Good afternoon,
More volatility. Big swings. We’re back to multiple price
changes per day.
The Dow ended the week at 15,070, down from 15,248 last
week.
The 10 year treasury is at 2.13% yield, down from 2.16% last
week.
The dollar is up to $1.32/Euro.
The MBS is about where it was last week and the attached
rates are mostly the same, but some are down.
Lending terms
I first published this a couple years ago and have been
adding to it, something of a glossary of lending terms. I hope you find it
useful.
LO – loan officer. Your representative and advocate
(hopefully) in the lending process.
OO – Owner occupied residence
NOO – Non-owner occupied = rental property. This is
not a vacation home that you sometimes rent out for a week. That is a
second home and we don’t count the rent (with some exceptions).
PITI – principal, interest, taxes and insurance (and
HOA dues, if applicable). It’s the cost of home ownership, as far as a lender
is concerned. We always calculate it, even if the loan does not have impounds.
Impounds – the lender collects taxes and insurance in
the mortgage payment and pays them when due. Required with some loans in
California (and on all loans in most states). Also known as escrows.
DTI – debt to income ratio – it’s debt divided by
income.
Housing ratio – not always used, but it’s the
PITI/income. Also known as the front end DTI ratio.
Back-end ratio – it’s the total debt (PITI + car
loans + credit cards, etc.) / income. Normally synonymous with DTI. 45% is the
standard maximum DTI, but it can be higher or lower depending on a multitude of
factors. The new QM loan regulations will drop this to 43%. Some lenders are
even lower.
DP – down payment
LTV – loan to value = loan amount divided by price
(or appraised value, whichever is lower).
CLTV - combined loan to value = first loan plus
second loan divided by price (or appraised value).
HVCC – those confounded regulations for appraisals
RESPA – Real Estate Settlement Procedures Act –You
know what it is, I know. For us it’s rules, rules and more rules. “Can you
close in 9 days?” No. “Why not?” RESPA is why not. Our costs are up, profits
are down and turn times have grown because of RESPA.
GFE – Good Faith Estimate – used to be our estimate
of fees. The government, as part of RESPA, had the good idea to standardize the
GFE and enforce it. In principal, it really is a good idea. As implemented it
fails to achieve its goals and actually is often a detriment to the borrower.
Anyway, the thing to remember is fees can go down from what is on the GFE,
but they cannot go up, which means the GFE is usually inflated. Also, the
gov wants you to know about fees you don’t have to pay. So they want us to
disclose them. That’s fine, but they want us to disclose them as the borrower’s
fees even when they aren’t. This results in GFEs with massive numbers on
them. Some loan officers choose not to disclose those fees. That is great
from a sales perspective, but it can kill the deal later. I was told of one
example where the real estate agents ended up paying the escrow fee and owners
title insurance because the lender hadn’t disclosed them in the GFE and the LO
convinced the agents it was their fault.
Residential – 1-4 unit residential property. A 5-plex
is commercial property.
Mixed use – condos and commercial space intermixed,
like Santana Row. If the commercial space is a small part of the project, then
residential lending is probably OK. Otherwise you will need a commercial loan
even for the condos.
Townhouse – An architectural style, like Tudor or
Ranch, NOT a legal description. If your lender asks you what property type it
is the answer is PUD or Condo, and there are important
differences.
PUD – Planned unit development
Coop – You know what it is, but you should also know
they are very hard to get loans for. Converting from Coop to condo is possible,
but has special challenges.
Portfolio – For the last 5 years or so “portfolio”
has been synonymous with “jumbo” and means a loan that will not be re-sold,
regardless of loan amount. We are just beginning to see a few jumbo loans sold,
but not many. The lender will keep the loans in its own portfolio, and are
underwritten to the lender’s own guidelines, assuming Congress is OK with the
guidelines. These can also be known as “niche” loans, as they are not uniform
and we go to these looking for homes for loans that Fannie, Freddie and FHA
can’t fit in their rigid little cookie cutters. Niche and portfolio do not
normally mean “easier.” To the contrary, they are usually more difficult to get
done, normally having bigger down payments, lower DTI’s and usually more
conditions.
Niche – see portfolio
Jumbo – A term that is temporarily going away in
favor of portfolio, it means big loan. “True” jumbo is currently over $626,000.
Agency – refers to Fannie Mae (FNMA) and Freddie Mac
(FHLMC), the government agencies that buy loans
FHA – a government owned mortgage insurance company
(MI, with no “P”). All FHA loans have mortgage insurance, by definition,
regardless of down payment. The agencies buy FHA loans. Trivia: FHA was the
first mortgage insurance company, established back in the 1930’s.
PMI – Private mortgage insurance - mortgage insurance
not offered by the government. Came into existence in the 1950’s.
Conforming – a loan that conforms to Fannie &
Freddie guidelines and can be purchased by them is a conforming loan.
Non-conforming – Fannie and Freddie won’t buy them.
Generally interchangeable with “portfolio” and “jumbo”.
Conventional – Not a government insured loan. Also
not private money.
Government loan – a government insured loan like FHA,
USDA and VA.
Agency Jumbo = high balance conforming = jumbo conforming
= high balance agency = loans over $417,000 and under $625,500 that
meet Fannie or Freddie guidelines. They have different rates and guidelines
than loans under $417,000. Also, the loan amounts I reference are for Santa
Clara and San Mateo counties. They will be different in lower cost counties.
Secondary mortgage market – this is where a lender
can sell the loan they fund. Currently limited to Fannie and Freddie, with some
recent exceptions that are so small they are barely notable.
Hard Money or Private Money – It’s someone lending
his own money or some other guy’s own money. Some are big, regional lenders,
some are one person. One guy I work with is literally gone fishing half the
time, or more, and returns calls inconsistently, but if you can get his
attention he can get things done. These all have points (3-6 points is typical)
and rates are much higher than conventional financing (2 to 7% higher,
normally). They don’t have rate sheets and they don’t have much in the way of
guidelines, and no pre-pay penalties. They assess risk and come up with
the rate and points they need to make a loan attractive enough to take on the
risk, and that rate is exponentially more volatile than with institutional
loans. So if you think loan officers try to dance around the question “what are
rates like” on normal loans, ask about hard money rates. They now have stricter
government oversight than they used to and have narrowed what they do, but are
still the ultimate niche lenders. 40% equity is a requirement they are now
required to meet on many loans and these days they have to qualify income on
most loans, too, but they have a lot more exceptions and work-arounds. They can
typically cross-collateralize (place liens on multiple properties to get to the
40% equity requirement) in their sleep, if that’s an option for your buyers. Sean,
Alan and I work with hard money lenders if you have any questions on them.
Overlay – it is a guideline that lenders add to
investor requirements. For example, FHA allows 580 credit scores, but nearly
all lenders have overlays limiting credit scores to 620+, or 640+. There are
also pricing overlays in addition to guideline overlays.
MCC – Mortgage Credit Certificate program. It’s a tax
CREDIT for first time homebuyers. When it’s funded, and if the borrower
qualifies, it’s free money (well, there’s a $200 app fee). Great program.
$103k/year and $570k price.
Typical for the area – an appraisal term. If a
property is not “typical for the area” financing will not be easy. Most of you
old pros know this instinctively and talk your clients out of it before you get
to financing. Geodesic dome? Get familiar with hard money. Log cabin? Charming,
but un-lendable. Less than 650 square feet? You had better have some good
comps. A 10 acre prop in Woodside? No problem. A 10 acre prop in the middle of
Cupertino? Good luck. Luxury condo in Palo Alto? Of course. Luxury condo in
East PA? Not so easy. I had a client who found a lovely old home on the
main street in a small town, the edge of the business district. I could have
got them a loan, but not one they wanted.
Every time I drive by that igloo/caveman looking place off
280 I wonder how that thing gets financed.
Habitable – this has a changing definition, but it
means someone can live there. Working stove, sink, bathroom. Roof that appears
to keep water out. Ditto the walls and windows. Interior walls need to have at
least sheet rock on them, meaning remodels don’t necessarily need to be
completed, but they need to be completed to a point it is habitable. If there’s
a slot for a dishwasher, a dishwasher needs to be in it. No one is going to
turn the dishwasher on, but it needs to be there. If the appraiser sees
something he thinks should be inspected a clearance will be asked for. So if he
sees possible termite damage the underwriter will ask for clearance. If he
thinks the house might be sinking, there will be a foundation clearance called
for.
Un-inhabitable - What about an un-inhabitable home?
You need a rehab loan and those are not so easy to find. FHA has a couple rehab
loans. We do those.
Lot loan – Usually, you need a bunch of dirt with
ready access to electricity and plumbing, or in some cases a septic. Ready to
build. No structures. No foundation.
Construction loan – can be for a lot, or remodel. Must
have approved plans and be ready to build. Can be used to buy a home, if
there are approved plans. Always pays off any existing liens. The key to
qualifying these days seems to be the ability to get a take-out loan.
Take-out loan – when construction is done these days
construction lenders want their money back immediately. You have to refinance
and pay off the construction loan. Called a take-out loan. We used to have
“lock and build” loans, meaning you locked in the take-out rate when you
started construction. Those loans are history, to the best of my knowledge.
Safety hazard – Anything the lenders sees as a
potential safety issue will have to be repaired before funding. No flexibility
here. Appraiser notes a bannister is broken? Fix it. A light was removed and
there are open wires? Electrical outlet has no cover? Fix it. Detached garage
has big crack? Call in the relevant inspector. And if he says it is a safety issue?
Tear it down. If you see a safety hazard, fix it before the appraiser sees it.
1004D – we used to call this a 442. It’s when we send
the appraiser back out to verify the bannister has been repaired. Or any time
we send him back out to verify something. Usually costs about $100. Sometimes
lenders are more flexible on some things and will take a photo from an agent,
but it’s better to nip it in the bud and fix things before the inspection. I
have asked listing agents, before I send the appraiser if there are any defects
I should know about. Sometimes they are helpful, sometimes they are offended,
sometimes they try to downplay poor condition. Don’t downplay. If you think I
should go look at it, tell me. I’ll drive out there.
Points – a point means 1%. That’s it. However, when a
mortgage lender is talking about points we are usually talking about discount
points (or points in fee, or points in cost). It is basically interest that a
borrower pays to a lender up front and in exchange the lender lowers the interest
rate. On average, one point lowers an interest rate .25% and takes 48 months to
recoup in saved interest payments. And how much does one point cost? Since a
point means one percent, one point costs one percent of the loan amount.
MBS – mortgage backed securities. Most mortgages go
into securities and are traded on the open market, same as stocks and other
bonds. The price of these securities drives mortgage rates. I could write
volumes on these, but I’ll stop there.
Rate – the rate of interest a lender charges on a
loan. An obvious one, I know. The most common loan officer seminar topic is how
to avoid answering questions about current rates. Why? For one, because
RATES CHANGE. If you asked me what Google stock was selling for and I said $700.1245
per share you wouldn’t expect to be able to buy Google for that exact price
even 15 minutes later. You know stock prices change constantly. But if someone
asks me to quote a mortgage rate, they think that rate is set in stone. They
are not. They change up to 5 times a day. Some lenders change rates more often
than others, and the lender with the best rate changes, too. I will also add
that there are about 33 data points we plug in to calculate an interest rate,
any one if which can change the rate. And we have hundreds of loan products. If
you catch me at the water cooler and ask me how stocks are doing I might be
able to tell what the Dow has been doing, but I won’t be able to give you an
exact price for Home Depot stock. “Can you guess?” Sure, but the guess will be
wrong. Same goes for rates. I can tell you in detail what the MBS has been
doing, in 10 minute increments, but if you want a rate quote I need to break
out some software and send a query to our server. Imagine someone walked up to
you and asked, “What are homes selling for? Just a ballpark. Give me a guess. I
won’t hold you to it.” What do you say? So, you give them the median price in
Santa Clara county. Later you find out the person listed with another realtor.
Why? Because your quote was low. This other realtor said she could get them a
higher price on their estate in Los Altos Hills, and you didn’t even know you
were doing a listing presentation. Or you quote them the median price in Los
Altos and then they are mad when you can’t sell their condo in Campbell for
that price. Those are real hazards with rate quotes. Having said that, if you
want a rate quote, you need to be clear you want a rate quote and not try and
trick a loan officer into spitting out a rate.
Add – this is something a lender adds to the price or
rate of a loan. Some adds are to points (what you have to pay to get a specific
rate) and some adds directly increase the rate .
Lenders have adds for all kinds of things: LTV, credit
score, zip code, title in an LLC, using rental income on an outgoing property,
more than 4 financed properties, interest only, condo, waiving impounds, and on
and on and on it goes. Adds are not standard. They vary from lender to lender,
loan program to loan program.
Lock – this is when we set the rate on a loan. It’s
like when you send in the buy order on a stock. You can’t lock until you are in
contract.
No cost/No fee – a type of loan where the lender pays
the closing costs. You will often hear this spun as a FREE loan, or something
like that. This is great salesmanship. All loans have fees associated with
them. The lender is paying them by taking a higher rate and using a credit to
pay the fees. Don’t believe me? Keep pushing for a lower rate. Eventually, the
LO will inform you they can go lower, but you will have to pay the fees. I
guarantee it. And yes, we do no cost/no fee loans. Everyone does, but not
necessarily on every loan.
Guidelines – these are the rules that underwriters
follow when deciding if a loan is approved. Some loans fit the guidelines, but
are declined anyway, because they push the limits in too many places.
UW – underwriter – the person who goes through the
guidelines and approves the loan
Investor – the person who will buy the loan and has
final say on what will be approved. The investor may or may not be involved in
underwriting, and usually is consulted on exceptions.
Pre-qualify – it’s when we talk to a borrower and
come up with an idea of what they might get approved for.
Pre-approval – we take a complete loan profile,
income documentation, assets, credit and so on and get them approved pending a
property. Also known as a TBD approval.
Conditional Approval – When a borrower goes into
contract we send the live loan to an underwriter who approves it. ALL approvals
are “conditional” until they have been funded and the transaction closes,
meaning we always have conditions to satisfy before the UW will allow
the loan to go to docs or to fund. The lack of open conditions is the signal to
fund the loan. There are always conditions that involve no changes to the
credit profile. That means if the borrower quits their job, spends their money,
takes out a car loan, gets a big deposit we can’t source, misses a payment, or
anything else the lender might be interested in, the loan can be suspended or
declined because of that change. Right up until the very last minute.
Conditions can be added at any time for any reason. Sometimes when we satisfy
one condition, we create new ones. Sometimes lenders miss something they catch
later.
PTD – prior-to-documents approval – a list of
conditions that must be satisfied to get loan docs drawn.
PFT – prior-to-funding approval – a list of
conditions that must be satisfied to get a loan funded.
Suspense – you don’t have an approval. We have to
satisfy the UW on one or more conditions to get them to approve the loan.
Sometimes, a condition isn’t listed as a suspense condition, but an experienced
loan officer will identify it as such.
Final approval – not really a lending term. You’re
never going to hear it come out of my mouth. It’s more of a real estate agent
and borrower term. You will know when a loan approval is final because the
money is in escrow, and even then...
Contingency removal – This is not really a lending
term because Buyers remove contingencies, not LOs or lenders. However,
we are asked for our opinion, and rightly so. For this purpose we group
conditions into two types: those that scare us and those that don’t. That’s
probably not how your LO will present them to you, but that is what we are
thinking. Deciding which conditions to be afraid of is part of the skill of the
job. Sometimes a condition doesn’t scare the LO when it should. That doesn’t
often happen to me as I am easily scared, but I get a lot of business rescuing
transactions from people who underestimate their conditions. The point is, if
we don’t see any conditions that scare us, we … um… how do I phrase this…won’t
stop you from removing contingencies. I tend to call the remaining
conditions paperwork. Paperwork can and will delay close, but it won’t prevent
it. It can delay it a really long time, though. Why won’t a competent LO come
right out and tell you to remove contingencies? I have had borrowers quit their
job after removing contingencies; laid off; fired; filed for divorce; got
married; bought a car with a loan; filed a lawsuit; bought another house;
co-signed for a student loan; made giant cash deposits; and done 100s of other
things that changed their credit profile (and I am almost always told by their
RE agent or find out on my own, rarely does the borrower tell me). I have had
borrowers repeatedly lie to me about relevant facts, and done things I have
explicitly told them not to do (“I didn’t think you meant it”), and once escrow
refused to insure title at the last minute. I closed every single one of
them, but if I hadn’t closed they could have come back and said, “You said
it was OK to remove contingencies!” If the borrower wants to wait until there
is no risk to remove contingencies they have to wait until the loan has funded.
Exception – We have general rules and we have
guidelines, both may have exceptions. A general rule is something like lenders
don’t lend to people with more than 4 financed residential properties. But
there are a few lenders who will. Also called a niche. Guidelines may
also have exceptions. Like if a guideline says “minimum credit score of 720”
and you have 719, we might ask for an exception. Sometimes we get them,
sometimes we don’t, sometimes they won’t even consider them. Sometimes they put
the exception in the guidelines. Exceptions used to be routine, but we don’t
get a lot of them anymore, and they aren’t normally free when we do get
them.
LOE – letter of explanation – means “please explain
this thing to the UW.” Must be signed. My rule is use the fewest words possible
to satisfy the condition. Not one extra word. Extra words can create
extra conditions. I mean it. “BMW ran our credit when we test drove a car. We
did not open any new credit, because our company is going out of business.” That
last part isn’t necessary. Unless the condition asks for your motivation we
don’t need your motivation.
Appraisal – an estimate of market value of real
estate.
AMC – appraisal management company – Appraisals need
to be ordered through them. They also tend to do a quality control review of
the appraisal, which may or may not help you, but always add to the turn time.
Princeton has its own AMC, which makes a difference.
Appraisal inspection – when an appraiser visits the
property and measures it. He also takes pictures and notes any obvious
defects.
Desk Review – an appraiser reads the appraisal and
decides if he agrees with the value.
Field Review – like a desk review, there is an
inspection of the property.
Appraisal dispute – when one challenges the value
derived in an appraisal. It requires specific comps or specific errors in the
appraisal. One AMC told me their dispute success rate was around 2%, but
one lender we work with said theirs was 10-15%. The biggest lenders don’t allow
disputes, period.
Questions?
Greg Vanslow
Mortgage Planning Specialist
Princeton Capital
Telephone (650) 917-4263 | Mobile (650)
537-7905 | Private Fax (408) 335-1176
Princeton Capital is a Residential Mortgage
Lender, and an RMR Financial company, licensed by the California Department of
Corporations under the California Residential Mortgage Lending Act, license
#415-0027.
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