INTRODUCTION

TO
MORTGAGE
 TABLE OF CONTENTS

WHAT IS A MORTGAGE?................................................................. 2
HOME EQUITY ................................................................................ 2
TYPES OF BORROWER.................................................................... 2
FORMS OF MORTGAGES ................................................................. 2
WHO GIVES A HOME MORTGAGE? .................................................. 3
WHAT ARE THE TYPES OF MORTGAGES? ........................................ 3
STEPS IN SECURING MORTGAGE ................................................... 3
PARTICIPANTS IN MORTGAGE SYSTEM.......................................... 3
HOW A MORTGAGE WORKS ............................................................ 4
MORTGAGE LOAN PROCESS ........................................................... 4
WHAT’S A CREDIT SCORE?............................................................. 5
FIVE FACTORS THAT MAKE UP CREDIT SCORE ............................... 6
COST OF MORTGAGE ...................................................................... 6
CLOSING COSTS............................................................................. 7
THE APPRAISAL ............................................................................. 8
GLOSSARY OF MORTGAGE TERMS .................................................. 8

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WHAT IS A MORTGAGE?
At its most basic, a mortgage is a loan used to buy a house. A mortgage is a loan secured from a bank for the
purchase of your new home. It's also a legal contract stating that you promise to pay back the loan on a
monthly basis. Your monthly payment typically goes toward interest, taxes and insurance as well as the
principal. You will repay the bank the loan (with interest) over the term of your mortgage.

The key difference between a mortgage and a regular loan, is that when you take out a mortgage, you’re
putting something up for collateral. That something is the home you’re buying. For example, let’s pretend
you bought your home for $300,000 and you had saved enough money to come up with a $60,000 down
payment. Down Payment is the amount of your home's purchase price that you pay upfront.

This would mean that in order to purchase the house you would have to borrow $240,000. Your $60,000 down
payment goes to the seller and the lender kicks in the remaining $240,000. Under the mortgage agreement
you’re the owner of the house with one condition. If you don’t make your payments the lender has the right
to foreclose the house, evict you, and sell the house to try and recover their part of the loan.

Few terms to note:

• Interest Rate: The percentage rate that a lender charges to borrow money.
• Principal: The balance - not counting interest - is the amount owed on the loan minus the amount repaid.
• Term: How many years you have to pay back the loan.

HOME EQUITY
Assuming you make your payments on time, you’ll begin to build up equity in your home. Basically, equity is
the value of your home that actually belongs to you. Here’s how you calculate it: Take your house’s fair
market value and subtract how much you owe on the mortgage you took out against it.

Equity is the difference between the current market value of a property and the total debt obligations against
the property. On a new mortgage, the down payment represents the equity in the property.

If we look at our example above, we can say that you have $60,000 in equity because you have a $240,000
mortgage on a $300,000 home.

TYPES OF BORROWER
Borrowers fall into three categories:

1. An owner-occupant is someone who plans to live in a property.

2. A non-occupying owner is an investor who will rent the property to others as a way of generating income.
3. A non-occupying co-borrower is a person whose name will be on the title but who doesn’t plan to live in
the property. This is often a family member or friend of the occupying borrower. Their income and
liabilities are combined with the occupant’s to help the occupant qualify for the loan.

FORMS OF MORTGAGES
While many borrowers use mortgage loans to purchase a home, there are other forms of mortgages.

When interest rates fall, a borrower may take out a new loan to pay off an existing one, a process called
refinancing.

Someone who wants to build a new home might take out a construction loan, a short-term loan to finance the
cost of construction.

Finally, there are home equity loans, which enable homeowners to borrow money against the equity that has
accrued in their homes. Home equity loans come in two types:

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• Single advance (or second mortgage)
• Revolving line of credit (also called a home equity line of credit or HELOC)

With a single-advance home equity loan, the borrower gets the entire loan amount upfront and makes
monthly payments until the loan is repaid. With a home equity line of credit, a person can borrow what they
need up to a certain maximum draw, pay it back, and reborrow if they wish. These loans offer flexibility, but
can be risky for consumers because HELOCs use adjustable interest rates.

WHO GIVES A HOME MORTGAGE?

There are three basic channels for obtaining home mortgage financing available to consumers. Each has
differences in approach and structure.

1. Commercial and Savings Banks are direct lenders and can be approached individually for
mortgages. They underwrite and fund their own loans and have specific programs depending on
their own requirements.

2. Mortgage Banks are banks solely in the business of offering home mortgages. They underwrite and
fund their own loans but have relationships with many commercial and savings banks and are able to
offer programs from multiple sources.

3. Mortgage Brokers are companies that do not fund their own loans but rather arrange loans for their
clients through commercial and savings banks. Mortgage brokers are typically paid commissions for
their services by the banks they arrange loans through. The banks, not the mortgage brokers,
underwrite and fund the loan.

WHAT ARE THE TYPES OF MORTGAGES?

There are a few different types of mortgages to choose from. Your mortgage professional will be your guide
in choosing the correct mortgage for your financial situation.

a. Fixed Rate Mortgage – the interest rate is fixed for the entire term of the loan.
b. Adjustable Rate Mortgage (ARM) – the interest rate changes over the term of the loan in increments
of one month, six months, 12, 18, etc.
c. Hybrid Mortgage – this is the most popular loan, especially in New York City. The interest rate is
fixed for 3, 5, 7 or 10 years and then switches (typically) to a one year adjustable schedule. This is the
most attractive option for people who do not plan on owning their apartment for the entirety of a 30
year mortgage. Also, the shorter term the fixed portion is, the lower the interest rate tends to be.

STEPS IN SECURING MORTGAGE

a. A borrower decides that he/she would like to purchase a home
b. He/she does not have enough cash to make the purchase
c. The borrower goes to a mortgage banker who provides financing for the purchase by making a loan
to him/her (in other words, the mortgage banker is the middleman between the borrower and the
required money).
d. After the mortgage banker has made several loans, their company may decide to pool these loans
together and sell them to an outside investor to make a short-term profit. This process is known as
Warehousing.
e. The proceeds from this sale are then used to pay for the operating expenses of the mortgage banker

PARTICIPANTS IN MORTGAGE SYSTEM

Various parties involved in the loan transaction :

• Borrower: The one who is in need of money.

• Real Estate Agent: A person licensed to negotiate and transact the sale of real estate.

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 • Loan Officer: Loan officer facilitates lending of Mortgage Bankers by seeking potential clients and
assisting them in applying for loans. Loan officers also gather information about clients and
businesses to ensure that an informed decision is made regarding the quality of the loan and the
probability of repayment.
• Mortgage Broker: The one who brings the borrower and banker together and assists in negotiating
the contract between them.
• Mortgage Banker: The one who funds the loan .In addition to this, he can also buy/sell or service the
loan thereon.
• Investor: The one who buys/sells the loan from the mortgage banker.

HOW A MORTGAGE WORKS

Simply put, a mortgage has four basic components:
• The amount you’re borrowing
• The amortization period (the total time you have to pay down your mortgage)
• The term of the mortgage (the amount of time before you have to renew it)
• The cost of your mortgage (the amount of interest being charged by the lender)

The length of time your mortgage is amortized determines the size of your mortgage payment. A common
amortization period is 25-30 years as payments are more affordable than a mortgage with a shorter
amortization.

MORTGAGE LOAN PROCESS

The main components of mortgage loan process are:

• Origination
• Processing
• Underwriting
• Closing
• Warehousing
• Loan Delivery
• Servicing (Loan Administration)
• Secondary Marketing

Origination
It means generating new business and taking a loan application. It is the stage of the loan process where loan
application is secured from the loan applicant

Processing
It is the collection of documents to verify and support the information provided in the loan application. In
other words it means the preparation of the application and supporting documents for Underwriting. It is the
stage where all supporting information are requested, received and submitted to the lender

Underwriting
Underwriting is the process of evaluation of loan documentation to approve/deny the loan. It is analyzing the
risk involved in approving a loan to determine whether or not it is acceptable to the lender. It is the process
where the lender determines whether or not the borrower is a good credit risk based on the 4 C’s i.e. the
borrower’s Capital (assets), Capacity (income/employment), Character (credit history) and Collateral
(property being mortgaged)

Closing
The conclusion of the real estate transaction where legal documents are reviewed and funds are disbursed is
known as Closing. Closing is the signing and recording of loan documentation, plus the disbursement of loan
funds. It is the point in the loan transaction that the loan request becomes a mortgage lien.

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At this time all conditions for approval as determined by the underwriter must be met, all necessary legal
documentation is signed and recorded, closing costs are collected, and funds must be disbursed. Once the loan
is funded, the final step in the closing process is to record the mortgage documents. Recording of documents
means a public notice of ownership and this gives an assurance that the borrower is in the proper lien
position.

Warehousing
Warehousing is the financing of loans from Closing until the sale to the Investor. Many mortgage firms
borrow funds on a short-term (line of credit) basis in order to originate loans, which are to be sold later in the
secondary mortgage market (or to investors). The warehousing bank or lender typically holds the loan
documents as collateral to protect in the event of default by the mortgage banker. A loan is warehoused with
the warehousing bank or other lender until the mortgage banker has pooled enough similar loans together to
ship to the investor to satisfy the commitment to that investor. This phase of pooling similar loans for
shipping to investors is known as loan delivery.

Loan Delivery
It is the packaging of closed loan files for delivery to an investor. The loan has to be delivered according to
investor guidelines. Investor guidelines refer to the acceptable risk guidelines each investor is willing to allow
when purchasing a product.

Servicing (Loan Administration)

Loan administration is the collection recording and remittance of monthly mortgage payments to investors.
The servicing of loans consists of the administrative tasks necessary to manage closed loans, which include
administration of escrows for the payment of property taxes, hazard insurance, and mortgage insurance
premiums.

Secondary Marketing
Secondary marketing is the sale of existing loans to investors, and management of the risk associated with
mortgages. In other words, it is the market where lenders and investors buy and sell existing mortgages
thereby providing greater availability of funds for additional mortgage lending.

WHAT’S A CREDIT SCORE?

Credit is the ability of a person to borrow money, or buy goods by paying over time.

A credit score is a computer-generated number that summarizes your credit profile and predicts the
likelihood that you’ll repay future debts. It is based in large part on your credit history. Remember your first
credit card? Or how about all those late cell phone bills? What about those student loan payments? These are
all factors that contribute to what’s known as your credit history.

It’s your credit history in conjunction with other factors such as your income, assets, and liabilities that will
determine who gets a great deal on a mortgage, and who doesn’t. The first thing any bank or lender will do
when you apply to borrow money for your mortgage loan is pull up your credit score. And unfortunately, a
less than stellar credit rating can affect your ability to get the best mortgage rates. Your credit score, or FICO
score, is a number that major credit rating agencies assign to you based on your credit history. It can range
anywhere from 300 to 900.

Since your credit score is based on your credit history, this signals to lenders that whether you’re a good risk
or a bad risk. At high credit scores (750 and up), lenders offer a quick approval at the best possible rates.
This score says the person is reliable and responsible with debt. At lower scores (below 620), you could pay a
premium on your borrowing rate and possibly even find it difficult to qualify.

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Credit Bureau
A credit bureau is a company that gathers information on consumers who use credit. Lenders will ask for
your permission before getting a copy of your credit report from these companies.

A Credit Report is a document used by the lender to examine your use of credit. It provides information on
money that you’ve borrowed from credit institutions, the amount of available credit you have in your name,
and your payment history. Lenders obtain credit reports from credit bureaus. Three main credit bureaus
are:

• Experian
• Equifax
• TransUnion

FIVE FACTORS THAT MAKE UP CREDIT SCORE

Your score is based on the following five attributes, with some attributes weighted more heavily than others.

• Previous payment history (approx. 35% of score): Your track record of paying your credit accounts on
time is the most heavily weighted attribute. Events such as late payments, collections, judgments, liens,
foreclosures, bankruptcies, and wage attachments are part of this category and are considered quite
serious. More recent events and large amounts will affect your score more than older events and small
amounts.
• Current level of indebtedness (approx. 30% of score): This portion of the score considers whether you
are overextended or not. Too many credit cards or keeping your accounts at or near their maximum limit
can signal that you don’t manage credit responsibly, and that you may have trouble making payments in
the future.
• Length of credit history (approx. 15% of score): The longer you have had credit in good standing the
lower the risk indicators. This score considers the age of your oldest account and an average age of all of
your accounts. New accounts will therefore lower your average account age.
• Pursuit of new credit (approx 10% of score): Opening several credit accounts in a short period of time is
a risk indicator. The number of enquiries done on your behalf can also have an effect. However, FICO
scores try to differentiate between rate shopping for a single loan and searching for many new credit
accounts.
• Types of credit available (approx. 10% of score): This attribute considers the mix of credit accounts you
have: credit cards, retail accounts, installment loans, accounts with finance companies, and your
mortgage. The goal is to determine if you have a healthy mix of credit. For instance, having a car loan,
mortgage and credit card is more positive than a concentration of debt in only credit cards.

COST OF MORTGAGE
People generally think about a mortgage in terms of the monthly payment. While that payment represents
the amount of money needed each month to cover the debt on the property, the payment itself is actually
made up of a series of underlying expenses. The down payment and closing costs must also be taken into
consideration.

Regardless of whether a mortgage is based on a fixed-rate loan or a variable-rate loan, the series of
underlying components that combine to equal the amount of the monthly payment typically includes both
principal and interest. Principal simply refers to the amount of money originally borrowed. Interest is a fee
charged to the borrower for the privilege of borrowing money.

In a mortgage made up of just principal and interest, the payment will remain the same over time, but the
amount of the payment dedicated to each of the underlying components will change. Consider, for example, a
$1,000 monthly mortgage payment. The initial years of a mortgage payment consist primarily of interest
payments, so the first payment might be $900 dollars in interest and $100 in principal. In later years, this
equation reverses, because after each mortgage payment, a portion of the initial amount owed is reduced.
Therefore, the majority of the monthly payment at this point in time goes towards principal repayments.

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Toward the end of the life of the mortgage, the $1,000 payment might consist of $900 in principal and $100 in
interest.

Additional Direct Costs

The subcomponents of most, but not all, mortgages also include real estate taxes and insurance. The property
tax component is determined by taking the amount of taxes assessed on the property and dividing the number
by the number of monthly payments. For most borrowers, that number will be 12, but there are some
mortgage programs that offer bi-weekly payments to enable borrowers to pay off their loans more quickly.
The lender collects the payments and holds them in escrow until the taxes are due to be paid. The insurance
component will include property insurance, which protects the home and its contents from fire, theft and
other disasters. There is another type of insurance that will need to be purchased if 80% or more of the
home's purchase price was financed through a mortgage. In this case, the insurance component of the
monthly mortgage payment will also include an allocation for private mortgage insurance (PMI). While
property insurance protects the homeowner against hazards, PMI protects the lender by minimizing the risk
to the lender if the borrower defaults on the mortgage.

While principal, interest, taxes and insurance (PITI) comprise a typical mortgage, some borrowers opt for
mortgages that do not include taxes or insurance as part of the monthly payment. When borrowers choose a
loan structure that does not account for taxes or insurance, the borrowers are responsible for making those
payments on their own, outside of the mortgage payment.

Down Payment
How much should you put down? The down payment is the difference between how much you borrow and
the purchase price of your home. In addition to the money required to cover the mortgage, simply obtaining a
mortgage often requires a substantial amount of money to cover the down payment and closing costs. Ideally,
the down payment is equal to or greater than 20% of the price of the dwelling. The 20% number is significant
because anything below that requires the purchase of PMI, which increases the amount of the monthly
mortgage payment.

CLOSING COSTS
There are a bunch of miscellaneous fees that come with getting a mortgage known as closing costs. Closing
costs include a variety of expenses over and above the price of the property and can include items such as title
insurance, appraisal, processing, underwriting and surveying fees.
These can be divided into two categories: recurring costs and non-recurring costs. Recurring costs include
property taxes and homeowner's insurance; one year's worth of each must be paid in advance and put in an
escrow account to ensure that the cash is available when it is time for the bills to be paid. Non-recurring costs
include fees related to conducting a real estate transaction, and include loan origination costs, title search
fees, surveys, credit report costs, origination points, discount points and other miscellaneous expenses.

Some of these fees may be negotiable and some are set. They can cost thousands of dollars so it’s important
that you budget for them appropriately.

Mortgage Insurance
If you get approved for a high ratio mortgage, you will have to pay mortgage insurance. This will range
anywhere from 0.5 percent to 3.15 percent of the total loan amount. This protects the lender and ensures the
loan will be repaid even if the borrower (you) defaults. The insurance fee is determined by a formula so there
is no room for negotiation. Typically it’s capitalized onto your mortgage.

Property Appraisal
Lenders have the option to require a property appraisal of your prospective home. They may also choose the
professional appraiser to determine the market value of the property. Generally a real estate appraisal will
cost approximately $250. Most banks will require an appraisal of the property prior to granting a mortgage.
In the case of hi-ratio mortgages, the application fee of $165 includes a market value appraisal.

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Legal Fees
You’ll need to hire an attorney to assist with the legal details of home ownership transfer, preparing all the
mortgage documentation, and searching the title of the property. Generally these fees are deducted from the
mortgage loan itself.

Property Survey
Most lenders require an accurate survey of the property you are purchasing to ensure it’s in accordance with
all relevant by-laws and zoning. The sellers agent will often provide a copy of the survey but if not you will be
required to provide one. Surveys usually cost anywhere from $200 up to $1000. As an alternative to a survey,
the majority of lenders will accept proof of title insurance which will cost about $250.

Home Insurance
Proof of insurance against fire and damage is usually required by the lender before or at closing before giving
you the loan.

THE APPRAISAL
An appraisal is a written estimate of a property's current market value. An appraisal report is a document
from a professional that gives an estimate of a property's fair market value based on the sales of comparable
homes in the area and the features of a property; an appraisal is generally required by a lender before loan
approval to ensure that the mortgage loan amount is not more than the value of the property.

Having an idea of what is involved in appraising a piece of property can greatly help the seller arrive at a fair
asking price and the buyer determine what to offer. An appraisal consists of several steps. The following are
the major steps in the process:

• Research the property as to size, bedrooms, baths, year built, lot size, condition, and square footage.
• Gather data of recent sales in the neighborhood. The appraiser needs to locate at least three and
preferably more similar-sized homes which have sold and closed escrow in the neighborhood. The homes
need to be within one mile of the subject and sold within the past six months. These homes are considered
the “Comparable Properties, ” or “Comps” for short.
• Field inspection consists of two parts: first the inspection of the subject property, and second, the exterior
inspection of the comparable properties.
• The subject inspection consists of taking photos of the street scene, front of the home and rear of the
home, which may include portions of the yard. The appraiser will make an interior inspection for
condition, noting any items that would detract from or add to the value of the home. He will also draw a
floor plan of the home while doing the inspection.

GLOSSARY OF MORTGAGE TERMS

Balance Sheet A financial statement that shows the assets, liabilities and net worth of an
individual or company.
Borrower A person who has been approved to receive a loan and is then obligated to
repay it and any additional fees according to the loan terms.
Credit Report A report from an independent agency detailing credit history and previous
and current debt to help determine creditworthiness.
Credit Score A mathematical formula that predicts an applicant's creditworthiness based
on credit card history, outstanding debt, type of credit, bankruptcies, late
payments, collection judgments, extent of credit history and number of credit
lines
Deed The legal document that transfers property from one owner to another.
Earnest Money Deposit made by a buyer toward the down payment to show good faith when
the purchase agreement is signed. Funds from you to the seller, held on
deposit, to show that you’re committed to buying the home. The deposit will
not be refunded to you after the seller accepts your offer. It will go toward

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 your total closing costs and any remaining amount will then go toward your
down payment.
Good Faith Estimate Written estimate of the closing costs the borrower will likely have to pay to
obtain the loan.
Private Mortgage Insurance Insurance to protect the lender in case the borrower defaults on the loan.
(PMI)
Title Document that shows ownership of a property.
Title Search Examination of municipal records to ensure that the seller is the legal owner
of a property and that there are no liens or other claims against the property
that would prevent a transfer of ownership.
Underwriting In mortgage lending, the process of determining the risks involved in a
particular loan and establishing suitable terms and conditions for the loan.
Annual Percentage Rate How much a loan costs annually. The APR includes the interest rate, points,
(APR) broker fees, and certain other credit charges a borrower is required to pay.
This is not the interest rate that helps set your monthly payment.
Application Fee The fee that a mortgage lender charges to apply for a mortgage.

Assets Items of value an individual owns, such as money in savings accounts, stocks,
bonds, and automobiles.
Collateral Property which is used as security for a debt. In the case of a mortgage, the
collateral is the house and land.
Co-Borrower Any additional borrower(s) whose name(s) appear on loan documents and
whose income and credit history are used to qualify for the loan. Under this
arrangement, all parties involved have an obligation to repay the loan. For
mortgages, the names of applicable co-borrowers also appear on the
property’s title.
Co-Signer A term used to describe an individual who signs a loan or credit application
with another person and promises to pay if the primary borrower doesn’t
pay. A co-signer is different from a co-borrower in that a co-signer takes
responsibility for the debt should the borrower default, but does not have
ownership in the property.
Commitment Letter A letter from the lender stating the amount of the mortgage loan, the number
of years to repay the mortgage loan (the term), the interest rate, the mortgage
loan origination fee, the annual percentage rate, and the monthly payments.
Debt Money owed by one person or institution to another person or institution.
Default Failure to fulfill a legal obligation, like paying your mortgage. A default
includes failure to pay on a financial obligation, but may also be a failure to
perform some action or service that is non-monetary. For example, when
leasing a car, the lessee is usually required to properly maintain the car.
Escrow A deposit by a borrower to the lender of funds to pay property taxes,
insurance premiums, and similar expenses when they become due.
Good Faith Estimate A document that provides you with an estimate of the costs associated with
your mortgage loan. Your loan officer must provide you with a Good Faith
Estimate within three business days of completing the loan application.
Hazard Insurance Insurance coverage that provides compensation to the insured individual or
family in case of property loss or damage.
Homeowners Insurance A policy that protects you and the lender against losses due to fire, flood, or
other
acts of nature. It also offers protection against liability in the event that a
visitor to your home is injured on your property.
HUD-1 Settlement Statement A standard form that discloses the fees and services associated with closing
your mortgage loan.

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Liabilities Your debts and other financial obligations.
Lien A claim or charge on property for payment of a debt. A mortgage is a lien,
meaning the lender has the right to take the title to your property if you don’t
make the mortgage payments.
Loan Officer The person who takes applications for loans offered at the bank. The loan
officer can answer your questions, provide written information explaining
loan products, and help you fill out a loan application.
Loan Origination Fees Fees paid to your mortgage lender for processing the mortgage loan
application. These fees are usually in the form of points. One point equals one
percent of the mortgage amount. For instance on a $100,000 mortgage, one
point is $1,000.
Lock-In Rate A written agreement from your lender guaranteeing a specific mortgage
interest rate for a certain amount of time.
Mortgage Broker A licensed individual or firm that charges a fee to serve as the mediator
between the buyer and seller. Mortgage brokers are individuals in the
business of arranging funding or negotiating contracts for a client, but who
does not loan the money.
Mortgage Insurance Insurance that protects mortgage lenders against loss in the event of default
by the
borrower. If you make a down payment of less than twenty percent, your
lender will generally require mortgage insurance.
Mortgage Lender The lender providing funds for a mortgage. Lenders also manage the credit
and financial information review, the property review, and the mortgage loan
application process through closing.
Mortgage Note A legal document that provides evidence of your indebtedness and your
formal promise to repay the mortgage loan, according to the terms you’ve
agreed to. The note also explains the consequences of failing to make your
monthly mortgage payments
Mortgage Rate The cost or the interest rate you pay to borrow the money to buy your house
Mortgage Servicer The financial institution or entity that is responsible for collecting your
mortgage loan payments.
Real estate broker Someone who helps find a house.
Title Written evidence of the right to ownership in a property.
Title Insurance Insurance providing protection against loss arising from problems connected
to the title to your property.
Universal Residential Loan Standard mortgage loan application where you provide the lender with
Application information required to assess your ability to repay the loan amount and to
help the lender decide whether to lend you money.
Truth-in-Lending Disclosure A form required by federal law for lenders to provide to you full written
Statement disclosure on the mortgage loan amount being financed, fees and charges, the
payment schedule, the interest rate, the annual percentage rate, and any
other costs associated with the mortgage loan.
Underwriting The process that your lender uses to assess your eligibility to receive a
mortgage loan. Underwriting involves the evaluation of your ability to repay
the mortgage loan.

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