securities to investors on the open market.
Fully Amortized ARM
A Fully Amortized ARM is an adjustable-rate mortgage where the monthly payments are designed to pay off the entire loan balance by the end of the loan's set term. The payment covers both the principal and interest at the current rate, ensuring the loan is fully settled over its duration.
Good Faith Estimate
A form that lists basic information about the terms of a mortgage loan for which the applicant has applied. It provides an estimate of the costs to get a mortgage. Note: The Good Faith Estimate (GFE) was replaced by the Loan Estimate and Closing Disclosure forms in October 2015 due to the TILA-RESPA Integrated Disclosure (TRID) rule.
Gross Monthly Income
The total amount the borrower earns per month, before any expenses.
Home Equity
The difference between the market value of a home and the amount the homeowner owes on the mortgage. It generally increases as the homeowner pays down the mortgage and the home's value appreciates.
Home Equity Line of Credit (HELOC)
A loan in which the lender agrees to lend a maximum amount within an agreed period, where the collateral is the borrower's equity in their house.
Home Equity Loan
A type of loan in which the borrower uses the equity of their home as collateral. These are often used to finance major expenses such as home repairs, medical bills, or college education.
Home Inspection
A limited, non-invasive examination of the condition of a home, usually in connection with the sale of that home. Home inspections are usually conducted by a home inspector who has the training and certifications to perform such inspections.
Home Inspection Contingency
A clause in a purchase contract that allows the buyer to hire a professional home inspector and gives them the right to negotiate repairs or cancel the contract based on the inspection findings.
Homeowner's Insurance
A form of property insurance that covers losses and damages to an individual's residence, along with furnishings and other assets in the home.
Home Warranty
A service contract that provides coverage for repairs or replacements of major home systems and appliances due to normal wear and tear.
Housing Expense Ratio
The Housing Expense Ratio is a metric used to determine a borrower's ability to manage monthly housing costs. It is the proportion of a person's gross monthly income that goes towards housing expenses. There are two main components to consider: 1. The top ratio: This is your total monthly mortgage payment as a percentage of your gross monthly income. Ideally, this should be at or below 28%. 2. The bottom ratio: This takes into account your total monthly mortgage payment plus any other monthly debts, compared to your gross monthly income. It's recommended that this doesn't exceed 36%. These ratios help lenders gauge a borrower's financial capacity to handle a mortgage.
Index
The index is a benchmark that influences the interest rate adjustments of an Adjustable-Rate Mortgage (ARM). Lenders often link ARM interest rates to recognized indices like LIBOR, T-Bill, or 11th District Cost of Funds (COFI). These indices help determine the rates for mortgage loans. For ARMs, a set margin is added to the index to determine the rate adjustment. Thus, if an ARM's rate is tied to a particular index, any fluctuation in that index will impact the borrower's monthly payment. When a mortgage has an adjustable rate, the lender outlines how these rates vary. For instance, the LIBOR index reflects daily rates based on short-term interbank lending in the international market.
Initial Interest Rate
The initial interest rate refers to the rate applied during the first segment of an Adjustable-Rate Mortgage (ARM) loan. This rate typically has set boundaries or caps, ensuring it doesn't fluctuate too drastically. These caps are designed to shield borrowers from sudden significant rate hikes while also preventing rates from plummeting too much, which safeguards the lender's interests.
Insured Mortgage
An insured mortgage is a type of loan safeguarded by either the Federal Housing Administration (FHA) or private mortgage insurance (MI). This protection kicks in if the borrower fails to keep up with their loan payments, providing a safety net for lenders.
Interest
Interest is the cost a borrower pays to a lender for borrowing money over a certain period. It's essentially the price tag of using someone else's money for a set duration.
Interest Rate
The interest rate on a mortgage is the percentage the lender charges for borrowing their money. It's a key component of your monthly mortgage payment, alongside the principal (the borrowed amount). The interest rate determines how much extra you'll pay on top of the principal amount. A lower interest rate means you'll owe less interest on your loan, reducing the overall cost of borrowing.
Interest Rate Ceiling
The interest rate ceiling represents the maximum interest rate a borrower can be charged on an adjustable-rate mortgage. It's a safeguard to ensure that the rate doesn't climb beyond a certain level, offering protection against extreme rate hikes.
Interest Rate Floor
The interest rate floor defines the minimum interest rate a borrower can be charged on an adjustable-rate mortgage. It serves as a protective boundary, ensuring the rate doesn't drop below a specified level, which can be crucial for lenders during periods of low market rates.
Investment Property
A property purchased with the intention of generating income or profit, typically through rental income or appreciation.
Jumbo Loan
A type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans are not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.
Late Charge
A late charge is a fee imposed on a borrower for missing a payment deadline. It's applied when the payment is made after the allotted grace period, serving as a penalty for the delay.
Lease
A legal document outlining the terms under which one party agrees to rent property from another party.
Lifetime Payment Cap
A Lifetime Payment Cap is a protective measure for borrowers, setting the maximum limit on how much the interest rate can change throughout the duration of an Adjustable-Rate Mortgage (ARM) loan. It ensures that the rate won't exceed a certain level from the original rate, offering long-term peace of mind. This is a type of "cap" designed to provide stability in fluctuating interest rate environments.
Lien
A claim or legal right against assets that are typically used as collateral to satisfy a debt.
Liquid Asset
A liquid asset refers to cash or any asset that can be quickly and easily turned into cash without losing much of its value. These assets provide financial flexibility and can be readily accessed in case of immediate financial needs.
Loan Estimate (LE)
A standardized form provided to borrowers by lenders within three business days of receiving a mortgage application, outlining the estimated loan terms and costs.
Loan Modification
The process of modifying the terms of an existing mortgage loan to make it more affordable for the borrower, often by adjusting the interest rate, loan term, or payment structure.
Loan Origination Fee
A Loan Origination Fee is a charge by a lender to cover the administrative expenses related to setting up and processing a new loan. It's essentially the cost to the borrower for the work involved in evaluating, preparing, and finalizing the loan agreement.
Loan Servicer
The company responsible for collecting loan payments, managing escrow accounts, and handling other administrative tasks related to a mortgage loan.
Loan-to-Value Ratio (LTV)
A financial term used by lenders to express the ratio of a loan to the value of the purchased asset. The LTV ratio is one of the key risk factors that lenders assess when qualifying borrowers for a mortgage.
Lock or Lock-In Period
A Lock or Lock-In Period is a specified duration during which a lender guarantees a particular interest rate for a mortgage. This arrangement shields borrowers from potential market rate increases during that time frame. Typically ranging from 15 to 60 days, the lock period is the window in which the loan must be finalized. Most lenders establish this rate lock after a mortgage application is completed, ensuring consistency between the initial plan and the final loan agreement. This term can also be referred to as a "Rate Lock."
Margin
A mortgage margin refers to the set percentage added to the loan's index to determine the interest rate of a loan, specifically for adjustable-rate mortgages. Established by the lender, this fixed percentage remains constant for the entirety of the loan's term. It represents the lender's profit margin or the cost of doing business. Legally, lenders are obligated to inform borrowers about the specific index tied to their loan, the margin to be added, and any applicable rate or payment limits.
Maturity
Maturity refers to the end date of a loan when the full principal amount is expected to be paid off. By this date, both the interest and principal of the mortgage should be settled in full. Most loans are structured with the expectation that the borrower will maintain them up to this maturity date, fulfilling all payment obligations.
Monthly Mortgage Payment
This is the regular amount a borrower pays to the lender for their home loan. It often encompasses four key components, known as PITI: Principal (the amount borrowed), Interest (the charge for borrowing), Taxes (property taxes), and Insurance (home and sometimes mortgage insurance). If taxes and insurance are managed separately and not by the lender, then the monthly payment will primarily cover just the principal and interest.
Mortgage
At its core, a mortgage is a legal agreement where real property is used as collateral to secure a loan. While the term specifically refers to this document, in everyday language, "mortgage" often broadly describes various loan options for buying, refinancing, or accessing a home's equity. Essentially, it's both the formal contract and the common term for the home loan itself.
Mortgage Banker
A Mortgage Banker, either an individual or a lending institution, specializes in originating and sometimes servicing mortgage loans. Their role is pivotal in guiding borrowers, detailing the features and advantages of various mortgage options, and aligning them with one that aligns with the borrower's financial objectives. Often, these professionals or entities originate mortgages with the intention of selling them in the secondary mortgage market, rather than holding onto them.
Mortgage Broker
An intermediary who brokers mortgage loans on behalf of individuals or businesses. They do not lend money themselves but find a lender for a borrower.
Mortgage Broker Fee
A fee charged by a mortgage broker for their services in connecting borrowers with lenders and assisting in the mortgage application process.
Mortgage Insurance
Insurance that compensates lenders or investors for losses due to the default of a mortgage loan. Often required for borrowers making a down payment of less than 20%.
Mortgage Insurance Premium (MIP)
An insurance premium paid by borrowers with FHA loans to protect the lender against losses in case of borrower default.
Mortgagee
The lender in a mortgage agreement.
Mortgage Note
A document in which the borrower promises to repay a loan that's used to purchase a home. It also outlines the terms of the loan, including the interest rate and the repayment period.
Mortgagor
The borrower in a mortgage agreement.
Multiple Listing Service (MLS)
A database used by real estate agents to share property listings and facilitate cooperation between agents representing buyers and sellers.
Negative Amortization
Negative Amortization occurs when the monthly payments on a loan don't cover the total interest due. As a result, instead of decreasing, the outstanding principal balance increases. This happens because the difference, or the unpaid interest, is added back to the loan's principal. Notably, Prosperity Home Mortgage, LLC. does not provide loans with negative amortization features.
Non-Conforming Loan
A type of mortgage that doesn't meet the guidelines of government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and hence cannot be sold to Fannie Mae or Freddie Mac. Non-conforming loans are more risky to lenders; they are often offered at a higher interest rate and require a larger down payment.
Note
A Note is a legal document that binds a borrower to repay a specified amount of money, along with interest, over a set period. This official agreement ensures the borrower's commitment and is fortified by a supplementary document, often a mortgage, deed of trust, or another security instrument, which offers an additional layer of protection for the lender.
Origination Fee
A fee charged by a lender on entering into a loan agreement to cover the cost of processing the loan.
Origination Process
The process of applying for and obtaining a mortgage loan, including the submission of documentation, credit checks, and underwriting.
Owner Financing
Owner Financing refers to a property buying arrangement where the seller, rather than a financial institution, offers either full or partial financing to the buyer. This setup can simplify the purchasing process and is often considered in scenarios where traditional lending might not be feasible or desirable.
Payment Change Date
The Payment Change Date refers to the specific day when a new monthly payment amount starts for an Adjustable-Rate Mortgage (ARM). Typically, this date falls in the month right after the ARM's adjustment date, signifying when the updated payment amount, based on the adjusted interest rate, becomes applicable.
Periodic Payment Cap
A Periodic Payment Cap sets a boundary on how much loan payments can rise or fall during a single adjustment period. It's a protective measure in adjustable-rate mortgages, ensuring that payments remain within manageable limits regardless of interest rate fluctuations.
PITI
An acronym that stands for principal, interest, taxes, and insurance - the four elements of a monthly mortgage payment.
PITI Reserves
PITI Reserves refer to a recommended cash cushion that buyers are advised to keep on hand after covering the down payment and all closing costs when purchasing a new home. "PITI" stands for Principal, Interest, Taxes, and Insurance – the primary components of a mortgage payment. Having these reserves ensures that the buyer has enough funds to manage future mortgage payments and any unexpected expenses.
Points
Also known as discount points, a type of prepaid interest on the loan charged at the time of closing. Each point is equal to 1% of the total loan amount.
Points and Fees
Additional costs paid by the borrower at closing, including origination fees, discount points, and certain third-party fees.
Pre-Approval
A lender's offer to loan money to a potential borrower, based on a preliminary assessment of the borrower's creditworthiness.
Prepayment Penalty
A fee charged by lenders if the borrower pays off a mortgage loan before the agreed-upon term, discouraging early loan repayment.
Prime Rate
The Prime Rate, often simply termed "prime," is the primary interest rate that banks offer to their most credit-worthy and established business clients. These clients typically pose minimal risk of loan default. While this rate forms a benchmark, individual loan rates, such as those for personal properties or mortgages, tend to be higher. The reason is that individual borrowers pose a higher risk of default compared to stable business entities. Nonetheless, the prime rate plays a crucial role in determining rates for various financial products, including variable-rate mortgages.
Principal
The original amount of money borrowed in a loan or put into an investment.
Private Mortgage Insurance (PMI)
A type of mortgage insurance that a borrower might be required to buy as a condition of a conventional mortgage loan if they're making a down payment that's less than 20% of the home's purchase price.
Private Mortgage Insurance (PMI) Cancellation
The process of removing PMI from a mortgage loan once the homeowner reaches a certain level of equity, typically when the loan-to-value ratio (LTV) reaches 78-80%, depending on the loan type.
Property Tax
A tax on real estate, based on the property's value. The tax is levied by the governing authority of the jurisdiction in which the property is located.
Quality Control Underwriter
Skilled individual who audits and reviews mortgage loan files for accuracy and compliance. Responsible for ensuring that loans meet both company and regulatory standards and are free of errors, omissions, or fraud.
Qualifying Ratios
Qualifying Ratios are calculations used by lenders to assess a borrower's financial stability and gauge their ability to manage loan repayments. These ratios juxtapose a borrower's gross income against housing costs and other non-housing-related expenses. They play a pivotal role in the loan approval process, helping determine the loan amount a borrower can comfortably manage. For instance, the Federal Housing Administration typically advises that a monthly mortgage payment shouldn't exceed 29% of a borrower's pre-tax monthly income. Furthermore, when combined with other debts, the total shouldn't surpass 41% of the borrower's income.
Rate Lock
A guarantee from a mortgage lender that they will give a mortgage loan applicant a certain interest rate, at a certain price, for a specific time period.
Real Estate Agent
A professional who represents buyers or sellers in real estate transactions.
Real Estate Settlement Procedures Act (RESPA)
A federal law that regulates the real estate settlement process, requiring lenders to provide borrowers with certain disclosures and protecting consumers from illegal or unethical practices.
Realtor
A real estate professional who is a member of the National Association of REALTORS®, which means they must uphold the standards of the association and its code of ethics.
Recording
Recording refers to the official documentation of the sale or transfer of real estate into public records. A recording fee is a charge paid to governmental agencies for this service, ensuring the transaction's legality and public acknowledgment. Given the intricate nature of real estate transactions, various fees arise, including preparation, recording, and filing charges. Apart from the recording fee, buyers and sellers might also encounter costs like attorney’s fees and underwriting fees during closing. To keep borrowers informed and prepared, lenders are mandated by law to provide a Closing Disclosure, a document outlining all expected costs and fees, prior to the actual closing.
Refinance
The process of obtaining a new mortgage in an effort to reduce monthly payments, lower your interest rates, take cash out of your home for large purchases, or change mortgage companies.
Reverse 1031 Exchange
A type of real estate exchange where an investor acquires a replacement property first and then sells their existing property, allowing them to defer capital gains taxes.
Reverse Mortgage
A type of home loan for older homeowners that requires no monthly mortgage payments. Borrowers are still responsible for property taxes and homeowner's insurance.
Second Mortgage
A type of subordinate mortgage made while an original mortgage is still in effect. The borrower uses the home's equity as collateral for the second mortgage.
Security
In the context of mortgages and loans, "Security" denotes the property address that is being used as collateral. Essentially, it's the physical property that guarantees the repayment of the loan. If the borrower fails to meet their payment obligations, the lender has the right to take possession of this property as a means of recovering the loan amount.
Seller's Market
A situation in the housing market where sellers have the power and advantage over buyers in terms of pricing and negotiation, often due to high demand and low inventory.
Servicer or Loan Servicer
A Servicer is the entity responsible for managing and processing monthly mortgage payments from homeowners. They are tasked with crediting the borrower's account after each payment. Many times, servicers also handle a borrower’s escrow account, ensuring that bills such as property taxes and insurance fees are paid punctually. Essentially, they act as the intermediary between the borrower and the lender, overseeing the ongoing management of the loan post-closing.
Short Sale
A sale of a property where the proceeds fall short of the outstanding mortgage balance, requiring the lender's approval to accept a lower payoff amount.
Third-party Fees
Third-party Fees refer to charges that are paid to external entities for services they provide during the loan process, as requested by the lender for the borrower's benefit. These services can include property appraisals, title searches, credit checks, and more. Essentially, they're costs associated with ensuring the loan's proper execution and validity, but are not charged directly by the lender.
Title
A legal document evidencing a person's right to or ownership of a property.
Title Company
A company that verifies the legal ownership of a property and ensures that the title is free from any liens or claims before the sale or refinance of the property.
Title Insurance
Insurance that protects the holder from loss sustained by defects in the title.
Title Insurance Policy
An insurance policy that protects the property owner and lender against any defects or claims on the title, ensuring a clear and marketable title.
Title Search
An examination of public records to confirm a property's legal ownership, and find out what claims or liens are on the property.
Title Transfer
The legal process of transferring ownership of a property from one party to another, typically done through the recording of a deed.
Total Payments
These represent the cumulative amount a borrower will have disbursed over the entire duration of the loan. This sum encompasses payments made toward the loan's principal, interest, and any prepaid finance charges. This figure assumes that the borrower retains the loan until its maturity and consistently makes the stipulated monthly payments without any defaults or prepayments.
Underwater Mortgage
A situation where the outstanding balance on a mortgage loan exceeds the current market value of the property, often resulting in challenges when selling or refinancing the property.
TRID
TRID stands for TILA-RESPA Integrated Disclosures. It's a combination of two key acts: TILA (Truth-in-Lending Act) and RESPA (Real Estate Settlement Procedures Act). Under TRID, the formerly separate Good Faith Estimate and the initial Truth-in-Lending disclosure have been merged into a single document called the Loan Estimate. Similarly, the HUD 1 Settlement Statement and the final Truth-in-Lending disclosure have been unified into a document known as the Closing Disclosure. This consolidation aims to simplify and clarify the mortgage process for borrowers.
Truth-in-Lending Act
The Federal Truth-in-Lending Act (TILA) is a legislation mandating lenders to provide borrowers with a clear, written disclosure of vital terms of a mortgage, including the Annual Percentage Rate (APR) and any associated fees or costs. Enacted to safeguard consumers, TILA ensures that borrowers have comprehensive understanding of their loan commitments. Furthermore, the act introduces a "right of rescission" period, granting borrowers a window of time to reconsider or revoke their loan agreement under certain conditions.
Underwriter
An individual or entity that evaluates and assumes the risk of another party for a fee, such as a commission, premium, spread or interest.
Underwriting
The process a lender uses to determine if the risk of offering a mortgage loan to a particular borrower under certain parameters is acceptable.
USDA Loan
A zero down payment mortgage for eligible rural and suburban homebuyers. USDA loans are issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture.
VA Loan
A mortgage loan in the United States guaranteed by the United States Department of Veterans Affairs.
Waiver
A waiver refers to the voluntary act of giving up or surrendering a particular right or privilege.
Warranty Deed
A Warranty Deed is a legal document ensuring that the seller holds genuine ownership of the property, possesses the legal authority to sell it, and assures that no outstanding claims or liens exist against the property.
X-Ineligible
In the context of VA loans, X-Ineligible denotes that the property doesn't qualify for financing under certain standards.
Yield
Yield represents the annual rate of return on an investment, showcased as a percentage of the initial investment.
Yield Spread Premium (YSP)
YSP is a compensation provided by the lender to a broker when an interest rate sold is above the standard or par rate. It's a tool that can sometimes offset a borrower's closing costs.
Zero Down Payment
A financing option where the borrower purchases a home without making a down payment.
Zero-lot line
A Zero-lot line pertains to a plot of land developed such that one side of a structure aligns perfectly with the property's boundary.
Zoning
Local government regulations that dictate the permissible use, density, and development standards for properties within a specific area.
Zoning Ordinance
A Zoning Ordinance is a set of regulations dictating the types of structures and uses permitted for properties within certain regions. This can influence whether a property can be used for residential, commercial, or mixed purposes.
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FAQ
I received a letter in the mail about making payments to a different company – why?
Prosperity partners with industry leading loan servicers who specialize in the collection and processing of mortgage and tax payments. Most of our loans are not serviced long term by Prosperity but transferred to fully vetted third parties who will take over the servicing of your loan. Please refer to the letters you received for information on how to contact your new servicer. As always, please contact the Prosperity Loan Servicing Department should you have any questions.