Mortgage dictionary
Mortgage terms in plain English
100 terms you'll hear from a lender, a real estate agent or an underwriter. Each one says what it means, how FHA, Conventional, VA and USDA treat it, and what it does to the price you can buy at.
Qualifying
Automated underwritingAutomated underwriting is the software, such as Desktop Underwriter, Loan Product Advisor, FHA's TOTAL Scorecard or USDA's GUS, that reads your credit, income, debts and savings and returns an approve or refer result.Back-end ratioThe back-end ratio adds your proposed house payment to every other monthly debt payment and divides the total by gross monthly income, and it's the main DTI number lenders approve on.Certificate of EligibilityA Certificate of Eligibility, or COE, is the VA document that proves to a lender you qualify for a VA home loan based on your service, and it shows your entitlement and funding fee status.Co-borrowerA co-borrower is a second person who signs the mortgage note, shares responsibility for every payment and normally goes on the title as a part owner of the home.Compensating factorsCompensating factors are strengths in a manually underwritten loan, such as savings left after closing or a small jump from current rent, that let the underwriter approve higher debt ratios.Conditional approvalConditional approval means an underwriter has approved your mortgage on a specific home, subject to a written list of items, such as an updated pay stub or the appraisal, that must be cleared before closing.Debt serviceDebt service is the principal and interest you must pay over a set period, usually a month or a year, to keep a loan current and repay it on schedule.Debt-to-income ratioDebt-to-income ratio is the share of your gross monthly income that goes to the new house payment plus your monthly debt payments, and every loan program caps how high it can go.DSCRDSCR, or debt service coverage ratio, is a rental property's monthly rent divided by its full monthly payment, and lenders use it to approve investor loans without checking personal income.First-time homebuyerFor most mortgage and assistance programs, a first-time homebuyer is someone who hasn't owned a home they lived in during the three years before buying, so past owners can qualify again.Front-end ratioThe front-end ratio is your proposed monthly house payment, including taxes, insurance and mortgage insurance, divided by your gross monthly income before taxes.Gross monthly incomeGross monthly income is what you earn each month before taxes, insurance and retirement contributions come out, and it's the income figure lenders divide your payments by.Income-driven repaymentIncome-driven repayment is a federal student loan plan that sets your monthly payment from your income and family size instead of your balance, which can shrink the payment a mortgage lender counts.Installment debtInstallment debt is a loan with a fixed monthly payment and a set end date, such as a car loan, personal loan or student loan, and lenders count that payment in your debt-to-income ratio.Loan officerA loan officer is the licensed person who takes your mortgage application, compares loan programs and prices, collects your documents and keeps the loan moving from pre-approval to the closing table.Manual underwritingManual underwriting is a human underwriter approving a loan by checking the documents and ratios against the program's handbook, used when automated underwriting returns a Refer or can't score the borrower.Mortgage brokerA mortgage broker is a licensed company that takes your home loan application and places it with one of several wholesale lenders, choosing a lender whose rules approve you at the best available price.Non-occupant co-borrowerA non-occupant co-borrower is someone, often a parent, who signs the mortgage and adds their income to yours but won't live in the home you're buying.Non-taxable income gross-upA gross-up raises non-taxable income such as SSI, VA disability or child support by a set percentage before the lender figures your ratios, so untaxed dollars qualify on equal terms with taxable pay.PITIPITI is the full monthly house payment a lender counts: principal, interest, property taxes and homeowners insurance, plus mortgage insurance and HOA dues when the home has them.Pre-approvalA pre-approval is a lender's written statement that, after pulling your credit and checking your income and asset documents, you qualify for a mortgage up to a set amount before you've chosen a home.Pre-qualificationPre-qualification is a lender's early estimate of how much you could borrow, based on the income, debts and credit you report, made before any pay stubs or bank statements are checked.Rental income offsetRental income offset is how lenders count rent toward qualifying: 75% of the expected rent is added to income or set against a rental's own payment, with 25% held back for vacancies and upkeep.ReservesReserves are the savings you still have after paying the down payment and closing costs, measured in how many months of the new house payment they would cover.Residual incomeResidual income is the money a VA borrower has left each month after taxes, the new house payment, debts and an allowance for upkeep and utilities, measured against a VA minimum by household size.Revolving debtRevolving debt is credit you can borrow, repay and borrow again up to a set limit, like credit cards and store cards, and mortgage lenders count its minimum monthly payment in your debt ratio.Self-sufficiency testThe self-sufficiency test is FHA's rule for 3 and 4 unit homes: 75% of the market rent for every unit, including the one you live in, has to cover the full monthly mortgage payment.UnderwriterAn underwriter is the lender's employee who checks a mortgage application against the loan program's rules, verifying credit, income, savings and the home's value before approving the loan with any conditions.Underwriting conditionsUnderwriting conditions are the specific documents, letters or outside reports an underwriter requires before a conditionally approved mortgage can close, each one tied to a number or fact in the loan.Verification of employmentA verification of employment is the lender's confirmation, straight from your employer or a payroll database, that you work where you said, since when, and what you earn, including overtime and bonuses.
Credit
Bankruptcy waiting periodA bankruptcy waiting period is the stretch of time a mortgage program requires between a bankruptcy's discharge or dismissal and the approval of a new home loan.CAIVRSCAIVRS is HUD's Credit Alert Verification Reporting System, a shared federal database that lenders check to see whether a buyer is in default or delinquent on a debt owed to a federal agency.Charge-offA charge-off is a debt that the original creditor has written off its books as a loss after months of missed payments, even though the borrower still owes the balance.Collection accountA collection account is an unpaid bill that the original company turned over or sold to a collection agency, which then reports it as a separate negative item on your credit report.Credit inquiryA credit inquiry is the record left on your credit report each time someone checks your credit, and hard inquiries from applying for new credit can lower a score slightly while soft inquiries don't.Credit utilizationCredit utilization is the share of your credit card limits you're using, found by dividing your total card balances by your total card limits, and it's one of the biggest drivers of a credit score.Foreclosure waiting periodA foreclosure waiting period is the time a mortgage program requires between the completion of a foreclosure, short sale or deed-in-lieu and the approval of a new home loan.Letter of explanationA letter of explanation is a short, signed note a mortgage underwriter asks for when something in your credit, bank statements or work history needs context, such as a recent credit inquiry.Nontraditional creditNontraditional credit is a payment history built from bills that don't show on a credit report, such as rent, utilities, phone and insurance, so a buyer with no credit score can still qualify.Rapid rescoreA rapid rescore is a lender-requested update that puts a paid-down balance or corrected error on your credit report within days, so a new score can be pulled before the normal monthly reporting catches up.Representative credit scoreYour representative credit score is the single score a mortgage lender qualifies you on: the middle of your three bureau scores, or the lower of two, and the lowest of those among co-borrowers.Tri-merge credit reportA tri-merge credit report combines your Equifax, Experian and TransUnion files and scores into one report, and it's the credit pull mortgage lenders base an approval on.
Costs
AmortizationAmortization is the schedule that pays off a loan with equal monthly payments, where early payments go mostly to interest and later payments go mostly to principal.APRAPR, or annual percentage rate, is the yearly cost of a mortgage that combines the interest rate with points, lender fees and mortgage insurance, so offers with different fees can be compared.Closing DisclosureThe Closing Disclosure is the five-page form listing your final mortgage terms, closing costs and cash to close, which you must receive at least three business days before you sign.Discount pointsDiscount points are an upfront fee paid at closing to lower a mortgage's interest rate for the life of the loan, where one point equals 1% of the loan amount.Escrow accountAn escrow account is an account your mortgage servicer holds to collect part of each monthly payment and pay your property taxes and homeowners insurance when those bills come due.Homeowners insuranceHomeowners insurance is a policy that pays to repair or rebuild your home after covered damage such as fire, wind or hail, and every mortgage lender requires it before closing.Loan EstimateA Loan Estimate is the standard three-page form a lender must send within three business days of your mortgage application, showing the rate, monthly payment, closing costs and cash to close.Mortgage insurance premiumA mortgage insurance premium, or MIP, is the insurance charge on every FHA loan: 1.75% of the loan at closing plus an annual premium paid as part of the monthly payment.Private mortgage insurancePrivate mortgage insurance, or PMI, is a monthly charge on a Conventional loan with less than 20% down that protects the lender and comes off once enough equity builds.Rate lockA rate lock is a lender's commitment to hold a specific interest rate and points for a set number of days, as long as the loan closes in time and the application doesn't change.Title insuranceTitle insurance is a one-time policy bought at closing that pays for covered problems with a home's ownership history, such as old liens or recording errors, that surface after you buy.Upfront mortgage insurance premiumThe upfront mortgage insurance premium is a one-time FHA charge of 1.75% of the base loan amount, usually added to the loan so the buyer pays nothing for it at closing.USDA guarantee feeThe USDA guarantee fee is the charge for USDA's backing of a rural home loan: 1.00% of the loan at closing, usually financed, plus an annual fee of 0.35% paid monthly.VA funding feeThe VA funding fee is a one-time charge on most VA home loans, a percentage of the loan set by down payment and prior VA use, that can be financed instead of paid at closing.Wholesale lenderA wholesale lender is a mortgage company that funds home loans brought to it by licensed brokers, setting its own prices and approval rules and closing each loan in its own name.
Down payment and closing
Amendatory clauseThe amendatory clause is required wording in an FHA purchase contract that lets the buyer cancel without losing the earnest money deposit if the home appraises for less than the contract price.AppraisalAn appraisal is a licensed appraiser's written opinion of a home's market value, ordered by the lender, and the loan is based on that value whenever it comes in below the price.Appraisal gapAn appraisal gap is the dollar difference between a home's contract price and a lower appraised value, which the buyer, the seller or both must settle because the loan is based on the lower number.AS IS contractFlorida's AS IS contract is a standard purchase contract in which the seller isn't obligated to make repairs, and the buyer may inspect and cancel for any reason during the inspection period.Cash to closeCash to close is the total a buyer pays at the closing table: the down payment plus closing costs and prepaids, minus the earnest money deposit, seller credits and any other credits.Clear to closeClear to close is the underwriter's final sign-off that every condition on your mortgage has been met, which lets the lender send the Closing Disclosure and set the signing date.Closing costsClosing costs are the one-time charges to complete a home purchase and its mortgage, such as lender, appraisal, title, settlement, recording and Florida tax fees, paid at the closing table.Combined loan-to-valueCombined loan-to-value adds up every loan secured by the home, such as a first mortgage plus a down payment assistance second, and divides that total by the home's value.Down payment assistanceDown payment assistance is money from a government agency, housing finance agency or approved program that pays a buyer's down payment, usually as a second mortgage that's deferred, forgiven or repaid monthly.Earnest moneyEarnest money is the deposit a buyer makes once an offer is accepted, held by a title company, closing attorney or broker and credited toward the buyer's down payment and costs at closing.Financing contingencyA financing contingency is the part of a purchase contract that lets the buyer cancel and recover the earnest money deposit if the mortgage isn't approved by a stated deadline.Gift fundsGift funds are money a relative or another approved donor gives a homebuyer toward the down payment or closing costs, with no repayment expected and a paper trail showing where it came from.Gift letterA gift letter is a short signed statement from the person giving you money for a home, confirming the dollar amount, their relationship to you and that it never has to be paid back.Gift of equityA gift of equity is the part of a home's value a relative gives up when selling it to family below market value, and lenders count it like cash toward the down payment.Home inspectionA home inspection is a visual examination of a home's structure, roof, electrical, plumbing, heating and cooling systems by a licensed inspector, ordered by the buyer to learn the home's condition before closing.Minimum required investmentThe minimum required investment is the money an FHA buyer must put into the purchase: 3.5% of the home's value with a 580 score or higher, or 10% with a score from 500 to 579.Mortgage payoff statementA mortgage payoff statement is the servicer's written figure for the exact amount needed to pay a mortgage off in full by a set date, including unpaid principal, interest to that date and fees.PrepaidsPrepaids are ownership costs collected at closing before they come due, mainly the first year of homeowners insurance, daily interest through month end and the opening escrow deposit.Seller concessionsSeller concessions are money the seller agrees to put toward the buyer's closing costs, prepaids and points, written into the contract and capped by each loan program as a percentage of the price.Title searchA title search is a review of a property's public records, done before closing, to confirm the seller owns the home and to find any liens, judgments or claims that must be cleared.
Loans and limits
Adjustable-rate mortgageAn adjustable-rate mortgage is a home loan whose rate stays fixed for an opening period, often 5, 7 or 10 years, then adjusts using a published index plus a set margin, within caps.Assumable mortgageAn assumable mortgage is a home loan a buyer can take over from the seller, keeping its interest rate and remaining balance, once the loan servicer approves the buyer's credit and income.Cash-out refinanceA cash-out refinance replaces your current mortgage with a larger one and pays you the difference in cash, so you can borrow against equity you've built in your home.Conforming loan limitThe conforming loan limit is the largest mortgage Fannie Mae and Freddie Mac can buy from a lender, set once a year by the Federal Housing Finance Agency for each county and unit count.FHA 203(k) loanAn FHA 203(k) loan is one FHA mortgage that pays for both the purchase of a home and the cost of repairing it, with the repair money released to contractors as the work is done.FHA loan limitThe FHA loan limit is the largest base loan amount the Federal Housing Administration will insure on a one to four unit home in a given county, and HUD updates it every year.FHA Streamline RefinanceAn FHA Streamline Refinance replaces an existing FHA loan with a new FHA loan at a lower rate or better terms, usually with no appraisal and lighter income and credit paperwork.Fixed-rate mortgageA fixed-rate mortgage is a home loan whose interest rate is set at closing and never changes, so the monthly principal and interest payment stays the same from the first payment to the last.High-balance loanA high-balance loan is a Conventional mortgage larger than the national baseline conforming limit but within the higher limit set for a high-cost county, so Fannie Mae or Freddie Mac can still buy it.Jumbo loanA jumbo loan is a mortgage larger than the conforming loan limit for its county, so Fannie Mae and Freddie Mac can't buy it and each lender writes its own approval rules.Loan-to-value ratioLoan-to-value is the mortgage amount divided by the home's value, using the lower of the price or the appraisal, written as a percentage that sets your down payment and mortgage insurance.Owner-occupancyOwner-occupancy means at least one borrower will live in the home as their main residence, which is what opens low down payment programs such as FHA, VA and USDA.VA entitlementVA entitlement is the amount VA promises to repay your lender if a VA loan goes unpaid, and it decides whether a veteran can buy with $0 down and how large that loan can be.VA IRRRLA VA IRRRL, or Interest Rate Reduction Refinance Loan, replaces an existing VA loan with a new VA loan at a lower rate, or moves it from an adjustable rate to a fixed rate.
Florida
Elevation certificateAn elevation certificate is a FEMA form, completed by a licensed surveyor, engineer or architect, that records how high a building's lowest floor sits compared with the expected flood level for its location.Florida documentary stamp taxFlorida's documentary stamp tax is a state tax paid when a deed or mortgage note is recorded: 70 cents per $100 of the price on deeds and 35 cents per $100 of the loan.Four-point inspectionA four-point inspection is a short report on an older Florida home's roof, electrical system, plumbing and heating and air conditioning that insurance companies use to decide whether to write a policy.HOA estoppel letterAn HOA estoppel letter is a signed statement from a homeowners association listing the dues, assessments and other amounts owed on a home, so the closing agent can settle them at the sale.Homestead exemptionFlorida's homestead exemption reduces the taxable value of the home you own and live in as your permanent residence, and it limits how fast that home's assessed value can rise each year.NMLSNMLS, the Nationwide Multistate Licensing System and Registry, is the national database that gives every mortgage company and loan officer a permanent ID number and shows the public their licenses and any regulatory actions.Property tax prorationProperty tax proration is the closing-day split of the year's property tax bill, where the seller pays for the days they owned the home and the buyer pays for the rest.Special Flood Hazard AreaA Special Flood Hazard Area is land that FEMA's flood maps show with at least a 1% chance of flooding in any year, labeled with zone names that start with A or V.Wind mitigation inspectionA wind mitigation inspection records a Florida home's hurricane-resistant features, such as roof attachment and storm shutters, on a state form that insurers must accept when applying windstorm premium discounts.
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