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FIT Funding Learning Center
Feeling confused? Don’t be! We’ve assembled several helpful resources in our Learning Center to get you up to speed on your home loan basics, including a glossary, mortgage checklist, and information about the mortgage loan process.
From credit to closing – All the knowledge you need to succeed.
You may be a first-time buyer or refinancing for the first time in a long time. This information will help make your loan process more comfortable for you. As always feel free to ask any one of your FIT Funding Team to explain any of this for you.
Understanding Credit Scores
The impact of your credit score on your mortgage loan.
A credit score is a number between 350 – 850 on a scale created by the Fair Isaac Corporation (FICO). This number is known as your FICO® score, and it is used by lenders as a snapshot of your credit history and a summary of risk involved to lending to you.
- A higher FICO score equates to less possible risk to lenders, and generally a lower interest rate to you as a borrower.
- A lower FICO score equates to more possible risk to lenders, and generally higher interest rates to you as a borrower.
Your FICO score can be an asset to obtaining home financing at competitive rates, or it can be an obstacle to securing a loan or credit.
Your credit score matters. When you apply for a home loan with Next Mortgage, we will check your credit score for you as part of the pre-approval process.
What factors go into determining a credit score?
Your credit score changes as new information is updated in your credit report. There are five primary factors that determine this constantly updating score. Here is what the credit reporting agencies are looking at, and what you can do to optimize your score.
- Payment History – 35% of Total Score
Late payments can have a negative impact on your credit score. Recent late payments will result in more lost points than older late payments, since this factor is weighted to the most recent activity. The frequency and severity of late payments will also come into play; a 90-day late is considered worse than a 30-day late payment. Over time, your older late payments will have less of an impact on your credit score, since your most recent payment history is a better reflection of your credit risk.
Optimize your credit score by making sure all bills are paid within 30 days of the due date.
- Utilization Rate – 30% of Total Score
The ratio of your credit balance to your available limit is known as the utilization rate. The utilization rate of your individual cards and cumulative limit of all your cards are taken into account when considering your credit risk. Your credit score may improve when your balance to limit ratio is below 30%, and you may lose points for balances exceeding 30% of your limit.
Optimize your credit score by paying credit cards down below 30% of their limits, or by requesting an increase in your limit to improve your utilization rate.
- Length of History – 15% of Total Score
An established credit history is favorable when considering your credit risk. Your credit accounts have an overall age that goes up and down over time as you open new accounts. Opening new accounts will reduce your overall credit age, and will generally lose you points the first 12 months after a new account has opened. The next 12 months an account is neutral on your credit report, and will start to earn you points after 24 months of on-time payments.
Optimize your credit score by keeping your older accounts open – even if you have paid that card off. Unless a paid off account is costing you in annual fees, it is providing positive points as an established account. Try to use that card at least once every 6 months to keep the account open and active, and then maintain your good history with on-time payments.
- Type of Credit – 10% of Total Score
To maximize the points on your credit score, creditors like to see a mix of account types. A good mix of account types demonstrates your credit worthiness and a reduced credit risk. Different credit types include installment loans, such as mortgages and auto loans, and revolving credit (credit cards).
Optimize your credit to get the highest scoring in this category with one major installment loan (mortgage or HELOC), one additional installment loan (auto), and a minimum of three revolving accounts. Mortgage paid off? No problem. A home equity line of credit (HELOC) can be a smart tool to optimize your credit score. Use a HELOC for any number of expenses and pay it off the following month.
- Inquiries – 10% of Total Score
Each year, you can request a free copy of your credit report from the major reporting agencies. This sort of inquiry is considered a “soft” inquiry, and has no negative impact on your score. Credit inquiries requested from an employer with your permission also fall within this soft category.
The type of credit inquiries that will impact your credit score are “hard” inquiries. A hard inquiry occurs when a lender pulls your credit. If you are applying for new credit cards from multiple lenders in a short period of time, each inquiry counts as an individual hard inquiry, and will result in lost points on your credit score. However, if multiple lenders pull your credit for a single new account, like a mortgage, all of these inquiries are counted as one hard inquiry.
Optimize your score by sharing personal information only when necessary to complete a borrowing transaction, and limit the amount of accounts that you apply for at a time. Inquiries will reduce your score for 12 months, but remain on your credit report for 2 years.
For more information about your credit score
Download these free PDF booklets from FICO for more information about your credit report and ever-changing credit score.
*Note: FIT Fundingis not a credit repair company; this information is for information purposes only. We are not licensed credit repair specialists or counselors.
Understanding Home Equity
The impact of home equity on your mortgage loan.
You hear the phrase “home equity” used a lot when discussing your mortgage loan options, but what is it, exactly? Consider equity an equation describing the value of your home and the claims against it.
Changes to either of these variables can impact the amount of equity you have in your home.
As the appraised, fair market value of your home increases, so does your equity. If the appraised value of your home decreases, the amount of equity also decreases. If you pay down the principal balance of loans on your home, your equity increases. As you borrow more against your home, your equity may decrease, depending on the market value.
You don’t have to remember any equations to understand equity. To put it simply, your home can gain equity in the following ways:
- Cash used for down payment
- Extra payments made toward principal balance
- Appreciation of your home’s fair market value
What can your home equity be used for?
You can pull the equity that you have earned in your home and use it for any purpose that you need. You may find that your equity is a good tool to pay off high interest debt, loans, or overdue bills. Your equity may be used to repair and remodel your current home, or used as a down payment on a vacation or investment property. Your equity may be the lifeline to protect you during periods of hardship or unemployment, or the ticket to the vacation or retirement that you have been waiting for. The equity in your home belongs to you, and you can do with it whatever you choose.
How do you get your home equity?
If you want to access the equity in your home, contact our FIT FundingBranch one of our experts can discuss how your equity can be put to work for you. One of the things they will present to you are the various options in which you can access your equity.
- A Cash-out Refinance
- A Home Equity Line of Credit (HELOC)
- A Home Equity Loan
Understanding Home Appraisals
The impact of a home appraisal on your mortgage loan.
A home appraisal determines what your home is worth in the current market. This fair market value will determine how much equity you have in your home, and the amount that lenders are willing to lend on your home. Appraisals are not just for home purchases, your lender may request one for your refinance mortgage loan as well.
What is the home appraisal process?
Your lender will ask a state-licensed and lender-approved professional to assess your home and determine its fair market value. The report submitted by the appraiser will tell the lender if the property value supports the requested loan amount, and can affect the amount that they are willing to lend.
The appraisal report will contain information such as the home’s legal description, size, shape, age, and condition. The appraiser will perform a complete visual inspection of the home’s interior and exterior areas, inspect the neighborhood, and inspect comparable sales on the street.
The inspection of comparable sales, or “comps” will help the appraiser to see how your home compares to other homes in your neighborhood that have recently sold. Your home value may be adjusted higher or lower than the other comparable homes depending on how it matches. Swimming pools or additional rooms at your home may bring additional value to your home if the comparable did not have them.
We have the answers to your appraisal questions. If you want to know whether your loan will require an appraisal, what to expect during the appraisal process, or whether certain features of your home will be counted towards your value, ask us. There are no questions too small our team of experts at Next Mortgage.
At FIT Funding we will also attempt to get you and appraisal waiver saving you the cost and time associated with a traditional appraisal. Your Senior Mortgage Analyst will let you know before the loan is submitted to underwriting if this waiver was granted.
Mortgage Glossary
The ultimate translation tool for your journey through the mortgage process.
Is your head swimming with home loan jargon, acronyms, loan programs, and mortgage terms? Before you try to figure out if Freddie Mac graduated from your high school, take a quick look at this mortgage and home loan glossary to get up to speed on the lingo.
We want to be sure you are making educated, informed, and confident decisions during the home loan process. If the mortgage glossary hasn’t cleared something up, ask us! We are happy to help you get the knowledge you need to navigate the home loan process with transparency and complete understanding.
Mortgage and Home Loan Glossary:
Acceleration Clause
Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.
Additional Principal Payment
A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).
Adjusted Basis
The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
Adjustment Date
The date that the interest rate changes on an adjustable-rate mortgage (ARM).
Adjustment Period
The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
Affordability Analysis
An analysis of a buyer’s ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
Amortization
The gradual repayment of a mortgage loan, both principal and interest, by equal monthly installments.
Amortization Term
The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.
Annual Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate.
Appraisal
A written analysis prepared by a qualified appraiser and estimating the value of a property.
Appraised Value
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
Asset
Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
Assignment
The transfer of a mortgage from one company to another.
Assumability
An assumable mortgage can be transferred from the seller to the new buyer. Always requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
Assumption Fee
The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.
Balance Sheet
A financial statement that shows assets, liabilities, and net worth as of a specific date.
Balloon Mortgage
A mortgage with equal monthly payments that amortizes over a stated term but also requires that a lump sum payment be paid at the end of the term.
Balloon Payment
The final lump sum paid at the maturity date of a balloon mortgage.
Before-tax Income
Income before taxes are deducted.
Bridge Loan
A short term loan that is collateralized by the borrower’s present home allowing the proceeds to be used to close on a new house before the present home is sold.
Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
Buydown
When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage. Buydowns can occur in both fixed and adjustable rate mortgages.
Cap
Limits how much the interest rate or the monthly payment can increase on an ARM loan at each adjustment and over the life of the mortgage.
Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
Change Frequency
The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).
Closing
A meeting held to finalize the purchase of a new home. The buyer signs the mortgage documents and pays closing costs. Also called “settlement.”
Closing Costs
These are expenses – over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.
Consumer Reporting Agency (or Bureau)
An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources.
Conversion Clause
A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
Credit Report
A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.
Credit Risk Score
A credit score measures a consumer’s credit risk relative to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Issac and Company. This 3-digit number, ranging from 350 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.
Deed of Trust
The document used in some states instead of a mortgage. Title is conveyed to a trustee.
Default
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Delinquency
Failure to make mortgage payments on time.
Down Payment
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
Effective Gross Income
A borrower’s normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.
Equity
The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.
Escrow
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.
Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
Escrow Payment
The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
FHA Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance in an FHA loan transaction.
FICO Score
FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 350 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.
First Mortgage
The primary lien against a property.
Fixed Installment
The monthly payment due on a mortgage loan including payment of both principal and interest.
Fixed-Rate Mortgage (FRM)
A mortgage interest that is fixed throughout the entire life of the loan.
Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
Housing Expense Ratio
The percentage of proposed monthly payment to gross monthly income budgeted to pay housing expenses.
Index
The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is a published number or percentage, such as the average interest rate or yield on Treasury bills, used to establish adjustment of an ARM loan. Some index rates tend to be higher than others and some more volatile.
Initial Interest Rate
This rate changes for an adjustable-rate mortgage (ARM). This refers to the original interest rate of the mortgage at the time of closing.
Installment
The regular periodic payment that a borrower agrees to make to a lender.
Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).
Interest
The fee charged for borrowing money.
Interest Accrual Rate
The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.
Interest Rate Buydown Plan
An arrangement that allows the property seller or buyer to deposit money to an account. That money is then released each month to reduce the mortgagor’s monthly payments during the buy down period of the mortgage.
Interest Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.
Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.
Late Charge
The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
Lease-Purchase Mortgage Loan
An alternative financing option that allows low- and moderate-income home buyers to lease a home with an option to buy. Each month’s rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a down payment.
Liabilities
A person’s financial obligations. Liabilities include long-term and short-term debt.
Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.
Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.
Liquid Asset
A cash asset or an asset that is easily converted into cash.
Loan
A sum of borrowed money (principal) that is generally repaid with interest.
Loan Estimate
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts.
Loan-to-Value (LTV) Percentage
The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.
Lock-In Period
The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to approval of the loan application.
Margin
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Maturity
The date on which the principal balance of a loan becomes due and payable.
Monthly Fixed Installment
That portion of the total monthly payment that is applied toward principal and interest.
Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Banker
A company that originates mortgages exclusively for resale in the secondary mortgage market.
Mortgage Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
Mortgage Insurance
A contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
Mortgagor
The borrower in a mortgage agreement.
Net Worth
The value of the difference between a person’s assets, liabilities and cash.
Non Liquid Asset
An asset that cannot easily be converted into cash.
Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Origination Fee
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.
Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM). The payment change date occurs in the month immediately after the adjustment date.
Periodic Rate Cap
A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be. The monthly payment adjusts with the interest rate adjustment.
PITI Reserves
Cash reserve amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).
Points
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them. Paying points upfront reduces your interest rate payment over the life of the loan.
Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.
Pre-Approval
The process of determining how much money you will be eligible to borrow before you apply for a loan.
Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.
Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
Principal Balance
The outstanding balance of principal on a mortgage not including interest or any other charges.
Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.
Private Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
Qualifying Ratios
Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
Rate Lock
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
Realtor®
A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Realtors.
Recording
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.
Refinance
Paying off one loan with the proceeds from a new loan using the same property as security.
Secondary Mortgage Market
Where existing mortgages are bought and sold.
Security
Improved real property that will be provided as collateral for a loan.
Seller Carry-back
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See Owner Financing.
Servicer
An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
Standard Payment Calculation
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
Third-party Origination
When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.
Total Expense Ratio
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
Treasury Index
An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.
VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.
Source: Ellie Mae, Inc.
