What is PMI (Private Mortgage Insurance)?

PMI is insurance you pay when your down payment is less than 20% on a conventional loan. It protects the lender if you default. It typically costs 0.3%–1.5% of the loan amount per year and can be removed once you reach 20% equity.

What is DTI (Debt-to-Income Ratio)?

DTI is your total monthly debt payments divided by your gross monthly income. Most lenders want a DTI of 43% or less. For example, if you earn $8,000/month and have $2,800 in monthly debts (including the new mortgage), your DTI is 35%.

What is APR (Annual Percentage Rate)?

APR is the true yearly cost of a loan, including interest plus fees like origination charges and mortgage insurance. It's always higher than the note rate and helps you compare loan offers apples-to-apples.

What are Closing Costs?

Closing costs are fees paid when your loan finalizes — typically 2%–5% of the loan amount. They include appraisal fees, title insurance, escrow deposits, origination fees, and recording fees.

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. It allows down payments as low as 3.5% and is popular with first-time buyers and those with lower credit scores (minimum 580 for 3.5% down).

Escrow has two meanings: (1) During a purchase, a neutral third party holds funds and documents until the deal closes. (2) After closing, an escrow account is where your lender collects monthly payments for property taxes and insurance.

What is Pre-Approval?

Pre-approval is a lender's written commitment to lend you up to a certain amount, based on a credit check and review of your finances. It's stronger than pre-qualification and tells sellers you're a serious buyer.

What is LTV (Loan-to-Value)?

LTV is the ratio of your loan amount to the home's appraised value. A $380,000 loan on a $400,000 home is 95% LTV. Lower LTV means less risk for the lender and often better rates for you.

What is a Conforming Loan?

A conforming loan meets the guidelines set by Fannie Mae and Freddie Mac, including loan limits ($766,550 in most areas for 2024). Because they can be sold to these agencies, conforming loans typically offer lower rates than jumbo loans.

Mortgage Glossary — 50+ Terms Explained in Plain English

Q: What is a VA Loan?

A VA loan is a mortgage guaranteed by the Department of Veterans Affairs for eligible service members, veterans, and surviving spouses. Key benefits: no down payment, no PMI, and competitive interest rates.

A

Amortization #

The process of paying off a loan over time through regular payments. Early payments are mostly interest; later payments go mostly toward principal.

Example: On a 30-year fixed mortgage, your first payment might put $300 toward principal and $1,200 toward interest. By year 25, those numbers flip.

APR (Annual Percentage Rate) #

The true yearly cost of a loan, including interest plus lender fees like origination charges and mortgage insurance. Always higher than the note rate — use it to compare loan offers apples-to-apples.

Example: A loan with a 6.5% note rate might have a 6.8% APR after fees are factored in.

Appraisal #

A professional estimate of a property's market value, required by lenders to ensure the home is worth the loan amount. A licensed appraiser visits the property and compares it to recent sales.

Example: You offer $450,000 for a home. The appraisal comes back at $440,000, so the lender will only base the loan on $440,000.

ARM (Adjustable-Rate Mortgage) #

A mortgage with an interest rate that starts fixed for a set period (usually 5, 7, or 10 years), then adjusts periodically based on a market index. Can be risky if rates rise significantly.

Example: A 5/1 ARM has a fixed rate for 5 years, then adjusts once a year. If you plan to sell in 4 years, the lower initial rate could save you money.

Assessed Value #

The value assigned to a property by the local tax assessor for calculating property taxes. Often different from market value or appraised value.

Example: Your home's market value might be $500,000, but the assessed value for taxes could be $420,000 depending on your county.

B

Basis Points #

A unit of measurement equal to 1/100th of a percentage point. Used to describe small changes in interest rates or fees.

Example: If your rate drops from 7.00% to 6.75%, it fell by 25 basis points (0.25%).

Bridge Loan #

A short-term loan that lets you use equity in your current home to buy a new one before the old one sells. Typically higher interest rates with a 6–12 month term.

Example: You find your dream home but haven't sold your current house yet. A bridge loan covers the down payment, and you pay it off when your old home closes.

Buydown #

A financing technique where you (or the seller) pay upfront to temporarily or permanently lower the interest rate. Common structures are 2-1 or 3-2-1 buydowns.

Example: With a 2-1 buydown on a 6.5% loan, you'd pay 4.5% in year 1, 5.5% in year 2, then 6.5% for the remaining term. The seller often pays for this as a concession.

C

Cash-Out Refinance #

Replacing your existing mortgage with a larger one and taking the difference in cash. You're borrowing against your home's equity.

Example: Your home is worth $500,000 and you owe $300,000. A cash-out refi for $400,000 gives you $100,000 in cash (minus closing costs) for renovations, debt consolidation, etc.

Closing Costs #

Fees paid when your mortgage finalizes — typically 2%–5% of the loan amount. Includes appraisal, title insurance, escrow deposits, origination fees, and recording fees.

Example: On a $400,000 loan, expect $8,000–$20,000 in closing costs. Your Loan Estimate will itemize every fee.

Closing Disclosure #

A 5-page document you receive at least 3 business days before closing. It details your final loan terms, monthly payment, and all closing costs. Compare it to your Loan Estimate to catch any changes.

COE (Certificate of Eligibility) #

A document from the VA that proves a veteran's or service member's eligibility for a VA loan. Your lender can usually pull this electronically.

Conforming Loan #

A mortgage that meets Fannie Mae and Freddie Mac guidelines, including loan amount limits ($766,550 in most areas for 2024). Conforming loans typically offer the best rates because they can be sold to government-sponsored agencies.

Example: If you're borrowing $600,000 in a standard county, that's a conforming loan. Borrow $900,000 and you're in jumbo territory (unless you're in a high-cost area).

Conventional Loan #

Any mortgage not backed by a government agency (FHA, VA, USDA). Can be conforming or non-conforming. Typically requires stronger credit and a larger down payment than government loans.

Credit Score #

A number (300–850) that represents your creditworthiness. Mortgage lenders use the middle of your three bureau scores (Equifax, Experian, TransUnion). Higher scores get better rates.

Example: A 740+ score typically qualifies for the best conventional rates. FHA loans accept scores as low as 580 for 3.5% down.

D

Debt-to-Income Ratio (DTI) #

Your total monthly debt payments divided by your gross monthly income. Lenders use this to determine how much mortgage you can afford. Most want 43% or less, though some programs allow higher.

Example: You earn $8,000/month gross. Your car payment ($400), student loans ($300), and proposed mortgage ($2,100) total $2,800. Your DTI is 35%.

Deed of Trust #

A legal document used in many states (including California) instead of a traditional mortgage. It involves three parties: borrower, lender, and a neutral trustee who holds the title until the loan is paid off.

Discount Points #

Upfront fees paid to the lender at closing to lower your interest rate. One point equals 1% of the loan amount and typically reduces the rate by about 0.25%.

Example: On a $400,000 loan, one point costs $4,000. If it drops your rate from 7% to 6.75%, you'd save about $67/month. You'd break even in about 5 years.

Down Payment #

The upfront cash you put toward the home purchase. It's the difference between the purchase price and the loan amount. Larger down payments mean lower monthly payments and possibly no PMI.

Example: Buying a $400,000 home with 10% down means $40,000 cash and a $360,000 mortgage.

Due Diligence #

The investigation period after your offer is accepted. You inspect the property, review disclosures, check title, and verify the home meets your expectations before committing.

E

Earnest Money #

A good-faith deposit (usually 1%–3% of the price) made when your offer is accepted. It shows the seller you're serious. The money goes toward your down payment or closing costs at closing.

Example: On a $400,000 home, you might deposit $8,000 in earnest money into escrow within 3 days of acceptance.

Equity #

The portion of your home you actually own — the difference between what it's worth and what you owe. Equity grows as you pay down the mortgage and as the home appreciates.

Example: Your home is worth $500,000 and you owe $350,000. You have $150,000 in equity (30%).

Escrow #

A neutral third party that holds money and documents during a real estate transaction until all conditions are met. Also refers to the period between acceptance and closing ("in escrow").

Example: Once your offer is accepted, the escrow company holds your earnest money, coordinates with the lender and title company, and distributes funds at closing.

Escrow Account #

An account managed by your loan servicer that collects a portion of your monthly payment for property taxes and homeowners insurance. The servicer pays these bills on your behalf when they're due.

Example: If your annual taxes are $6,000 and insurance is $1,800, an extra $650/month goes into your escrow account on top of your principal and interest payment.

F

FHA Loan #

A government-backed mortgage insured by the Federal Housing Administration. Popular with first-time buyers because it allows down payments as low as 3.5% and credit scores as low as 580. Requires MIP (mortgage insurance premium).

Example: A buyer with a 600 credit score and $15,000 saved can often qualify for an FHA loan when conventional financing isn't available.

Fixed-Rate Mortgage #

A mortgage with an interest rate that never changes for the life of the loan. Your principal and interest payment stays the same every month. Most common terms are 15 and 30 years.

Flood Insurance #

Insurance that covers damage from flooding — not included in standard homeowners insurance. Required if your property is in a FEMA-designated flood zone. Available through NFIP or private insurers.

Forbearance #

A temporary agreement with your lender to reduce or pause mortgage payments during financial hardship. It's not forgiveness — you still owe the money and must repay it later.

Example: After a job loss, you negotiate 3 months of forbearance. Afterward, you repay the missed amounts through a repayment plan or loan modification.

Foreclosure #

The legal process where a lender takes possession of a property after the borrower fails to make payments. It severely damages your credit and stays on your record for 7 years.

G

Gift Funds #

Money given to you by a family member (or other approved donor) to use toward your down payment or closing costs. The donor must provide a gift letter confirming no repayment is expected.

Example: Your parents give you $20,000 for a down payment. The lender requires a signed gift letter and proof the funds were transferred from the donor's account.

Good Faith Estimate (GFE) #

A now-replaced document that estimated closing costs. Since 2015, the Loan Estimate has taken its place under TRID rules. You may still hear the term used informally.

Guarantee Fee #

A fee charged on USDA loans (similar to MIP on FHA or the VA funding fee). Includes an upfront fee (1% of the loan) and an annual fee (0.35%) that funds the USDA loan program.

H

HELOC (Home Equity Line of Credit) #

A revolving line of credit secured by your home's equity. Works like a credit card — you draw what you need during the draw period (usually 10 years), then repay during the repayment period.

Example: With $200,000 in equity, you might qualify for a $100,000 HELOC. You draw $30,000 for a kitchen remodel and only pay interest on that $30,000.

High-Balance Loan #

A conforming loan in a high-cost area where the loan limit is higher than the standard limit. In 2024, these can go up to $1,149,825 in the most expensive counties.

HOA (Homeowners Association) #

An organization that manages a community (condos, townhomes, planned developments) and collects monthly dues for shared amenities and maintenance. HOA fees are factored into your DTI.

Example: Your condo's HOA charges $350/month covering pool maintenance, landscaping, exterior insurance, and a reserve fund.

Homeowners Insurance #

Insurance that covers damage to your home and belongings from fire, theft, storms, and other perils. Required by all mortgage lenders. Does NOT cover floods or earthquakes (separate policies).

HUD (Department of Housing and Urban Development) #

The federal agency that oversees FHA lending, fair housing laws, and affordable housing programs. HUD sets the guidelines for FHA loans.

I

Interest Rate #

The percentage charged by the lender for borrowing money — your cost of the loan. Expressed as an annual rate but calculated monthly. Not the same as APR, which includes fees.

Example: At a 6.5% interest rate on a $400,000 loan, you'd pay about $2,528/month in principal and interest.

Interest Rate Lock #

A lender's guarantee that your interest rate won't change for a set period (typically 15–60 days) while your loan is processed. Protects you if rates rise before closing.

Example: You lock at 6.5% for 30 days. Even if rates jump to 6.75% next week, your rate stays at 6.5%.

IRRRL (Interest Rate Reduction Refinance Loan) #

A VA streamline refinance that lets veterans lower their interest rate with minimal paperwork and no appraisal required. One of the fastest refinance options available.

J

Joint Tenancy #

A form of property ownership where two or more people hold equal shares with the right of survivorship — if one owner dies, their share automatically passes to the surviving owner(s).

Jumbo Loan #

A mortgage that exceeds conforming loan limits and can't be sold to Fannie Mae or Freddie Mac. Jumbo loans typically require higher credit scores (700+), larger down payments (10–20%), and may have slightly higher rates.

Example: In a standard county, any loan over $766,550 is a jumbo. You'll likely need 10%+ down and a 700+ credit score.

L

Lien #

A legal claim on a property used as security for a debt. Your mortgage is a lien. Other liens can include tax liens, mechanic's liens, or judgment liens — all must be cleared before selling.

Loan Estimate #

A standardized 3-page document your lender must provide within 3 business days of applying. It shows your estimated interest rate, monthly payment, closing costs, and loan terms.

Example: You apply with two lenders and compare their Loan Estimates side by side. Same format makes it easy to spot differences in fees and rates.

Loan Officer #

A licensed mortgage professional who helps you choose the right loan, guides you through the application process, and works with underwriting to get your loan approved.

Lock Period #

The number of days your interest rate is guaranteed. Common lock periods are 15, 30, 45, or 60 days. Longer locks may cost slightly more because the lender takes on more risk.

LTV (Loan-to-Value) #

The ratio of your loan amount to the property's appraised value. Lower LTV means less risk for the lender and often better rates and terms for you.

Example: A $380,000 loan on a $400,000 home = 95% LTV. Put 20% down ($80,000) and you're at 80% LTV — no PMI required on conventional loans.

M

MIP (Mortgage Insurance Premium) #

Insurance required on FHA loans — both an upfront fee (1.75% of the loan, usually rolled into the balance) and an annual fee (0.55% typically, paid monthly). Unlike PMI, FHA MIP usually lasts the life of the loan.

Example: On a $300,000 FHA loan, your upfront MIP is $5,250 and your monthly MIP is about $138.

Mortgage Insurance (PMI/MIP) #

Insurance that protects the lender (not you) if you default. Required when your down payment is less than 20% on conventional loans (PMI) or on all FHA loans (MIP). It's an extra monthly cost added to your payment.

Mortgage Broker #

A licensed intermediary who shops multiple lenders on your behalf to find the best loan terms. Unlike a loan officer at a bank, a broker isn't tied to one lender's products.

N

NMLS (Nationwide Multistate Licensing System) #

The federal registry where mortgage loan originators are licensed. Every loan officer has a unique NMLS number you can look up to verify their credentials and disciplinary history.

Example: Before working with a loan officer, search their NMLS number at nmlsconsumeraccess.org to verify they're licensed in your state.

Non-QM (Non-Qualified Mortgage) #

A mortgage that doesn't meet the Consumer Financial Protection Bureau's "Qualified Mortgage" rules. Designed for borrowers with non-traditional income (self-employed, bank statements, asset-based) who don't fit conventional guidelines.

Example: A self-employed business owner who writes off heavy expenses shows low taxable income. A Non-QM bank statement loan looks at actual deposits instead.

Note Rate #

The actual interest rate stated on your mortgage note — the rate used to calculate your monthly principal and interest payment. It does not include fees (that's APR).

O

Origination Fee #

A fee charged by the lender for processing your loan application — typically 0.5%–1% of the loan amount. It covers underwriting, document preparation, and funding the loan.

Example: On a $400,000 loan with a 1% origination fee, you'd pay $4,000 at closing.

Owner-Occupied #

A property where the borrower lives as their primary residence. Owner-occupied homes get the best mortgage rates and terms compared to second homes or investment properties.

P

PITI (Principal, Interest, Taxes & Insurance) #

The four components of your total monthly mortgage payment. Principal pays down the loan, interest is the lender's charge, taxes and insurance are usually collected into your escrow account.

Example: Principal & interest: $2,100 + property taxes: $500/mo + insurance: $150/mo = $2,750 total PITI.

PMI (Private Mortgage Insurance) #

Insurance required on conventional loans when your down payment is less than 20%. It protects the lender if you default. Costs 0.3%–1.5% of the loan amount annually. Can be removed once you reach 20% equity.

Example: On a $400,000 loan, PMI might cost $100–$250/month. Once your balance drops below 80% of the home's value, you can request cancellation.

Points #

Fees paid to the lender at closing, expressed as a percentage of the loan. Discount points lower your rate; origination points are a lender fee. One point = 1% of the loan amount.

Pre-Approval #

A lender's written commitment to lend you up to a specific amount, based on a credit check, income verification, and asset review. Much stronger than pre-qualification — sellers take it seriously.

Example: After submitting pay stubs, tax returns, and bank statements, your lender issues a pre-approval letter for $500,000. Now your offers carry weight.

Pre-Qualification #

A quick, informal estimate of how much you might be able to borrow, based on self-reported income and debts. No credit check or document verification — it's a starting point, not a commitment.

Prepayment Penalty #

A fee some lenders charge if you pay off your mortgage early (usually within the first 3–5 years). Rare on standard residential loans today — most conventional, FHA, and VA loans don't have them. Common on Non-QM loans.

Principal #

The amount of money you borrow — your loan balance. Each monthly payment reduces your principal (slowly at first, faster over time due to amortization).

Prop 13 (Proposition 13) #

A California law that limits property tax to 1% of the purchase price at the time of sale, with annual increases capped at 2%. This means your neighbor who bought 20 years ago might pay far less in taxes than you.

Example: Buy a home for $600,000 and your base tax is about $6,000/year. It can only increase by a max of 2% annually regardless of how much the home appreciates.

Q

QM (Qualified Mortgage) #

A category of loans that meet specific Consumer Financial Protection Bureau standards designed to protect borrowers — including limits on fees, no risky features like interest-only payments, and DTI verification. Lenders get legal protections for issuing QM loans.

R

Rate Lock #

An agreement with your lender to freeze your interest rate for a specified period while your loan processes. If rates rise, you're protected. If rates drop significantly, ask about a float-down option.

Refinance #

Replacing your current mortgage with a new one — typically to get a lower rate, change the loan term, or access equity (cash-out). Involves new closing costs, so make sure the savings justify the expense.

Example: You have a 7.5% rate. Rates drop to 6%. Refinancing a $400,000 loan could save you $400+/month — well worth the $6,000–$8,000 in closing costs.

RESPA (Real Estate Settlement Procedures Act) #

A federal law that requires lenders to provide borrowers with disclosures about closing costs, prohibits kickbacks between settlement service providers, and limits escrow account requirements.

Right of Rescission #

Your legal right to cancel a refinance within 3 business days of closing, no questions asked. Applies to refinances of your primary residence — does NOT apply to purchase loans.

S

Second Home #

A property you occupy part-time (vacation home) that's not your primary residence and not rented out full-time. Rates are slightly higher than primary residences but better than investment properties. Typically requires 10%+ down.

Seller Concessions #

Credits the seller pays toward your closing costs as part of the negotiation. There are limits based on loan type and down payment (e.g., conventional with 10% down caps at 6%).

Example: You negotiate $10,000 in seller concessions. At closing, the seller covers $10,000 of your closing costs, reducing the cash you need.

Short Sale #

When a homeowner sells for less than what they owe on the mortgage, with the lender's approval. Less damaging to credit than foreclosure, but the process can be lengthy.

Streamline Refinance #

A simplified refinance for government-backed loans (FHA, VA, USDA) that requires less documentation and often no appraisal. Designed to lower your rate quickly with minimal hassle.

Subordination #

The process of rearranging lien priority — typically when you refinance your first mortgage but keep your HELOC. The HELOC lender must agree to stay in second position behind the new first mortgage.

T

Title Insurance #

Insurance that protects against claims on the property's ownership history — liens, forgeries, missing heirs, recording errors. The lender requires a lender's policy; you should also get an owner's policy (one-time fee at closing).

Transfer Tax #

A tax charged by the city or county when a property changes hands. In California, the standard county transfer tax is $1.10 per $1,000 of the sale price. Some cities charge additional taxes.

Example: On a $600,000 sale in an unincorporated area, the transfer tax would be $660.

TRID (TILA-RESPA Integrated Disclosure) #

Federal rules (also called "Know Before You Owe") that created the Loan Estimate and Closing Disclosure forms, replacing the old GFE and HUD-1. These standardized documents make it easier to understand and compare loan costs.

Trust Deed #

Another term for Deed of Trust — the security instrument used in California and many other states. A trustee holds the legal title as security until the loan is repaid.

U

Underwriting #

The process where a lender evaluates your financial profile — income, assets, credit, property — to determine if you qualify for the loan. The underwriter is the person who approves, denies, or conditionally approves your mortgage.

Example: After submitting your application, the underwriter reviews your tax returns, verifies your employment, and checks that the property meets guidelines before issuing approval.

USDA Loan #

A zero-down-payment mortgage for eligible rural and suburban areas, backed by the USDA. Has income limits and geographic restrictions but offers very competitive rates and low fees.

V

VA Entitlement #

The amount the VA guarantees on your loan — essentially the VA's promise to cover a portion if you default. You have basic entitlement ($36,000) and bonus entitlement that allows loans well over $1 million with no down payment in most cases.

VA Funding Fee #

A one-time fee on VA loans that funds the program. Ranges from 1.25%–3.3% of the loan amount depending on down payment and whether it's your first VA loan. Can be rolled into the loan. Exempt for veterans with service-connected disabilities.

Example: First-time use with no down payment: 2.15% fee. On a $400,000 loan, that's $8,600 — often financed into the loan balance.

VA Loan #

A mortgage guaranteed by the Department of Veterans Affairs for eligible service members, veterans, and surviving spouses. Key benefits: no down payment, no PMI, competitive rates, and limited closing costs.

Example: A veteran buys a $500,000 home with $0 down, no PMI, and a rate that's often 0.25%–0.5% lower than conventional — saving hundreds per month.

W

Wraparound Mortgage #

A type of seller financing where the seller's existing mortgage stays in place and the buyer makes payments to the seller, who continues paying the original loan. Carries significant risk — if the seller stops paying, the home could be foreclosed.

Y

Yield Spread Premium (YSP) #

A payment a lender makes to a mortgage broker for delivering a loan at a rate higher than the minimum the borrower qualifies for. Largely replaced by lender-paid compensation rules after the 2010 Dodd-Frank Act.