Optimal Mortgage · Mortgage Glossary

Mortgage glossary —
109 terms, plain English.

Every term you will encounter from application to closing, defined clearly without assuming you already know what they mean. Search by term or browse by letter.

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Abstract of title A summary of all recorded documents affecting title to a property, including deeds, mortgages, liens, and encumbrances. Required by lenders to verify clear title before closing. Adjustable-rate mortgage (ARM) A mortgage with an interest rate that changes periodically based on an index. Typically has a fixed initial period (e.g., 5/1 ARM = fixed 5 years, then adjusts annually). Amortization The process of paying off a loan through scheduled installment payments over time. Each payment covers interest owed plus a portion of principal, with the principal portion increasing over the loan term. Amortization schedule A table showing each periodic payment, the portion applied to interest, the portion applied to principal, and the remaining balance after each payment. Annual percentage rate (APR) The total annual cost of a loan expressed as a percentage, including interest rate and most fees. Used to compare loans with different fee structures. Assumes the loan is held to maturity. Appraisal An independent professional opinion of a property's market value, ordered by the lender and paid by the borrower. Required on most mortgage transactions. Appraised value The appraiser's opinion of the property's current market value based on comparable sales, property condition, and market analysis. As-is value The value of a property in its current condition, without improvements or repairs. Assumption A transaction in which a buyer takes over the seller's existing mortgage, including its rate, balance, and remaining term. Subject to lender approval and program eligibility.

Balloon mortgage A loan with smaller periodic payments that does not fully amortize — the remaining balance is due in full at the end of a specified term, typically 5-7 years. Basis point One one-hundredth of one percent (0.01%). Used to describe changes in interest rates and fees. 100 basis points = 1%. Bridge loan A short-term loan secured by the borrower's current home to fund the purchase of a new property before the existing home is sold. Broker price opinion (BPO) A real estate professional's estimate of a property's value, typically used in default situations or when a full appraisal is not required.

Cap rate Capitalization rate. Net operating income divided by property value. Used to evaluate investment property returns. Cash-out refinance A refinance in which the new loan amount exceeds the existing loan balance, with the difference paid to the borrower in cash. Clear to close (CTC) The lender's confirmation that all underwriting conditions have been satisfied and the loan is approved to fund at closing. Closing The final step in a real estate transaction where documents are signed, funds are disbursed, and ownership transfers. Closing costs Fees and expenses paid at closing beyond the down payment, including lender fees, title charges, prepaid items, and government recording fees. Typically 2-5% of the loan amount. Closing disclosure (CD) A standardized 5-page form provided at least 3 business days before closing showing final loan terms, costs, and cash to close. The final version of the Loan Estimate. Comparable sales (comps) Recently sold properties similar in size, condition, and location used by appraisers to support a value opinion. Conforming loan A mortgage that meets Fannie Mae and Freddie Mac guidelines for purchase, including loan limits and underwriting standards. Contingency A condition in a purchase contract that must be satisfied for the transaction to proceed. Common contingencies include financing, inspection, and appraisal. Conventional loan A mortgage not insured by a government agency. Follows Fannie Mae or Freddie Mac guidelines. Credit score A numerical representation of creditworthiness based on payment history, debt levels, length of credit history, types of credit, and recent inquiries. FICO scores range from 300-850.

Debt-to-income ratio (DTI) Total monthly debt obligations divided by gross monthly income. Lenders use DTI to evaluate repayment ability. Conventional loans typically allow up to 45-50% DTI. Deed A legal document that transfers ownership of real property from one party to another. Deed of trust A three-party security instrument used in many states instead of a mortgage, involving the borrower, lender, and a trustee who holds title until the loan is repaid. Default Failure to fulfill a legal obligation — most commonly, failure to make scheduled mortgage payments. Delinquency A loan that has an overdue payment. Typically reported to credit bureaus after 30 days. Depreciation A decline in property value over time due to physical deterioration, functional obsolescence, or external factors. Desktop Underwriter (DU) Fannie Mae's automated underwriting system. Analyzes loan applications and returns findings (Approve/Eligible, Refer, etc.) that determine loan eligibility and required documentation. Discount points Prepaid interest paid at closing to reduce the mortgage interest rate. One point equals 1% of the loan amount and typically reduces the rate by approximately 0.25%. Documentary stamp tax A state-imposed tax on mortgage documents and property deeds, calculated as a percentage of the loan or purchase price. Down payment The portion of the purchase price paid by the buyer at closing from their own funds. The remainder is financed through the mortgage. DSCR (Debt Service Coverage Ratio) A metric used in investment property lending. Net operating income divided by total debt service (PITIA). A DSCR of 1.0 means the property exactly covers its payment; above 1.0 means it cash flows positively.

Earnest money A good-faith deposit made by the buyer when going under contract, typically 1-3% of the purchase price. Applied to closing costs or returned if contingencies are not met. Encumbrance Any claim, lien, or liability attached to a property that may affect its value or transfer. Equity The difference between a property's current market value and the outstanding loan balance(s). Equity increases as the loan pays down and/or the property appreciates. Escrow A neutral third-party arrangement where funds or documents are held until specified conditions are met. In mortgages, escrow accounts hold funds for property taxes and insurance.

Fair market value The price a willing buyer would pay a willing seller in an arm's-length transaction with both parties having reasonable knowledge of relevant facts. Fannie Mae Federal National Mortgage Association. A government-sponsored enterprise that purchases conforming mortgage loans from lenders, providing liquidity to the mortgage market. FHA loan A mortgage insured by the Federal Housing Administration. Allows lower credit scores and down payments (3.5% minimum with 580+ credit score). Requires mortgage insurance premium (MIP). Fixed-rate mortgage A mortgage with an interest rate that remains constant for the entire loan term, resulting in predictable monthly payments. Float Choosing not to lock an interest rate, allowing it to move with market conditions until a lock is requested. Flood insurance Insurance required by lenders on properties in federally designated high-risk flood zones. Separate from standard homeowner's insurance. Foreclosure The legal process by which a lender takes possession of a property after the borrower defaults on the mortgage. Freddie Mac Federal Home Loan Mortgage Corporation. A government-sponsored enterprise that purchases conforming mortgages from lenders alongside Fannie Mae.

Good faith estimate The predecessor to the Loan Estimate, previously required within 3 business days of application. Replaced by the Loan Estimate in 2015 under TRID rules. Gross income Total income before taxes and deductions. Used by lenders to calculate DTI ratio.

Hard money loan Asset-based financing from private lenders, typically at higher rates with shorter terms. Used by investors when traditional financing is unavailable or too slow. HELOC Home Equity Line of Credit. A revolving credit line secured by home equity, with a draw period and repayment period. Variable rate in most cases. Homeowner's insurance Property insurance covering damage to the home and personal liability. Required by lenders. Premiums are included in the escrow payment. HUD-1 settlement statement The predecessor to the Closing Disclosure, used in transactions prior to October 2015.

Income approach A property valuation method based on the income a property generates. Primary method for investment property appraisals. Index A benchmark interest rate used to calculate adjustments on an ARM. Common indices include SOFR and the 1-year Treasury. Intangible tax A state tax on new mortgages, calculated as a percentage of the loan amount. Interest rate The annual cost of borrowing the principal loan amount, expressed as a percentage. Determines the monthly principal and interest payment. Investment property Real property purchased to generate income through rent or resale rather than as a primary or secondary residence.

Jumbo loan A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Requires stricter credit and reserve requirements and typically carries a higher rate.

Lien A legal claim against a property, often used as security for a debt. Liens must typically be resolved before a property can be sold or refinanced. Loan estimate (LE) A standardized 3-page disclosure provided within 3 business days of a loan application showing estimated rate, payment, and closing costs. Loan origination fee A fee charged by the lender for processing and originating the loan. Expressed as a percentage of the loan amount or a flat dollar amount. Loan Product Advisor (LPA) Freddie Mac's automated underwriting system. The counterpart to Fannie Mae's Desktop Underwriter (DU). Loan-to-value ratio (LTV) The loan amount divided by the appraised value or purchase price (whichever is lower), expressed as a percentage. A key factor in rate pricing and program eligibility. Lock An agreement with a lender to hold a specific interest rate for a defined period while the loan is processed.

Margin On an adjustable-rate mortgage, the fixed percentage added to the index rate to determine the fully indexed rate after the initial period. Market value The most probable price a property would sell for in a competitive and open market under fair sale conditions. Maturity date The date on which the final loan payment is due and the loan balance is paid in full. MIP (Mortgage Insurance Premium) Insurance required on FHA loans, paid by the borrower. Includes an upfront premium (1.75% of loan amount) and an annual premium paid monthly. Permanent in most cases on 30-year FHA loans. Mortgage A legal agreement by which a lender provides funds to a borrower for the purchase of real property, with the property serving as collateral. Mortgage broker A licensed intermediary who connects borrowers with wholesale lenders. Does not fund loans directly. Required to disclose compensation on the Loan Estimate. Mortgage insurance Insurance that protects the lender against loss if the borrower defaults. Required on conventional loans with less than 20% down (PMI) and on all FHA loans (MIP).

Non-QM loan Non-Qualified Mortgage. A loan that does not meet the Consumer Financial Protection Bureau's Qualified Mortgage standards. Includes bank statement, DSCR, ITIN, and foreign national programs. Note rate The actual interest rate written into the promissory note — the rate used to calculate the monthly principal and interest payment.

Origination The process of creating a new mortgage loan, from application through closing. Owner-occupied A property used as the borrower's primary residence. Owner-occupied financing typically offers better rates and lower down payment requirements than investment property financing.

Per diem interest Daily interest charged from the closing date through the end of the month. Included in prepaid items at closing. PITIA Principal, Interest, Taxes, Insurance, and Association dues. The full monthly housing payment used to calculate DTI. PMI (Private Mortgage Insurance) Insurance required on conventional loans when the down payment is less than 20%. Unlike FHA MIP, PMI can be removed when the loan reaches 80% LTV. Points Prepaid interest charges paid at closing. One point = 1% of the loan amount. Used to buy down the interest rate or as a form of lender compensation. Pre-approval A lender's conditional commitment to lend based on verified credit, income, and asset documentation. Stronger than a pre-qualification. Pre-qualification A preliminary assessment of loan eligibility based on self-reported financial information, without documentation or credit verification. Prepayment penalty A fee charged for paying off a loan before the end of its term. Uncommon on conventional purchase loans but present in some non-QM and portfolio products. Principal The original loan amount or the remaining balance owed, excluding interest. Private mortgage insurance See PMI. Purchase money mortgage A mortgage obtained to finance the purchase of a property, as opposed to a refinance.

Qualified mortgage (QM) A mortgage that meets specific CFPB standards for consumer protection, including limits on fees, no negative amortization, and verified ability to repay.

Rate and term refinance A refinance that changes the interest rate, loan term, or both, without taking cash out beyond closing costs. Real estate owned (REO) Property owned by a lender, typically acquired through foreclosure. Recording The process of filing legal documents with the county to create a public record of ownership and encumbrances. Refinance Replacing an existing mortgage with a new loan, typically to obtain a lower rate, change the term, or access equity. Reserves Liquid assets remaining after closing. Measured in months of PITIA payment. Required by lenders to demonstrate financial stability, particularly on investment properties and second homes. RESPA Real Estate Settlement Procedures Act. Federal law governing mortgage lending disclosures, prohibiting kickbacks, and requiring the Loan Estimate and Closing Disclosure.

Second home A property used as a vacation or seasonal residence, distinct from the borrower's primary residence. Requires owner occupancy at least part of the year. Second mortgage A subordinate mortgage secured by the same property as the first mortgage. Includes HELOCs and fixed-rate second loans. Seller concession An amount the seller agrees to contribute toward the buyer's closing costs. Subject to maximum limits by loan program. Short sale A sale of a property for less than the outstanding mortgage balance, with lender approval. Subject property The property being financed or appraised in a specific transaction.

Title Legal ownership of a property. Clear title means there are no outstanding claims, liens, or encumbrances that would cloud ownership. Title insurance Insurance protecting against losses from title defects, liens, or ownership disputes. Two types: lender's policy (required) and owner's policy (recommended). Title search A review of public records to verify the seller's right to transfer title and identify any liens, encumbrances, or other title issues. TRID TILA-RESPA Integrated Disclosure. The regulatory framework requiring the Loan Estimate and Closing Disclosure, effective October 2015. Truth in Lending Act (TILA) Federal law requiring lenders to disclose the true cost of credit, including APR, finance charges, and total payment amounts.

UFMIP Upfront Mortgage Insurance Premium. The 1.75% upfront MIP charge on FHA loans, added to the loan balance at closing. Underwriting The process of evaluating a loan application against program guidelines to determine approval. Reviews credit, income, assets, and collateral.

VA loan A mortgage guaranteed by the Department of Veterans Affairs. Available to eligible veterans, active-duty service members, and surviving spouses. No down payment required with full entitlement. No PMI. Verification of employment (VOE) Confirmation from an employer of a borrower's job status, income, and tenure. May be verbal or written depending on lender requirements.

Wholesale lender A lender that originates loans through mortgage brokers rather than directly to consumers. Offers lower rates than retail lenders due to reduced overhead.

Zero-down mortgage A mortgage requiring no down payment. VA and USDA loans offer zero-down options for eligible borrowers.

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Mortgage glossary —109 terms, plain English.

Talk to our team — in plain English

Mortgage glossary —
109 terms, plain English.