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Fixed Rate
Mortgage: A mortgage where the
interest rate remains the same for the entire term of the loan.
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30 year, 20 year,
15 year and 10 year options
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Adjustable
Rate Mortgage (ARM): the
interest rate is adjusted periodically based on a certain financial market
index such as LIBOR (London Inter Bank Offered Rate).
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3/1, 5/1, 7/1,
10/1 rates are fixed for these periods (3, 5, 7, or 10 years) respectively and
will adjust every 1 year afterwards
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Interest rate after fixed period is known as
the fully indexed rate and is calculated by adding the market index + a
margin (e.g. 2.25%)
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Balloon
Mortgage: Usually a five, seven or ten
year term where at the end of the term, the remaining outstanding principal on
the loan is due. This final payment is known as a balloon payment.
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Home Equity
Loan (fixed rate) or Home Equity Line of Credit (adjustable rate):
a fixed or adjustable rate loan secured by borrowing
against the existing equity in your home. Interest paid is usually
tax-deductible. Often used for home improvement, debt consolidation, or a down
payment on a 2nd home.
Loan
Programs: Non-Traditional – up to
100% loans
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Interest
Only: A loan in which simple
interest is calculated and due at regular intervals until maturity, when the
full principal on the loan is due
Some mortgage products do
not use income as a qualifier in determining an applicant's loan eligibility.
There are many types of loans in which a borrower needs to provide limited or
no income documentation including:
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No Income
Verification: No income information needs to be stated on the application or
verified. Only borrower’s credit, assets, employment and the property value are
verified.
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No Income No
Asset (NINA): No income or asset
information needs to be verified. Only borrower’s
credit, employment and the property value are verified.
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No
Documentation:
No income, assets or employment
need to be verified. Only borrower’s credit and the property value are
verified.
Qualifying
Factors for a Mortgage
Credit Score: Mathematical summary assigned by weighing various pieces
of consumer credit history information. Known as FICO score, the standard
measure of credit risk, as created by Fair Issac Corporation.
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Scores are
weighted by payment history (35%), amounts owed (30%), credit history (15%),
types of credit (10%) and new credit (10%)
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Data from all
three credit bureaus viewed (Equifax, Trans Union and Experian) with middle score
used to determine client credit risk
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Scores range
from 400 to 850, with minimum average credit being about 640, and A+ credit
starting at 700.
Credit
Reports & associated scores are the foundation for all mortgage lending,
and critically vital in the evaluation of Jumbo Mortgages, High Loan to Value
loans, Low Documentation loan programs, 2nd Mortgages and
Non-Traditional loan programs
Debt to Income Ratio
(DTI): Borrower’s payment obligation
on long term debts is divided by borrower(s) gross income, before taxes. Two
ratios known as “Front” and “Back” ratios are calculated.
Front DTI Ratio = Monthly
Principal + Interest+ Taxes + Insurance (PITI) ÷ Gross Monthly Income
Back DTI Ratio = Monthly
PITI + All other Monthly Revolving Debt ÷ Gross Monthly Income
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Ideal DTI ratios
are 33% (Front) & 38% (Back)
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Back ratio can reach
45%, and 50% in a few specific Loan Program situations
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With certain
non-traditional loan programs, Back DTI can reach 50%, or higher
Equity:
Typically, a buyer must put 20% down for the purchase
of a home. This would leave the borrower with a loan to value ratio (LTV) of
80%.
LTV: Loan to Value - How
does is work?
Loan to Value ratio or LTV
is the relationship between the amount of the mortgage loan and the appraised
value of the property expressed as a percentage. (Loan Amount ÷ Value of Property)
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If LTV > 80%,
lenders are usually required to carry Private Mortgage Insurance or PMI
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Some programs
allow LTV of 95% and greater, without demanding PMI (non-traditional)
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A 2nd
mortgage can also be created to avoid > 80% LTV(80% First, 10% Second)