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Glossary of Mortgage Terms

Adjustable Rate Mortgage (ARM): a mortgage loan or Deed of Trust which allows the lender to periodically adjust the interest rate in accordance with a specified index.

Appraiser: one who is trained and educated in the methods of determining the value of property (appraised value.) You will pay a fee for an appraisal report containing an opinion as to the value of your property and the reasoning leading to this opinion.

Credit Report Fee: this fee covers the cost of a credit report which shows your credit history. The lender uses the information in a credit report to assess your credit indicator.

Default: the inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.

Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.

Down Payment: the portion of a home’s purchase price that is paid in cash and is not part of the mortgage loan.

Earnest Money Deposit: money you will put down to show that you are serious about purchasing the home. It often becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or may be forfeited if you do not follow through with the deal.

Escrow Account: an impound account in which a portion of your monthly mortgage payment is deposited to cover annual charges for homeowner’s insurance, mortgage insurance (if applicable) and property taxes.

Escrow Agent: a person or entity holding documents and funds in a transfer of real property, acting for both parties pursuant to instructions. Typically the agent is a person (often an attorney), escrow company or title company, depending on local practices.

Flood Certification Fee: a fee for the assessment of your property to determine if it is located in a flood prone area.

Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrowers.

Good Faith Estimate (GFE): an estimate of the settlement charges you are likely to incur; it also contains other information about the loan.

Government Recording and Transfer Charges: fees for legally recording your deed and mortgage. These fees may be paid by you or by the seller depending upon the terms of the sales agreement.

Home Inspection: an inspection of the mechanical, electrical, and structural aspects of your home. You will pay a fee for this inspection, and the inspector will provide you a written report evaluating the condition of the home.

Homeowner’s Insurance or Home Hazard Insurance: an insurance policy that protects your home and your possessions inside from serious loss, such as theft or fire. This insurance is usually required by all lenders to protect investment and must be obtained before closing on your loan.

HUD-1 Settlement Statement: a statement that itemizes the services provided to you and the fees charged for those services. This form is filled out by the person who will conduct the settlement. You can ask to see your settlement statement at least one day prior to your settlement.

Interest: a fee charged by the lender for the use of its money.

Interest Rate: the change by the lender for borrowing money expressed as a percentage.

Lender Inspection Fees: this charge covers inspections, often of newly constructed housing, made by employees of your lender or by an outside inspector.

Loan to Value (LTV) Ratio: a percentage calculated by dividing the amount to be borrowed by the price or appraised value of the home to be purchased (whichever is less.) The loan to value ratio is used to qualify borrowers for a mortgage, and the higher the LTV, the tighter the qualification guidelines for certain mortgage programs become. Low loan to value ratios are considered below 80% and carry lower rates since borrowers are lower risk.

Mortgage: the transfer of an interest in property to a lender as a security for a debt. This interest may be transferred with a Deed of Trust in some states.

Origination Fee: a fee charged to the borrower by the loan originator for making a mortgage loan.

Origination Services: any service involved in the creation of a mortgage loan, including but not limited to the taking of the loan application, loan processing, and the underwriting and funding of a loan and the processing and administrative services required to perform these functions.

Payment Shock: a scenario in which monthly mortgage payments on an adjustable rate mortgage (ARM) rise so high that the borrower may not be able to afford the payments.

PITI (Principal, Interest, Taxes and Insurance): the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance goes into an escrow account to cover the fees when they are due.

Pest Inspection: an inspection for termites or other pest infestations of your home. This inspection is frequently required by your lender.

Point(s): amount of money paid to reduce the interest rate on a loan. A point is usually equal to 1% of the loan amount.

Pre-paid Items: lenders often require the prepayment of items such as insurance premiums for private mortgage insurance, homeowner’s insurance, and real estate taxes.

Recording and Transfer Charges: these charges include fees paid to the local government for filing official records of real estate transactions.

Sales Agreement: the contract signed by a buyer and the seller stating the terms and conditions under which a proper will be sold. It may also be called an “Agreement of Sale” or “Purchase Contract.”

Settlement: the time at which the property is formally sold and transferred from the seller to the buyer. It is at this time that the borrower takes on the loan obligation, pays all closing costs and receives title from the seller.

Settlement/Closing Agent: in some states, a settlement agent, or closing agent, handles the real estate transaction when you buy or sell a home. It may also be an attorney or a title agent. He or she oversees all legal documents, fee payments, and other details of transferring the property to ensure that the conditions of the contract have been met and appropriate real estate taxes have been paid.

Settlement Costs/Closing Costs: the customary costs above and beyond the sales price f the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower at the time the GFE is given.

Survey Fee: a fee for obtaining a drawing of your property showing the location of the lot, any structures, and any encroachments. The survey fee is usually paid by the borrower.

Title Service Fees: title service fees include charges for title search and title insurance if required. This fee also includes the services of a title or settlement agent.

Title Insurance: insurance that protects your lender against any title dispute that may arise over your property. Through a title search, the lender verifies who the actual property-owners are and whether the property is free of liens. The title search company then issues title insurance which protects the title of the property against any unpaid mortgages and judgments. In case a claim is made against the property, the title insurance provides legal protection and pays for court fees and related costs. You may also purchase Owner’s title insurance which protects your as the homeowner.

Tax Certificate: official proof of payment of taxed due provided at that time of transfer of property title by the state of local government.

Tax Service Fee: this fee covers the cost of your lender engaging a third party to monitor and handle the payment of your property tax bills. This is done to ensure that your tax payments are made on time and to prevent tax liens from occurring.

Tolerance Category: the maximum amount by which the charges for a category or categories of settlement cost may exceed the amount of the estimate for such category or categories on a good faith estimate. When the originator selects and identifies the provider of services, these charges may only increase 10% in the aggregate. If the borrower selects a provider that is not on the written list provided by the loan originator, the lender is not subject to any tolerance restrictions for that service.