Alt-A, What is it and does it still exist?

If you ask 5 different mortgage persons what they are, you are likely to get 5 different answers. However, most will probably be pretty close, just a bit different perspective.

"A classification of mortgages where the risk profile falls between prime and subprime. The borrowers behind these mortgages will typically have clean credit histories, but the mortgage itself will generally have some issues that increase its risk profile. These issues include higher loan-to-value and debt-to-income ratios or inadequate documentation of the borrower's income."

As real estate professionals or consumers using the services of a real estate professional you will be exposed to an onslaught of acronyms. The Alt-A -- or Alternative A-Paper (also known as prime and conforming) mortgage type is not lacking. Falling in the middle of the three general categories (oh, don't forget the government categories FHA and VA :), these are famous for their acronyms which bleed over to the Prime and sub-prime arena as well:

SIVA -- Stated Income, Verified Assets -- also known as "Stated"
Your income is stated, your job (not income) is verified and so are your assets
SISA -- Stated Income, Stated Assets
Both your income and assets are stated, but not verified, job is verified
NIVA -- No Income, Verified Assets
No job verification but assets are verified
NINA -- No Income, No Assets
Neither your job nor your assets are verified (can't understand why this caused a problem in the mortgage market :)
No Ratio -- No Ratio
Your Debt-To-Income Ratio is not taken into consideration
No Doc-- No Documentation (clever with that one)
They don't care anything about, job or assets, just credit score

All of the above are credit score driven and were as investopedia said these mortgages were typically given to clients with clean credit histories.

Many, many lenders have temporarily or permanently shut down these type of loan programs and others were put out of business b/c of their use. We still have a few brave lenders out there willing to fund these loans. Since the secondary market (where lenders and bank sell these loans and replenish their funds) lost their appetite for these, the rates have begun to climb dramatically. Only time will tell whether these loans will come back. I believe they will, but we are not likely to see the near Prime rates that we once had.

The virtues, or lack thereof, of these programs can be discussed 'til the cows come home. Feel free to comment, but I hope this provides a little introduction as to what these products were/are.

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Estates & ownership interests defined

The law recognizes different sorts of interests, called estates, in real property. The type of estate is generally determined by the language of the deed, lease, or bill of sale through which the estate was acquired. Estates are distinguished by the varying property rights that vest in each, and that determine the duration and transferability of the various estates. A party enjoying an estate is called a "tenant."

Some important types of estates in land include:
Fee simple: An estate of indefinite duration, that can be freely transferred. The most common and perhaps most absolute type of estate, under which the tenant enjoys the greatest discretion over the disposition of the property.

Conditional Fee simple: An estate lasting forever as long as one or more conditions stipulated by the deed's grantor does not occur. If such a condition does occur, the property reverts to the grantor, or a remainder interest is passed on to a third party.

Fee tail: An estate which, upon the death of the tenant, is transferred to his heirs.

Life estate: An estate lasting for the natural life of the grantee, called a "life tenant." If a life estate can be sold, a sale does not change its duration, which is limited by the natural life of the original grantee.

Leasehold: An estate of limited duration, as set out in a contract, called a lease, between the party granted the leasehold, called the lessee, and another party, called the lessor, having a longer lived estate in the property.

For example, an apartment-dweller with a one year lease has a leasehold estate in her apartment. Lessees typically agree to pay a stated rent to the lessor.

A tenant enjoying an undivided estate in some property after the termination of some estate of limited duration, is said to have a "future interest."

Two important types of future interests are:
Reversion: A reversion arises when a tenant grants an estate of lesser maximum duration than his own. Ownership of the land returns to the original tenant when the grantee's estate expires. The original tenant's future interest is a reversion.

Remainder: A remainder arises when a tenant with a fee simple grants someone a life estate or conditional fee simple, and specifies a third party to whom the land goes when the life estate ends or the condition occurs. The third party is said to have a remainder. The third party may have a legal right to limit the life tenant's use of the land.

Estates may be held jointly as joint tenants with rights of survivorship or as tenants in common. The difference in these two types of joint ownership of an estate in land is basically the inheritability of the estate. In joint tenancy (sometimes called tenancy of the entirety when the tenants are married to each other) the surviving tenant (or tenants) become the sole owner (or owners) of the estate.

Nothing passes to the heirs of the deceased tenant. In some jurisdictions the magic words "with right of survivorship" must be used or the tenancy will assumed to be tenants in common. Tenants in common will have a heritable portion of the estate in proportion to their ownership interest which is presumed to be equal amongst tenants unless otherwise stated in the transfer deed.

Real property may be owned jointly with several tenants, through devices such as the condominium, housing cooperative, and building cooperative.

Zoning ordinance

The division of land into residential, commercial, industrial and rural districts.

Zoning laws, which came about in the 1920s, serve to protect the public’s safety.

Zoning laws restrict the size of a lot, of building’s height and how a property can be used. In general, a residential zone is broken down into single-family, multifamily and mobile home districts.

Commercial areas are divided into retail, office and wholesale space. The government will not give you any money to compensate for a loss in your property’s value that may result from a zoning ordinance.

Wraparound mortgage

A type of financing where the seller carries the buyer's loan.

Wraparound mortgages are a creative, though rare, way to allow buyers to purchase a home without having to qualify for a loan or to pay closing costs.
The contract is made between the buyer and seller with the lender’s approval.

Here is how it works:
(1) the seller holds onto the existing mortgage
(2) the seller names the property’s selling price
(3) the seller offers the buyer a loan at a higher interest rate than the
existing mortgage
(4) the buyer pays the seller a fixed monthly
amount
(5) the seller uses part of this money towards the
existing loan and then pockets the difference

Unlike an installment sales contract, the buyer gets title (ownership) of the property at closing.
This type of financing is not common since most mortgages have a due-on-sale clause.

Wraparound mortgages are also called all-inclusive trust deeds.

Verification of deposit (VOD)

A document from a bank vouching for the balance of a person's checking and savings accounts.

A lender may ask for a VOD when you are applying for a loan to make sure that you actually have the money stated on your loan application.

VA loan

A low-cost loan for U.S. veterans that is partially guaranteed by the Department of Veterans Affairs (VA).

If you are a veteran, you can get some VA loans without a down payment. You also can negotiate the interest rate with the lender. The loan amount cannot be more than the VA's appraisal. If it is, you have to pay the difference in cash.
You still need to pay closing costs, including appraisal and title insurance fees, as well as one-time funding fee for about 2% of the loan amount.

VA loans present high risk to a lender since the VA guarantees a portion of the loan amount- usually 25%. So, in case of foreclosure, the VA has two choices: pay the lender the loan's balance and take the property or pay the guaranteed amount and let the lender keep the property.

Usually, to be eligible for VA loan, you must have served at least 181 days of active duty or at least six years in the National Guard.

If you need information contact your regional VA office or call
1-800-827-1000.

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Unsecured loan

A debt that is not backed by collateral.

Unsecured loans, like credit card debt, doctor bills and student loans, do not require you to sign an agreement pledging collateral, such as property, to secure the loan.

If you fail to pay an unsecured loan, the creditor can only take you to court to get their money. Mortgages and car loans, though, are secured loans. So, in case of default, the lender can take back the collateral-the property or the car-and sell them to pay off the loan.

Underwriting

Underwriting

A lender's process to evaluate whether or not to give a borrower a loan.
When lenders underwrite a loan, they look at your income, debt and credit history to see if you are a low-risk loan candidate.

Once your loan is approved and you meet all the lender's conditions, you can sign the final loan documents.

The lender will then fund the loan.

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Two-step mortgage

A type of loan that has a low interest rate for the first 5 or 7 years, then adjusts to a higher interest rate for the remaining 25 or 23 years.

Two-step mortgages are ideal for first-time buyers and if you have a job that demands that you relocate often. Your monthly loan payments are lower for those first years than a regular 30-year fixed loan, and when it is time to adjust to the higher rate, you can do so at no cost. The new rate that you get after 5 or 7 years though can be high, which is when most people decide to move. Two-step mortgages are also called resets.

See: Adjustable rate mortgage

Truth-in-lending act

A federal law that requires a lender to give borrowers the annual percentage rate (APR).

The APR helps borrowers compare one loan to another since it factors in not only the interest rate but also all the fees and closing costs that you need to pay. APR, though, is not always the best measure of comparison since not all the lenders include the same fees and closing costs. The Truth-in-Lending act is also called Regulation Z.

See: APR

Trustee's sale

When a lender sells your property to pay for a mortgage in default.

Most Deed of trust have a "power of sale" clause, giving the trustee, a neutral party who acts on behalf of the lender, the right to a trustee's sale. A trustee's sale varies from state to state, but in general the trustee, typically a title insurance company, advertises the property's sale in a local/count newspaper and then auctions off the property to the highest bidder.

All is not lost, you have up to five days before the sale to pay everything you owe, plus the legal fees incurred by the trustee, to get back your property. Note that some mortgages contain a power of sale clause, giving the lender the right to foreclose without taking you to court first.

See: Foreclosure, Deed of trust

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Transfer tax

A state or local tax that a buyer or seller has to pay when property changes ownership.

The seller usually has to pay the transfer tax, which is paid on the closing date. The rules on how it is calculated vary from state to state, but usually it is based on the property's purchase price.

Some cities will also add a tax on top of the transfer tax.

Title report

The results from a title search.

In some states, the title insurance company conducts a second title search a couple of days before closing and gives you a title report. This report makes sure that there are no claims on the property and that the seller is the legal owner of the property. If there are any claims, they must be cleared before you can buy it.

See: Preliminary title report

Title insurance

An insurance policy that protects a lender and/or home owner against any loss resulting from a title error or dispute.

Most lenders require that you buy title insurance for them to protect against future problems that might arise with the title (ownership). For example, a long lost relative may show up out of the blue to refute your right to a property, claiming that the property's deed is a forgery.

Depending on where you live, you may have to pay for both your policy and the lender's policy. The cost of the owner's policy is based on the property's purchase price, about $3 to $5 per $1,000.

The cost for the lender's policy is based on the loan amount, about $2 to $3 per $1,000. You pay this one-time fee on your home's closing date.

Title insurance may also cover the charge to oversee closing, conduct the title search and the premium. If you refinance your mortgage, you only have to buy the lender's title insurance. The owner's policy protects you and your heirs until you sell your property.

Title

Ownership of a property.

If you have title to a property, that means you have the right to own it.

Sometimes title can refer to the documents, such as a deed, which proves you own a property. Title documents are on public record at the county courthouse.

See: Deed

Tenancy in common

A type of ownership where two or more people share ownership of a property, but not necessarily equally.

Even though the owners of a tenancy in common property can have unequal shares of the property, they all have the right to use the entire property. Unlike joint tenancy, tenancy in common doesn't have right of survivorship. So, if one of the co-owners dies, his/her interest passes to an heir(s), not the surviving co-owners. When this happens, probate court is required.

Teaser rate

The initial interest rate on an adjustable rate mortgage (ARM).

Take-out loan

A long-term loan taken out upon completion of a new building.

Take-out loans work together with construction loans. Here is how it works: A land developer gets a construction loan to build a cluster of homes. Then when all the homes are ready to sell, a lender offers a buyer a take-out loan to purchase one of the new homes. The builder, now taking on the role as seller, will then use part or all of the money from the sale towards paying off the construction loan. If you plan to build your own home, you can also pay off the construction loan using a take-out loan. Take-out loans are also called permanent loans.

Example: How does a builder pay off a construction loan?

The builder gets a $1 million construction loan to put up ten homes. The builder then puts up each home for sale at $300,000. The buyer gets a take-out loan for $300,000 to buy one of these brand new homes. For every home that the builder sells, the builder pays $100,000 towards the construction loan and pockets $200,000 as profit.

Sweat equity

A program that gives a buyer part or all of the money for a down payment in exchange for hours of labor helping to build the home.

Sweat equity allows you strike a deal with a homebuilder to exchange hours of hard labor for 5% to 10% of your down payment. Depending on your skill set, you can do a range of construction jobs such as sand and paint walls, nail down floorboards and fit bathroom tiles.

Lenders find sweat equity programs risky because buyers often don't follow through on the amount of work required.

Super jumbo loan

Any mortgage for $1 million or more.

Though not very common, lenders do provide loans for $1 million or more. A millionaire, for example, might take out a mortgage solely to benefit from the tax write-offs.

Secondary market

Companies that buy groups of loans from lenders and then sell them to other lenders and investors.

The secondary market allows lenders to get more money in order to offer more loans.

Three federally-charted agencies are important in keeping a steady flow of cash available for loans: Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae).

In general, Fannie Mae and Freddie Mac buy and sell loans, and Ginnie Mae issues mortgage-backed securities, which lenders sell to investors.

Second mortgage

A loan that in the event of foreclosure is paid off after the first mortgage.

You can have one or more mortgages on your property. Buyers often use second mortgages when they can not get enough financing from a lender to pay for a home. For example, you can ask the seller to reduce a home's selling price by $15,000 and offer to pay back this amount along with interest in monthly installments.

This $15,000 is secured with a second mortgage. The seller, though, is taking a risk - if you default on the first mortgage and the lender forecloses on the home, there might not be enough money from the sale to cover both the first mortgage and the seller's loan. Second mortgages usually have a higher interest to offset this risk. In some states, a second mortgage is called a junior trust deed.

Seasonal income

Any income that you receive on a cyclical basis.

Here are a few examples of seasonal income:
(1) you’re not a full-time accountant, but you make money preparing income taxes during tax season, from February to April
(2) you work on a farm only during the spring as a strawberry picker. If you can prove that you have received a seasonal income for two years in a row and it is likely to continue, you can cite it as a source of income when applying for a loan to buy a home.

Sales comparable

A recent sale of a property that is used to estimate the value of a similar property.

Generally referred to as comps. Comps come in handy when you are trying to set the best sale price on your home, they provide a good reference point, so you accurately price your home's value. Appraisers, certified professionals who estimate the fair market value on homes, also use comps to help them evaluate properties.

When attempting to set a price, you should use comps that were sold in the last six months and are similar to your home in age, style, size, condition and location. Real estate agents also have easy access to comps via an online network. Keep in mind that other factors, such as market conditions also affect a home's selling price.

Revolving credit

A credit line that is restored as the borrower pays off what is owed

Credit cards and home equity credit lines have revolving credit. For example, you could go on a shopping spree using your Visa card and charge up to $600. As you pay off your Visa bill, your $600 credit amount will be restored and you can go for the next round of shopping. Loans, such as mortgages and student loans don’t have revolving credit.

Reverse mortgage

A loan for home owners who have already paid off their mortgage but want to tap into their home’s equity

Reverse mortgages come in handy for older home owners who might have a financial hardship or who just want some extra cash without having to uproot and sell their homes.

You can either receive a lump-sum loan, a line of credit or a monthly check based on the amount of equity in your home.

This money is also tax-free, since it is a loan. When you sell your home, you use your home’s equity to pay off the loan and interest.
Keep in mind that you need to pay closing costs, such as a loan origination and processing fees.

Typically, to qualify for a reverse mortgage, you need to be over 60.

Residential loan application form (1003)

The name of the standard loan application that all lenders require a borrower to complete when applying for a loan.

See: Application

Repayment plan

A time table of mortgage payments over a loan’s term thats hows how much is applied to both the principal and interest.

See: Amortization schedule

Rent

Payment in exchange for the temporary use of something

When you pay rent for an apartment or house, you are not building equity unless your rent payments are going towards a down payment to own the home in the future. The owner of the property is called a landlord and the renter is called a tenant. The rent is mutually agreed upon by both the landlord and the tenant, and is written into a rental agreement or lease.

Remaining balance

The total amount that a borrower owes on a loan

Remaining term
The amount of time until a loan is completely paid off

If you are in your fifth year of paying off a 30-year loan, the remaining term is 25 years.

Refinance

When a homeowner replaces their current mortgage with a new one

Refinancing can take several hundred dollars off your monthly mortgage payment. You replace your existing loan with another loan for the same amount, but with a lower interest rate. For example, if you trade in your $150,000 loan, 25-year fixed mortgage at 10% interest for the same loan at 7% interest, you’ll save $291 per month.

Refinancing makes sense when market interest rates drop one or more percentage points lower than your present rate. Also, you need to consider how long you plan to stay in your home to break even on the costs to refinance.

The steps to refinance are almost the same for a home purchase:

1. you fill out a standard loan application
2. the lender approves the loan based on your income, debt and credit history
3. you pay closing costs, such as theappraisal and processing fee

Record

To make a document available to the public

Your home’s purchase is official the moment that you record the deed at the county courthouse. Usually, the title company or escrow agent is responsible for recording the deed and you will be responsible for a small fee. If you wanted to do a little investigating into the former owners of your home, you could go to the county clerk’s office and check the files - this list of owners is called the chain of title.

Any claims on your home, including a mortgage and liens for unpaid debts, are also recorded there. The county clerk who records a deed can be called the county recorder or the registrar of deeds.

Real property

Land and anything permanently attached to it

Your home, your backyard, and even your roses planted in the yard are examples of real property. Real property can not be moved or taken away without lawful permission. If you want togive or sell someone real property, you must use a document called a deed.

Real Estate Settlement Procedure Act (RESPA)

A federal law that says a lender must give a borrower an estimate of closing costs within three business days of applying for a loan

After you apply for a loan, the lender must give you a Good faith estimate within 3 business days. The Good faith estimate is a document with a detailed breakdown of the costs that you will need to pay at closing. RESPA also requires that lenders give you a Uniform Settlement statement or HUD-1 before or at closing, which lists the final closing costs.

This law isn’t taken lightly - if lenders don’t supply you with this information, they’ll be slapped with a $10,000 fine and possibly jail time.

Rate lock

A lender’s guarantee on a specific interest rate

Until you request a rate lock, a loan’s interest rate quoted by either a lender or broker is apt to change due to market fluctuations. The rules on how to do this will vary from lender to lender and broker to broker, but typically you can request a rate lock after you submit your signed loan application (1003) and other requested forms.

Do not let a low rate slip through your fingers. Once you have settled on a rate, the lender usually guarantees the rate for 15, 30, 45 or 60 days. Rate lock is also called lock-in rate.

A loan with a fixed interest rate

Quitclaim deed

A document that can be used to both transfer ownership of property and to release a person’s claim on a property

Out of all the deeds used to exchange ownership of a home, quitclaim deeds are used the least since they do not give buyers a firm assurance that the seller is the home’s legal owner. Quitclaim deeds are usually used to clear up a variety of simple ownership (title) issues.

For example, Mr. and Mrs. Jones buy a home together, but 10 years later Mrs. Jones wants to separate and wants nothing to do with the property. She just has to sign a quitclaim deed to release her claim on the property.

Principal

The amount borrowed on a loan

If you take out a loan for $100,000, the principal on the loan is$100,000. You repay the principal plus the interest and fees over the life of the loan. As you continue to pay off your loan, more and more of your payment goes to the principal, and slowly but surely the amount due shrinks away.

See: Amortization

Prequalification

When a lender or broker figures out how much you qualify to borrow

Before shopping for a home, you can save yourself a lot of time by first finding out whether or not you are likely to qualify for the loan you want. Also, you will also get a rough idea of the price range that you can afford on a home. To do this, a lender or broker will look at your income, debt, assets and credit history.

I fall goes well, you will receive a prequalification letter that you can then show Realtors, so they feel confident about investing time and energy in your home search.

Prepayment penalty

A fee that lender charges home owners if they pay more that is required on a monthly loan payment, or pay off the loan before its term ends

Loans with a prepayment penalty usually have a lower interest rate. But, in exchange for what seems a sweeter deal, you’ll be slapped with a whopping penalty of up to 3% of your loan’s amount if you decide to pay off the loan on your home, or refinance within the first 3 years of buying your home.

The penalty also applies if you pay more than 20% of your unpaid loan balance in any year during this time. So, if market rates drop in the second year of owning a home, you may miss outon an opportunity to refinance to get lower monthly loan payments.

Prepayment

A clause that allows a borrower to make larger (oradditional) payments than the amount stated in the loan agreement

It’s in your best interest to make extra or bigger monthly payments on your loan since this will reduce your loan balance quicker than if you only paid the amount that’s due. You’ll also cut down the interest that you need to pay.

Prepayment is also called the "or more clause."