Mortgage Glossary
64+ mortgage and real estate terms explained in plain English. Bookmark this page for reference throughout your homebuying journey.
A
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically after an initial fixed period (e.g., 5/1 ARM = fixed for 5 years, then adjusts annually). Rate changes are based on a market index plus a margin.
Amortization
The process of paying off a loan through regular payments over time. Early payments are mostly interest; later payments are mostly principal. A 30-year amortization schedule spreads payments over 360 months.
Annual Percentage Rate (APR)
The total cost of borrowing expressed as a yearly rate, including interest plus fees. APR is always higher than the interest rate because it includes origination fees, points, and other costs. Use APR to compare true loan costs between lenders.
Appraisal
A professional assessment of a property's market value by a licensed appraiser. Required by lenders to ensure the property is worth at least the loan amount. If the appraisal comes in below the purchase price, negotiations or additional cash may be needed.
Asset Depletion
A qualification method that divides a borrower's liquid assets by the loan term to create a monthly "income" for qualification purposes. Used in no-income and asset-based mortgage programs.
B
Bank Statement Loan
A non-QM mortgage that uses 12–24 months of bank deposits to verify income instead of tax returns. Designed for self-employed borrowers whose tax deductions reduce their reported income below their actual cash flow.
Bridge Loan
Short-term financing (6–12 months) that helps homeowners buy a new property before selling their existing one. The loan is repaid when the existing property sells.
Buydown
Paying additional upfront fees (points) to reduce the interest rate on a mortgage. A 2-1 buydown temporarily reduces the rate by 2% in year one and 1% in year two. Sellers sometimes pay for buydowns as a concession.
C
CalHFA
The California Housing Finance Agency — a state agency that provides affordable home loans and down payment assistance to first-time California homebuyers through participating lenders.
Cash-Out Refinance
Replacing an existing mortgage with a new, larger loan and receiving the difference in cash. Used to access home equity for renovations, debt consolidation, investments, or other purposes.
Closing Costs
Fees paid at the closing of a real estate transaction, typically 2–5% of the purchase price. Includes lender fees, title insurance, escrow, appraisal, recording fees, and prepaid taxes/insurance.
Closing Disclosure (CD)
A 5-page document provided at least 3 days before closing that details final loan terms, projected payments, and all closing costs. Required by TRID regulations.
Conforming Loan
A mortgage that meets Fannie Mae/Freddie Mac guidelines, including the conforming loan limit ($1,209,750 in California high-cost counties for 2025). Conforming loans generally offer the best rates.
Conventional Loan
A mortgage not insured or guaranteed by the federal government (unlike FHA, VA, or USDA). Conventional loans follow Fannie Mae/Freddie Mac guidelines and offer the broadest property type eligibility.
D
Debt-to-Income Ratio (DTI)
The percentage of gross monthly income that goes toward debt payments (including the new mortgage). Most conventional loans cap at 43–45% DTI; FHA allows up to 50% with compensating factors.
Deed of Trust
The legal document that secures a mortgage by giving the lender a lien on the property. California uses deeds of trust rather than traditional mortgages.
Discount Points
Upfront fees paid to reduce the mortgage interest rate. One point equals 1% of the loan amount and typically reduces the rate by about 0.25%. Points make sense if you plan to keep the loan long-term (breakeven is usually 4–6 years).
Down Payment
The portion of the purchase price paid by the buyer at closing. Ranges from 0% (VA, USDA) to 3% (conventional first-time) to 20%+ (jumbo, investment). Larger down payments get better rates and eliminate PMI.
DSCR (Debt Service Coverage Ratio)
The ratio of a property's rental income to its total mortgage payment. A DSCR of 1.0 means rent exactly covers the payment. DSCR loans qualify investors based on this ratio rather than personal income.
E
Earnest Money Deposit (EMD)
A good-faith deposit made when submitting an offer to purchase, typically 1–3% of the purchase price. Held in escrow and applied to the down payment at closing.
Equity
The difference between your home's market value and the amount you owe. If your home is worth $900,000 and you owe $600,000, you have $300,000 in equity.
Escrow
A neutral third party that holds funds and documents during a real estate transaction. In California, escrow companies manage the closing process. Also refers to the account where lenders collect monthly tax and insurance payments.
F
Fannie Mae (FNMA)
The Federal National Mortgage Association — a government-sponsored enterprise (GSE) that buys and guarantees conventional mortgages, providing liquidity to the mortgage market.
FHA Loan
A mortgage insured by the Federal Housing Administration with low down payment (3.5%) and flexible credit requirements (580+ minimum). Popular with first-time California buyers. Requires both upfront and annual mortgage insurance premiums.
Fixed-Rate Mortgage
A mortgage with an interest rate that never changes for the entire loan term. The most common type in California — 30-year fixed provides payment stability and predictability.
Float-Down
A provision in a rate lock agreement that allows the borrower to receive a lower rate if market rates drop before closing. Usually involves a small fee.
Forbearance
A temporary pause or reduction in mortgage payments granted by the lender during financial hardship. Interest continues to accrue, and the paused payments must eventually be repaid.
Freddie Mac (FHLMC)
The Federal Home Loan Mortgage Corporation — a GSE that, like Fannie Mae, buys and guarantees conventional mortgages to provide market liquidity.
Funding Fee
A one-time charge on VA loans (1.25–3.3% of the loan amount) that funds the VA loan program. Can be financed into the loan. Waived for veterans with service-connected disabilities.
G
Good Faith Estimate (GFE)
A former document (replaced by the Loan Estimate in 2015) that provided estimated closing costs. Lenders now provide the Loan Estimate within 3 business days of application.
H
Hard Money Loan
A short-term, asset-based loan secured by real estate rather than the borrower's creditworthiness. Used by investors for fix-and-flips, bridge situations, and quick closings. Higher rates but approval in as little as 24 hours.
HELOC (Home Equity Line of Credit)
A revolving line of credit secured by your home's equity. Works like a credit card — draw funds as needed during the draw period (usually 10 years), then repay. Variable interest rate.
Home Equity Loan
A second mortgage that provides a lump sum secured by your home's equity. Fixed interest rate and fixed monthly payments, unlike a HELOC's variable rate and revolving balance.
Homeowners Insurance
Property insurance that covers damage to the home and personal liability. Required by mortgage lenders. California homeowners in wildfire-prone areas may face higher premiums or limited availability.
HUD-1 Settlement Statement
The former closing document (replaced by the Closing Disclosure in 2015) that itemized all charges in a real estate transaction.
I
Interest-Only Mortgage
A loan where the borrower pays only interest for a set period (typically 5–10 years), with no principal reduction. Monthly payments are lower during the IO period but increase when full amortization begins.
ITIN Loan
A mortgage program for borrowers who file taxes using an Individual Taxpayer Identification Number instead of a Social Security number. Uses alternative credit evaluation methods.
J
Jumbo Loan
A mortgage exceeding the conforming loan limit ($1,209,750 in California high-cost counties). Required for luxury properties in many coastal California markets. Jumbo rates can be competitive with conforming for strong borrowers.
L
Lien
A legal claim on property as security for a debt. A mortgage creates a lien — if you don't pay, the lender can foreclose. Multiple liens can exist (first mortgage, second mortgage, tax liens).
Loan Estimate (LE)
A 3-page document provided within 3 business days of application that details estimated interest rate, monthly payment, and closing costs. Required by TRID regulations.
Loan-to-Value Ratio (LTV)
The loan amount divided by the property's appraised value, expressed as a percentage. An $800,000 loan on a $1,000,000 home = 80% LTV. Lower LTV means better rates and no PMI requirement.
Lock (Rate Lock)
A commitment from the lender to hold a specific interest rate for a set period (typically 30–60 days) while the loan is processed. Protects the borrower from rate increases before closing.
M
Mortgage-Backed Security (MBS)
An investment product created by pooling multiple mortgages and selling shares to investors. MBS pricing directly affects mortgage rates — when MBS demand is high, rates go down.
Mortgage Insurance Premium (MIP)
The insurance required on FHA loans — 1.75% upfront plus 0.55% annually. Unlike conventional PMI, FHA MIP lasts for the life of the loan (with less than 10% down). The only way to remove it is refinancing into a conventional loan.
N
NMLS (Nationwide Mortgage Licensing System)
The national registry for mortgage companies and loan officers. Every licensed mortgage professional has a unique NMLS ID number. Save Financial's NMLS is #377740.
Non-QM Loan
A Non-Qualified Mortgage that doesn't meet the Consumer Financial Protection Bureau's definition of a Qualified Mortgage. Includes bank statement loans, DSCR loans, asset-depletion, and other alternative programs.
O
Origination Fee
A fee charged by the lender for processing the loan application, typically 0.5–1% of the loan amount. One of the most negotiable closing costs.
P
PMI (Private Mortgage Insurance)
Insurance required on conventional loans with less than 20% down payment. Costs 0.2–1.5% of the loan annually. Can be canceled when equity reaches 20% (unlike FHA MIP which is typically permanent).
Points
See Discount Points. One point = 1% of the loan amount.
Portfolio Loan
A mortgage that the lender keeps on its own books rather than selling to Fannie Mae/Freddie Mac. Allows more flexible underwriting for unique situations.
Pre-Approval
A formal lender review of credit, income, and assets resulting in a conditional commitment to lend. Stronger than pre-qualification. Essential for competitive offers in California markets.
Pre-Qualification
An informal estimate of borrowing capacity based on self-reported information. Less thorough than pre-approval and carries less weight with sellers.
Principal
The amount of money borrowed (the loan balance). Monthly payments include both principal (reducing what you owe) and interest (the cost of borrowing).
Proposition 13
A 1978 California ballot measure that limits property tax to approximately 1.1% of the purchase price with annual increases capped at 2%. This means property taxes don't rise significantly with market appreciation — a major benefit for long-term California homeowners.
R
Rate-and-Term Refinance
Replacing an existing mortgage with a new one at a different rate or term, without taking cash out. Used to lower monthly payments, shorten the loan term, or switch from ARM to fixed rate.
Reverse Mortgage
A loan for homeowners age 62+ that converts home equity into cash payments. No monthly payments required — the loan is repaid when the homeowner sells, moves, or passes away.
S
Second Mortgage
A loan secured by property that already has a first mortgage. HELOCs and home equity loans are common types. Second mortgages have higher rates because they're subordinate to the first lien.
Seller Concessions
Closing costs paid by the seller on behalf of the buyer. Limits vary by program: FHA allows up to 6%, conventional allows 3–9% depending on down payment, VA allows up to 4%.
Stated Income Loan
A mortgage where the borrower states their income without traditional verification. More common before 2008. Modern versions include bank statement and asset-based programs with some form of alternative verification.
T
Title Insurance
Insurance that protects the buyer and lender against claims on the property's ownership. Required by California lenders. Two policies: lender's policy (required) and owner's policy (recommended).
TRID (TILA-RESPA Integrated Disclosure)
Federal regulations that standardized mortgage disclosures into the Loan Estimate and Closing Disclosure documents, replacing the previous GFE and HUD-1.
U
Underwriting
The process of evaluating a loan application — verifying income, assets, credit, and property value to determine approval. The underwriter is the decision-maker who approves or denies the loan.
USDA Loan
A zero-down-payment mortgage for eligible rural and suburban properties, backed by the U.S. Department of Agriculture. Income limits apply. Some California communities qualify.
V
VA Loan
A mortgage guaranteed by the Department of Veterans Affairs for eligible military service members. Zero down payment, no PMI, competitive rates, and no loan limit with full entitlement.
Need Help Understanding Your Mortgage Options?
Save Financial explains everything in plain English — no jargon, no confusion. Call (888) 703-1840 for a free consultation.