Mortgage Glossary

A tax-deferred exchange that allows real estate investors to sell one investment property and purchase another without paying capital gains taxes. Named after IRS Code Section 1031.

A federal rule requiring lenders to make a reasonable determination that borrowers can repay their mortgage. Lenders must verify income, assets, employment, and credit.

A loan where the interest rate can change periodically based on market conditions. ARMs typically start with a lower rate than fixed-rate mortgages but can increase over time.

The estimated value of a property after planned renovations are completed. Used for fix-and-flip loans and renovation financing.

The process of paying off a loan through regular payments over time. Each payment includes both principal and interest, with the principal portion increasing over time.

The total cost of the loan expressed as a yearly rate, including interest, points, and other fees. APR is always higher than the interest rate and allows comparison between different loan offers.

A professional assessment of a property's market value conducted by a licensed appraiser. Required by lenders to ensure the property is worth at least the loan amount.

The value determined by a licensed appraiser based on recent comparable sales, property condition, and market conditions. Lenders use the lower of appraised value or purchase price.

The current market value of a property in its present condition, without any repairs or improvements. Common for investment properties and fix-and-flip loans.

A mortgage qualification method that converts liquid assets into monthly income by dividing total assets by a specific number of months (typically 60-360). Perfect for retirees with substantial savings but limited W-2 income.

A loan that can be transferred from the seller to the buyer when the property is sold. The buyer takes over the existing loan terms, which can be beneficial if rates have increased.

Computer software that evaluates loan applications and provides an approve/refer/decline decision. Common systems include Fannie Mae's Desktop Underwriter (DU) and Freddie Mac's Loan Product Advisor (LPA).

The percentage of your gross monthly income that goes toward all monthly debt obligations, including housing, credit cards, auto loans, and student loans. This is your DTI ratio.

A mortgage program that uses 12 or 24 months of personal or business bank statements to calculate income instead of tax returns. Ideal for self-employed borrowers with significant business write-offs.

Monthly statements from your financial institutions showing deposits, withdrawals, and account balances. Bank statement loans use 12-24 months to calculate income.

A short-term loan used to bridge the gap between buying a new home and selling your current one. Typically 6-12 months with interest-only payments.

Capitalization rate—a measure of investment property return calculated as annual net operating income divided by property value. Higher cap rates indicate better returns but may signal higher risk.

Refinancing your mortgage for more than you currently owe and taking the difference in cash. Used to access home equity for debt consolidation, home improvements, or other purposes.

Final approval from the underwriter indicating all conditions have been met and the loan is ready to close. You can schedule your closing date once you receive clear to close.

The final step in the home buying process where ownership is transferred from seller to buyer. You'll sign all loan documents and pay closing costs.

Fees and expenses paid at closing, typically 2-5% of the loan amount. Includes origination fees, appraisal, title insurance, escrow fees, and prepaid items.

A five-page document that provides final details about your mortgage loan. You must receive it at least three business days before closing. Replaced the HUD-1 settlement statement in 2015.

The total of all loans secured by the property divided by its value. Important when you have a first mortgage and a second lien (HELOC or second mortgage).

Recently sold properties similar to the subject property in size, location, condition, and features. Appraisers use comps to determine market value.

Positive aspects of a loan application that offset weaknesses, such as large reserves, low DTI, significant equity, or excellent payment history. Can help approval for borderline applications.

Loan approval subject to meeting specific conditions, such as providing additional documentation or clearing title issues. Most loans receive conditional approval before final approval.

A housing unit within a larger building or complex where you own the interior space but share ownership of common areas. Lenders review condo association financials and insurance.

A mortgage that meets Fannie Mae and Freddie Mac guidelines, including loan amount limits, credit requirements, and documentation standards. Typically offers the lowest interest rates.

A short-term loan used to finance the construction of a new home. Funds are disbursed in stages as construction progresses. Converts to a permanent mortgage when construction is complete.

A numerical representation of your creditworthiness, typically ranging from 300 to 850. FICO scores are most commonly used by mortgage lenders. Higher scores qualify for better interest rates.

The percentage of your gross monthly income that goes toward debt payments. Calculated as total monthly debts divided by gross monthly income. Most NON-QM loans allow DTI up to 50%.

A program that allows you to purchase a property with cash and then obtain a mortgage within 6 months, pulling your cash back out. Treated as a rate-and-term refinance rather than cash-out.

The number of months used to divide liquid assets when calculating qualifying income for asset depletion loans. Common periods are 60, 120, 180, 240, or 360 months.

Upfront fees paid to the lender to reduce your interest rate. One point equals 1% of the loan amount. Each point typically reduces the rate by 0.25%.

The upfront cash payment you make when purchasing a home, expressed as a percentage of the purchase price. NON-QM loans typically require 15-25% down.

Debt Service Coverage Ratio loan that qualifies borrowers based on a property's rental income rather than personal income. The DSCR is calculated by dividing monthly rental income by monthly mortgage payment (PITIA).

A federal law that prohibits lenders from discriminating against credit applicants based on protected characteristics including race, color, religion, national origin, sex, marital status, or age.

The difference between your home's current market value and the amount you owe on all mortgages. Equity increases as you pay down the loan and as the property appreciates.

An account held by the lender to pay property taxes and homeowners insurance on your behalf. Monthly payments include 1/12 of annual taxes and insurance.

For bank statement loans, the percentage deducted from gross deposits to account for business expenses. Typically 25-50% depending on account type (personal vs business).

A federal law that prohibits discrimination in housing based on race, color, religion, sex, national origin, familial status, or disability.

The most widely used credit scoring model, developed by Fair Isaac Corporation. Mortgage lenders typically use FICO scores from all three credit bureaus and take the middle score.

A loan where the interest rate remains the same for the entire loan term, typically 15 or 30 years. Monthly principal and interest payments never change.

Choosing not to lock your interest rate, allowing it to fluctuate with market conditions. Risky strategy that could result in a higher or lower rate at closing.

A mortgage program designed for non-US citizens purchasing property in the United States. Borrowers typically need an ITIN, valid passport, and proof of down payment funds.

The percentage of your gross monthly income that goes toward housing expenses (PITI). Also called the housing ratio. Typically should not exceed 28-31% for conventional loans.

The process of the lender transferring loan funds to the escrow company or title company. Typically occurs on the closing date or shortly after signing documents.

Money given to you by a family member or other approved source to use toward your down payment or closing costs. Requires a gift letter stating the funds don't need to be repaid.

Your total monthly income before taxes and deductions. Used as the denominator when calculating debt-to-income ratios.

A short-term loan secured by real estate, typically used by investors for fix-and-flip projects. Higher interest rates and fees than traditional mortgages but faster approval and funding.

An adjustable-rate mortgage with an initial fixed-rate period (typically 3, 5, 7, or 10 years) followed by annual adjustments. Common examples are 5/1 ARM or 7/1 ARM.

The cost of borrowing money, expressed as a percentage of the loan amount. Mortgage interest is typically calculated monthly based on the outstanding principal balance.

The percentage charged on the loan principal, expressed as an annual rate. This is different from APR, which includes additional loan costs.

A mortgage where the borrower pays only interest for a specified period (typically 5-10 years), with no principal reduction. After the interest-only period, payments increase to include principal.

A property purchased to generate rental income or appreciation. Investment properties require higher down payments (typically 20-25%) and have higher interest rates than primary residences.

Individual Taxpayer Identification Number—a tax processing number issued by the IRS to individuals who don't qualify for a Social Security Number. Required for foreign national loans.

A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac ($766,550 in most areas for 2024). Jumbo loans typically require higher credit scores and larger down payments.

A legal contract between landlord and tenant specifying the terms of the rental, including rent amount, duration, and responsibilities. Required documentation for DSCR loans on rented properties.

A three-page document that provides an estimate of your loan terms and closing costs. Lenders must provide it within three business days of receiving your application.

The length of time you have to repay the loan. Common terms are 15, 20, or 30 years. Shorter terms have higher monthly payments but lower total interest costs.

The loan amount divided by the property's appraised value or purchase price (whichever is lower), expressed as a percentage. An 80% LTV means you're borrowing 80% and putting 20% down.

The length of time your interest rate is guaranteed, typically 30, 45, or 60 days. If you don't close within the lock period, you may need to extend (usually for a fee) or accept current market rates.

The process of evaluating a loan application by hand rather than through automated systems. Common for NON-QM loans and borrowers with unique financial situations.

The amount a property could reasonably rent for based on comparable rental properties in the area. Used when the property is not currently rented or when actual rent is below market.

A residential building with 2-4 separate living units (duplex, triplex, fourplex). Can qualify for residential financing if you occupy one unit as your primary residence.

A mortgage that doesn't meet Fannie Mae and Freddie Mac guidelines. Includes jumbo loans and NON-QM loans. Typically has higher interest rates than conforming loans.

A non-qualified mortgage that doesn't meet the Consumer Financial Protection Bureau's qualified mortgage standards. These loans offer flexible underwriting for borrowers who don't fit traditional lending guidelines.

A fee charged by the lender for processing your loan application, typically 0.5-1% of the loan amount. Also called a loan origination fee or points.

Documents from your employer showing your gross income, deductions, and net pay for a specific pay period. Lenders typically require the most recent 30 days of pay stubs.

Principal, Interest, Taxes, and Insurance—the four components of a typical monthly mortgage payment. Used to calculate housing expense ratios.

Principal, Interest, Taxes, Insurance, and Association dues—used for properties with HOA fees. The total monthly housing expense used in DSCR calculations.

A community where homeowners own their lot and home but share ownership of common areas. Similar to condos but with individual lot ownership.

A mortgage that the lender keeps on its own books rather than selling to Fannie Mae, Freddie Mac, or investors. Allows for more flexible underwriting guidelines.

A conditional commitment from a lender to loan you a specific amount based on verified financial information. Stronger than pre-qualification and shows sellers you're a serious buyer.

An informal estimate of how much you might be able to borrow based on self-reported financial information. Not as reliable as pre-approval.

A fee charged if you pay off your mortgage early, either through refinancing or selling the property. Common in NON-QM loans, typically lasting 1-5 years.

The home where you live most of the year. Primary residences typically qualify for the best interest rates and lowest down payment requirements.

The original amount borrowed or the remaining balance on a loan, excluding interest. Each mortgage payment includes both principal and interest.

Insurance that protects the lender if you default on the loan. Required on conventional loans with less than 20% down payment. Can be removed once you reach 20% equity.

A financial statement showing a business's revenues, costs, and expenses over a specific period. Self-employed borrowers may need to provide a year-to-date P&L.

A loan that meets the Consumer Financial Protection Bureau's standards for stable features and borrower ability to repay. Excludes risky features like negative amortization or interest-only payments beyond 5 years.

The monthly income amount used by lenders to determine how much you can borrow. Calculated differently for each loan type (W-2, bank statements, assets, rental income, etc.).

Refinancing to change your interest rate or loan term without taking cash out. Used to lower monthly payments or pay off the loan faster.

A federal law that requires lenders to provide borrowers with disclosures about the settlement process and prohibits kickbacks and referral fees.

The process of filing the mortgage and deed with the county recorder's office to make them part of the public record. Establishes the lender's lien on the property.

Money received from tenants for occupying your property. Can be used to qualify for investment property loans. Lenders typically use 75% of gross rents to account for vacancy and maintenance.

Liquid assets remaining after closing, measured in months of PITI (Principal, Interest, Taxes, Insurance). Most NON-QM loans require 6-12 months of reserves.

A loan for homeowners 62+ that allows them to convert home equity into cash without selling. No monthly payments required; loan is repaid when the homeowner sells, moves, or passes away.

A three-day period after closing on a refinance during which you can cancel the loan without penalty. Does not apply to purchase transactions or second homes/investment properties.

The length of time funds have been in your bank account or the time since a significant credit event. Lenders typically require 60 days of seasoning for down payment funds and 2-4 years after bankruptcy or foreclosure.

A property you occupy part-time, typically for vacation or seasonal use. Must be at least 50 miles from your primary residence and not rented out regularly.

A standalone house designed for one family. The most common property type for residential mortgages.

A loan program where the borrower states their income without full documentation. These programs were common before 2008 and are now rare, replaced by bank statement and asset depletion programs.

A simplified refinance process with reduced documentation requirements. Available for FHA, VA, and USDA loans when refinancing into the same loan type.

IRS Form 1040 showing your annual income and tax liability. Traditional lenders require 2 years of personal tax returns. NON-QM programs often don't require tax returns.

Insurance that protects against losses from title defects, liens, or ownership disputes. Lender's title insurance is required; owner's title insurance is optional but recommended.

A multi-story home that shares one or more walls with adjacent properties but has its own entrance. Can be classified as a condo or PUD depending on ownership structure.

A credit report that combines information from all three major credit bureaus (Experian, Equifax, TransUnion). Lenders use the middle of the three FICO scores for qualification.

A federal law requiring lenders to disclose loan terms and costs in a clear, standardized format. Protects consumers by ensuring they understand the true cost of credit.

The process of evaluating a loan application to determine the borrower's ability to repay and the property's value. Underwriters review income, assets, credit, and property documentation.

The percentage of time a rental property sits vacant. Lenders account for this by using only 75-80% of gross rents when calculating qualifying income.

A document confirming your bank account balances and average balance over time. Lenders may request this directly from your bank.

A document confirming your employment status, position, salary, and length of employment. Lenders contact your employer directly or use third-party verification services.

An annual wage and tax statement from your employer showing your earnings and taxes withheld. Traditional lenders require 2 years of W-2s for employed borrowers.