Plain-language definitions for common mortgage and real estate terms. Use the alphabet navigation to jump to any letter.
A mortgage with an interest rate that remains fixed for an initial period and then adjusts periodically based on a market index. Common structures include 5/1, 7/1, and 10/1 ARMs. Rate caps limit how much the rate can change at each adjustment and over the life of the loan.
The process of gradually paying off a loan balance through scheduled payments over time. Each payment covers both interest and a portion of the principal. Early in the loan term, more of each payment goes toward interest; over time, more goes toward reducing the balance.
A broad measure of the cost of borrowing, expressed as a yearly rate. The APR includes the interest rate plus certain fees and costs associated with the loan, making it higher than the stated interest rate. Comparing APRs across lenders helps evaluate overall loan cost.
An independent assessment of a property's market value, conducted by a licensed appraiser. Lenders require an appraisal to confirm that the property's value supports the loan amount. The appraiser evaluates the property's condition, features, and compares it to recent sales of similar homes in the area.
A method of qualifying for a mortgage using liquid assets rather than regular income. The lender calculates a theoretical monthly income by dividing eligible assets by the loan term. This can be useful for borrowers with substantial savings but limited regular income.
A Non-QM loan program that uses personal or business bank statements (typically 12 to 24 months) to document income instead of tax returns or pay stubs. This is common for self-employed borrowers whose tax returns may not reflect their actual cash flow.
In the context of refinancing or paying points, the break-even point is the time it takes for the monthly savings to equal the upfront cost. For example, if refinancing saves $200 per month and costs $4,000 in closing costs, the break-even is 20 months.
A financing arrangement where funds are paid upfront to reduce the interest rate for a specified period (or for the life of the loan). Temporary buydowns (such as 2-1 or 3-2-1) lower the rate in the early years of the loan before it returns to the full note rate. Permanent buydowns reduce the rate for the full loan term.
A refinance in which the new loan amount is larger than the existing mortgage balance. The difference is paid to the borrower in cash at closing. The funds can be used for home improvements, debt consolidation, or other purposes. The new loan is subject to full underwriting review.
A document issued by the Department of Veterans Affairs confirming that a borrower meets the service requirements for a VA loan. Lenders use the COE to verify VA loan eligibility. It can be obtained through the VA's eBenefits portal or through a lender.
The stage in the loan process where the underwriter has reviewed and approved all conditions and the loan is ready to proceed to closing. Receiving a CTC means the lender is prepared to fund the loan pending completion of closing paperwork and receipt of the closing disclosure acknowledgment.
The final step in a real estate transaction, where all parties sign the required documents, the buyer pays remaining costs and down payment, and ownership of the property is transferred. For a purchase, the loan funds and the buyer receives the keys at closing.
Fees and expenses paid at or before closing to complete the mortgage transaction. These include lender charges, third-party fees (appraisal, title insurance, attorney), prepaid items (homeowner's insurance, prepaid interest), and escrow setup costs. A Loan Estimate provides an itemized breakdown of estimated closing costs.
A required document provided to the borrower at least three business days before closing that details the final loan terms, costs, and cash needed at closing. Borrowers should review the CD carefully and confirm it matches the Loan Estimate before signing.
A mortgage that meets the guidelines established by Fannie Mae and Freddie Mac, including loan amount limits set annually by the FHFA. Conforming loans can be sold to these agencies, which makes them widely available and typically competitively priced.
A mortgage not backed by a government agency (such as the FHA, VA, or USDA). Conventional loans follow the guidelines of Fannie Mae or Freddie Mac (for conforming loans) or are held by the lender (for non-conforming or portfolio loans). They are the most common loan type.
A measure of monthly debt obligations relative to gross monthly income, expressed as a percentage. Lenders evaluate DTI to assess repayment capacity. There are two components: the front-end ratio (housing costs only) and the back-end ratio (all monthly debt obligations including housing). Maximum DTI limits vary by loan program.
Upfront fees paid to a lender to reduce the interest rate on a loan. One point equals 1% of the loan amount. Paying points lowers the monthly payment but increases closing costs. Whether paying points is beneficial depends on the monthly savings and how long the borrower keeps the loan.
The portion of the purchase price paid upfront by the buyer, from their own funds or eligible gift sources. The remainder is financed through the mortgage. Minimum down payment requirements vary by loan program. A larger down payment reduces the loan amount and may eliminate the need for mortgage insurance.
A Debt Service Coverage Ratio loan is a Non-QM program for investment properties where qualification is based on the property's rental income rather than the borrower's personal income. The DSCR is the ratio of the property's rental income to its total debt payment. This is commonly used by real estate investors.
A deposit made by a buyer to demonstrate good-faith intent when submitting a purchase offer. Earnest money is typically held in escrow and applied toward the down payment or closing costs at settlement. If the buyer backs out without a valid contingency, the deposit may be forfeited.
A neutral third-party account used to hold funds during a real estate transaction. After closing, many mortgages include an escrow account where the borrower deposits monthly amounts for property taxes and insurance, which the servicer pays on their behalf when bills are due.
A mortgage insured by the Federal Housing Administration, designed to help buyers with lower down payments and more flexible credit guidelines access homeownership. FHA loans require an upfront and annual mortgage insurance premium (MIP) and have loan limits that vary by county.
A mortgage with an interest rate that remains constant for the entire loan term. The monthly principal and interest payment does not change, providing payment predictability over the life of the loan. Common terms are 10, 15, 20, and 30 years.
Funds given to a borrower by a family member or other eligible donor to be used toward a down payment or closing costs. Most loan programs allow gift funds with documentation confirming the source and that repayment is not expected. Eligible donors and documentation requirements vary by program.
A revolving line of credit secured by the equity in a home. During the draw period, the borrower can access funds up to the credit limit and typically makes interest-only payments. During the repayment period, the balance is paid down with principal and interest payments. The rate is typically variable.
A fixed-rate loan secured by the equity in a home. Unlike a HELOC, a home equity loan provides a lump sum disbursed at closing, with a set repayment schedule. Monthly payments include principal and interest throughout the loan term.
Insurance that protects against damage to a home and personal property from covered perils such as fire, theft, and certain weather events. Lenders require homeowner's insurance as a condition of the mortgage. Premiums are often collected in the escrow account and paid by the servicer.
The annual cost of borrowing the loan principal, expressed as a percentage. The interest rate determines the principal and interest portion of the monthly payment. It is different from the APR, which includes additional costs associated with the loan.
A mortgage for an amount that exceeds the conforming loan limits set annually by the FHFA. Jumbo loans do not meet Fannie Mae or Freddie Mac guidelines and are typically held by the lender or sold in private markets. They generally require a stronger financial profile than conforming loans.
A legal claim on a property used as security for a debt. When you take out a mortgage, the lender places a lien on the property. The lien is released when the loan is paid in full. A first lien has priority over other liens in the event of a default.
A standardized form provided to borrowers within three business days of completing a loan application. The Loan Estimate outlines the proposed loan terms, projected monthly payment, and estimated closing costs. It allows borrowers to compare offers from different lenders on an equal basis.
The ratio of the loan amount to the appraised value (or purchase price, whichever is lower) of the property, expressed as a percentage. For example, a $320,000 loan on a $400,000 property equals an 80% LTV. LTV affects loan eligibility, mortgage insurance requirements, and in some cases the available rate.
The agreed-upon timeframe during which the lender holds a specific interest rate for the borrower. Common lock periods are 15, 30, 45, and 60 days. If the loan does not close within the lock period, an extension may be available, sometimes at an added cost.
The mortgage insurance required on FHA loans. MIP includes an upfront premium (typically 1.75% of the loan amount, financed into the loan) and an annual premium collected monthly. Unlike conventional PMI, MIP on most FHA loans with low down payments remains for the life of the loan.
A loan used to purchase or refinance real property, where the property serves as collateral. The borrower agrees to repay the loan with interest over a set term. If the borrower defaults, the lender may foreclose on the property to recover the outstanding balance.
A licensed professional who helps borrowers obtain mortgage financing. An MLO evaluates applications, explains available loan programs, guides borrowers through the process, and coordinates with all parties through closing. MLOs must be licensed through the NMLS in each state where they originate loans.
A centralized registry for mortgage loan originators and companies. Each licensed MLO is assigned a unique NMLS ID number, which allows consumers to verify their credentials at nmlsconsumeraccess.org. Parth Malkan's NMLS ID is #2682845.
A Non-Qualified Mortgage is a loan that does not meet the standard documentation or guideline requirements of conventional or government-backed programs. Non-QM loans are designed for borrowers who fall outside traditional underwriting parameters, such as self-employed borrowers or real estate investors. They are offered by select lenders and typically carry different terms than QM loans.
The interest rate stated on the promissory note, which is the legal document evidencing the borrower's obligation to repay the loan. The note rate is used to calculate the monthly principal and interest payment. It is different from the APR.
A charge from the lender for processing and underwriting the loan, listed under Section A of the Loan Estimate. It may be a flat dollar amount or a percentage of the loan amount. Not all lenders charge origination fees; some may offset the absence of a fee with a slightly higher rate.
Insurance required on conventional loans when the down payment is less than 20% of the purchase price. PMI protects the lender in the event of default. The cost varies by loan-to-value ratio and credit profile. On conventional loans, PMI can typically be removed once the loan balance reaches 80% of the original value, subject to lender guidelines.
See Discount Points.
A more thorough review of a borrower's financial profile than pre-qualification. Pre-approval involves a credit check and review of financial documentation and results in a letter stating the loan amount the lender is prepared to offer, subject to a satisfactory property appraisal and final underwriting. It is not a guarantee of loan approval.
Costs paid at closing that are collected in advance rather than as recurring monthly charges. Common prepaid items include homeowner's insurance premiums, prepaid mortgage interest covering the days between closing and the first payment date, and initial escrow deposits for taxes and insurance.
The original amount borrowed in a loan, not including interest. Each mortgage payment reduces the outstanding principal balance. As the loan is paid down through amortization, the interest portion of each payment decreases and the principal portion increases.
A signed contract between a buyer and seller that outlines the terms and conditions of a real estate purchase, including the purchase price, contingencies, and closing date. Also called a sales contract or contract of sale. A fully executed purchase agreement is typically required to proceed with loan processing.
A category of mortgage that meets specific requirements under federal consumer protection regulations, designed to ensure borrowers have the ability to repay the loan. QM loans include conventional, FHA, VA, and USDA loans meeting standard guidelines. Non-QM loans fall outside these requirements but are still legal and offered by select lenders.
An agreement between a borrower and lender that guarantees a specific interest rate for a set period. Locking a rate protects the borrower from increases while the loan is being processed. The lock period must cover the time needed to close the loan; extensions may be available at an added cost.
The process of replacing an existing mortgage with a new one. Borrowers may refinance to obtain a lower rate, change the loan term, switch from an ARM to a fixed rate, or access equity through a cash-out refinance. A refinance involves a new application, underwriting review, and closing costs.
A loan secured by the same property as an existing first mortgage. Second mortgages have a subordinate lien position, meaning the first mortgage is paid first in the event of default or sale. HELOCs and home equity loans are common types of second mortgages.
The company that collects monthly mortgage payments, manages escrow accounts, and handles day-to-day loan administration. The servicer may or may not be the same company that originated the loan. Borrowers direct payments and servicing inquiries to their servicer.
Insurance that protects against losses related to defects in a property's title, such as prior liens, ownership disputes, or recording errors. Lender's title insurance protects the lender's interest and is typically required. Owner's title insurance protects the buyer and is often recommended. Both are one-time premiums paid at closing.
A review of public records to verify the legal ownership of a property and identify any outstanding liens, claims, or encumbrances. A title search is conducted before closing to ensure the seller has clear title to transfer to the buyer and the lender can take a valid first lien.
The process by which a lender evaluates a loan application to determine whether it meets program guidelines and poses an acceptable level of risk. The underwriter reviews income, assets, credit history, employment, and the appraisal. The outcome may be an approval (with or without conditions), a suspension (pending additional information), or a denial.
A mortgage program backed by the Department of Veterans Affairs, available to eligible veterans, active-duty service members, National Guard and Reserve members with qualifying service, and surviving spouses. VA loans offer no-down-payment options for eligible borrowers, no PMI, and competitive rates. Eligibility is verified through a Certificate of Eligibility (COE).
An upfront fee charged on most VA loans, which can be financed into the loan amount. The fee varies based on down payment amount, whether it is the borrower's first use of the VA benefit, and loan type. Certain veterans with service-connected disabilities may be exempt from the funding fee.
A tax form issued by employers that reports an employee's annual wages and the taxes withheld. Lenders typically request W-2s for the past two years as part of income verification for salaried or hourly borrowers. Self-employed borrowers generally do not have W-2s and may use tax returns or bank statements to document income instead.
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