Mortgage Glossary

Plain-English definitions for the 42+ terms every home buyer will hear from a lender, agent, or loan officer. Bookmark this page — you'll come back to it.

Adjustable-Rate Mortgage (ARM)

A mortgage whose interest rate changes on a set schedule after an initial fixed period (e.g. 5/1 ARM = 5 years fixed, then annual adjustments).

Amortization

The schedule by which loan principal is paid down over time. Early payments are mostly interest; later payments are mostly principal.

Annual Percentage Rate (APR)

The true annual cost of a loan including interest rate plus most fees, expressed as a percentage. Always higher than the note rate.

Appraisal

A licensed appraiser's opinion of a property's market value. Required by lenders to make sure the home is worth what you're paying.

Automated Underwriting System (AUS)

Software (DU for Fannie Mae, LPA for Freddie Mac, TOTAL for FHA, GUS for USDA) that renders an initial approve/refer decision on a loan file.

Basis Point

One one-hundredth of a percent (0.01%). Interest rates and pricing adjustments are quoted in basis points ('the rate moved 25 bps').

Cash-to-Close

The total amount you need to bring to closing — down payment plus closing costs, minus earnest money and any lender/seller credits.

Certificate of Eligibility (COE)

The document from the VA that proves you qualify for a VA loan. Required before a lender can order a VA appraisal.

Closing Costs

Fees paid at closing: lender origination, title, appraisal, escrow setup, taxes, insurance. Typically 2–5% of the purchase price.

Closing Disclosure (CD)

The final loan-terms document you receive at least 3 business days before closing. Compare it line-by-line to your Loan Estimate.

Compensating Factors

Positive parts of a file (large reserves, low DTI, long job tenure) that let underwriters approve loans slightly outside standard guidelines.

Conforming Loan

A conventional loan under the Fannie/Freddie loan limit ($806,500 in most 2026 counties).

Debt-to-Income Ratio (DTI)

The percentage of your gross monthly income that goes to debt payments (proposed housing + credit cards + car + student loans). Most programs cap at 43–50%.

Related: dti explained

Down Payment

The upfront cash you put toward the purchase price. Ranges from 0% (VA/USDA) to 20%+ (to avoid PMI on conventional).

Down Payment Assistance (DPA)

State or local programs that provide grants or second mortgages to cover part or all of your down payment. Usually first-time-buyer + income-capped.

Earnest Money

A good-faith deposit (1–3% of the price) held in escrow when your offer is accepted. Applied to down payment at closing.

Escrow

A neutral third-party account that holds funds for taxes and insurance (or the earnest money before closing).

FHA Loan

A government-insured mortgage for buyers with 580+ FICO and 3.5% down. Requires MIP for the life of most 30-year loans.

Fixed-Rate Mortgage

A mortgage whose interest rate stays the same for the entire loan term (typically 15 or 30 years).

Funding Fee

VA loans' one-time fee to the Department of Veterans Affairs (1.25%–3.3% depending on down payment and use). Usually financed into the loan.

Related: va funding fee

Gift Funds

Money from a family member (or approved donor) used toward your down payment or closing costs. Requires a signed gift letter and paper trail.

Guaranteed Rural Housing

USDA's zero-down loan program for buyers in eligible rural and suburban areas with household income at or below 115% of AMI.

Hazard Insurance

Homeowners insurance required by lenders. Covers fire, wind, theft. Usually paid monthly through escrow.

Housing Ratio (Front-End DTI)

Just the proposed housing payment (PITI) divided by gross monthly income. Most programs prefer under 31%.

Interest Rate

The percentage the lender charges on your loan balance each year. The 'note rate' — not the same as APR.

Jumbo Loan

A conventional loan above the conforming limit. Requires stronger credit, larger down payment, and higher reserves.

Loan Estimate (LE)

A 3-page disclosure lenders must provide within 3 business days of a full application. Shows rate, fees, and estimated cash-to-close.

Loan-to-Value (LTV)

Loan amount divided by property value, as a percentage. 95% LTV = 5% down.

Mortgage Insurance Premium (MIP)

FHA's mortgage insurance: 1.75% upfront (financed) + 0.55% annual for most 30-year loans. Stays for the life of the loan on <10% down.

Origination Fee

The lender's fee for processing your loan. Usually 0.5%–1% of the loan amount.

PITI

Principal + Interest + Taxes + Insurance — the full monthly housing payment lenders use to calculate DTI.

Points (Discount Points)

Prepaid interest to lower your rate. 1 point = 1% of the loan amount, typically reduces the rate by 0.125%–0.25%.

Pre-Approval

A lender's conditional commitment based on verified credit, income, and assets. Stronger than pre-qualification; needed to make competitive offers.

Principal

The loan balance itself, separate from the interest you pay on it.

Private Mortgage Insurance (PMI)

Insurance conventional lenders require when your down payment is less than 20%. Drops off automatically at 78% LTV.

Rate Lock

A lender agreement to hold a specific rate for a set period (usually 30–60 days) while your loan closes.

Reserves

Liquid assets remaining after closing, measured in months of PITI. Many programs require 2–6 months.

Residual Income

VA's alternative to DTI: cash left over each month after all obligations. Must exceed a table minimum based on family size and region.

Seller Concessions

Money the seller agrees to pay toward your closing costs, capped by program (FHA 6%, VA 4%, Conv 3–9%).

Title Insurance

One-time policies that protect the lender (required) and optionally you (owner's policy) from ownership disputes on the property.

Underwriter

The person who reviews your full file against program guidelines and issues the final approval, conditional approval, or denial.

VA Loan

A Department of Veterans Affairs-guaranteed mortgage for eligible service members and veterans. No down payment, no monthly MI.