Mortgage Glossary

Plain-English definitions of the terms you'll encounter during the mortgage process. No jargon, no confusion - just clear answers.

A

Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that changes periodically based on a market index. ARMs typically start with a lower fixed rate for an introductory period (such as 5 or 7 years), then adjust annually. They can be a good fit if you plan to sell or refinance before the adjustment period begins.
Amortization: The process of paying off a loan through regular monthly payments over time. Each payment covers both principal and interest, with early payments going mostly toward interest and later payments going mostly toward principal. A standard mortgage amortization schedule runs 15 or 30 years.
Annual Percentage Rate (APR): The total yearly cost of borrowing, expressed as a percentage. APR includes the interest rate plus lender fees, mortgage insurance, and other costs - making it a more complete picture of what your loan actually costs than the note rate alone.
Appraisal: A professional evaluation of a property's market value, conducted by a licensed appraiser. Lenders require an appraisal before approving a mortgage to make sure the home is worth at least as much as the loan amount. The appraisal protects both you and the lender from overpaying.
Asset Depletion Loan: A Non-QM loan that uses your liquid assets (savings, investments, retirement accounts) to calculate qualifying income instead of traditional pay stubs or tax returns. The lender divides your total assets by a set number of months to determine your monthly income. This is popular with retirees and high-net-worth borrowers.
Assumable Mortgage: A mortgage that allows a buyer to take over the seller's existing loan, keeping the original interest rate and terms. FHA, VA, and USDA loans are generally assumable, while most conventional loans are not. In a high-rate environment, assuming a low-rate loan can save a buyer thousands over the life of the loan.

B

Balloon Mortgage: A mortgage with small monthly payments for a set period (usually 5 to 7 years), followed by one large lump-sum payment for the remaining balance. These loans carry more risk because you need to either pay off or refinance the balance when the balloon comes due.
Bank Statement Loan: A Non-QM loan designed for self-employed borrowers who show strong cash flow in their bank accounts but lower income on tax returns. Instead of W-2s and tax returns, the lender reviews 12 to 24 months of personal or business bank statements to calculate qualifying income. Learn more in our bank statement loan guide.
Bridge Loan: A short-term loan that helps you buy a new home before selling your current one. Bridge loans use your existing home's equity as collateral and are typically repaid once that property sells. They are useful in competitive markets where you need to move quickly.
Buydown: A financing technique where you (or the seller) pay an upfront fee to temporarily or permanently reduce the mortgage interest rate. Common structures include 2-1 and 1-0 temporary buydowns, where the rate steps up over the first few years. Read our full breakdown of how mortgage rate buydowns work.

C

Cash-Out Refinance: Replacing your current mortgage with a new, larger loan and taking the difference in cash. Homeowners use cash-out refinances to tap into their equity for home improvements, debt consolidation, or other expenses. Compare this option with a HELOC in our HELOC vs. cash-out refi guide.
Closing Costs: The fees and expenses you pay when finalizing a mortgage, beyond the down payment. These typically include appraisal fees, title insurance, lender origination fees, escrow deposits, and recording fees. Closing costs generally range from 2% to 5% of the loan amount.
Closing Disclosure: A five-page document that lists your final loan terms, monthly payment, and all closing costs. Federal law requires your lender to provide this form at least three business days before closing so you can review it and compare it to your Loan Estimate.
CLTV (Combined Loan-to-Value): The ratio of all loans secured by a property divided by its appraised value. If you have a first mortgage of $300,000 and a HELOC of $50,000 on a home worth $500,000, your CLTV is 70%. Lenders use CLTV to assess overall risk when you have more than one loan on a property.
Conforming Loan: A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including maximum loan limits. Because these loans can be sold to government-sponsored enterprises, they generally offer lower interest rates than non-conforming or jumbo loans.
Conventional Loan: A mortgage that is not insured or guaranteed by a government agency like the FHA or VA. Conventional loans typically require higher credit scores and larger down payments but offer more flexibility on property types and loan amounts. They are the most common mortgage type in the U.S. Learn about the differences in our FHA vs. conventional comparison.
Credit Score: A three-digit number (typically 300 to 850) that represents your creditworthiness based on your payment history, outstanding debt, length of credit history, and other factors. Higher scores qualify you for better mortgage rates and terms. Check out our article on credit score myths for homebuyers.

D

Debt Service Coverage Ratio (DSCR): A ratio that compares a property's rental income to its mortgage payment. A DSCR of 1.25 means the property generates 25% more income than its debt obligations. DSCR loans let real estate investors qualify based on property cash flow rather than personal income. Learn more in our DSCR loans guide.
Debt-to-Income Ratio (DTI): The percentage of your gross monthly income that goes toward paying debts, including your proposed mortgage payment. Lenders use DTI to determine how much you can afford to borrow. Most loan programs require a DTI below 43% to 50%, depending on the loan type and other qualifying factors.
Deed of Trust: A legal document used in many states instead of a traditional mortgage. It involves three parties: the borrower, the lender, and a neutral trustee who holds the property title as security until the loan is fully repaid. If the borrower defaults, the trustee can initiate foreclosure proceedings.
Default: When a borrower fails to meet the terms of their mortgage, most commonly by missing payments. Defaulting on a mortgage can lead to foreclosure, damage your credit score, and make it difficult to qualify for future loans. If you are struggling to make payments, contact your lender early to discuss options like forbearance.
Down Payment: The upfront cash you pay toward the purchase price of a home. Down payment requirements vary by loan type - conventional loans may require as little as 3%, FHA loans require 3.5%, and VA loans may require nothing down. A larger down payment can help you avoid PMI and secure a better rate.
Down Payment Assistance (DPA): Programs offered by state and local agencies, nonprofits, and some lenders that help homebuyers cover part or all of their down payment and closing costs. DPA can come as grants, forgivable loans, or low-interest second mortgages. See our guide to down payment assistance programs.
Due Diligence: The research and investigation period after your offer is accepted but before closing. During due diligence, you typically complete inspections, review the title, finalize financing, and confirm the property meets your expectations. This is your opportunity to identify any issues before you are fully committed.

E

Earnest Money: A deposit made to show you are serious about buying a home. Earnest money is held in an escrow account and applied toward your down payment or closing costs at closing. If you back out of the deal without a valid reason outlined in the contract, you may forfeit the deposit.
Equity: The difference between your home's current market value and what you still owe on your mortgage. If your home is worth $500,000 and you owe $300,000, you have $200,000 in equity. You can access your equity through a cash-out refinance, HELOC, or home equity loan.
Escrow: A neutral third party that holds funds and documents during a real estate transaction until all conditions are met. During the homebuying process, escrow manages the exchange of money between buyer, seller, and lender to protect everyone involved.
Escrow Account: An account set up by your lender to collect and pay your property taxes and homeowners insurance on your behalf. A portion of each monthly mortgage payment goes into the escrow account, and the lender pays these bills when they come due. Also called an impound account.

F

Fair Housing Act: A federal law that prohibits discrimination in housing based on race, color, national origin, religion, sex, familial status, or disability. The Fair Housing Act applies to mortgage lending, home sales, rentals, and advertising. All lenders and real estate professionals must follow these protections.
Fannie Mae: The Federal National Mortgage Association, a government-sponsored enterprise that buys mortgages from lenders and packages them into mortgage-backed securities. Fannie Mae sets the guidelines for conforming loans, and its standards influence interest rates and qualification requirements across the mortgage industry.
FHA Loan: A government-backed mortgage insured by the Federal Housing Administration, designed for borrowers with lower credit scores or smaller down payments. FHA loans require as little as 3.5% down and are popular with first-time homebuyers. They do require both upfront and monthly mortgage insurance premiums.
Fixed-Rate Mortgage: A mortgage with an interest rate that stays the same for the entire life of the loan. The most common terms are 15-year and 30-year fixed. Your principal and interest payment never changes, which makes budgeting predictable over the long term.
Forbearance: A temporary agreement where your lender allows you to reduce or pause mortgage payments during a period of financial hardship. Forbearance does not erase the debt - you will need to repay the missed amounts later through a repayment plan, loan modification, or other arrangement.
Foreclosure: The legal process where a lender takes ownership of a property after the borrower defaults on the mortgage. Foreclosure severely impacts your credit and can remain on your credit report for up to seven years. If you are at risk, contact your loan servicer as early as possible to explore alternatives.
Freddie Mac: The Federal Home Loan Mortgage Corporation, a government-sponsored enterprise similar to Fannie Mae. Freddie Mac buys mortgages from lenders, packages them into securities, and sells them to investors. Together, Fannie Mae and Freddie Mac provide liquidity that keeps mortgage rates competitive.

G

Gift Funds: Money received from a family member, employer, or other approved source to help cover your down payment or closing costs. Most loan programs allow gift funds, but they require a signed gift letter confirming the money is a gift and does not need to be repaid.
Good Faith Estimate: A document that was once used to provide borrowers with estimated closing costs. The Good Faith Estimate has been replaced by the Loan Estimate form under federal TRID regulations, which provides a more standardized and transparent breakdown of costs.
Government-Backed Loan: A mortgage that is insured or guaranteed by a federal agency, reducing the lender's risk. The three main types are FHA loans (Federal Housing Administration), VA loans (Department of Veterans Affairs), and USDA loans (Department of Agriculture). These programs typically offer more flexible qualification requirements than conventional loans.
Guarantor: A person who agrees to take responsibility for repaying a loan if the primary borrower cannot. Having a guarantor can help a borrower who might not qualify on their own due to limited credit history or income. The guarantor's credit and financial standing are evaluated alongside the primary borrower's.

H

Hard Money Loan: A short-term loan funded by private investors or companies, secured primarily by the value of the property rather than the borrower's creditworthiness. Hard money loans fund quickly and are commonly used by real estate investors for fix-and-flip projects or bridge financing. Interest rates and fees are higher than traditional mortgages.
HECM (Home Equity Conversion Mortgage): The most common type of reverse mortgage, insured by the FHA. A HECM allows homeowners age 62 or older to convert part of their home equity into cash without making monthly mortgage payments. The loan is repaid when the borrower sells, moves out, or passes away.
HELOC (Home Equity Line of Credit): A revolving line of credit secured by your home's equity. A HELOC works like a credit card - you can borrow, repay, and borrow again during the draw period. Learn about our 5-day digital HELOC process or compare your options in our HELOC vs. cash-out refi guide.
Home Equity Loan: A loan that lets you borrow a lump sum against your home's equity at a fixed interest rate. Unlike a HELOC, you receive the full amount upfront and repay it in fixed monthly installments. Home equity loans are often used for large, one-time expenses like home renovations.
Homeowners Insurance: Insurance that protects your home and personal property against damage, theft, and liability. Lenders require homeowners insurance as a condition of your mortgage, and the premium is often paid through your escrow account. Coverage amounts and costs vary based on your home's location, value, and the policy you choose.
HUD: The U.S. Department of Housing and Urban Development, the federal agency responsible for housing policy, FHA insurance programs, and fair housing enforcement. HUD oversees programs that help make homeownership accessible and affordable, and it publishes resources for homebuyers and renters.

I

Impound Account: Another name for an escrow account. Your lender collects a portion of your property taxes and insurance with each mortgage payment and holds it in the impound account. When those bills come due, the lender pays them on your behalf.
Interest Rate: The percentage a lender charges you to borrow money, expressed as an annual rate. Your interest rate directly affects your monthly payment and the total amount you pay over the life of the loan. The interest rate differs from the APR, which includes additional costs beyond just the rate itself.
ITIN Loan: A mortgage available to borrowers who have an Individual Taxpayer Identification Number instead of a Social Security Number. ITIN loans are a Non-QM product that helps non-citizen residents become homeowners. Down payment requirements and rates may differ from standard loan programs.

J

Jumbo Loan: A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans are used to finance higher-priced properties and typically require larger down payments, higher credit scores, and more cash reserves than conforming loans.

L

Lien: A legal claim against a property that serves as security for a debt. Your mortgage creates a lien on your home, and the lien is removed when the loan is paid in full. Other liens can come from unpaid taxes, contractor work, or court judgments, and they must usually be resolved before a property can be sold.
Loan Estimate: A standardized three-page document your lender must provide within three business days of receiving your loan application. It outlines your estimated interest rate, monthly payment, closing costs, and other loan details. Compare it closely with your Closing Disclosure before signing.
Loan Officer: A licensed professional who helps you find the right mortgage, guides you through the application process, and works with underwriting to get your loan approved. Your loan officer is your main point of contact from application to closing. Reach out to discuss your options.
Loan Origination Fee: A fee charged by the lender for processing and underwriting your loan application. Origination fees are typically expressed as a percentage of the loan amount and are listed on your Loan Estimate and Closing Disclosure. This fee covers the administrative work of creating your loan.
Loan-to-Value Ratio (LTV): The ratio of your loan amount to the appraised value of the property. If you borrow $400,000 on a $500,000 home, your LTV is 80%. A lower LTV generally means better rates and terms, while an LTV above 80% on a conventional loan typically requires PMI.
Lock (Rate Lock): An agreement between you and your lender that guarantees a specific interest rate for a set period, usually 15 to 60 days. A rate lock protects you from rate increases while your loan is being processed. If rates drop after you lock, you typically keep the locked rate unless you have a float-down option.

M

Mortgage Broker: A licensed professional who shops your loan across multiple lenders to find the best rate and terms for your situation. Unlike a loan officer at a single bank, a broker has access to a wide network of wholesale lenders. This can mean more options and potentially better pricing for borrowers.
Mortgage Insurance: Insurance that protects the lender (not you) if you stop making payments. It is required on conventional loans with less than 20% down (PMI) and on all FHA loans (MIP). Mortgage insurance adds to your monthly payment but enables you to buy with a smaller down payment.
Mortgage Insurance Premium (MIP): The mortgage insurance required on FHA loans. MIP includes both an upfront premium (typically 1.75% of the loan amount, rolled into the loan) and an annual premium paid monthly. Unlike conventional PMI, FHA MIP often lasts the life of the loan unless you refinance to a conventional mortgage.

N

NMLS: The Nationwide Multistate Licensing System, a registry where all mortgage loan originators and companies must be registered. Every loan officer has a unique NMLS number that you can look up at NMLSConsumerAccess.org to verify their license status and history.
Non-QM Loan: A mortgage that does not meet the Consumer Financial Protection Bureau's definition of a Qualified Mortgage. Non-QM loans serve borrowers who fall outside traditional guidelines - including self-employed individuals, real estate investors, and foreign nationals. Common Non-QM products include bank statement loans, DSCR loans, and asset depletion loans.
Note Rate: The actual interest rate stated on your mortgage note, which determines your monthly principal and interest payment. The note rate does not include fees or other costs - for the full cost of borrowing, look at the APR.

O

Origination Fee: See Loan Origination Fee. This is the fee a lender charges for processing your mortgage application and creating your loan. It is typically expressed as a percentage of the total loan amount.
Owner-Occupied: A property classification meaning the borrower lives in the home as their primary residence. Owner-occupied properties qualify for the best mortgage rates and terms because lenders consider them lower risk. Investment properties and second homes have different qualifying requirements and typically carry higher rates.

P

PITI: An acronym for Principal, Interest, Taxes, and Insurance - the four components that make up most monthly mortgage payments. Lenders use your total PITI when calculating your DTI ratio to determine how much you can afford to borrow.
PITIA: An extension of PITI that adds Association dues (HOA fees) to the calculation. PITIA stands for Principal, Interest, Taxes, Insurance, and Association dues. If the property has an HOA, lenders include those dues in your total housing payment.
PMI (Private Mortgage Insurance): Insurance required on conventional loans when your down payment is less than 20%. PMI protects the lender if you default, and it adds to your monthly payment. Once you reach 20% equity in your home, you can request to have PMI removed.
Points (Discount Points): Upfront fees you pay to your lender at closing in exchange for a lower interest rate. One point equals 1% of your loan amount. Paying points makes sense if you plan to keep the loan long enough for the monthly savings to outweigh the upfront cost. See our buydowns guide for more detail.
Pre-Approval: A lender's written commitment to lend you a specific amount based on a review of your income, assets, credit, and debts. Pre-approval involves a credit check and document review, making it much stronger than a pre-qualification. Sellers and real estate agents take pre-approved buyers more seriously.
Pre-Qualification: An informal estimate of how much you might be able to borrow based on self-reported financial information. Pre-qualification does not require a credit pull or document verification, so it carries less weight than a pre-approval. It is a useful first step to understand your budget before house hunting.
Principal: The amount of money you borrow from a lender, not including interest. As you make monthly payments, a portion goes toward reducing your principal balance. The faster you pay down principal, the less total interest you pay over the life of the loan.
Profit and Loss (P&L) Loan: A Non-QM loan that uses a borrower's business profit and loss statement - prepared by a CPA or tax professional - to verify income instead of tax returns. This product works well for self-employed borrowers whose P&L shows stronger income than their tax filings.

Q

Qualified Mortgage (QM): A mortgage that meets specific requirements set by the Consumer Financial Protection Bureau (CFPB), designed to ensure borrowers can reasonably afford to repay. QM standards include limits on fees, loan terms, and DTI ratios. Loans that fall outside these standards are considered Non-QM.

R

Rate Lock: See Lock (Rate Lock). A rate lock secures your interest rate for a specified period so market fluctuations do not affect your terms while the loan is being processed.
Rate-and-Term Refinance: Replacing your existing mortgage with a new loan that has a different interest rate, loan term, or both - without taking cash out. This is the most common type of refinance, typically used to lower your monthly payment or shorten the payoff timeline. Read our guide on whether refinancing makes sense for you.
Refinance: The process of replacing your current mortgage with a new one, typically to get a lower rate, change your loan term, or access your home's equity. Common types include rate-and-term refinances and cash-out refinances. Check out our guide on whether you should refinance.
Reserves: Liquid assets (savings, investments, retirement funds) that a lender requires you to have left over after your down payment and closing costs. Reserves are measured in months of your total housing payment. Having strong reserves shows the lender you can continue making payments even if your income is temporarily disrupted.
Reverse Mortgage: A loan for homeowners age 62 or older that converts home equity into cash without requiring monthly mortgage payments. The loan balance grows over time and is repaid when the borrower sells, moves out, or passes away. The most common type is the FHA-insured HECM. Learn more on our reverse mortgage page.

S

SBA Loan: A loan partially guaranteed by the Small Business Administration, designed to help small businesses purchase commercial real estate or fund operations. SBA 504 and 7(a) loans offer competitive rates and longer terms than conventional commercial loans. They require the business to occupy a significant portion of the property.
Second Mortgage: A loan taken out on a property that already has a first mortgage. HELOCs and home equity loans are common forms of second mortgages. Because the second lender is paid after the first lender in a foreclosure, second mortgages typically have higher interest rates.
Seller Concessions: An agreement where the seller pays a portion of the buyer's closing costs. Seller concessions are negotiated as part of the purchase contract and can help buyers who have limited cash available beyond their down payment. Each loan program sets limits on how much the seller can contribute.
Short Sale: A sale where the homeowner sells the property for less than the remaining mortgage balance, with the lender's approval. Short sales happen when the borrower is behind on payments and the home has lost value. While it still affects your credit, a short sale is generally less damaging than a foreclosure.
Streamline Refinance: A simplified refinance program available for FHA and VA loans that requires less documentation and often no appraisal. FHA Streamline and VA IRRRL programs are designed to lower your rate quickly with minimal paperwork, as long as you are current on your existing loan.

T

Title: The legal right to own, use, and sell a property. A title search is conducted before closing to confirm the seller has the legal right to transfer ownership and to identify any liens or claims against the property. Clear title is required before a lender will fund your mortgage.
Title Insurance: A one-time insurance policy that protects against financial loss from defects in the title, such as undisclosed liens, errors in public records, or fraud. There are two types: lender's title insurance (required by the lender) and owner's title insurance (optional but recommended to protect your investment).
Truth in Lending (TILA): A federal law that requires lenders to clearly disclose loan terms, APR, fees, and total costs to borrowers before they commit to a loan. TILA protections help you compare offers from different lenders on an equal basis. The Loan Estimate and Closing Disclosure forms are part of TILA compliance.

U

Underwriting: The process where a lender evaluates your financial information - income, assets, credit, debts, and the property details - to decide whether to approve your loan. The underwriter verifies everything in your application and may ask for additional documentation. This is one of the final steps before your loan is cleared to close.

V

VA IRRRL: The VA Interest Rate Reduction Refinance Loan, also called a VA Streamline Refinance. It allows veterans with an existing VA loan to refinance to a lower rate with minimal paperwork and usually no appraisal required. You must be current on your existing VA mortgage to qualify.
VA Loan: A government-backed mortgage guaranteed by the Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses. VA loans offer zero down payment, no PMI, and competitive rates. Read our complete VA loan benefits guide.

W

Walk-Through: A final inspection of the property, typically done 24 to 48 hours before closing. The walk-through lets you confirm the home is in the agreed-upon condition, that any repairs the seller promised have been completed, and that no new damage has occurred since your last visit.

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