Mortgage glossary
Plain-English definitions of the terms you will hear from lenders, agents and title companies.
A
- Adjustable-rate mortgage (ARM)
- An adjustable-rate mortgage (ARM) is a home loan whose interest rate stays fixed for an initial period, then adjusts at set intervals based on a market index plus a margin.
- Amortization
- Amortization is the process of paying off a loan through scheduled, equal payments over time, with each payment split between interest owed and reduction of the principal balance.
- Annual percentage rate (APR)
- The annual percentage rate (APR) is the yearly cost of a loan expressed as a percentage, combining the interest rate with certain lender fees and charges so offers can be compared.
- Appraisal
- An appraisal is an independent, licensed professional's opinion of a property's market value, ordered by the lender to confirm the home is worth enough to support the loan amount.
- Asset depletion
- Asset depletion is a qualifying method that converts a borrower's liquid assets into a calculated monthly income figure, letting people with significant savings but limited paychecks qualify for a mortgage.
B
- Bank statement loan
- A bank statement loan is a non-QM mortgage that qualifies self-employed borrowers using deposits shown on personal or business bank statements instead of tax returns to document income.
C
- Cash-out refinance
- A cash-out refinance replaces an existing mortgage with a new, larger loan and pays the borrower the difference in cash, turning part of the home's equity into money at closing.
- Cash-out seasoning
- Cash-out seasoning is the minimum time a borrower must have owned a home, or held the current loan, before a lender will allow a cash-out refinance on that property.
- Clear to close
- Clear to close is the underwriter's final sign-off confirming every loan condition has been satisfied, meaning the lender is ready to prepare final documents and fund the loan at closing.
- Closing costs
- Closing costs are the fees and prepaid expenses due when a mortgage closes, covering lender charges, appraisal, title insurance, recording, and upfront funding of the escrow account for taxes and insurance.
- Closing Disclosure
- The Closing Disclosure is a standardized five-page federal form showing a mortgage's final terms, projected payments, and every closing cost, delivered at least three business days before closing.
- Conforming loan limit
- The conforming loan limit is the maximum loan amount Fannie Mae and Freddie Mac will purchase, set yearly by the Federal Housing Finance Agency, with higher limits in designated high-cost counties.
- Conventional loan
- A conventional loan is a mortgage not insured or guaranteed by a government agency, typically following Fannie Mae or Freddie Mac guidelines on credit, income, down payment, and property.
- Credit score
- A credit score is a three-digit number, typically ranging from 300 to 850, that summarizes a borrower's credit history and helps lenders gauge the likelihood of repaying a loan.
D
- Debt service coverage ratio (DSCR)
- The debt service coverage ratio (DSCR) compares a rental property's income to its monthly housing expense, letting investors qualify for a mortgage on the property's cash flow rather than personal income.
- Debt-to-income ratio (DTI)
- The debt-to-income ratio (DTI) is the percentage of a borrower's gross monthly income that goes toward monthly debt payments, including the new mortgage, used by lenders to measure affordability.
- Discount points
- Discount points are optional upfront fees paid at closing to lower a mortgage's interest rate for the life of the loan, with one point typically equal to 1% of the loan amount.
- Down payment assistance (DPA)
- Down payment assistance (DPA) is a grant, forgivable loan, or deferred second loan that helps eligible buyers cover a down payment and sometimes closing costs when buying a home.
E
- Earnest money
- Earnest money is a good faith deposit a buyer makes after signing a purchase contract, held by the title company and usually applied toward the down payment or closing costs at closing.
- Entitlement (VA)
- VA entitlement is the amount the Department of Veterans Affairs will guarantee on an eligible veteran's home loan, which lets lenders offer VA financing with no down payment for qualified borrowers.
- Escrow account
- An escrow account is a separate account managed by the loan servicer that collects part of each mortgage payment to pay the borrower's property taxes and homeowners insurance when they come due.
F
- FHA loan
- An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and more flexible credit standards than many conventional loans for primary residences.
- Funding fee (VA)
- The VA funding fee is a one-time charge paid to the Department of Veterans Affairs on most VA loans, helping fund the program in place of monthly mortgage insurance.
H
- HELOC
- A HELOC, or home equity line of credit, is a revolving credit line secured by your home that lets you borrow against equity as needed, typically with a variable rate.
- Homestead exemption (Texas)
- A Texas homestead exemption reduces the taxable value of a home that is the owner's principal residence, lowering the property tax bill and limiting how fast the taxable value can rise.
I
- Interest rate lock
- An interest rate lock is a lender's commitment to hold a specific interest rate and pricing for a set number of days while the loan is processed, protecting the borrower from market increases.
- IRRRL
- An IRRRL, or Interest Rate Reduction Refinance Loan, is a VA streamline refinance that lets borrowers with an existing VA loan refinance into a new VA loan with reduced paperwork.
- ITIN loan
- An ITIN loan is a mortgage for borrowers who file taxes with an Individual Taxpayer Identification Number instead of a Social Security number, typically offered through non-QM lending programs.
J
- Jumbo loan
- A jumbo loan is a mortgage for an amount above the conforming loan limit, used to finance higher-priced homes that Fannie Mae and Freddie Mac cannot purchase under their guidelines.
L
- Loan Estimate
- The Loan Estimate is a standardized three-page federal form a lender must provide within three business days of a mortgage application, summarizing the loan's terms, projected payments, and closing costs.
- Loan-to-value ratio (LTV)
- The loan-to-value ratio (LTV) is the mortgage amount divided by the property's appraised value or purchase price, whichever is lower, expressed as a percentage that shows how much equity backs the loan.
M
- Manual underwriting
- Manual underwriting is a loan review in which a human underwriter evaluates a borrower's full file directly, instead of relying on an automated underwriting system's approval, often for thin or unusual credit.
- Mortgage insurance premium (MIP)
- Mortgage insurance premium (MIP) is the insurance FHA borrowers pay to protect the lender against default, made up of an upfront premium at closing and an annual premium paid monthly.
N
- Non-QM loan
- A non-QM loan is a mortgage that falls outside the federal qualified mortgage standards, using alternative ways to document income or property cash flow for borrowers who do not fit agency guidelines.
P
- Pre-approval
- A pre-approval is a lender's written statement, based on a credit check and documented income and assets, that a borrower is likely to qualify for a specific loan amount and program.
- Pre-qualification
- A pre-qualification is an early, informal estimate of how much a borrower might be able to borrow, usually based on self-reported income, debts, and assets rather than verified documents.
- Private mortgage insurance (PMI)
- Private mortgage insurance (PMI) is insurance that protects the lender on a conventional loan when the borrower puts down less than 20%, usually paid as a monthly addition to the mortgage payment.
R
- Rate buydown (temporary)
- A temporary rate buydown is an arrangement, often funded by the seller or builder, that lowers a mortgage's interest rate for the first one to three years before it returns to the note rate.
T
- Title insurance
- Title insurance protects the lender and, if purchased, the homeowner against financial loss from defects in a property's ownership history, such as liens, recording errors, or undisclosed heirs.
U
- Underwriting
- Underwriting is the lender's process of verifying a borrower's income, assets, credit, and the property to decide whether the loan meets program guidelines and can be approved.
- USDA loan
- A USDA loan is a mortgage guaranteed by the U.S. Department of Agriculture for homes in eligible rural and suburban areas, offering no down payment financing to buyers within household income limits.
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