Important Mortgage Banking Terms To Know

Important Mortgage Banking Terms To Know –updated 7-21-23

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Mortgage Banker:  A firm or individual who originates loans for sale to other investors (such as Fannie Mae or Freddie Mac) and usually is a depository institution. They usually service the loan also.  

A mortgage bank is a state-licensed banking entity that makes a mortgage loan directly to the consumer. The mortgage banker unlike the mortgage broker; fund their loans and use their capital.

Mortgage Broker:  A mortgage broker is an originator of loans for a mortgage banker/lender. They act as a go-between for the lender who will fund the loan and the loan is closed in the lender’s name who furnishes the capital to close.

Lender:  A lender is an institution that meets certain guidelines and regulations with certain investors such as Fannie Mae, Freddie Mac, FHA, and VA.  

They are the same as a mortgage banker; they originate loans, process loans, underwrite their loans, and close and fund loans with their capital.  These lenders allow brokers to submit loans to them for approval as brokers normally do not fund their loans.

Mortgage Documentation

Application: (referred to as 1003) in mortgage lending. This form contains all of the pertinent information the applicant gives to the lender. Full names, addresses, phone, Social Security numbers, asset information, and debt obligations, including but not limited to alimony and child support.

**Normally if the application is taken face to face, the application will sign a consent form. The application may be taken via email, phone, and fax. Upfront disclosures must be sent within (3) working days.

More Mortgage Banking Terms to Know

Mortgage:  A formal document; sometimes called a Deed of Trust in some states; which is executed by an owner of a property; pledging that property as collateral for payment of the debt.  The non-borrower spouse must sign the mortgage/deed of trust to relinquish their right; should the loan default and go into foreclosure.

Deed of Trust:  In some states, the document is used instead of a mortgage.  A security instrument conveying title in trust to a third party covering a particular piece of property.  It is used to secure the payment of the note.  

A conveyance of the title land to a trustee as collateral security for the payment of a debt with the condition that the trustee shall re-convey the title upon the payment of the debt, and with the power of the trustee to sell the land and pay the debt in the event of a default on the part of the debtor.

Note:  This describes a kind of paper or document signed by the borrower of a loan that is acknowledging a debt and a promise to repay the debt.  When it is secured by a mortgage/deed of trust; it is called a mortgage note and the mortgagee is named as the payee.

Mortgage Note:  A document that is a written promise, sometimes called a promissory note; to pay a sum of money at a state rate of interest during a specified term.  This note is secured by a mortgage.

Verification of Employment:  A designated form which is used in mortgage lending to send directly to a borrower’s employer to be completed about the borrower’s hire date, position, monthly or annual salary, year-to-date earnings, date of last salary increase, hourly rate if applicable, the base number of hours worked each week,  two previous years earnings total and the likelihood of continued employment.

Verification of Deposit:  A designated form that is used in mortgage lending that is sent directly to the borrower’s bank to verify the assets they have listed on the application.  

The type of accounts, the current balances, the average balances, the dates the accounts were opened, and if there are any loans in the borrower’s name at the institution.

Quitclaim Deed:  This is a deed relinquishing all interest, title, or claim in a property by a grantor, but not representing that such title is valid, nor containing any warranty or covenants for title.

Warranty Deed:  A deed in which the grantor or seller warrants or guarantees that good title is being conveyed, as opposed to a quitclaim deed, which contains no representation or warranty regarding the quality of title being conveyed.

The Difference in The Lender, The Borrower & The Loan Officer

Mortgagor:  The borrower or owner who has signed a mortgage note/mortgage/deed of trust and pledges the property as security for the debt.

Borrower: The same as the mortgagor; an individual who applies and becomes approved for a mortgage loan.

Co-Borrower:  A co-borrower is usually the secondary borrower who applies with another borrower to obtain mortgage financing.  They do not have to be married to be borrower and co-borrower.

Mortgagee:  The lender in a mortgage transaction.

Originator:  A person who solicits builders, brokers, real estate agents, and others to obtain applications for mortgage loans. 

Origination (taking of the application and processing the loan request) is the process by which a mortgage banker or direct lender brings into being a mortgage secured by real estate.

Fees Of A Mortgage Loan

Origination Fee:  This is the fee the lender charges for the origination of the mortgage application to prepare the file for closing.  This may include; processing, underwriting, preparation of documents, verification of employment, verification of assets, credit checks, and inspections. 

Usually, it does not include the appraisal fee and sometimes does not include the credit report.  But, all fees must be disclosed to the applicant, as to what makes up the origination fee.  Any broker fees must be included and within tolerances.

Discount points: A charge that is paid for buying down the interest rate of the loan. 1% discount = 1 percent of the loan amount and is added to the total closing cost. The lender may pay these charges if they agree to, however, this is not always true.

The Different Terms Used To Describe a Mortgage Loan

Conventional Conforming Loan:  A loan that is made by a lender with a maximum loan amount not higher than $726,200 (2023) for a one-family dwelling in certain states.  It is a mortgage loan not insured by FHA or guaranteed by the VA or Farmers Home Administration.

Non-Conforming Mortgage Loan:  A mortgage loan in which the loan-to-value ratio, the term, or other aspects of the loan exceed permissible limits specified by regulations within the conforming loan requirements put out by Fannie and Freddie. **Sometimes also referred to as a Jumbo loan because of the loan limits being exceeded.

Jumbo Loan:  A loan that exceeds the maximum loan limits of Fannie and Freddie. A loan that is greater than,  $726,200 (2023) for one unit single-family dwelling and $1,089,300 (2023) in high-cost areas for loan limits for 2023

Convertible Mortgage:  A mortgage in which the funds, in the form of a loan as supplied by a lender, convert into equity or a share of ownership after a prescribed period.

**In an ARM loan; this can also mean that the mortgage loan interest rate may/can be converted to a fixed-rate loan at a certain interval and after a certain period.

FHA Loan:  A loan that is insured by the Federal Housing Administration; sometimes called a government loan.  This loan has upfront MIP (mortgage insurance premium- which is default insurance and monthly/annual MIP).

VA -Veterans Administration:  Federal Government Agency created in 1930.  The Servicemen Re-adjustment Act of 1944 authorized the agency to administer a variety of benefit programs designed to facilitate the adjustment of returning veterans to civilian life. 

The VA home loan guaranty program is designed to encourage lenders to offer long-term, low-down-payment mortgages to eligible veterans by guaranteeing the lender against loss.

Mortgage Insurance Terms

MIP- Mortgage Insurance Premiums:  The amount paid by a mortgagor for mortgage insurance to either FHA or a private mortgage insurance company (MIC).

MIC- Mortgage Insurance Certificate:  The certificate issued by HUD/FHA as evidence that the mortgage has been insured.  This certificate is the evidence that a contract of mortgage insurance exists between HUD/FHA and the lender, incorporating the HUD/FHA regulations identified in the cert.

Mortgage Insurance:  This is a type of term life insurance often bought by mortgagors.  The amount of coverage decreases as the mortgage balance declines.  In the event the borrower dies while the policy is in force, the debt is automatically satisfied by the insurance proceeds.

The Terms Used for the Product Type

Fixed-Rate Loan:  A loan that carries a fixed interest rate for the entire term of the loan.

ARM- Adjustable Rate Loan:  An adjustable-rate loan is one that carries a rate of interest that adjusts at different intervals depending upon which ARM preselected index.  

The terms, adjustment schedule, and index to be used can be negotiated by the borrower and the lender.  Some ARM loans have a rate that may fluctuate every six months – 12 months. 

Some ARM products have a fixed-rate period for the first 12, 36, or 60 months and then it becomes an adjustable rate changing every 12 months.

When The Borrower Cannot Sign

Attorney In Fact:  One who holds a power of attorney from another to execute documents on behalf of the grantor of the power. It is terminated upon the death, relocation, or court-decided incompetence of the grantor.

Power of Attorney:  A legal document authorizing one person to act on behalf of another. **For Mortgage Lending:  This is when a borrower gives another person the power to sign the mortgage instruments on their behalf.  It is usually a  Specific Power of Attorney and a General Power of Attorney. 

A Specific Power of Attorney is for one specific issue such as signing mortgage instruments on their behalf if they are not available to do so themselves such as servicemen, a borrower who is out of the Country for any reason, and illness, etc.

PITI:  Principal, Interest, Taxes, and Insurance which makes up the full mortgage payment for the borrower.  This may include mortgage insurance.

APR (Annual Percentage Rate)– This is the total amount of what the financing of the loan as per the entire amortization of the loan and may include the certain closing cost in mortgage lending. This is not your base interest rate.

Interest-Only Payment:  This is a payment option that usually exists for the first 10 years of a loan. It is exactly what it says; Interest-only and there is no principal paid during this time. The mortgage loan payment after the interest-only period is then amortized over the remaining life of the loan.

Assets:  accumulation of property that is useful and/or has a value and can be converted to cash.

Closing Cost: This is the accumulation of the cost of the mortgage loan that is required to be paid for the loan product being financed. This usually exists with origination fees, discount points (if any), title insurance, attorney fees, recording fees, underwriting fees, processing fees, state tax stamps, realtor fees, appraisal fees, document preparation fees, credit report fees, taxes, and home inspection.

*Some fees may be paid by the seller for a purchase transaction. FHA allowable fees to be in buyers closing costs are not the same as conventional lending, or VA closing costs.

Liquid Assets:  property, funds, or paper that has been converted to liquid and/or cash on hand which is ready for use. Liquid assets are usually in the form of money that is deposited into checking, or savings accounts.

Money Market Accounts:  The financial market that brings investment capital and short-term money instruments (those maturing within a year) such as treasury bills, notes, commercial paper, etc.

Negative Amortization:  A loan payment schedule in which the outstanding principal balance goes up, rather than down, because the payments do not cover the full amount of interest due.  The unpaid interest is added to the principal.

The Seller and Buyers Contract

Purchase Agreement (Contract):  A written proposal by a buyer to purchase real estate that becomes binding upon the acceptance of the seller.  *This contract/purchase agreement must be signed by all parties of the transaction, including the Realtor (if applicable), buyer/purchaser(s), and seller(s).

Contingency:  A clause in a contract that requires the completion of a certain act or the occurrence of a certain event before the contract is binding.

Closing Agent:  This can be an attorney or title company that does the preliminary workup of the title. They search the title to make sure all prior liens or encumbrances have been cleared and released.

This can mean that all prior owners have been released from the title. Title insurance is ordered and the lender’s and buyer’s interest in the loan is considered full entitlement without exceptions.

Title Insurance:  A contract by which the insurer, usually a title insurance company, agrees to pay the insured a specific amount for any loss caused by defects of title to real estate.

This is wherein the insured has an interest as purchaser, mortgagee, or otherwise.  A mortgage lender will have insurance and the mortgage application/borrower can also have title insurance.  It is called lender policy and owner policy respectively.

Title Search:  An examination of public records, laws, and court decisions to disclose the past and current facts regarding ownership of real estate.  The search is completed to make sure no liens are outstanding that have not been released or paid off. 

In buying real estate; one wants to make sure that they have a clear title and a lender will not provide funds without a clear title.

Tenancy by Entirety:  The joint ownership of property by a husband and wife where both are viewed as one person under common law that provides for the right of survivorship.

Tenancy in Common:  In law, the type of ownership created when real or personal property is granted to two or more persons, without express words creating a joint tenancy:  There is no right of survivorship.

Tax Lien:  A claim against the property for the amount of its due and unpaid taxes.

Tangible Assets:  Physical assets such as electrical fixtures as opposed to intangible assets such as customer goodwill.

Ratio Analysis:  DTI (debt to income ratio):   An analysis in the underwriting of a mortgage loan that calculates the proposed housing expense, plus other long-term debt expenses as a percentage of monthly income.

The standard benchmark housing is 28-31%; the total debt to income is 36-41%. **These calculations may be greater if the loan is run in the agency’s automated underwriting systems and is preliminarily approved through these.

This is dependent upon the overall credit and financial quality of the file, including credit, assets, and loan to value.

Replacement Cost:  The cost to replace a structure with one of equivalent value and function, but not necessarily identical in design or material. A mortgage lender usually requires hazard insurance to be either; the full amount of the loan or the replacement cost.

RESPA:  Real Estate Settlement Procedure Act:  RESPA is a federal law that requires lenders to provide home mortgage borrowers with information on known or estimated settlement costs. **Explained changes below in Loan Estimate /Closing Disclosure.

Release of Record:  The act of recording a release deed or satisfaction of mortgage to release or eliminate the lien of the mortgage on the public records.

Release of Liability:  An agreement by a lender to terminate the personal obligation of a mortgagor in connection with the payment of a debt.

Right of Survivorship:  This is co-ownership of the property where if one owner dies, the undivided estate then passes to the surviving owner(s) in the case of joint tenancy and tenancy by the entirety (husband and wife).

Right of First Refusal:  This is a provision in an agreement or contract for a property. This will stipulate that the owner of the property must offer the first opportunity to purchase or lease a property. It is usually to a specified person or company before offering it to others.

The satisfaction of Mortgage:  When a loan is paid in full, the instrument given by the lender will evidence payment in full of the mortgage debt and is recorded.  The borrower is released from liability to the mortgage company. 

The debt no longer exists.  You are not released from liability until the release of the mortgage is recorded. The lien will show on a title examination until it is released by the lender.

Sweat Equity:  Equity created in a property by the performance of work or labor by the purchaser or borrower.

Property Appraisal: an evaluation of the property being secured by the mortgage. The appraisal is obtained by approved appraisers. He/she will inspect the property for the amenities of the subject. Size – square footage of the home, building materials, included amenities such as appliances, heating, air, lot size, and condition of the property.

The appraisal is used to prove the sales price is accurate or within a close range of the properties within the same neighborhood. The similarities are evaluated and a value is given from the comparables within a subdivision, certain area, or closest proximity.

Subject to Mortgage:  A taking of title to a mortgaged property without assuming personal liability for the mortgage debt.

Subordination:  The act of a party acknowledging, by written recorded instrument, that debt is inferior to the interest of another in the same property.  Subordination may apply not only to mortgages, but to leases, real estate rights, and any other type of debt instrument.

Settlement Cost:  Cash paid at closing by the borrower and sellers to constitute the closing of a mortgage loan.  The seller portion if is usually deducted from the sales price at closing with net funds after the cost is disbursed.  This normally includes origination fees, discount points (if any) title insurance, survey, attorney’s fees, and such prepaid items as taxes and insurance escrow payments.

Seller-Servicer:  This is a term that is used by Fannie Mae and Freddie Mac. It describes those who are approved corporations/lenders, mortgage companies, or mortgage banking institutions that sell and service mortgages for them.

Secondary Mortgage Market:  This is the process of lenders and investors who sell and buy existing mortgage, which is closed, loans, and made into mortgage-backed securities. This provides greater availability of funds for additional mortgage lending by banks and mortgage bankers. Fannie Mae and Freddie Mac are considered the Secondary Market.

Securitization:  The process of pooling loans into mortgage-backed securities for sale into the secondary market (When loans are sold from a bank/mortgage company- it frees up monies to reinvest in originations of other mortgage loans).

Security Instrument (Deed of Trust or Mortgage):  The mortgage or trust deed that evidences the pledge of real estate security as distinguished from the note or other credit instrument. The security instrument will detail the terms of the note, and give any restrictions, rules, or state regulations for securing the property.

Important Changes: Recently reformed application and closing document rules: Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z)

Review the entire rule here:  Reg X and Regulation Z Changes    

Loan Estimate (replaces 2 forms):  The Loan Estimate form replaces two current Federal forms. It replaces the Good Faith Estimate designed by the Department of Housing and Urban Development (HUD) under RESPA.

This also covers the “early” Truth in Lending disclosure designed by the Board of Governors of the Federal Reserve System (the Board) under TILA. The final rule and the Official Interpretations (on which creditors and other persons can rely) contain detailed instructions as to how each line on the Loan Estimate form should be completed.

There are sample forms for different types of loan products. The Loan Estimate form also incorporates new disclosures required by Congress.

Timing: The creditor or broker must give the form to the consumer no later than three business days after the consumer applies for a mortgage loan.

Closing Disclosure:  The Closing Disclosure form replaces the current form used to close a loan, the HUD-1, which was designed by HUD under RESPA.  It also replaces the revised Truth in Lending disclosure designed by the Board under TILA. The rules and the Official Interpretations (on which creditors and other persons can rely) contain detailed instructions. It gives instructions for each line on the Closing Disclosure form that should be completed. The Closing Disclosure form contains additional new disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction.

Timing:  The creditor must give consumers the Closing Disclosure form to consumers so that they receive it at least three business days before the consumer closes on the loan.1

Quality Control:  Methods, procedures, and policies used to maintain acceptable and dependable levels of quality in the production, selling, and servicing of mortgage loans. **This is the measure that is undertaken, before and after closing such as verbal verifications of employment to make sure a borrower is still employed, checking asset information, etc.