Mortgage terms, explained
California Mortgage Solutions, a mortgage broker in San Luis Obispo, defines here the words that appear on this site and in a loan file. Each definition is written from the agency or regulator that owns the term, and the source is under it.
Applying and underwriting
The words a lender uses from the first conversation to the final signature, and what each one commits anyone to.
- Pre-qualification
A letter from a lender saying it is generally willing to lend up to a certain amount on certain assumptions; lenders use the word pre-approval for the same kind of letter, and the two words tell a buyer little about how far a lender has looked. Neither is a commitment to lend.
- Underwriting
The process a lender uses to decide whether to approve a loan, in which it evaluates the property and the borrower's credit and ability to pay the mortgage.
- Credit report
A statement of a person's credit activity and current credit situation, such as how loans have been paid and the status of each account. Lenders read it alongside credit scores when deciding whether to lend and at what rate.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Credit score
A number that predicts how likely a person is to repay a loan on time, produced by a scoring model from the information in a credit report. There are several models, so a person has more than one score, and a score moves with credit history, the kind of loan and even the day it is calculated.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Debt-to-income ratio DTI
All of a borrower's monthly debt payments divided by gross monthly income, one of the ways a lender measures whether the borrower can manage the payments on the money they plan to borrow.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Reserves
Liquid or near liquid assets a borrower still has after the mortgage closes: cash, and assets easily turned into cash by withdrawing, selling or redeeming them. Lenders measure reserves in months of the new housing payment those assets could cover, after the funds to close are taken out.
SourceB3-4.1-01, Minimum Reserve Requirements | Fannie Mae Selling Guide
- Loan Estimate
A standard form every lender must send soon after receiving a mortgage application, showing the estimated interest rate, monthly payment and closing costs, the estimated taxes and insurance, and any feature such as a prepayment penalty. It is neither an approval nor a denial; it shows the terms the lender expects to offer.
SourceWhat is a Loan Estimate? | Consumer Financial Protection Bureau
- Closing Disclosure
A required form giving the final details of the mortgage a borrower has chosen: the loan terms, the projected monthly payments, and the fees and other costs of getting the loan.
SourceMortgages key terms | Consumer Financial Protection Bureau
Costs and closing
What changes hands at closing, who holds it on the way, and the names each charge goes by on the forms.
- Closing costs
All the costs paid at closing: origination charges, the appraisal fee, the credit report, title insurance and any other fee the lender requires or that is part of the transaction. The Loan Estimate summarizes them.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Origination fee
What a lender charges a borrower for making the loan, which can cover processing the application, underwriting, funding and other administrative work. Once disclosed, it can generally rise only in certain circumstances.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Discount points
An amount paid at closing in exchange for a lower interest rate on the loan. Some lenders use the word for any up-front fee calculated as a share of the loan amount, whether or not the rate comes down.
- Escrow
In California a sale closes through escrow: a neutral third party holds the money and the documents of title under the buyer's and seller's instructions and, once every condition is met, passes title to the buyer and the funds to the seller. An escrow account is the part of a monthly payment held to pay taxes and insurance.
SourceGeneral Definitions | Escrow Law | California Department of Financial Protection and Innovation
- Impound account
The California name for an escrow account: money set aside out of each mortgage payment and held by the lender or servicer to pay property taxes and homeowners insurance when they fall due, so the borrower does not meet those bills in one lump.
SourceWhat is an escrow or impound account? | Consumer Financial Protection Bureau
- Title insurance
Lender's title insurance protects the lender, and only the lender, against problems with the title to the property, such as someone with a legal claim against the home. Owner's title insurance protects the homeowner if someone sues claiming an interest in the home from before the purchase.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Appraisal
A written opinion of how much a property is worth, prepared as an independent assessment of its value. It describes what makes the property valuable and may show how it compares with other properties nearby.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Earnest money
A deposit a buyer pays to show good faith on a signed purchase contract, held by the seller or a third party such as a title company. If the sale closes it can go toward closing costs or the down payment; if the buyer does not perform in good faith it can be forfeited to the seller.
SourceMortgages key terms | Consumer Financial Protection Bureau
Rates and payments
How a rate is quoted, how a monthly payment is built, and the features of a loan that can change either one.
- Interest rate
The cost of borrowing the money each year, expressed as a percentage rate. It does not reflect fees or the other charges that come with the loan.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Annual percentage rate APR
A broader measure of the cost of borrowing than the interest rate, because it reflects the rate together with any points, mortgage broker fees and other charges paid to get the loan. For that reason it is usually higher than the interest rate.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Rate lock
An agreement that the interest rate will not change between the offer and closing, as long as the loan closes within the agreed time and nothing in the application changes. Until a rate is locked it can change at any time, and extending a lock can cost money.
SourceWhat's a lock-in or a rate lock on a mortgage? | Consumer Financial Protection Bureau
- Amortization
Paying a loan off with regular payments over time, so that the balance falls with each payment. A loan that does not fully amortize leaves money owing at the end of its term, and one whose payments do not cover the interest due grows instead, which is called negative amortization.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Principal
The amount of the loan that has to be paid back. Part of each monthly payment goes to principal, and as the principal falls so does the interest charged on it.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Balloon payment
A single payment, larger than the others and usually due at the end of the loan's term, on a loan whose regular payments do not pay it off. A borrower who cannot pay it may have to refinance or sell.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Prepayment penalty
A fee some lenders charge if all or part of the mortgage is paid off early, agreed to when the loan closed. Not every mortgage has one.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Adjustable-rate mortgage ARM
A loan whose interest rate can change, usually by reference to an index rate, so that the monthly payment moves up or down with the loan's introductory period, its rate caps and the index. The rate and payment may start lower than on a loan whose rate does not change, and both can rise substantially.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Index and margin
The index is a benchmark interest rate that moves with the market; the margin is the number of percentage points the lender adds to it, set in the loan agreement and unchanged after closing. Together they set the rate on an adjustable-rate mortgage once its initial period ends.
SourceMortgages key terms | Consumer Financial Protection Bureau
Programs and limits
The names of the loan types on this site and the lines that separate one from another.
- Conforming loan limit
The largest balance Fannie Mae and Freddie Mac may buy on a single-family mortgage, set under a formula in federal law and published each year by the Federal Housing Finance Agency, with higher values in counties the agency counts as high cost. A loan above it is a jumbo loan.
- Conventional loan
Any mortgage that is not insured or backed by a government program, such as the FHA, VA or USDA loan programs.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Jumbo loan
A mortgage whose balance is above the conforming loan limit, so Fannie Mae and Freddie Mac may not buy it. The limit is set each year by the Federal Housing Finance Agency and differs by county, so the line between the two moves.
- Mortgage insurance
Insurance that protects the lender, not the borrower, if payments fall behind; a conventional loan carries it as private mortgage insurance from a private company while the loan is large against the home's value, and it can later be canceled. An FHA loan pays its premium to FHA itself, up front and monthly, on every loan.
SourceWhat is mortgage insurance and how does it work? | Consumer Financial Protection Bureau
- Funding fee
A one-time fee a Veteran, service member or survivor pays on a VA-backed or VA direct home loan; it lowers the program's cost to taxpayers, since VA loans carry no monthly mortgage insurance. Borrowers receiving VA compensation for a service-connected disability, among others, are exempt.
SourceVA Funding Fee And Loan Closing Costs | Veterans Affairs
- Guarantee fee
The up-front fee a lender pays USDA Rural Development on a Single Family Housing Guaranteed Loan Program loan, which the lender may pass on to the borrower and which is not refunded once the loan note guarantee is issued. The program also charges an annual fee on the loan's balance, which the lender may pass on as well.
SourceeCFR :: 7 CFR 3555.107 -- Application for and issuance of the loan guarantee.
- Qualified mortgage QM
A loan with less risky features and protections that make it more likely the borrower can afford it; a lender that makes one is presumed to have followed the ability-to-repay rule. That rule requires most lenders to make a reasonable, good faith determination that the borrower is able to pay the loan back.
SourceWhat is a Qualified Mortgage? | Consumer Financial Protection Bureau
Property and equity
How a home is measured against the loan on it, and the ways the difference can be borrowed.
- Equity
The amount a property is currently worth minus the amount of any mortgage on it.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Home equity line of credit HELOC
A line of credit secured by the equity in a home, drawn on as needed during a set draw period and repaid afterward, usually at an adjustable rate. The home is the collateral, so a borrower who cannot repay can lose it to foreclosure.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Home equity loan
A loan that borrows against the equity in a home and pays the money out as one lump sum, usually at a rate that does not change. The home is the collateral, so a borrower who cannot repay can lose it to foreclosure.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Cash-out refinance
A new first mortgage, secured by the same property, that pays off the existing mortgage and any junior liens and lets the borrower take equity out of the property for any purpose. Closing costs, points and prepaid items can be financed in the new loan.
SourceB2-1.3-03, Cash-Out Refinance Transactions | Fannie Mae Selling Guide
- Second mortgage
A loan taken out with the house as collateral while another loan secured by the same house is still in place. A junior lien is the same thing by its legal name.
SourceMortgages key terms | Consumer Financial Protection Bureau
- Primary residence
The home a borrower occupies as their main residence, which Fannie Mae calls a principal residence and lenders call owner-occupied; the other occupancy types are a second home and an investment property. Each type has its own requirements, and the one a borrower states is part of what the lender underwrites.
Investor and non-QM loans
The words that come up when the loan is for a rental, rests on bank deposits, or sits outside the agency rules.
- Debt service coverage ratio DSCR
A property's net operating income divided by its annual debt service: the measure bank examiners use of whether a property's own income can carry the loan on it. Some lenders qualify a rental on this ratio instead of on the borrower's income.
SourceComptroller's Handbook, Commercial Real Estate Lending | Office of the Comptroller of the Currency
- Bank statement loan
A loan on which the deposits shown in a borrower's bank statements, rather than tax returns or pay stubs, are the record the lender uses to verify income. Regulation Z lists financial institution records among the third-party records a lender may rely on, and each lender writes the loan under its own non-QM rules.
SourceeCFR :: 12 CFR 1026.43 -- Minimum standards for transactions secured by a dwelling.
- Non-QM loan
A mortgage that does not meet Regulation Z's definition of a qualified mortgage, so the lender has no presumption that it followed the ability-to-repay rule and stands on its own judgment of the borrower's ability to repay. It must still make a reasonable, good faith determination that the borrower can repay the loan.
SourceeCFR :: 12 CFR 1026.43 -- Minimum standards for transactions secured by a dwelling.
- ITIN loan
A loan to a borrower whose taxpayer identification number is an ITIN, the number the IRS issues to a person who needs one for federal tax purposes but is not eligible for a Social Security number. Some lenders lend on it under their own rules, outside the agency programs.
SourceIndividual taxpayer identification number (ITIN) | Internal Revenue Service
- Hard money
A loan funded by a private individual or another lender that is not an institution, secured by real property and, in California, arranged by a licensed real estate broker under the Department of Real Estate's rules for private money transactions.
SourceMortgage Loan Broker Compliance Evaluation Manual (RE 7) | California Department of Real Estate
- Bridge loan
A short-term loan that carries a borrower from one transaction to the next, such as a loan to buy a new home while the current one is still to be sold. Regulation Z's ability-to-repay rule leaves out a temporary or bridge loan whose term is short enough, so the lender sets its own terms.
SourceeCFR :: 12 CFR 1026.43 -- Minimum standards for transactions secured by a dwelling.
- Accessory dwelling unit ADU
A home that is accessory to a primary residence and has complete independent living facilities for one or more people, whether attached to the main house, inside it, in a converted garage, or detached on the same lot. California law sets the rules under which a local agency permits one.
SourceAccessory Dwelling Unit Handbook | California Department of Housing and Community Development
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This page is general information about the words a loan file uses, not an offer of credit or a commitment to lend. What a lender will do with your file depends on the file.
A word here is one thing; your file is another
Start the application, or call and ask what a term means for your loan.