Mortgage Terms & Definitions

he following mortgage terms are provided as a reference.  If you have a specific question, then please contact a Multiline Mortgage Loan Officer.

Accrued Interest: that is earned but not paid, but added to the amount owed.

Adjustable Rate: An interest rate that changes periodically in relation to an index, and payments may increase or decrease accordingly.

Adjustable Rate Mortgage (ARM): A mortgage on which the interest rate, after an initial period, can be changed by the lender. While ARMs in many countries abroad allow rate changes at the lender's discretion ("discretionary ARMs"), in the US most ARMs base rate changes on a pre-selected interest rate index over which the lender has no control. These are "indexed ARMs". There is no discretion associated with rate changes on indexed ARMs.

Agreement of Sale: A contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Alternative Documentation: Expedited and simpler documentation requirements designed to speed up the loan approval process. Instead of verifying employment with the applicant's employer and bank deposits with the applicant's bank, the lender will accept paycheck stubs, W-2s, and the borrower's original bank statements. Alternative documentation remains “full documentation”, as opposed to the other documentation options.

Amortization: Is a repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

Annual Membership: An amount that may be charged annually for having a line of credit available. Often charged regardless of whether or not you use the line. Also referred to as a "participation fee."

Annual Percentage Rate (APR): The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the federal Truth in Lending Act, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note.

Application: An initial statement of personal and financial information which is required to approve your loan.

Application Fee: Fees that are paid upon application. An application fee may frequently include charges for property appraisal and a credit report.

Appraisal: A fee charged by an appraiser to render an opinion of market value as of a specific date. Required by most lenders to obtain a loan.

Assumption: A method of selling real estate where the buyer of the property agrees to become responsible for the repayment of an existing loan on the property. Unless the lender also agrees, the seller remains liable for the mortgage.

Assumption of Mortgage: The agreement of a purchaser to become primarily liable for the payments on a mortgage loan. Unless otherwise specified by the lender, the seller may remain secondarily liable for payments.

Automated Underwriting: A computer-driven process for approving the application for underwriting a loan. The quick decision is based on information provided by the applicant, which is subject to later verification, and other information retrieved electronically including information about the borrower's credit history and the subject property.

Bad-Faith Estimate: The practice of low-balling figures for settlement costs on the Good Faith Estimate to make them appear more attractive to potential mortgage shoppers.

Balloon mortgage: A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher rate later. They are riskier than ARMs because there is no limit on the extent of a rate increase at the end of the balloon period.

Balloon Payment: A lump sum payment for the unpaid balance of the loan
Bimonthly mortgage: A mortgage on which the borrower pays half the monthly payment on the first day of the month, and the other half on the 15th.

Biweekly mortgage: A mortgage on which the borrower pays half the monthly payment every two weeks. Because this results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term.

Bridge loan: A short-term loan, usually from a bank, that "bridges" the period between the closing date of a home purchase and the closing date of a home sale. Unsecured bridge loans are available if the borrower has a firm contract to sell the existing house. Secured bridge loans are available without such a contract.

Buy-Down: A permanent buy-down is the payment of points in exchange for a lower interest rate. A temporary buy-down concentrates the rate reduction in the early years.
Buy-up: Paying a higher interest rate in exchange for a rebate by the lender which reduces upfront costs.

Cap: The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage.

Cash Out: Receiving money back when refinancing your present mortgage.

Ceiling: The maximum allowable interest rate over the life of the loan of an adjustable rate mortgage.

Closing Costs: Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney's fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.

Closing Date: The date on which the closing occurs.

Co-Borrowers: One or more persons who have signed the note, and are equally responsible for repaying the loan. Unmarried co-borrowers who live together are advised to agree beforehand on what happens if they split.

Cost of Funds Index (COFI):  One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage.

Conforming Mortgage: A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.

Contract Knavery: Inserting provisions into a loan contract that severely disadvantage the borrower, without the borrower’s knowledge, and sometimes despite oral assurances to the contrary. Prepayment penalties are perhaps the most frequently cited subject of such abuse.

Conforming Loan: Generally, a mortgage loan under $203,150. Qualifying ratios and underwriting methods are standardized to a large degree.

Contract of Sale: The agreement between the buyer and seller on the purchase price, terms, and conditions necessary to both parties to convey the title to the buyer.

Conversion Option: The option to convert an ARM to an FRM at some point during its life. These loans are likely to carry a higher rate or points than ARMs that do not have the option.

Cost of Savings Index (COSI): One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage.

Credit Limit: The maximum amount that you can borrow under a home equity plan.

Credit Report: A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history.

Credit Score: A single numerical score, based on an individual's credit history, that measures that individual's credit worthiness. Credit scores are as good as the algorithm used to derive them. The most widely used credit score is called FICO for Fair Issac Co. which developed it.

Cumulative Interest: The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money.

Debt Consolidation: Rolling short-term debt into a home mortgage loan, either at the time of home purchase or later.

Debt Service: The total amount of credit card, auto, mortgage or other debt upon which you must pay.

Depreciation: A decrease in the value of a home

Deed of Trust: Used in many western states, the agreement used to pledge your home or other real estate as security for a loan. Similar to a mortgage.

Discount Points (or Points):The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Documentation Requirements: The set of lender requirements that specify how information about a loan applicant's income and assets must be provided, and how it will be used by the lender.

Down Payment: The difference between the purchase price and that portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer's own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.

Due on Sale: A clause in a mortgage agreement providing that, if the mortgagor (the borrower) sells, transfers, or, in some instances, encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full.

Effective Interest Rate: The cost of credit on a yearly basis expressed as a percentage. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Useful in comparing loan programs with different rates and points.

Encumbrance: A claim against a property by another party which usually affects the ability to transfer ownership of the property.

Equity: The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance.

Equity Grabbing: A type of predatory lending where the lender intends for the borrower to default so the lender can grab the borrower's equity.

Escrow: An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.

Fannie Mae: One of two Federal agencies that purchase home loans from lenders. (The other is Freddie Mac). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities.

FICO: The numerical credit score that credit bureaus give to you based on the amount of debt you have and whether you pay your bills on time. FICO is named after Fair Issac Corp, the company that pioneered credit scoring. Scores average between 300 and 850, the higher the better.

First Mortgage: A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances).

Fixed Rate: An interest rate which is fixed for the term of the loan. Payments as well are fixed at one amount.

FHA Loan: More appropriately termed "FHA Insured Loan." A loan for which the Federal Housing Administration insures the lender against losses the lender may incur due to your default.

Float: Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing. Allowing the rate to float exposes the borrower to market risk, and also to the risk of being taken advantage of by the loan provider.

Float-down: A rate lock, plus an option to reduce the rate if market interest rates decline during the lock period. Also called a cap. A float-down costs the borrower more than a lock because it is more costly to the lender. Float-downs vary widely in terms of how often the borrower can exercise (usually only once), and exactly when the borrower can exercise.

Foreclosure: The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults.

Forbearance Agreement: An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrower’s delinquency.

Fully Amortizing Payment: The monthly mortgage payment which, if maintained unchanged through the remaining life of the loan at the then-existing interest rate, will pay off the loan over the remaining life. On Fixed Rate Mortgage (FRM)s the payment is always fully amortizing, provided the borrower has made no prepayments. (If the borrower makes prepayments, the monthly payment is more than fully amortizing). On GPMs, the payment in the early years is always less than fully amortizing. On ARMs, the payment may or may not be fully amortizing, depending on the type of ARM.

Fully Indexed Interest Rate: The current index value plus the margin on an ARM. Usually, initial interest rates on ARMs are below the fully indexed rate. If the index does not change from its initial level, after the initial rate period ends the interest rate will rise to the fully indexed rate after a period determined by the interest rate increase cap. For example, if the initial rate is 4% for 1 year, the fully indexed rate 7%, and the rate adjusts every year subject to a 1% rate increase cap, the 7% rate will be reached at the end of the third year.

Gift of Equity: A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as down payment.

Good Faith Estimate: A written estimate of closing costs which a lender must provide you within three days of submitting an application.

Grace Period: A period of time during which a loan payment may be paid after its due date but not incur a late penalty. Such late payments may be reported on your credit report.

Graduated Payment Mortgage (GPM): A mortgage on which the payment rises by a constant percent for a specified number of periods, after which it levels out over the remaining term and amortizes fully. For example, the payment might increase by 7.5% every 12 months for 60 months, after which it is constant for the remaining term at a fully amortizing level.

Gross Income: For qualifying purposes, the income of the borrower before taxes or expenses are deducted.

Home Equity Line of Credit (HELOC): A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan: A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax -deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

Hazard Insurance: A contract between purchaser and an insurer, to compensate the insured for loss of property due to hazards (fire, hail damage, etc.), for a premium.

Housing Expense Ratio: The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers.  

HUD 1 Settlement Statement: A form utilized at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development.

Index: A number, usually a percentage, upon which future interest rates for adjustable rate mortgages are based. Common indexes include the Cost of Funds for the Eleventh Federal District of banks or the average rate of a one year Government Treasury Security.

Indexed ARM: An ARM on which the interest rate adjusts mechanically based on changes in an interest rate index, as opposed to a "discretionary ARM" on which the lender can change the rate at any time subject only to advance notice. All ARMs in the US are indexed.

Interest Accrual Period: The period over which the interest due the lender is calculated. If the interest accrual period on a 6 % mortgage for $100,000 is a year, as it is on some loans in the UK and India, the interest for the year is .06($100,000) = $6,000. If interest accrues monthly, as it does on most mortgages in the US, the monthly interest is .06/12($100,000) = $500. If interest accrues biweekly, as on a few programs in the US, the biweekly interest is .06/26($100,000) = $230.77. And if interest accrues daily, as HELOCs and some other mortgages in the US do, the daily interest is .06/365 ($100,000) = $16 .44.

Interest Cost: A time-adjusted measure of cost to a mortgage borrower. It is calculated in the same way as the APR except that the APR assumes that the loan runs to term, and is always measured before taxes. Interest cost is measured over the individual borrower's time horizon, and it may be measured after taxes at the individual borrower's tax rate. In addition, the cost items included in interest cost may be more or less inclusive than those included in the APR.

Interest Due: The amount of interest, expressed in dollars, computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by the interest accrual period. It is the same as interest payment except when the scheduled mortgage payment is less than the interest due, in which case the difference is added to the balance and constitutes negative amortization.

Interest Payment: The dollar amount of interest paid each month. It is the same as interest due so long as the scheduled mortgage payment is equal to or greater than than the interest due. Otherwise, the interest payment is equal to the scheduled payment.

Initial Interest Rate: The interest rate that is fixed for some specified number of months at the beginning of the life of a an ARM. The initial rate is sometimes referred to as a "teaser" when it is below the fully indexed interest rate.

Interest Rate: The periodic charge, expressed as a percentage, for use of credit.

Interest Rate Adjustment Period: The frequency of rate adjustments on an ARM after the initial rate period is over. The rate adjustment period is sometimes but not always the same as the initial rate period. As an example, a 3/3 ARM is one in which both periods are 3 years while a 3/1 ARM has an initial rate period of 3 years after which the rate adjusts every year.

Interest Rate Ceiling: The highest interest rate possible under an ARM contract; same as "lifetime cap." It is often expressed as a specified number of percentage points above the initial interest rate.
Interest Rate Floor: The lowest interest rate possible under an ARM contract. Floors are less common than ceilings.

Interest Rate Increase Cap: The maximum allowable increase in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points, but may be 5 points if the initial rate period is 5 years or longer.

Jumbo Loan: Mortgage loans over $417,000. Terms and underwriting requirements may vary from conforming loans.

Junk Fees: A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount.

Lease-to-Own Purchase: A transaction in which a hopeful home buyer leases a home with an option to buy it within a specified period.
Lien: The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.

Loan "Churning": The process of raising cash periodically through successive cash-out refinancings. It is a scam initiated by mortgage brokers that victimizes wholesale lenders, with the connivance of borrowers.

Loan to Value Ratio (LTV): A ratio determined by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $100,000 and a mortgage loan of $80,000, your loan to value ratio would be 80%. Loans with an LTV over 80% may require Private Mortgage Insurance, defined below.

Lock or Lock In: A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive the funds you have borrowed.

Lock Commitment Letter: A written statement from a lender verifying that the price and other terms of a loan have been locked. Borrowers who lock through a mortgage broker should always demand to see the lock commitment letter.

Lock Failure: The inability or unwillingness of a lender to honor a mortgage price that a borrower had believed was guaranteed.

Lock Jumper: A borrower, usually refinancing rather than purchasing a home, who allows a lock to expire when interest rates go down in order to lock again at the lower rate.

Lock Period: The number of days for which any lock or float-down holds. Ordinarily, the longer the period, the higher the price to the borrower.

Mandatory Disclosure: The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure.

Manufactured Housing: A house built entirely in a factory, transported to a site and installed there. They are usually built without knowing where they will be sited, and are subject to a Federal building code administered by HUD.

Margin: An amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages.

Maturity: The period until the last payment is due. This is usually but not always the term, which is the period used to calculate the mortgage payment.

Maximum Loan Amount: The largest loan size permitted on a particular loan program. For programs where the loan is targeted for sale to Fannie Mae or Freddy Mac, the maximum will be the largest loan eligible for purchase by these agencies. On FHA loans, the maximums are set by the Federal Housing Administration, and vary somewhat by geographical area. On other loans, maximums are set by lenders.

Minimum Payment: The minimum amount that you must pay, usually monthly, on a home equity loan or line of credit. In some plans, the minimum payment may be "interest only," (simple interest). In other plans, the minimum payment may include principal and interest (amortized).

Monthly Debt Service: Monthly payments required on credit cards, installment loans, home equity loans, and other debts but not including payments on the loan applied for.

Mortgage Banker: Originates mortgage loans, loaning you their funds and closing the loan in their name.

Mortgage Broker: As do mortgage bankers, takes loan application and processes the necessary paperwork. Unlike a mortgage banker, brokers do not fund the loan with their own money, but work on behalf of several investors, such as mortgage bankers, S and L's, banks, or investment bankers.

Mortgage Insurance (MIP or PMI): Insurance purchased by the borrower to insure the lender or the government against loss should you default. MIP, or Mortgage Insurance Premium, is paid on government-insured loans (FHA or VA loans) regardless of your LTV (loan-to-value). Should you pay off a government-insured loan in advance of maturity, you may be entitled to a small refund of MIP. PMI, or Private Mortgage Insurance, is paid on those loans which are not government-insured and whose LTV is greater than 80%. When you have accumulated 20% of your home's value as equity, your lender may waive PMI at your request. Please note that such insurance does not constitute a form of life insurance which pays off the loan in case of death.

Mortgage Loan: A loan which utilizes real estate as security or collateral to provide for repayment should you default on the terms of your loan. The mortgage or Deed of Trust is your agreement to pledge your home or other real estate as security.

Mortgage Modification: A change in the terms of a loan, usually the interest rate and/or term, in response to the borrower's inability to make the payments under the existing contract.

Mortgage Price: The interest rate, points and fees paid to the lender and/or mortgage broker. On ARMs, the price also includes the fully indexed rate and the maximum rate.
Mortgagee: The lender in a mortgage loan transaction.

Mortgagor: The borrower in a mortgage loan transaction.

Negative Amortization: Amortization in which the payment made is insufficient to fund complete repayment of the loan at its termination. Usually occurs when the increase in the monthly payment is limited by a ceiling. The portion of the payment which should be paid is added to the remaining balance owed. The balance owed may increase, rather than decrease over the life of the loan.
Negative Amortization Cap: The maximum amount of negative amortization permitted on an ARM, usually expressed as a percentage of the original loan amount (e.g., 110%). Reaching the cap triggers an automatic increase in the payment, usually to the fully amortizing payment level, overriding any payment increase cap.

Negative Points: Points paid by a lender for a loan with a rate above the rate on a zero point loan. For example, a wholesaler quotes the following prices to a mortgage broker. 8%/0 points, 7.5%/3 points, 8.75%/-3 points. On mortgage web sites, negative points are usually referred to as "rebates" because they are used to reduce a borrower's settlement costs. When negative points are retained by a mortgage broker, they are called a "yield spread premium".

No-Cost Mortgage: A mortgage on which all settlement costs except per diem interest, escrows, homeowners insurance and transfer taxes are paid by the lender and/or the home seller.
Non-Conforming Mortgage: A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.

No Asset Loan: A documentation requirement where the applicant's assets are not disclosed.
No Ratio Loan: A documentation requirement where the applicant's income is disclosed and verified but not used in qualifying the borrower. The conventional maximum ratios of expense to income are not applied.

Note: A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents.

Option ARM: An adjustable rate mortgage with flexible payment options, monthly interest rate adjustments, and very low minimum payments in the early years. They carry a risk of very large payments in later years.

Origination Fee: An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate.

Overage: The difference between the price posted to its loan officers by a lender or mortgage broker, and the price charged the borrower.
Partial Prepayment:  Making a payment larger than the scheduled payment as a way of paying off the loan earlier.

Payment Adjustment Interval: The period between payment changes on an ARM, which may or may not be the same as the interest rate adjustment period. Loans on which the payment adjusts less frequently than the rate may generate negative amortization.

Payment Increase Cap: The maximum percentage increase in the payment on an ARM at a payment adjustment date. A 7.5% cap is common.

Payment Decrease Cap: The maximum percentage decrease in the payment on an ARM at a payment adjustment date.

 Payment Period: The period over which the borrower is obliged to make payments. On most mortgages, the payment period is a month, but on some it is biweekly.

Per Diem Interest: Interest from the day of closing to the first day of the following month. In some cases, however, the borrower can get a credit at closing by making the first payment a month earlier.
Piggyback Mortgage: A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down.

Pipeline Risk: The lender's risk that between the time a lock commitment is given to the borrower and the time the loan is closed, interest rates will rise and the lender will take a loss on selling the loan.
Points: An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., "3 points" means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations with negative points. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed "discounts" and "premiums," respectively.

PITI: Principal, interest, taxes and insurance, which comprise your monthly mortgage payment.

Prepayment Penalty: A fee paid to the lending institution for paying a loan prior to the scheduled maturity date.

Pre-Approval: A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Unlike a pre-qualification, the lender checks the applicant's credit.

Prepayment: A payment made by the borrower over and above the scheduled mortgage payment. If the additional payment pays off the entire balance it is a "prepayment in full"; otherwise, it is a "partial prepayment."

Primary Residence: The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented.

Principal: The portion of the monthly payment that is used to reduce the loan balance.

Private Mortgage Insurance: Mortgage insurance provided by private mortgage insurance companies.

Processing: Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. The processing file is handed off to underwriting for the loan decision.

Qualification: The process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay a loan. Qualification is sometimes referred to as "pre-qualification" because it is subject to verification of the information provided by the applicant. Qualification is short of approval because it does not take account of the credit history of the borrower. Qualified borrowers may ultimately be turned down because, while they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay.

Qualifying Ratios: Comparisons of a borrower's debts and gross monthly income.
Qualification Requirements: Standards imposed by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum loan-to-value ratios, and so on. Less comprehensive than underwriting requirements, which take account of the borrower's credit record.

Rate Caps: Limitations on the size of rate adjustments on an ARM, often expressed in a/b/c fashion: "a" is the maximum rate change at the first rate adjustment, "b" is the maximum at all subsequent adjustments, and "c" is the maximum increase over the initial rate during the life of the contract.

Rate Protection: Protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. This protection can take the form of a "lock" where the rate and points are frozen at their initial levels until the loan closes; or a "float-down" where the rates and points cannot rise from their initial levels but they can decline if market rates decline. In either case, the protection only runs for a specified period. If the loan is not closed within that period, the protection expires and the borrower will either have to accept the terms quoted by the lender on new loans at that time, or start the shopping process anew.

Recast Payment: Raising the mortgage payment to the fully amortizing payment. Periodic recasts are sometimes used on ARMs in lieu of or in addition to negative amortization caps.

Refinance: Paying off an old loan while simultaneously taking a new one. This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan. It may be done to raise cash, as an alternative to a home equity loan. Or it may be done to reduce the monthly payment.

Rent Premium: An increment above the rent paid on a lease-to-own home purchase, which is credited to the purchase price if the purchase option is exercised, but which is lost if the option is not exercised.

Required Cash: The total cash required of the home buyer to close the transaction, including down payment, points and fixed dollar charges paid to the lender, any portion of the mortgage insurance premium that is paid up-front, and other settlement charges associated with the transaction such as title insurance, taxes, etc. The total required cash is shown on the Good Faith Estimate of Settlement that every borrower receives.

RESPA: The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.
Reverse Mortgage: A loan to an elderly home owner on which the balance rises over time, and which is not repaid until the owner dies, sells the house, or moves out permanently.

Right to Rescission: The legal right to void or cancel your mortgage contract in such a way as to treat the contract as if it never existed. Right of rescission is not applicable to mortgages made to purchase a home, but may be applicable to other mortgages, such as home equity loans.

Scenario Analysis: Determining how the interest rate and payment on an ARM will change in response to specified future changes in market interest rates, called "scenarios".

Scheduled Mortgage Payment: The amount the borrower is obliged to pay each period, including interest, principal, and mortgage insurance, under the terms of the mortgage contract. Paying less than the scheduled amount results in delinquency. On most mortgages, the scheduled payment is the fully amortizing payment throughout the life of the loan. On some mortgages, however, the scheduled payment for the first 5 or 10 years is the interest payment (see Interest Only Mortgages). And on option (flexible payment) ARMs, it can be the "minimum" payment as defined by the program.

Second Mortgage: A loan with a second-priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid. For articles on second mortgages, also known as "home equity loans,"
Secure Option ARM: An option ARM on which the initial rate holds for 5 years rather than one month.
Security Interest: An interest that a lender takes in the borrower's property to assure repayment of a debt

Self-Employed Borrower: A borrower who must document income using tax returns rather than information provided by an employer. This complicates the process somewhat.

Seller Contribution: A contribution to a borrower's down payment or settlement costs made by a home seller, as an alternative to a price reduction.

Seller Financing: Provision of a mortgage by the seller of a house, often a second mortgage, as a condition of the sale.

Servicing a Loan: The ongoing process of collecting your monthly mortgage payment, including accounting for and payment of your yearly tax and/or homeowners insurance bills

Servicing Release Premium: A payment made by the purchaser of a mortgage to the seller for the release of the servicing on the mortgage. It has no direct relevance to borrowers.

Settlement Costs: Costs that the borrower must pay at the time of closing, in addition to the down payment.

Short Sale: An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure.

Silent Second: A second mortgage used to deceive the first mortgage lender, or to provide preferential (subsidized) terms to qualified home buyers.

Simple Interest Mortgage: A mortgage on which interest is calculated daily based on the balance at the time of the last payment. The daily interest charge within the month is constant -- interest is not charged on the interest charges of prior days.

Stated Income: A documentation requirement where the lender verifies the source of the income but not the amount.

Streamlined Refinancing: Refinancing that omits some of the standard risk control measures, and is therefore quicker and less costly.

Subordinate Financing: A second mortgage on the property which is not paid off when a new loan is taken out. The second mortgage lender must allow subordination of the second to the new first mortgage.

Sub-Prime Borrower: A borrower with poor credit, who can borrow only from sub-prime lenders who specialize in dealing with borrowers who have poor credit. Such borrowers pay more than prime borrowers, and are sometimes taken advantage of. Not all borrowers who deal with sub-prime lenders, however, are sub-prime borrowers. Some could obtain loans from mainstream lenders if they properly shop the market.

Tax Service Fee: A fee charged by some lenders at closing to cover the cost of paying taxes on the borrower's property when they come due, or (if the borrower is paying the taxes), verifying that the payment has been made.

Temporary Buydown: A reduction in the mortgage payment in the early years of the loan in exchange for an upfront cash payment provided by the home buyer, the seller, or both.

Term: The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity. On a 7-year balloon loan, for example, the maturity is 7 years but the term in most cases is 30 years.

Title: The written evidence that proves the right of ownership of a specific piece of property.

Title Insurance: Protection for lenders or homeowners against financial loss resulting from legal defects in the title.

Total Interest Payments: The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money.

Total Expense Ratio: The ratio of housing expense plus current debt service payments to borrower income, which is used (along with the housing expense ratio and other factors) in qualifying borrowers.

Transaction Fee: A fee which may be charged each time you draw on a home equity credit line.
Truth in Lending (TIL): The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information.

Underage: Fees collected from a borrower by a loan officer that are lower than the target fees specified by the lender or mortgage broker who employs the loan officer.

Underwriting: The process of examining all the data about a borrower's property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.

Underwriting Requirements: The standards imposed by lenders in determining whether a borrower qualifies for a loan. These standards are more comprehensive than qualification requirements in that they include an evaluation of the borrower’s creditworthiness.

Upfront Mortgage Broker (UMB): A mortgage broker who charges a set fee for services provided, established in writing at the outset of the transaction, and acts as the borrower's agent in shopping for the best deal.

Variable Rate: An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

VA Loan: More appropriately termed "VA Insured Loan." A loan for which the Veteran's Administration insures the lender against losses the lender may incur due to your default. Available only to veterans possessing a Certificate of Eligibility

Waive Escrows: Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure where the lender adds a charge to the monthly mortgage payment that is deposited in an escrow account, from which the lender pays the borrower’s taxes and insurance when they are due. On some loans lenders will not waive escrows, and on loans where waiver is permitted lenders are likely either to charge for it in the form of a small increase in points, or restrict it to borrowers making a large down payment.

Warehouse Lender: A firm that lends to temporary lenders against the collateral of closed mortgage loans prior to the sale of the loans in the secondary market. Warehouse lenders can call the loans if the loans "in the warehouse" drop in value.

Warrantable Condos: A condominium project with features that lenders view as protections against hazards that would threaten the value of condo units. These features include the project being completed with most units sold rather than rented, no one party owning more than 10% of them, adequate insurance coverage of common structures, and an ownership association independent of the developer.

Workout Assumption: The assumption of a mortgage, with permission of the lender, from a borrower unable to continue making the payments.

Wrap-Around Mortgage: A mortgage on a property that already has a mortgage, where the new lender assumes the payment obligation on the old mortgage. Wrap-around mortgages arise when the current market rate is above the rate on the existing mortgage, and home sellers are frequently the lender. A due-on-sale clause prevents a wrap-around mortgage in connection with sale of a property except by violating the clause.

Yield Curve: A graph that shows, at any given time, how the yield varies with the period to maturity. Usually, the curve slopes upwards but occasionally it slopes down or is flat. A flat yield curve means that yields on long-term bonds are not much higher than those on short-term notes.

 

Multiline Mortgage Services, Inc.

What are the typical closing costs? 

Here are is a list of fees that either the buyer or the seller will have to pay in order to complete a real estate transaction.  These fees are in addition to the negotiated price of the property and any real estate broker fees.  These fees can be categorized into either one time transaction fees or reoccurring fees.  As a general rule of thumb, closing costs can run between 2 and 3 percent of the sale price of the property.

• Loan application fees and credit report
• Loan origination fee
• Points (1% to 3%)  
• Title search and insurance fees
• Lender's attorney
• Appraisal
• Homeowner's insurance
• Homeowner's Association fees
• PMI
• Inspections
• Survey
• Recording fees
• Transfer taxes
• Buyer's attorney
• Escrow deposit for taxes
• Partial month's interest (depends on closing date)

Title service costs maybe paid by either party according to the contract.  The lender requires the ability examine the chain of title to make sure that there are no outstanding leins.

Recording fees can be paid by either party, and are for entering an official record of the change of ownership of the property. Required by the government for recording the deed. 

Survey fee for a survey of the lot or land and all structures on it can be paid by either party, to confirm lot size and dimensions and check for encroachments.

Brokerage Commission, paid by the seller to a Real Estate Broker, to compensate the Broker(s) involved in the sale for their services in marketing the property, finding a buyer, and assisting in the negotiations. Brokerage commissions are usually computed as a percentage of the sale price, and are established in a listing agreement between the seller and the listing broker. The listing broker may offer Buyer Agents a portion of their commission as an incentive to find buyers for the property. Payment is required if real estate brokerage service was used. This is often one of the largest closing costs.

Mortgage Application Fees are usually paid by the buyer to the lender to cover the costs of processing their loan application.

Points are usually paid by the buyer to the lender, and points are a form of pre-paid interest charged by the lender as an alternative to charging a higher rate of interest on the mortgage loan. One point equals one percent of the loan principal.

Appraisal Fees are usually paid by the buyer and occasionally by the seller through negotiation.  Many lenders will require that an appraisal be performed as a condition of the mortgage loan. The purpose of this appraisal is to verify that the sale price of the property (upon which the underwriting of the loan is based) is equal to or greater than the fair market value of the property.

Inspection Fees is paid by the buyer.  Some lenders require inspections such as termite inspections to verify that the property is in good condition.  This is necessary to assure that the property will retain the collateral value required to secure the mortgage loan.

Home Warranties can be paid by either the buyer or the seller, and they are available on resale homes insuring major household systems against repair or replacement for the buyer's initial year of ownership. Sellers will sometimes offer these warranties as a marketing strategy, or buyers can elect to purchase them at closing.

Pre-paid Property Insurance is paid by the buyer. Lenders will typically require that a mortgaged property be insured at all times throughout the life of the mortgage, and will usually require that the first full year's property insurance premium be paid in advance by the buyer. If the buyer has not already paid the insurance company directly, this would become another closing cost payable at closing.

Pro-rata property taxes can be paid by both the seller and the buyer. Most taxes on real property are usually payable at a specified date annually.  Since all but a tiny fraction of real estate transactions close on a date other than this one specified annual date, most transactions must include an adjustment to assure that both the seller and the buyer end up paying their share of the annual property tax, proportionate to the percentage of the year that each has ownership of the property.

Pro-rata Homeowner Association Dues, paid by the seller, buyer, or both. If the property is covered by a Homeowner Association (HOA), the HOA will normally be funded by dues assessed against each property owner. Again, since the ownership of the seller and buyer are each fractional in the year of the transaction, there must be an adjustment made so that each owner pays their proportional share. Often required by institutional/commercial lenders and by the real estate contract.

Pro-rata Interest, paid by the buyer but may be reimbursed by the seller. The monthly mortgage payment is calculated and payable on a specified day each month. If the closing does not actually fall on that specified date (which is usually the case), then an adjustment must be made to calculate the interest on the loan for the number of extra days until the first payment is due.

Other items in addition to the above may be common in some jurisdictions, and some transactions may include unusual or unique items as closing costs. In the United States, Federal law requires that all residential transactions financed by a mortgage have all closing costs documented in detail upon the standard HUD-1 form. This information must be provided to the principals but does not have to be sent to the government. Instead a Declaration or Statement by Buyer and/or Seller is often required to be provided to the government office recording the deed. Form 1099-S may be required to be sent to the United States Internal Revenue Service, but Federal law does not allow a charge for this.