Glossary of mortgage terms
Adjustable Rate Mortgage (ARM): a mortgage loan or deed of trust that 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.) The mortgage borrower pays a fee for an appraisal report containing an opinion as to the value of the property and the reasoning leading to this opinion.
Closing costs: Also called settlement costs, these are customary costs above and beyond the sales price of the property. They must be paid to cover the transfer of ownership at closing. The costs generally vary by geographic location and typically are detailed to the borrower at the time the good-faith estimate is given.
Closing Disclosure: a statement that itemizes the services provided to the home buyer and the fees charged for those services. This form is provided to the borrower at least three days prior to closing, and is signed by the borrower at the closing.
Credit report fee: covers the cost of a credit report that shows the borrower’s credit history. The lender uses the information in a credit report to assess the borrower’s creditworthiness.
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 the prospective home buyer puts down to show they are serious about purchasing the home. It often becomes part of the down payment if the offer is accepted or is returned if the offer is rejected, or it may be forfeited if the prospective buyer does not follow through with the deal.
Escrow account: an impound account in which a portion of the home buyer’s 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 the property being purchased 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.
Government recording and transfer charges: fees for legally recording the deed and mortgage. These fees may be paid by the purchaser or by the seller, depending on the terms of the sales agreement.
Home inspection: an inspection of the mechanical, electrical, and structural aspects of the home being purchased. The buyer will pay a fee for this inspection, and the inspector will provide the buyer with a written report evaluating the condition of the home.
Homeowner’s 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 the investment, and it must be obtained before closing on the loan.
HUD-1 Settlement Statement: a statement that itemizes the services provided to the home buyer and the fees charged for those services. This form is filled out by the person who will conduct the settlement. The borrower can ask to see the settlement statement at least one day prior to the settlement.
Interest: a fee charged by the lender for the use of its money.
Interest rate: the charge 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 the lender or by an outside inspector.
Loan Estimate: an estimate of the closing charges the buyer is likely to incur. This also contains other information about the loan.
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 they carry lower rates, since borrowers are lower risk.
Mortgage: the transfer of an interest in a 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.
PITI (principal, interest, taxes, and insurance): the four elements of a monthly mortgage payment. Payments of principal and interest go directly toward repaying the loan, while the portion that covers taxes and insurance goes into an escrow account to cover 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 property will be sold. It may also be called an agreement of sale or a 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: See closing costs.
Survey fee: a fee for obtaining a drawing of the 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 the title search and title insurance, if required. This fee also includes the services of a title or settlement agent.
Title insurance: insurance that protects the lender against any title dispute that may arise over the property. Through a title search, the lender verifies the actual property owners 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, title insurance provides legal protection and pays for court fees and related costs. Borrowers also may purchase owner’s title insurance, which protects the homeowner.
Tax certificate: official proof of payment of taxes due. This is provided at the time of transfer of the property title by the state or local government.
Tax service fee: Title service fees include charges for the title search and title insurance, if required. This fee also includes the services of a title or settlement agent.
Tolerance category: the maximum amount by which the charges for a category or categories of settlement cost may exceed the amount of those appearing on a loan estimate. When the originator selects and identifies the provider of services, these charges may increase only 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.