Free Reference Resource
Mortgage Glossary: 40+ Terms Explained in Plain English
From ARM to VA loan — every mortgage term you need to know, written by a licensed broker in Irvine, CA.
A
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on a market index. ARMs typically start with a fixed rate for an initial period (e.g., 5/1 ARM = fixed for 5 years, then adjusts annually). They can offer lower initial rates than fixed-rate mortgages.
Amortization
The process of paying off a loan through regular payments over time. Each payment covers both interest and principal. Early payments are mostly interest; later payments are mostly principal. A 30-year mortgage fully amortizes over 360 monthly payments.
Annual Percentage Rate (APR)
The true annual cost of borrowing, expressed as a percentage. APR includes the interest rate plus lender fees (origination, points, etc.), making it a more complete comparison tool than the interest rate alone.
Appraisal
A professional estimate of a property's market value, conducted by a licensed appraiser. Lenders require an appraisal to confirm the home is worth at least the loan amount. FHA and VA appraisals have additional property condition requirements.
Asset Depletion
A method of qualifying for a mortgage using liquid assets (savings, investments) as income. The lender divides total assets by the loan term to calculate a monthly income figure. Useful for retirees or borrowers with significant savings but limited W-2 income.
B
Bank Statement Loan
A non-QM mortgage program that uses 12 or 24 months of bank deposits to calculate qualifying income instead of tax returns. Designed for self-employed borrowers, business owners, and 1099 contractors whose tax returns show write-offs that reduce qualifying income.
Basis Point (BPS)
One one-hundredth of one percent (0.01%). Used to describe changes in interest rates. A rate increase from 6.50% to 6.75% is a 25 basis point increase. Lender compensation is often quoted in basis points.
Bridge Loan
A short-term loan used to bridge the gap between buying a new home and selling an existing one. Allows buyers to purchase before their current home sells, using equity from the existing property as collateral.
C
Cash-Out Refinance
A refinance where you borrow more than your current mortgage balance and receive the difference in cash. Used to access home equity for home improvements, debt consolidation, or investment. The new loan replaces your existing mortgage.
Closing Costs
Fees paid at the closing of a real estate transaction, typically 2–5% of the loan amount. Includes lender fees (origination, underwriting), third-party fees (title, escrow, appraisal), and prepaid items (property taxes, insurance, interest).
Closing Disclosure (CD)
A five-page document provided by the lender at least 3 business days before closing. It details the final loan terms, monthly payment, and all closing costs. Borrowers should compare it carefully to the Loan Estimate received at application.
Conforming Loan
A mortgage that meets Fannie Mae and Freddie Mac guidelines, including loan limits set annually by the FHFA. For 2024, the conforming loan limit is $766,550 in most areas and up to $1,149,825 in high-cost areas like Orange County, CA.
Conventional Loan
A mortgage not backed by a government agency (FHA, VA, or USDA). Conventional loans follow Fannie Mae and Freddie Mac guidelines and are available for primary residences, second homes, and investment properties. They typically require stronger credit than government-backed loans.
D
Debt-to-Income Ratio (DTI)
The percentage of your gross monthly income that goes toward debt payments. Lenders calculate two DTI ratios: front-end (housing costs only) and back-end (all monthly debts). Most conventional loans allow a back-end DTI up to 45–50%. FHA allows up to 57% in some cases.
Discount Points
Upfront fees paid to the lender to reduce the interest rate. One point equals 1% of the loan amount. Paying points makes sense if you plan to keep the loan long enough for the monthly savings to exceed the upfront cost (the break-even point).
DSCR Loan (Debt Service Coverage Ratio)
An investor mortgage that qualifies based on the rental income of the property rather than the borrower's personal income. DSCR is calculated by dividing the property's gross rental income by the total monthly mortgage payment (PITIA). A DSCR of 1.0 means the property breaks even; above 1.0 means positive cash flow.
E
Earnest Money Deposit (EMD)
A deposit made by the buyer when submitting a purchase offer, typically 1–3% of the purchase price in California. It demonstrates serious intent and is held in escrow. If the sale closes, it applies toward the down payment. It may be forfeited if the buyer backs out without a valid contingency.
Escrow
A neutral third party that holds funds and documents during a real estate transaction until all conditions are met. In California, escrow companies (not attorneys) typically handle closings. Escrow also refers to the lender's impound account for property taxes and insurance.
F
FHA Loan
A mortgage insured by the Federal Housing Administration. FHA loans allow down payments as low as 3.5% with a 580+ credit score and are popular with first-time buyers. They require both upfront and annual mortgage insurance premiums (MIP) regardless of down payment size.
Fixed-Rate Mortgage
A mortgage with an interest rate that remains constant for the life of the loan. The most common terms are 30 years and 15 years. Provides payment stability and predictability. Generally has a higher initial rate than an ARM but protects against rate increases.
Freddie Mac
The Federal Home Loan Mortgage Corporation — a government-sponsored enterprise (GSE) that buys mortgages from lenders, packages them into securities, and sells them to investors. Along with Fannie Mae, Freddie Mac sets the guidelines for conforming conventional loans.
G
Gift Funds
Money given to a borrower by a family member or other approved source to help with a down payment or closing costs. Most loan programs allow gift funds with proper documentation (gift letter, donor bank statements). FHA allows 100% of the down payment to come from gifts.
H
Hard Money Loan
A short-term, asset-based loan secured by real property. Hard money lenders focus on the property value rather than the borrower's creditworthiness. Used by investors for fix-and-flip projects or when speed is critical. Higher rates and fees than conventional financing.
Home Equity Line of Credit (HELOC)
A revolving line of credit secured by your home equity. Works like a credit card — you draw funds as needed up to a credit limit during the draw period (typically 10 years), then repay during the repayment period. Interest rates are usually variable.
I
Impound Account
Also called an escrow account. A lender-managed account where a portion of each mortgage payment is held to pay property taxes and homeowners insurance when due. Required on most loans with less than 20% down. Prevents tax and insurance lapses.
Interest Rate
The annual cost of borrowing the principal, expressed as a percentage. Does not include lender fees. The interest rate determines your monthly payment amount. Compare APR (which includes fees) for a more complete picture of loan cost.
J
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. In Orange County, CA, loans above $1,149,825 are jumbo loans. Jumbo loans typically require stronger credit (720+), larger down payments (10–20%), and more cash reserves.
L
Loan Estimate (LE)
A three-page document provided within 3 business days of a mortgage application. It outlines the estimated loan terms, monthly payment, and closing costs. Lenders are required to provide it under TRID rules. Use it to compare offers from multiple lenders.
Loan-to-Value Ratio (LTV)
The ratio of the loan amount to the appraised value of the property, expressed as a percentage. A $600,000 loan on a $750,000 home = 80% LTV. Higher LTV means more risk for the lender. LTV above 80% typically requires PMI on conventional loans.
Lock Period
The length of time a lender guarantees a specific interest rate after issuing a rate lock. Common lock periods are 15, 30, 45, and 60 days. Longer locks typically cost more. If the loan does not close before the lock expires, you may need to extend (at a cost) or accept the current market rate.
M
Mortgage Insurance Premium (MIP)
Insurance required on FHA loans. Includes an upfront premium (1.75% of the loan amount, typically financed) and an annual premium paid monthly (0.55–1.05% depending on loan term and LTV). MIP remains for the life of the loan if the down payment is less than 10%.
N
Non-QM Loan
A mortgage that does not meet the Consumer Financial Protection Bureau's Qualified Mortgage (QM) standards. Non-QM loans serve borrowers who cannot qualify under standard guidelines — self-employed, investors, foreign nationals, or those with recent credit events. Includes bank statement, DSCR, and asset depletion programs.
O
Origination Fee
A fee charged by the lender for processing the mortgage application. Typically 0.5–1% of the loan amount. May be called an origination charge, underwriting fee, or processing fee. Included in the APR calculation and disclosed on the Loan Estimate.
P
Pre-Approval
A conditional commitment from a lender to provide a mortgage up to a specified amount, based on a full application and credit review. Stronger than pre-qualification. Sellers and agents take pre-approval letters seriously in competitive markets. Typically valid for 60–90 days.
Pre-Qualification
An informal estimate of how much you may be able to borrow, based on self-reported income, assets, and credit. Does not require a hard credit pull. Less authoritative than pre-approval but useful for early planning. Free and no-obligation.
Private Mortgage Insurance (PMI)
Insurance required on conventional loans when the down payment is less than 20% (LTV above 80%). Protects the lender if the borrower defaults. PMI can be cancelled once LTV reaches 80% through payments or appreciation. Typically costs 0.5–1.5% of the loan amount annually.
R
Rate Lock
An agreement between the borrower and lender that guarantees a specific interest rate for a set period (the lock period). Protects the borrower from rate increases while the loan is processed. Most purchase loans lock for 30–45 days.
T
Title Insurance
Insurance that protects against losses from defects in the title to a property — such as liens, encumbrances, or ownership disputes that were not discovered during the title search. Lenders require a lender's title policy. Buyers can also purchase an owner's policy for additional protection.
U
Underwriting
The process by which a lender evaluates the risk of a mortgage application. The underwriter reviews the borrower's credit, income, assets, and the property appraisal to determine whether to approve, suspend, or deny the loan. Most loans are conditionally approved pending additional documentation.
V
VA Loan
A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and surviving spouses. VA loans offer zero down payment, no private mortgage insurance, and competitive interest rates. There is no official minimum credit score, though most lenders require 580+.
Questions About Your Specific Scenario?
Knowing the terms is the first step. The next step is a free scenario review with a licensed loan specialist.