Use this glossary to learn the meanings of common terms you may encounter during your home financing process.

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that remains constant for an initial fixed period of time and then adjusts at a prearranged frequency

Amortization

A monthly repayment schedule in which a loan is repaid in fixed payments of principal and interest

Annual Percentage Rate (APR)

The annual cost of a loan, expressed as a yearly rate that reflects interest, discount points, lender fees, and mortgage insurance, thus being slightly higher than the interest rate on the loan

Application / URLA

An initial statement of personal and financial information required to approve a mortgage loan

Appraisal

A written estimate of a property’s current market value, based on recent sales information from similar properties and the current condition of the property

Cap

Limits on changes in adjustable-rate mortgage (ARM) interest rates or monthly payments, either in an adjustment period or over the life of the loan

Change in Circumstance

A form that accompanies a revised Loan Estimate (LE) and details what has changed on the revised LE

Closing Costs

Expenses paid by the borrower and/or seller during the closing, which can include the loan origination fee, discount points, attorney’s fees, title insurance, appraisals, etc.

Closing Disclosure (CD)

A form that provides final details about a mortgage loan, such as loan terms and projected monthly payments and closing costs, and must be provided to the borrower by the lender at least three days before the loan closes

Co-Borrower

Any additional borrowers whose names appear on the loan documents

Collateral

A property being financed that a borrower offers to a lender to secure a loan

Contingency

A condition that must be satisfied before a contract is legally binding and a sale can close

Conventional Loan

A mortgage that is not guaranteed or insured by any government agency

Debt-to-Income Ratio (DTI)

Total monthly debt payments (including projected payments for a new mortgage) divided by monthly income

Department of Veterans Affairs (VA)

The government agency that manages benefits and other issues for Veterans of the military

Discount Points

See: Points

Down Payment

The difference between the purchase price and the loan amount

Earnest Money

A deposit made by a buyer in evidence of good faith when the purchase agreement is signed

Equal Credit Opportunity Act (ECOA)

Federal law requiring creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs

Equity

The percentage of a property’s value held by the owner, which is the difference between the property’s value and the amount owed on the mortgage

Escrow

The neutral third party that holds money and/or documents until the escrow instructions are fulfilled

Fair Credit Reporting Act

The law that protects consumers through federal regulations on the total interest paid over the life of a loan and procedures to repair errors on a person’s credit report

Fannie Mae

A government-sponsored enterprise that buys and sells conventional mortgages

Federal Housing Administration (FHA)

A division of Housing and Urban Development (HUD) that insures residential mortgage loans and sets standards for underwriting

FHA Loan

A loan insured by the Federal Housing Administration

Fixed-Rate Mortgage

A mortgage with an interest rate that doesn’t change for the life of the loan

Freddie Mac

A government-sponsored enterprise that purchases conventional mortgages

Ginnie Mae

The government corporation that purchases conventional mortgages from HUD-approved bankers

Homeowners Insurance (HOI)

Insurance that covers an individual’s home against damages to the home or possessions in the home as well as accidents in the home or on the property

Housing and Urban Development (HUD)

A U.S. government agency established to implement federal housing and community development programs and that oversees the Federal Housing Administration

Index

A benchmark rate used to determine the rate on an adjustable-rate mortgage (ARM) after the initial rate expires

Interest Rate

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets

Jumbo Loan

A mortgage larger than the conforming loan limits set by Federal Housing Finance Agency (FHFA)

Loan Estimate (LE)

A form that provides important details about a loan and must be provided to the borrower by the lender within three days of the lender receiving the loan application

Loan-to-Value Ratio (LTV)

The percentage of a property’s value that is borrowed

Lock-In Rate

A lender’s guarantee of an interest rate for a set period of time

Margin

The amount of percentage points, or spread, added to an index to determine the rate an adjustable-rate mortgage will charge after each adjustment

Mortgage

A document that creates a lien on a property as security for the payment of a debt

Mortgage Insurance Premium (MIP)

An insurance premium that a borrower is required to pay on an FHA loan

Mortgage Servicer

The financial institution or entity that is responsible for collecting payments on a mortgage

Mortgagee Clause

A clause endorsed on a mortgagor’s insurance policy whereby the insurance company agrees to protect the mortgagee’s interest regardless of any violation of the policy terms by the mortgagor

PITI

An acronym used to describe monthly housing expenses: principal, interest, taxes, and insurance

Points

Funds paid at closing to the lender, with one point equal to 1% of the loan amount

Preapproval

A preliminary approval from a lender to loan a borrower a specific amount of money

Prepayment Penalty

A charge for paying off a loan prior to the end of the prepayment penalty period (certain loan types only)

Prequalification

A basic review by a lender determining the loan amount for which a borrower may qualify

Principal

The amount of debt on a loan that does not include interest

Private Mortgage Insurance (PMI)

Insurance that a borrower is typically required to purchase on a conventional loan with an LTV above 80%

Refinance

The process of paying off one loan with the proceeds from a new loan secured by the same property

Right of Rescission

A 3-day waiting period after signing the closing documents granted to the borrower on a refinance transaction of their primary residence to allow them to cancel if they so choose

Second Mortgage

A subordinate mortgage made in addition to a first mortgage

Term

The number of years until a loan is due to be paid in full

TILA-RESPA Integrated Disclosure Rule (TRID)

A rule that consolidates four existing disclosures, applicable to most closed-end borrower credit transactions secured by real property, into two forms: the Loan Estimate (LE) and the Closing Disclosure (CD)

Title

A document that gives evidence of ownership of a property as well as rights of ownership and possession

Title Insurance

Insurance that protects the lender (lender’s policy) or buyer (owner’s policy) against loss due to disputes over property ownership

Underwriting

The process of verifying data and evaluating a loan application for approval

VA Loan

A home loan available to eligible military Veterans and surviving spouses with little or no down payment and guaranteed by the Department of Veteran Affairs (VA)

VA Loan Funding Fee

The fee financed or paid upfront associated with a VA loan

Verification of Deposit (VOD)

A document signed by the borrower’s bank or other financial institution that verifies the borrower’s account balance and history

Verification of Employment (VOE)

A document signed by the borrower’s employer that verifies the borrower’s position and salary