Glossary Terms

1003 Loan Application

formal application you will need to sign before a lender will generally process your loan. The Broker/Originator will generally complete the application and send it to you for signature.

STOP!!! There are some declarations on the last page of the application you should complete personally, or answer for the Broker/Originator. It’s your responsibility to be certain that all information is true and accurate.

Good Faith Estimate

Generally a one page document that must be provided by the mortgage lender/broker/originator to the consumer. This is a requirement by the Real Estate Settlement Procedures Act (RESPA). The GFE must include an itemized list of fees and costs associated with your loan and must be provided within three business days of applying for a loan.
These mortgage fees, also called settlement costs or closing costs, cover most every expense associated with a mortgage loan and will give an estimated monthly payment as well.
You should use the GFE to compare different loan offers and products from different lenders or brokers. (Ex. 30 year fixed rate vs. a 15 year fixed rate or loans of the same terms with and without down payment amounts, interest rates and/or fees)
The GFE is only an estimate and is rarely 100% accurate to what the final closing numbers are on the HUD-1 Settlement Statement.

Primary Residence

the home that you reside in more than any other owned residence.

Second Home

any home other than your primary residence, but not considered vacation, rental, or investment property.

Investment Property

real property held as rental or income producing. This is not owner occupied, unless it is multi-family such as a duplex or 4-plex and the owner occupies one unit and renting others.

First Mortgage Loan

loan that is in first lien position and takes priority over all other liens. This means that in case of a foreclosure, the first mortgage loan will be repaid before any other mortgages on the property is repaid to the lender. The first mortgage loan is generally used where a borrower is needing a second loan to pay the full purchase amount.

Second Mortgage Loan

lien in which you are given a lump sum amount that you pay off in installments over a specified period of time. In the case of a foreclosure, the lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid. In the event of foreclosure, where the home fails to sell for an amount sufficient enough to cover the first mortgage, the borrower will still be responsible for paying the second mortgage.

Conventional Loan

any type of mortgage that is not secured by a government entity such as the Federal Housing Administration (FHA) or the Veterans Administration (VA).

Non-Conforming or Sub-Prime Loan

loans made to borrowers with less than good credit (general credit scores under 660) and carry high fees and aggressive terms such as higher interest rates and multiple discount points.

FHA Insured Loan

fixed- or adjustable-rate loans insured by the U.S. Department of Housing and Urban Development. FHA loans are designed to make housing more affordable, particularly for first-time homebuyers. FHA loans typically permit borrowers to buy a home with a lower down payment than conventional loans.

Hard Money Loan

these are real estate loans made by aggressive lenders to borrowers that may not be able to qualify for conventional conforming or even non-conforming loans. These loans come with extremely high discount points, fees, and interest rates. These are generally short term loans not exceeding 36 months but with some pre-payment penalties if paid back early.

Points

an up-front fee paid to the lender at the time that you get your loan. Each point equals one percent of your total loan amount. So, for example, 2 points on a $ 200,000 loan is $ 4,000, or 2% of the loan amount. Mortgage points and interest rates are inherently connected: in general, the more mortgage points you pay, the lower the interest rate you get. However, the more mortgage points you pay, the more cash you need up front since points are paid in cash at closing.

Interest Rate

cost the lender charges you, the borrower, for borrowing money. The amount of interest you owe the lender depends on the interest rate, the term of the loan, and the loan amount. The lower the interest rate, and the shorter the term, the less interest you pay over time.

Interest Only Loan

is one that gives you the option of paying just the interest with an option to also pay as much principal as you chose during an initial periond of time.

Truth-in-Lending

is a law requiring written disclosure of the terms of a mortgage (including the APR and other charges) by a lender to a borrower after application. The Truth-in-Lending Act is designed to protect consumers and to ensure clear disclosure of key terms of the loan as well as any costs or fees involved. The Truth-in-Lending Act also requires the right of rescission period.

Hazard Insurance

an insurance policy purchased by the borrower prior to closing the mortgage loan. The lender will be named as loss payee on the policy in case the home has an insured loss or is totally destroyed. In the event of a claim because of damage to the home, the insurance company will issue a check in the names of both the homeowner and the lender. In most cases, that check will have to be signed by the homeowner, sent to the lender, and the lender will make payment to the contractors after the repairs are completed.

Flood Insurance

insurance policy purchased separately from hazard insurance that only provides protection in the event the home is damaged by flooding. This policy is backed by the federal government-not private insurers. Depending on whether or not the home is located in a flood plain, you may or may not be required by the lender to provide this coverage.

Earthquake Insurance

a special insurance rider to the basic homeowners’ policy that covers damage to the premises caused specifically by an earthquake.

Escrow

special accounts that a lender uses to hold a borrower’s monthly payments towards property taxes, hazard insurance, and mortgage insurance. The lender will pay such expenses when they become due.

Loan Origination Fee

fee charged by lenders to cover administrative cots of processing a loan. This fee is generally 1% of the total loan amount.

Loan Discount Points

one or more percentage points of the loan amount paid by the borrower from the loan funds to the lender at closing. (Example: if the loan is $100,000 and the borrower is required to pay one discount point it would be $100,000 x .01=$1,000 in discount points)

Appraisal

written analysis of the estimated value of your property based on comparative sales of like type homes, construction replacement costs, or if an investment property, the income approach.

Credit Report

detailed summary of your borrowing history. Your credit report shows previous and current credit accounts along with your payment history for up to ten years. It is imperative that you pull all three of your credit reports from www.annualcreditreport.com. You also need to purchase your credit scores so you know what your credit looks like before applying for a mortgage.

Mortgage Broker Fee

monies paid to the broker or loan originator by the lender or from the borrower’s funds.

Processing Fee

fee charged to you to have your loan file packaged before it goes to the lender for review.

Underwriting Fee

covers the cost of evaluating your total loan application package, including your credit report, employment history, financial documents and appraisal, to determine if the loan can be approved.

Wire Transfer Fee

on occasion, money is transmitted via the inter-bank wire transfer system.

Attorney Closing Fee

fees charged by the closing attorney for services that must be performed to process and close your loan.

Title Insurance

protects lenders against any title dispute that may arise over a particular property. Home title insurance is a required fee paid at closing. It is recommended that you purchase owner’s title insurance which protects you as the homeowner.

Title Fees

fees charged by the closing attorney or title agent to make certain the title to the property is clear of liens and can be conveyed without any issues.

Recording Fees

money that is paid to a local government for entering the sale of a property into the public records.

City/County Tax Stamps

Property taxes (also known as real estate taxes) are assessed on the property by the local government (e.g. city, county, village, or township) for the various services provided to the property owner. When you pay property tax each year, you're paying for necessities that are provided by the city, such as police and fire department services, garbage pick up and snow removal. These stamps require an additional tax or stamp charge identical to the city/county tax stamp.
Typically, you will pay property taxes into an escrow account and your lender will forward the payment to your local government when it becomes due. Property taxes and the interest you pay on your mortgage are usually tax-deductible.

State Tax/Stamps

some states require an additional tax or stamp charge identical to the city/county tax/stamp. These stamp or tax charges are generally 1% of the selling price.

Pest Inspection Fee

this is the cost of having the property inspected for wood destroying insects and organisms like termite, ants, fungi, and mold.

Mortgage Insurance Premium (MIP/PMI)

insurance that protects the lender in case you default on your loan. A conventional loan for 80% or less of the total home value does not require mortgage insurance. For FHA and VA loans, mortgage insurance premium is required and will be added to your monthly payment.
Private mortgage insurance is generally included in your monthly mortgage payment and may be tax-deductible (please check with your tax advisor).

Homeowner Association Dues

the monthly or annual fees paid to the association of homeowners to cover the maintenance, insurance, and capital improvements. You are generally required to pay one year’s fees and an initiation fee up front when you close your new home loan. These fees range in amounts and frequency when due.

Settlement Charges

Also known as closing costs, these costs are for services that must be performed to process and close your loan application. Examples include title fees, recording fees, appraisal fee, credit report fee, pest inspection, attorney's fees, taxes, and surveying fees.

Yield Spread

this is the percentage of the total loan or dollar amount of money the broker is getting from the lender for getting you in the loan for a higher interest rate than the lender is actually charging. For example: based on your credit score and other financial conditions, the lender tells the broker they will offer you a loan at a 6% interest rate. The broker tells you that the best rate they can get you is 7%. The broker should then issue you a GFE showing the 1% ysp (yield spread) on that hard to find line under Total Settlement Charges. The broker will sometimes not put a dollar amount so you don’t ask what that dollar amount is all about.
For inexperienced borrowers, the Yield Spread can be as many as 3 points. Keep in mind the broker generally gets paid an Origination Fee of 1% of the total loan amount as a standard rule (Line number 801 on the GFE).
Here is an example of what that would mean in terms of real money:

You apply for a $100,000 loan and the lender agrees to loan you the entire amount at 6% interest. The broker gets you to pay 9% because you don’t know your credit score and true buying power.
Broker Loan Origination Fee is: $100,000 x .01 = $1,000
Brokers Yield Spread or extra money from the lender is: $100,000 x .03 = $3,000

The total amount paid to the broker at closing is: $1,000 (Orig. Fee) + $3,000 (ysp) = $4,000

The fact that you agree to buy the loan at a higher rate could be a problem. That’s why we recommend you always ask your broker to if there are any other incentives to them or from the lender that could be applied to the deal to make it better for you.

Affiliated Business Arrangement Disclosure Statement

this is another disclosure which conveys to you in writing which companies associated with the processing or approval of your loan are also affiliate companies (partially owned by) the lender

Interest Rate Acknowledgment

this document requires you to sign that you are aware and agree to the interest rate you are accepting

Interest Rate and Discount Fee "Float Agreement"

this document is also known as a Rate Lock Agreement. It states the interest rate you have locked in for your loan as of a certain day. Keep in mind interest rates can actually change multiple times in one day. The actual time and date you lock a loan will be recorded by the broker/loan originator

Appraisal Disclosure

this statement makes clear who did your appraisal and notifies you of your right to a copy of the document. Get it and keep it with your paperwork. You paid for it in most cases.

RESPA (Real Estate Settlement Procedures Act) Servicing Disclosure

this is a governmental requirement. This explains all the rights you have in understanding the full servicing of your loan and how often this particular lender sells their loans to other servicers.

Truth-in-Lending Disclosure Statement

this explains in great detail the cost of the money you are borrowing and the terms and meanings of the words used in the disclosure.

Disclosure Notices

the various disclosures required by law from the lender to the borrower. These may include but are not limited to the Affidavit of Occupancy, Fair Credit Reporting Act, Equal Credit Opportunity Act, FHA and Governmental Loans disclosures, Employment Certification, Anti-Coercion Statement, etc.

Provider of Service Addendum

This is a simple disclosure from the lender of affiliated loan service companies they employ in servicing their loans.

Privacy Statement

by law every company has to provide borrowers with a statement on how they will use or share your personal information. Generally, it will be shared with affiliates of the lender on a regular basis.

Patriot Act Data Collection

this may be a one or two page document that lists your personal identifying and account information with the lender. That information is required as part of the anti-terrorism legislation and must be submitted to the government.

Notice of Credit Reporting Sources

This disclosure is a requirement of law the lender must provide the borrower identifying the credit retrieval systems they relied on in making their decisions to loan you money, those companies contact information and the credit scores those agencies gave the lender for your file. Keep in mind, that the cost of money increases the lower your credit score.

HUD-1 Settlement Statement

this is the 2-sheet, legal page document that spells out all the sources and uses of the funds at closing. Of all the documents you will see during the mortgage process, none is more important than this one. Very few folks understand and can actually read a HUD-1 including real estate agents so don’t feel bad if this looks like Greek to you. Now is the perfect time to slow down, take a deep breathe, and listen to the closing attorney as he/she walks you through the statement line-by-line.