While browsing through this useful mortgage glossary of terms, keep an eye open for the Colorado Community Mortgage Referee. He’s throwing the flag on brokers trying to score big…at the borrower’s expense! We’ve successfully built a business on fairness, simplicity, and trust. So please contact us to find out how you can avoid these pitfalls by always being a part of our huddle.

The Administration Fee, when applicable, may be found on the Good Faith Estimate, in the first section of line items. These charges generally refer to lender efforts related to document preparation, funding, and review, which may also be included in what is referred to as Underwriting Fees.

Throwing the Penalty Flag! A lender will commonly charge the administration fee. Since a broker or retail lender will make their money through the Origination Fee, Yield Spread Premium, and Service Release Premium, a borrower should question any administration fee being paid to the broker. This is simply a hidden source of additional revenue. TOP

The Annual Percentage Rate (APR) appearing on the Truth-In-Lending Disclosure is derived by a federal government formula, and is designed to reflect the "true cost" of a loan to the borrower.

For instance, if a borrower receives a $100,000 loan to be paid over 30 years at 6%, and paid $2500 in pre-paid finance charges, the Principal and Interest (P&I) payment is $599.55. The resulting net proceeds, or credit provided to the borrower from the lender, would actually be $97,500. Now, the government formula calculates the APR from a different angle, using $599.55 as the payment on the smaller loan amount of $97,500 over the same term. The APR is 6.238%. Even though the net benefit is $97,500, the initial mortgage statement would accurately reflect a $100,000 balance the borrower must pay. The $2500 is still mathematically accounted for over the proposed term.

"True costs" are mostly theoretical however, because if a borrower simply paid an additional $100 toward the principle at any time during the term of the loan, the APR would be thrown off completely. Additionally, the "truth" in the Truth-In-Lending is only accurate for the first time a borrower may see it – much like a newspaper on a given day.

* Fees may include, but are not limited to, loan origination, loan discount, tax service fee, lender underwriting and document preparation fees, broker processing fee, and title company closing fee and courier fee.

Throwing the Penalty Flag! For the sake of obtaining a full and accurate accounting of costs, the broker or retail lender should always disclose which pre-paid items are, or are not, accounted for in the calculation of the loan amount and “credit extended to you or your behalf.” TOP

An Appraisal is a document that is obtained in order to determine specific value of the property being used to secure the requested loan. The type of appraisal required is usually identified by an automated underwriting system, for which the appraiser has set a pre-determined fee. For instance, a drive-by exterior-only appraisal will be less costly than a full appraisal. TOP

The Appraisal Fee, usually found on line 803 on the Good Faith Estimate, is the approximate amount the borrower can expect to pay for an appraisal, usually quoted toward the high-end of a given estimate range.

Throwing the Penalty Flag! Some brokers or retail lenders may generate additional revenue by charging more for the appraisal, than what it cost them to obtain it. The borrower could request the appraiser’s contact information, and ask the appraiser to provide a copy of the original invoice, once complete. Sometimes a lender will use an in-house appraiser, which might make obtaining the invoice more difficult. TOP

Attorney Fees, usually found on line 1107 on the Good Faith Estimate, reflect the expense of having an attorney, assigned by the broker or retail lender, review documents related to the transaction.

Throwing the Penalty Flag! These attorney services are rarely legitimate, and provide nothing more than additional revenue to the broker or retail lender. There are instances where “attorney fees” must be paid. If that is the case, ask for specific information regarding why and by whom they are required. TOP

The Closing Fee(s) is usually found on line 1101 of the Good Faith Estimate, and reflects a pre-determined charge by the designated title company, that cover expenses related to both administration and the time to facilitate the closing process. Varying closing fees may apply, depending on the loan scenario (i.e., purchase, refinance, 2nd mortgage, etc.).

Throwing the Penalty Flag! In the case where a broker or retail lender has the ability to close their own loans without the intervention of a title company, they may still implement a closing fee. This is simply additional revenue for the broker or retail lender, but may not always be avoided since the lender could reasonably price this service internally. TOP

The Compensation to Broker (not to be paid out of loan proceeds) is usually found on the Good Faith Estimate and appears under its own section. See Service Release Premium (SRP) and Yield Spread (YSP). TOP

The Credit Report Fee usually found on line 804 on the Good Faith Estimate refers to the cost of obtaining the borrowers credit report at the beginning of the loan approval process. This one report contains information about a borrower’s money-managing skills and habits, represented by a numerical score. Each of the three major credit bureaus (Equifax, Experian, and Trans Union) assign a credit score based upon the data they possess, and are contained in this single report.

Throwing the Penalty Flag! Generally speaking, credit report fees cost the broker or retail lender approximately $25 to obtain. It is expected that the borrower will pay this fee, though they should avoid paying a dramatically higher cost. A cost dramatically higher than $25 can be construed as additional revenue for the broker or retail lender. Some lenders will pull a report from only one of the credit bureaus, in which case, the report fee will be approximately $10. The borrower should ask their broker or retail lender which type of credit report was obtained. TOP

Document Preparation is usually found on line 1105 on the Good Faith Estimate and refers to a sub-charge by a lender, not broker. Overall, this fee is normally included in title company services, related to document handling and administration.

Throwing the Penalty Flag! As referenced above in the Closing Fee section, those fees cost approximately $200, and include the document preparation fee. TOP

The “Don’t-Make-Your-Monthly-Payment” scam is simple but very harmful. Some brokers or retail lenders will tell the borrower to skip impending scheduled monthly payments of debt; they claim the loan is scheduled to close quickly, when in fact it isn’t. The loan process is intentionally prolonged with the aim of raising the interest rate/fees at the last minute. The broker or retail lender will then “trap” the borrower, and take advantage of the borrower’s fear and urgency to payoff debt(s) already past due, thereby generating more revenue for the broker or retail lender. TOP

Discount Points are usually found on line 802 on the Good Faith Estimate, and refer to a percentage of the loan amount a lender may charge the borrower for a loan that falls outside the standard approval guidelines set by that particular investor.

Throwing the Penalty Flag! In most instances this charge is misapplied. Originally, if a borrower wanted a marginally lower interest rate under a lender’s standard guidelines, they could pay a certain percentage of the loan to the lender and “buy” a lower interest rate. The term “discount” does not refer to a reduction of fees a borrower will pay for the transaction.

Also, discount points may be a legitimate charge, depending on how they relate the loan type, or property type. Wholesale lenders often create their own loan programs in order to meet the needs of borrowers that fall outside the guidelines set by Fannie Mae, and then apply these discount points to those “special” programs. If a borrower believes their loan falls within “standard guidelines,” is not buying down the interest rate, and notices a charge for discounts points – they should ask their broker or retail lender to explain why that is the case. Often, this misapplication of discount points is merely additional revenue for the broker or retail lender.

Lastly, the Settlement Statement will reveal if a borrower is charged discount points. If discount points are legitimately applicable, the borrower should make sure discount point charges are being paid to the lender, and not the broker. TOP

Escrow is the holding of money or documents by a neutral third party prior to closing. It may also be an account set up to pay property taxes, homeowner and/or mortgage insurance when applicable, and is controlled by the lender or loan administrator. TOP

The Estimated Closing Costs found on the Good Faith Estimate, are the total charges associated with conducting a transaction. They are comprised of sections 800 (Broker or Retail Lender Fees), 1100 (Title Company Charges), 1200 (Government), and 1300 (Additional Fees). Estimated Closing Costs are also referred to as “Hard Costs”. TOP

The Finance Charge(s) is the amount of interest the borrower pays in the course of repaying the loan. TOP

The Flood Determination, found on the Good Faith Estimate, refers to the process when the lender employs a specialist to determine if the subject property is located in a flood plain as of the date assigned to the documentation. TOP

The Good Faith Estimate is a document that itemizes all the approximate associated costs with the transaction, and includes cursory information about the loan characteristics. TOP

“Hard” closing costs - See Estimated Closing Costs. TOP

Homeowner’s Insurance, also known as Hazard Insurance, generally refers to the annual cost of protection against potential losses related to the subject property. All lenders have varying insurance requirements. The Hazard Insurance Premium usually found on line 903 on the Good Faith Estimate refers to the cost of the annual insurance premium, and whether it will be collected at closing. Typically, if the policy renews within three months of the date the disclosures are signed, this line will reflect the amount of the premium to be collected as specified and determined by the borrower’s insurance agent. TOP

The Homeowner’s Association (HOA) Transfer Fee, when applicable on a purchase, is the cost associated with transfer of the Association membership from the seller to the buyer, which has been predetermined. TOP

The Improvement Location Certificate (ILC) from the Good Faith Estimate shows the relationship (location) of the structures (improvements) to the deed lines as described in the legal description. Distances from the major structures to the nearest deed lines will be shown, and will also show encroachments onto other properties or into areas reserved for easements. The ILC will also identify whether there are neighboring improvements encroaching on the subject property. TOP

The Items Required by Lender to be Paid in Advance (900 series) is found on the Good Faith estimate. Depending on the loan type, this may refer to interest due to the lender from the date the loan closes or funds, through the last day of that same month; mortgage insurance premium due, when applicable; and hazard insurance premium due, when applicable. TOP

The Lender/Investor Credit Report from the Good Faith Estimate refers to the charge associated with the lender obtaining an independent credit report other than that of the broker’s.

The Loan Origination Fee is usually found on line 801 of the Good Faith Estimate, and is charged by and paid to the broker expressed as a percentage of the loan amount, or a flat fee. It is paid to the broker at the time the loan funds.

Throwing the Penalty Flag! The Origination Fee was initially one of the most visible and legitimate measures of how much commission a broker would earn for putting a transaction together. The fee compensates the broker for industry knowledge, choosing a lender, administrative efforts, and customer service. Here’s a general guideline (based on a loan of $200,000 and average simplicity) related to broker compensation: the TOTAL dollar amount a competent broker should earn on a transaction should fall between 1% and 2% on a refinance, and 2% to 3% on a purchase. Again, that 1% to 3% is TOTAL compensation (combined Origination Fee, and Yield Spread). Above all, the fee should be commensurate with the effort GENUINELY expended by the broker to bring the transaction together on behalf of the borrower.

Some brokers will “sell” loans to potential borrowers by manipulating the Origination Fee in order to make it appear as if the borrower is getting a “good deal.” However, the broker is merely lowering or eliminating the Origination Fee, but inflating many other fees to make up for it.

Another common practice by some brokers is to tell the borrower the loan approval will be more difficult to obtain, for a number of contrived reasons, thereby increasing the Origination Fee initially quoted verbally, or on the Good Faith Estimate. The unscrupulous broker may take this opportunity to increase the interest rate initially quoted, in order to earn additional revenue. TOP

The Loan Discount is usually found on line 802 on the Good Faith Estimate. See Discount Points. TOP

Lock-in (or Rate Lock Confirmation) refers to the documented confirmation from the lender that guarantees the borrower a specific interest rate on a loan - providing it funds within a specific period of time.

Throwing the Penalty Flag! Some brokers or retail lenders will not lock the interest rate for the borrower in order to increase the broker or retail lender commissions (or yield spread premium). First, the borrower is quoted an interest rate higher than the best rate available. Second, the broker or retail lender will “float” the interest rate by essentially betting (with the borrower’s money) that rates will drop by the time the borrower’s loan must close. Lastly, if the interest rates drop, the broker or retail lender reaps the difference in the two rates as additional revenue/commission. Conversely, if the interest rates rise, the broker or retail lender will still make money from having quoted a higher interest rate quoted to the borrower in the beginning.

Another variation on this theme occurs when a broker or retail lender informs the borrower that the interest rate cannot be locked until they receive final approval for the loan. That may be true with some lenders on certain programs, but some brokers or retail lenders intentionally prolong the process in which the final approval is obtained, for the purpose of increasing their yield spread premium from the lender.

The final variation entails the broker or retail lender telling the borrower that the loan is locked; though it really isn’t. And as the closing date draws near, the broker or retail lender will inform the borrower that the lock date was missed for some contrived reason, and the interest rate has to be increased, or the borrower must pay discount points in order to keep the old interest rate. And sometimes the borrower finds out at closing, where the pressure to sign may be overwhelming.

To avoid these scenarios, a borrower should work with a broker or retail lender that will lock-in the best available interest rate, and provide the borrower with a copy of the rate-lock confirmation sheet, effective the date of the borrower’s request. TOP

A Low-Closing Cost Loan allows a broker or retail lender to increase the interest rate to a level that will pay the broker or retail lender a Yield Spread Premium sufficient to absorb a portion of the Hard Costs, primarily the Origination Fee.

Throwing the Penalty Flag! Some brokers will increase the interest rate far more than is necessary to cover a portion of the hard costs, and reap the additional yield spread as revenue. A borrower should obtain a copy of the rate lock confirmation sheet, which will indicate the exact percentage of the Yield Spread premium. TOP

A Mortgage Banker is generally assumed to originate and fund their own loans, which are then sold on the seconday market, usually to Fannie Mae, Freddie Mac, or Ginnie Mae.  

Throwing the Penalty Flag!  Many firms loosely apply the term Mortgage Banker to themselves, whether they are true mortgage bankers, or simply mortgage brokers or correspondents. 

Mortgage Brokers are required to disclose all additional compensation they receive from their investors and wholesale lenders to their borrowers. It appears on the Good Faith Estimate (see Service Release Premium and Yield Spread Premium) and on the Final HUD-1 Settlement Statement at closing. 

Many Mortgage Bankers will not disclose the additional revenue.   TOP

The Mortgage Broker Fee is usually found on line 808 of the Good Faith Estimate, and may refer to additional revenue to the broker or retail lender.  In some cases, the Mortgage Broker Fee is a result of a co-brokered loan, and is a legitimate charge.

Throwing the Penalty Flag! Some brokers or retail lenders will add an arbitrary number to this line, which only serves as an additional source of revenue. A borrower should dispute this charge if they are paying brokers or retail lenders “commission” through other means, such as through the Origination Fee, or Yield Spread Premium. A borrower should ask for a copy of the final Settlement Statement prior to closing, as the Mortgage Broker Fee may not appear until then. TOP

Mortgage Insurance (MI) protects the lender against losses incurred as a result of a borrower defaulting on a home loan, and is required as specified by the lender. TOP

The Mortgage Insurance Premium is usually found on line 902 from the “Items to be Paid In Advance” section of the Good Faith Estimate. This refers to the specific cost of Mortgage Insurance (MI) as represented on an annual basis, and is required as specified by the lender. TOP

A Mortgage Lender funds loans from their own pool of money, and ultimately sells the loan on the secondary market for servicing. TOP

A No-Closing Cost Loan allows a broker or retail lender to increase the interest rate to a level that will pay the broker or retail lender a Yield Spread Premium sufficient to absorb all of the Hard Costs, including the Origination Fee.

Throwing the Penalty Flag! Some brokers will increase the interest rate far more than is necessary to cover all the hard costs, and reap the additional yield spread as revenue. A borrower should obtain a copy of the rate lock confirmation sheet, which will indicate the exact percentage of the Yield Spread premium. TOP

The Notary Fee is usually found on line 1106 on the Good Faith Estimate, and covers the cost of having one or more documents notarized as part of the loan process and/or loan closing.

Throwing the Penalty Flag! Generally speaking, notary fees are regulated by the State. In Colorado, the fee shall not exceed $5 for each document. If you notice a Notary Fee, ask which documents were notarized, and by whom - the title company or the broker. TOP

Origination Fee - See Loan Origination Fee. TOP

Points - See Discount Points. TOP

Prepaid Finance Charges are fees the borrower will pay to execute the transaction, and are settled when the loan is funded. Finance charges include but may not be limited to, the Origination Fee, Loan Discount points, lender charges, processing fee, tax or closing fees. TOP

The Processing Fee is usually found on line 810 of the Good Faith Estimate, and is typically charged by a broker for assembling supporting documentation on a borrower’s file, and also includes other costs such as file copies, postage, and courier fees.

Throwing the Penalty Flag! Some brokers or retail lenders may increase the Processing Fee in order to increase revenue. A borrower should ask if the processing is done “in-house,” or by an outside processing company. A reasonable fee for processing, whether in-house or not, is approximately $200-$400. Also, the borrower should ask for an itemization of the services included in processing, as duplicate charges may be listed and paid to the broker as additional revenue without the borrower’s knowledge. If “processing-like” charges appear on the settlement Statement or Good Faith Estimate, the borrower should confirm those services are being charged by non-broker entities - such as the title company or the lender. TOP

Rate Lock - See Lock-in. TOP

Recording Fees usually found on line 1201 on the Good Faith Estimate refer to administrative costs associated with documents being filed by local government personnel. TOP

Reserves Deposited with Lender – See Escrow. TOP

Rescission Period refers to the three business days granted a borrower by law, to cancel the refinance or second mortgage transaction on their primary residence - for any reason. A written request to cancel must be submitted by the borrower and received by the closing agent before midnight of the third business day. This renders the agreement null and void, and returns the borrower and broker or retail lender to the position they were in prior to closing the loan.

Throwing the Penalty Flag! Like post-dating a personal check, some brokers or retail lenders will post-date the loan closing documents (three business days ahead of the actual signing date), thereby tricking the borrower out of their three-day rescission period. These brokers or retail lenders will instruct the borrower to put a specific date next to places the borrower’s signature appears. This may occur in transactions where brokers or retail lenders prepare their own documents, and close their own loans without the aid of a title company. Borrowers should always verify dates assigned to contracts and documents are accurate. TOP

The Settlement Statement is a document created by the title company closing agent, which is presented at the loan losing, and itemizes each expense associated with the loan transaction, that are paid by the borrower. TOP

The Service Release Premium (SRP) may appear the Settlement Statement, and refers to the amount of money (.125% up to .50% of the loan amount) a broker will receive as a bonus, for the broker preparing their own loan documents.  The SRP does NOT affect the borrower in any way. TOP

The Tax Related Service Fee can usually be found on line 809 of the Good Faith Estimate, and refers to a charge levied by the lender, who in turn pays an outside company responsible for monitoring the payment of property taxes on the subject property.

Throwing the Penalty Flag! If a charge appears for this service, the borrower should make sure the fee is paid directly to the lender, or the tax-service company - not the broker. This may merely be additional revenue for the broker. The borrower should refer to the Settlement Statement at closing, or ask for a copy of the final Settlement Statement 24 hours before the scheduled loan closing, as it is their prerogative. TOP

Title Insurance is usually found on line 1008 on the Good Faith Estimate, and refers to a policy that protects a homeowner or lender against loss or damage resulting from defects that may have occurred in the past. The process begins with the selected title insurance company providing a search and examination of public records that determine and disclose the facts relating to the ownership of a piece of real estate. Some of the facts include who currently owns the property; any liens or encumbrances against the property or its owner; easements and or restrictions, and other recorded interests. TOP

Total Estimated Settlement Charges is a line found on the Good Faith estimate, and refers to the sum of the “Hard Costs,” Pre-Paid Interest, and the amount collected for setting up escrow on taxes and insurance. TOP

The Transaction, Settlement, or Closing Costs section is found on the Good Faith Estimate and may include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys’ fees; recording fees; and notary, appraisal, and credit report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost either as an amount or a range. TOP

The Underwriting Fee is usually found on line 811 of the Good Faith Estimate, and refers to the process by which a lender decides whether to lend money, based on the value of the property, the borrower's credit history and any other relevant factors. TOP

The Wire Transfer Fee is usually found on line 812 of the Good Faith estimate, and refers to a charge levied by lender, where applicable, when funds are transferred by electronic means once final authorization is granted. The wire transfer takes place within a specified time after closing, where monies are sent to the closing agent by the lender.

Throwing the Penalty Flag! If this charge appears, the borrower should confirm it is payable to anyone but the broker. Some brokers may simply charge for a wire transfer when none was necessary or executed, because the funds may have been delivered by other means. TOP

Yield Spread Premium (also known as “ysp”) is usually found on the Good Faith Estimate under the section titled “Compensation To Broker”, and refers to a varying percentage of the loan amount paid to the broker, for providing a borrower with a specific interest rate. The lender predetermines the maximum percentage (or cap) allowed.

Throwing the Penalty Flag! Quick history: The yield spread was originally devised as a way to assist borrowers, by raising the interest rate enough to cover some or all of the closing costs, for what is known as a low-cost or no-cost transaction. The abuse of this tool has been the source of recent debate in the mortgage industry. Some brokers or retail lenders will simply offer a higher interest rate to a borrower because the premium/commission given to them by the lender is higher.

For example, on a $200,000 loan, a borrower may qualify for the absolute best rate of 6%, which pays the broker a generous 0.375% yield spread/commission totaling $750. But the broker or retail lender may intentionally misinform the borrower by saying the best interest rate available is 6.25%, where the lender has offered a 1.25% yield spread totaling $2500.

In this example, the broker or retail lender sold the borrower a higher interest rate in order to retain the $2500 as additional revenue, along with the Origination Fee. So, if a broker or retail lender did not offer to pay some or all of the closing costs, the $2500 premium cited in this example could be viewed as unethical.

Most importantly, the borrower is entitled to know exactly how much money the broker is earning in Yield Spread Premium, though it may not show on the Settlement Statement. When in doubt, the borrower should request a copy of the Rate Lock Confirmation sheet that is provided to the broker by the lender early in the process. It details important aspects of the transaction, including the note rate, term, and yield spread premium offered to the broker.

As a general guideline on broker compensation: the total amount a competent broker should earn on a transaction from the borrower should fall between 1% and 2% on a refinance, and 2% to 3% on a purchase (combined Origination Fee, and Yield Spread). These percentages apply for processing a loan of average size ($200,000) and ease (few administrative difficulties).

Above all, the fee should be commensurate with the effort genuinely expended by the broker to successfully bring the transaction together. TOP