Mortgage points/discount points - an option for buyers to pay an upfront fee at closing to buy down the interest rate on a loan. The term ''points'' is a common way of referring to a percentage of your loan amount.

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Loan-to-value (LTV) ratio - an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, loan assessments with high LTV ratios are considered higher-risk loans. Therefore, if the mortgage is approved, the loan has a higher interest rate.

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Private Mortgage Insurance (PMI) - a mortgage insurance that protects lenders when borrowers put down less than 20% of the home's value.

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Interest - a fee for taking on the risk of loaning a borrower money.

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Principal, interest, taxes, insurance (PITI) - the sum components of a mortgage payment. Specifically, they consist of the principal amount, loan interest, property tax, and the homeowners insurance and private mortgage insurance premiums.

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Underwriting - the process of assessing the risk and profitability of a property transaction.

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Debt-to-equity (D/E) ratio - a crucial metric used to assess a company’s financial leverage. In the context of real estate, this ratio helps investors understand the degree of leverage a real estate company has. 

1. D/E Ratios in the Real Estate Sector:

   • Real estate companies, including Real Estate Investment Trusts (REITs), tend to have D/E ratios ranging from less than 1.0 to more than 8.0.

   • A ratio of 1.0 indicates an equal amount of debt to equity.

   • Less than 1.0 means more equity than debt.

   • More than 1.0 means more debt than equity.

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Credit score - a three-digit number that rates your creditworthiness. FICO scores range from 300 to 850. The higher the score, the more likely you are to get approved for loans and for better rates.

 

Standard mortgage - a home loan where the borrower pays a fixed or variable interest rate and monthly payments for a certain amount of time. The most common mortgage term is 30 years in the U.S., but some mortgages can be shorter or longer. A fixed-rate mortgage has the same interest rate.

 

Deed of trust - transfer the legal title of a property to a third party such as a bank, escrow company, or title company to hold until the borrower repays their debt to the lender.

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A deed of trust exists so that the lender has some recourse if you don’t pay your loan as agreed. There are three parties involved in a deed of trust: the trustor, the beneficiary and the trustee.

• Trustor. This is the person whose assets are being held in the trust, also known as the borrower (i.e., you). The title to your home is held by the trust until the loan is paid off. 

• Beneficiary. The beneficiary is the party whose investment interest is being protected. Usually, that’s the lender, though it also can be an individual with whom you have a contract.

• Trustee. The trustee holds the legal title of the property while you’re making payments on the loan. Trustees often are title companies, but not always. Once you’ve paid off your loan, the trustee is responsible for dissolving the trust and transferring the title to you.

 

A deed of trust includes many important details about your property, loan and related terms and conditions;

• The names of the parties involved (the trustee, trustor and beneficiary)

• The original loan amount and repayment terms

• A legal description of the property

• The inception and maturity dates of the loan

• Fees

• Various clauses, such as acceleration and alienation clauses

• Any riders regarding the clauses outlined

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Promissory note - a written and signed promise to repay a sum of money in exchange for a loan or other financing.  The elements of a promissory note include:

1. The lender's and borrower's names and contact information

2. The principal amount borrowed

3. The interest rate and how it is calculated

4. The date and place of issuance

5. The maturity date and terms of repayment

6. The issuer's signature

7. The consequences of default and the rights of the payee

8. The amount must be specific and precise, and the promise must be unconditional and express

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Conventional loan - a mortgage that’s available through and backed by a private sector lender.

   

Amortized loan - a type of loan that requires the borrower to make scheduled, periodic payments that are applied to both the principal and interest.

• An amortized loan payment first pays off the interest expense for the period; any remaining amount is put towards reducing the principal amount.

• As the interest portion of the payments for an amortization loan decreases, the principal portion increases.

 

Amortization - the practice of spreading an intangible asset's cost over that asset's useful life.

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 Partially amortized loan - amortizes only partially during the loan term before the borrower makes a balloon payment. 

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Interest-only mortgage - is a type of mortgage in which the mortgagor (the borrower) is required to pay only the interest on the loan for a certain period. The principal is repaid either in a lump sum at a specified date, or in subsequent payments.

 

Adjustable-rate mortgage (ARM)/variable-rate mortgage - a home loan with an interest rate that adjusts over time based on the market. ARMs typically have a lower initial interest rate than fixed-rate mortgages.

 

Government Loans - Guarantees loans made by banks and finance companies.  The most common government loans are student loans, housing loans, and business loans.  Other loans include those for veterans and disaster relief.

 

The CARES Act and the Paycheck Protection Program and Health Care Enhancement Act provided special funding for small businesses impacted by the economic crisis in 2020.

 

FHA insured loans - A Federal Housing Administration (FHA) loan is a home mortgage that is insured by the government and issued by a bank or other lender that is approved by the agency. FHA loans require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than is usually required.

 

VA guaranteed loans - A VA-guaranteed loan is a loan made by private lenders (such as banks, savings & loans, or mortgage companies) to eligible veterans. These loans are for eligible service-members and veterans.  They carry a number of benefits (such as no down payment) that make them far more appealing than conventional loans in most cases.

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USDA/Rural Development loan programs - USDA loans are a zero down payment mortgage option backed by the United States Department of Agriculture (USDA) and offered by USDA-approved lenders to help fund rural housing development for low- to moderate-income individuals and families throughout the U.S. These government-backed loans can be used to purchase, build, repair or refinance a home in a rural area.

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Types of USDA loans:

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Guaranteed Loan - This mortgage loan assists USDA-approved lenders in providing low- and moderate-income households with 100% financing for the purchase, build, rehabilitation, improvement or relocation of a primary residence in a rural area.

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Direct Loan - USDA Direct Loans are funded by the USDA and processed by your local Rural Development office. Direct Loans are meant to help low- to very-low-income borrowers obtain an affordable mortgage when otherwise unable to secure financing for a safe and sanitary house. Loans have a 33 to 38 year term depending on your income level.

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Repair and Rehabilitation Loan - Also known as the Section 504 Home Repair Program, this type of loan provides money to low-income homeowners so they can repair or improve their home by removing health, safety or sanitation hazards.

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Rural Housing Site Loan - Unlike the other types of USDA loans mentioned, Rural Housing Site Loans are available to private and public non-profit organizations to assist them in purchasing a site and developing housing for low- or median-income families in rural areas as a part of what’s called the Self-Help Program.

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Owner financing - a transaction in which a property's seller finances the purchase directly with the person or entity buying it, either in whole or in part. This type of arrangement can be advantageous for both sellers and buyers because it eliminates the costs of a bank intermediary.

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Contract for deed/rent-to-own contract/bond for deed/land contract/installment land contract - a contract in which the buyer pays for land by making monthly payments for a period of years. The buyer does not own or have title to the land until all the payments have been made under the contract.

 

Reverse-mortgage loans - A reverse mortgage is a type of loan that allows homeowners ages 62 and older to borrow against their home’s equity for tax-free payments. The reverse mortgage lender makes these payments to the homeowner. The homeowner doesn’t have to repay the reverse mortgage until death, or when they permanently move out or sell the home.

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Home equity loans and lines of credit

Home equity loans and HELOCs are both financing tools that allow you to borrow against your ownership stake in your home.

1. Both act as second mortgages, using your home as collateral, and may offer tax deductions if the funds are used for substantial repairs or upgrades.

2. Home equity loans come with fixed interest rates and set monthly payments for the life of the loan.

3. HELOCs (home equity lines of credit) come with variable interest rates and fluctuating monthly payments (like credit cards).

Home equity lines of credit (HELOCs) and home equity loans are two similar finance tools — methods of borrowing money against the ownership stake you have in your home.  Both typically allow you to tap up to 80 or 85 percent — even 90  percent — of your home’s value, minus your outstanding mortgage balance.

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Construction loan - used to finance the building of commercial or residential real estate. The loan applicant may be a real estate developer or an individual building a custom house. The loan is often short-term and is then replaced by longer-term mortgage financing.

Construction loans are considered relatively risky and usually have higher interest rates than traditional mortgage loans.

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Rehab loan - is a loan that is used primarily in the rehabilitation of home or building. These types of loans may be made through traditional lenders, but are often insured by a governmental agency to make the risk more acceptable to the lender. The government sees the investment as a good way to rehabilitate and revitalize neighborhoods, as well as to expand the tax base in areas that have fallen into disrepair.

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Bridge loan - a financing option that serves as a source of funding until you get permanent financing or pay off debt. Also known as swing loans, bridge loans are typically short-term loans, lasting an average of 6 months to 1 year. They can be used to finance the purchase of a new home before selling your existing house.

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Real Estate Settlement Procedures Act (RESPA) - enacted by the U.S. Congress in 1975 to provide homebuyers and sellers with complete settlement cost disclosures. RESPA was also introduced to eliminate abusive practices in the real estate settlement process, prohibit kickbacks, and limit the use of escrow accounts. RESPA is a federal statute now regulated by the Consumer Financial Protection Bureau (CFPB).

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Kickback - an illegal payment intended as compensation for preferential treatment or any other type of improper services received. The kickback may be money, a gift, credit, or anything of value. Paying or receiving kickbacks is a corrupt practice that interferes with an employee's or a public official’s ability to make unbiased decisions. Kickbacks are often referred to as a type of bribery.

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The Truth in Lending Act (Regulation Z) - protects consumers in their dealings with lenders and creditors.  The regulations found in the TILA apply to most kinds of consumer credit, from mortgages to credit cards.  Lenders are required to clearly disclose information and certain details about their financial products and services to consumers by law.  Regulation Z prohibits creditors from compensating loan originators for anything other than the credit extended and for steering clients to unfavorable options for the sake of higher compensation.  Consumers are able to make better-informed decisions and, within limits, terminate unfavorable agreements, as a result of TILA regulations.

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TILA-RESPA Integrated Disclosures - TRID is a series of guidelines enforced by the Consumer Financial Protection Bureau (CFPB) to create a more consumer-friendly mortgage process. These rules specify what information mortgage lenders must provide to borrowers and when. TRID also regulates lenders’ fees and what is allowed as a mortgage matures.

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The Equal Credit Opportunity Act (ECOA) - a federal civil rights law designed to ensure fair lending practices. It prohibits lenders from discriminating against loan applicants, with the sole exception being their ability to repay the loan.

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Lending Process (application through loan closing) - The mortgage process is complicated but can be broken into a number of steps: pre-approval, house shopping, mortgage application, loan processing, underwriting, and closing.

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Mortgage prepayment penalty - a fee that some lenders charge when you pay all or part of your mortgage loan off early. The penalty fee is an incentive for borrowers to pay back their principal slowly over a longer term, allowing mortgage lenders to collect interest.

 

Balloon payment - the final amount due on a loan that is structured as a series of small monthly payments followed by a single much larger sum at the end of the loan period

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