If you think mortgage jargon is confusing, you’re not alone. And it’s not only novice homebuyers who are stumped. Some of the terms are so tricky even the experts don’t agree about exactly what they mean.
Here’s a list of some of the world’s most confusing mortgage terms:
A conforming loan is a mortgage that adheres, or ‘conforms,’ to a set of loan guidelines or standards, explains Bob Walters, chief economist of Quicken Loans, a mortgage company in Detroit.
By far, the most common type of conforming loan is one that meets Fannie Mae or Freddie Mac guidelines. These two entities purchase mortgages from lenders and package them into securities for resale to investors.
Loans that don’t conform are known as ‘non-conforming.’
Keith Gumbinger, vice president at HSH.com in Riverdale, New Jersey, explains, ‘You can spend your entire life in the set of rules of Fannie and Freddie, which define everything from which credit buckets they will write loans to, down payment requirements for mortgage insurance, dollar amounts of the loans, et cetera and so forth. Any loan that fails one of those things makes it non-conforming.’
This category is comprised of FHA, VA and USDA loans. FHA loans are insured by the Federal Housing Administration. VA loans are guaranteed by the U.S. Department of Veterans Affairs. USDA loans are backed by the U.S. Department of Agriculture. USDA loans are also called RD or Rural Development loans, after the USDA division that handles them.
Jumbo loans have a loan amount that’s higher than Fannie Mae or Freddie Mac guidelines known as loan limits. The cutoff in most U.S. counties is $417,000. Loans for less aren’t jumbos. Loans for more are jumbos. Sometimes.
These loans conform to Fannie Mae or Freddie Mac guidelines, but exceed the basic $417,000 loan limit. Instead, jumbo-conforming loans may be up to $625,500, a special higher limit that Fannie and Freddie allow in high-cost home areas like San Francisco and New York.
‘People use this terminology kind of loosely,’ Walters says. ‘Generally what they mean (by jumbo-conforming) is that the loan amount is above Fannie and Freddie guidelines, but in many other respects the loan conforms to underwriting guidelines that Fannie and Freddie put forward.’
Jumbo-conforming loans are also called conforming-jumbo, super-conforming, expanded conforming, agency jumbo and high-cost loan limit.
‘Any loan that conforms to Fannie and Freddie guidelines and has a dollar amount above $417,001 and below $625,500 is a jumbo-conforming or conforming-jumbo,’ Gumbinger says.
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This category includes all conforming loans and many non-conforming loans, but no jumbo, government or subprime loans.
‘Conventional usually means good credit, not jumbo, not FHA or VA, and a giant subsection that is Fannie and Freddie-eligible, which is typically called conforming,’ Walters explains.
Is ‘conforming’ and ‘conventional’ the same thing?
“Conforming” and “conventional” are often used interchangeably or synonymously, says Kirk Chivas, chief operating officer of First Commerce Financial, a mortgage company in Wixom, Michigan.
That makes sense because conforming loans make up the lion’s share and more of the conventional loan category.
Jumbo loans generally are considered to be conventional, but non-conforming.
Would a jumbo-conforming be considered conventional?
No one wants to go there.
Another puzzler is that Fannie Mae and Freddie Mac used to be publicly traded corporations known as government-sponsored entities (GSEs). Today, both Fannie Mae and Freddie Mac are essentially controlled by the federal government.
So, why aren’t conforming loans considered to be government loans?
Probably it’s only a matter of tradition or — shall we say? — convention.
‘Back in the days when Fannie and Freddie were GSEs, they were quasi-government. Not calling them government loans has survived, even though now they are in conservatorship,’ Walters says.
‘Private mortgage insurance’ or just ‘mortgage insurance’?
Another distinction involves mortgage insurance, which may be required when a borrower’s down payment or equity is less than 20 percent of the home’s purchase price or value.
Some mortgage insurance is called private mortgage insurance (PMI) and some is simply called mortgage insurance (MI) or mortgage insurance premium (MIP). Why two different terms?
‘PMI is private mortgage insurance, and it’s for conventional or conforming loans,’ Chivas explains. ‘MIP is mortgage insurance premium, and that is on FHA and USDA government loans. The VA doesn’t have MIP. It has a funding fee. It doesn’t have mortgage insurance, so it’s not applicable.’
The bottom line for borrowers is that it’s more important to understand the loan than the label.
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Prequalification is a lender’s preliminary assessment as to whether a borrower might be able to obtain a loan.
Typically, this step is based on information the borrower provides verbally, with little, if any, supporting documentation from the borrower or verification by the lender, explains Walters.
Prequalification might — or might not — include a look at the borrower’s credit score.
Preapproval ‘should be a stronger statement from the lender than prequalification,’ Walters says. That means the lender should review the borrower’s documents, verify the information, check or ‘pull’ the borrower’s credit and more.
Yet Walters says many loan officers ‘play fast and loose’ with prequalification and preapproval, using these terms wrongly or interchangeable.
‘They say, ‘You should be able to get a loan,” Walters says, ‘and then a lot of people find out the hard way later that the real work and verifications weren’t done. If the company is not verifying that information, the borrower should consider the preapproval or prequalification as a worthless piece of paper.’
Borrowers should always ask their lender what prequalification or preapproval means and what other requirements must be met to close their loan.
A point, plain and simple, is one percent of the borrower’s loan amount. For example, one point on a $250,000 loan would be $2,500.
A discount point, paid upfront to the lender, is supposed to lower the borrower’s interest rate over the life of the loan, Walters explains.
This interest rate reduction is sometimes called a ‘buy down.’
An origination point is a fee or collection of fees.
Unlike a discount point, an origination point doesn’t buy down the borrower’s interest rate, says Gumbinger.
‘Origination points — the term ‘points’ indicates that they are percentage-based fees — should have no effect on the interest rate,’ he explains.
An origination fee is a fee charged by the lender to originate the loan, explains Chivas.
‘The fee could be a percentage of the loan amount or it could be a flat number,’ he says.
The term ‘origination fee’ is more common today than the term ‘origination point.’
Advertisements aren’t always clear about points or fees.
‘You’ll see advertisements that say, ‘No points!,” Gumbinger says. ‘But they will charge a percentage-based origination fee.’
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Closing is perhaps the happiest term in real estate since it refers to the process by which the transaction is completed and everyone receives his or her due whether that’s the proceeds of a home sale for the seller or the title to a property for the buyer.
Settlement refers to the reconciliation of accounts or accounting process that takes place as part of the real estate closing.
With settlement comes an important government-mandated document, designed by the U.S. Department of Housing and Urban Development (HUD), that shows all the amounts paid into the transaction and paid out of the transaction. In other words, it shows who paid what and to whom.
‘The HUD settlement statement has all the different amounts: how much you are paying, how much the Realtor gets, how much the mortgage company gets, how much the title company gets,’ Walters says.
Escrow refers to an account or entity that holds funds for others prior to disbursement.
‘When used to describe the mortgage servicer as collecting an amount out of your payment every month and holding it on your behalf to disburse it out to pay the taxing authorities or the insurance companies, that is an escrow account,’ Walters explains.
Borrowers should remember that not everyone uses these terms the same way.
In parts of California, for example, a pending transaction is said to be ‘in escrow,’ and an escrow account is called an ‘impound,’ even though, as Walters says, an escrow account and impound account are ‘exactly the same thing.’
Could it possibly be any more confusing?
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Article courtesy of HSH.com