Want to understand mortgage lingo? We break down terms so
you can be fluent in finance.
- Adjustable-rate mortgage (ARM)
- An adjustable-rate mortgage (ARM) is a loan that offers an initial period of fixed interest that then resets at a specified interval. Typically, you will see an ARM expressed as two numbers.
For example, a 5/6 ARM SOFR has a fixed interest rate for the first five years, followed by rate adjustments every six months.
An ARM tends to have a lower initial interest rate than a fixed-rate mortgage. However, it does come with a certain amount of unpredictability. When an ARM enters its adjustable period, its interest rate may trend up or down depending on the market’s state.
Though other lenders may suggest this option, at iApprove Lending, we want to ensure the best financial situation for you. We will help you make a comparison.
- Amortization is the process of paying off the principal and interest on your loan. You may see it expressed as an amortization schedule—nearly an outlook of every payment you need to make until you have paid off the loan’s balance in full.
- Annual percentage rate (APR)
- APR is a percentage of how much interest and service charges you pay each year.
Suppose you have a 30-year loan. For the next 30 years, part of your monthly payments goes towards interest. Since you already pre-paid your Costs to Close, APR shows how on top of your interest, how your pre-paid Costs to Close will spread out for the next 30 years.
Since APR bundles your interest rate and closing costs, your APR is usually higher than your interest rate.
If two lending companies offer the same interest rate, you can compare each company’s APR for your desired interest rate. The company with a lower APR will be more affordable.
- An appraisal is an unbiased estimate of your property’s fair market value by a licensed professional.
All lenders typically require it during the mortgage process to ensure that you are not overpaying for the house in your home purchase.
A refinance transaction provides the lender with the fair market value and helps them determine Appraisals factor, location, condition,
and sales of similar homes in the area.
- Appreciation is the increase in the value of your home over time.
It can be affected by all kinds of events—from property renovations to changes in the housing market.
- Basis points or BPs
- Basis points (also known as BPs) are a unit of measurement. They are equal to one-hundredth of one percentage point (0.01%). Basis Points remove any ambiguity when referring to an interest rate’s specifics.
Let us say the average mortgage rate fell 25 basis points (remember, a basis point is worth 0.01%), and now it is at 3%. That means the interest rate was initially 3.25%. Even this difference could mean saving tens of thousands of dollars throughout the lifetime of your loan.
- Cash reserve
- A cash reserve (also known as a mortgage reserve) is the savings you have set aside for emergencies—such as losing a job. Lenders typically require you to have two months of mortgage payments on hand in case of emergency.
- Cash to close
- Cash to close is the total amount needed to bring to the closing attorney’s office on closing day. It typically includes down payment, fees, pre-paid taxes, homeowner’s insurance, and any homeowners association fees that may be applicable. Cash to close is usually paid in the form of a wire transfer or a certified bank or cashier’s check.
- Cash-out refinance
A cash-out refinance is when a mortgage is refinanced for more than the outstanding balance—converting home equity into cash.
Cash-out refinancing can be a great way to free up money for unpaid debt or to make an investment in home improvements.
- Close of escrow
- Close of escrow is the point in the home buying process finalized.
The funds held in escrow and the loan amount now transfers to the seller,
and all outstanding third-party costs, such as taxes and HOA fees, are settled.
- Closing is the final step of the home buying transaction. The escrow company pays all outstanding fees listed in the closing disclosure,
delivers funds to the seller, and the buyer and seller sign documents to transfer ownership of the property. The buyer signs the mortgage loan.
The title company registers the title deed to the property in the buyer’s name.
- Closing costs
- Closing costs are paid to various third parties to complete the sale of the property. Depending on the lender, these may include origination fees,
credit report fees, and appraisal fees, as well as property taxes and recording fees.
- Closing disclosure
- A closing disclosure (CD) is a standardized document from the lender that provides final details about the mortgage loan. It includes the loan terms,
projected monthly payments, fees, and other closing costs. The lender is required to give you the CD at least three business days before the date of close
so you can compare it against the loan estimate (LE). If something on your CD does not look right, be sure to ask your lender about it before closing.
- A co-applicant is someone whose income and credit history are on the loan application in addition to the primary borrower.
Co-applicants are a common addition when the primary borrower may not qualify for the mortgage on their own.
- A co-borrower is a spouse whose income and credit history are on the loan application in addition to the primary borrower.
- Collateral is an asset that a lender accepts as security for a loan. In a traditional mortgage, the collateral is the home itself.
Suppose you fail to make loan payments to your lender. In that case, they have the option to repossess or claim ownership of the collateral—i.e., the property.
- Comparable sale/comp
- A comparable sale (also known as a “comp”) is a recently sold property in the area with similar features to the home you are looking to buy.
Appraisers use comparable sales to help estimate the fair market value of a home.
- Condo insurance
- Condominium insurance (also known as an HO-6 insurance policy) protects the condo unit’s interior—usually defined as everything within its four walls.
Since the condo association owns common areas outside the condo, common areas are under separate policies.
Check your condo association bylaws to find more specific information regarding required insurance.
- Condominium (condo)
- A condominium (also known as a condo) is a privately-owned home within a multi-unit development.
Each owner has a shared interest in the building’s common areas—such as elevators, garages, gyms, etc.
Monthly homeowners association (HOA) fees maintain common areas.
- Conforming loan
A conforming loan is any type of home loan that meets the Federal Housing Finance Agency (FHFA)—an independent government agency.
These limits are based on property size and location and change annually with home prices. Conforming loans also require you to meet Fannie Mae
and Freddie Mac lending guidelines. Home loans that fall outside the set limits (non-conforming) are called jumbo loans and tend to come with a few extra hurdles.
- Contingencies are conditions in a purchase contract protecting both parties in a real estate transaction.
Conditions include clauses that allow you to back out of the sale if you cannot secure financing or if the home fails to pass inspections.
- Conventional Mortgage
- A conventional mortgage (also known as a non-FHA loan) is a type of home loan that is not insured or guaranteed by the federal government.
Fannie Mae and Freddie Mac are private investors backing the loan. Conventional loans are the most common type of home loan, making up
nearly three-quarters of home loans. If you apply for a conventional loan with less than a 20% down payment, you will be required to pay
for private mortgage insurance (PMI).
- A cooperative (also known as a co-op) is a multi-unit development where owners technically do not “own” their units outright. Owners
have shares in a corporation (the building) and the right to live in one unit. Shareholders periodically pay fees that cover everything
from the door person’s salary to maintaining common areas in the building. Governing boards are responsible for setting all the building
rules and requirements for moving in and screening potential residents.
- Credit check
- A credit check (also known as a credit inquiry or credit pull) is when a lender looks into your financial history with credit reporting
agencies to determine your creditworthiness. iApprove Lending uses both “soft” and “hard” credit checks to see if you qualify for a loan.
For pre-approval, we issue a soft credit check that does not impact your credit score.
- Credit score
Your credit score (also known as a FICO score) is a number that reflects your financial history. Scores range from 300–850,
with a high credit score indicating that you have consistently repaid debts and other loans on time.
- Credits/lender credits
A credit (also known as a lender credit) is money that the lender provides to lower your closing costs in exchange for a higher interest rate.
Credits are inverse to points.
- Debt-to-income ratio (DTI)
- Your debt-to-income ratio (DTI) measures your monthly debt compared to your monthly income, calculated by your monthly debt divided by your monthly gross (pre-tax) income. DTI is one factor used to determine how much you can afford in a monthly mortgage payment.
- A default is when a borrower fails to pay their mortgage. At this point, the borrower risks foreclosure, whereby the lender can repossess the home.
- Depreciation refers to the loss of value on an asset over time.
- Down payment
A down payment is the amount of cash you pay upfront toward the purchase of a home. It is a percentage of the selling price—typically 5–20%
depending on the type of loan. The difference between your down payment and the home price is what you finance with a mortgage. Generally,
if you put less than 20% “down” on a home, private mortgage insurance (PMI) is required in addition to your monthly payment.
- Earnest money/good faith deposit
- Earnest money (also known as a good faith deposit) is money the buyer gives the seller in the sales contract to show intent to purchase. The money is deposited into a third-party account, known as escrow, and held until closing. Once contracts are signed, the earnest money becomes part of the down payment. If the agreement falls through, the earnest money is either forfeited. The seller keeps it, or the buyer has to return the money, depending on the contract.
- Equity is the difference between the amount you owe on a property and its current market value. In other words, your equity is
the amount of ownership you have in your property.
- An escrow (also known as an impound account) is a third-party account managing money between two or more parties. Escrow accounts
can hold a buyer’s deposits during a real estate transaction process. Escrow accounts hold property taxes and insurance premiums
(collected as part of the monthly mortgage payment) until due payments.
- FICO score
- The Fair Isaac Corporation (FICO) generates credit scores based on three national credit reporting agencies: Experian, Equifax, and TransUnion.
Typical FICO scores are in the 300–850 range. However, FICO has variations of scoring for different types of lenders. Credit scores
give lenders an evaluation of your likelihood to pay your bills on time. A higher credit score indicates a more favorable borrower.
- Fannie Mae
- Fannie Mae is the nickname for the Federal National Mortgage Association. This government-sponsored entity provides funding to mortgage
lenders by buying mortgages and selling the debt to investors. The primary purpose of Fannie Mae is to ensure that there are affordable
housing options and programs for homebuyers, sellers, and renters. They do this by setting lending guidelines to ensure loans originate
legally and do not qualify those who cannot afford them.
- Federal Housing Administration loans
- The Federal Housing Administration (FHA) is a government agency that promotes affordable, easy-to-qualify-for-home loans. FHA loans are only
available through approved lenders. An FHA loan could be an attractive option if you are a first-time homebuyer without a substantial credit history.
You can qualify for an FHA loan with a minimum credit score of 500 and a 3.5% down payment. FHA loans require an upfront mortgage insurance premium and less than a 10% down payment, and mortgage insurance for the life of the loan.
- Fixed-rate Mortgage
- A fixed-rate mortgage is a home loan with a constant interest rate for the lifetime of the loan. Fixed-rate mortgages
come in 10-, 15-, 20-, 25-, and 30-year terms—giving homebuyers the security of a predictable monthly payment.
Shorter-term fixed-rate loans typically carry the lowest interest rates but are a larger monthly payment.
- Flood certification
- Flood certification (also known as a flood determination and certification) is issued to certify whether a property is in a flood zone.
Flood certification uses FEMA (Federal Emergency Management Association) flood maps. Lenders require this to determine if
your home needs special flood insurance.
- Foreclosure is the process of repossessing a home after the borrower defaults on their mortgage.
- Freddie Mac
Freddie Mac is the nickname for the Federal Home Loan Mortgage Corporation. This government-sponsored entity provides funding to
smaller mortgage banks and lenders by buying their loans. The primary purpose of Freddie Mac is to ensure that there are affordable
housing options and programs for low-income homebuyers, sellers, and renters.
- Gift letter
- A gift letter documents money that has been given to you by a family member, spouse, or partner to support your down payment or closing costs. Its purpose is to assure the lender the borrower does not have to repay the gift funds. Otherwise, they would be classified as debt and included in your debt-to-income ratio.
- Home inspection
- A home inspection is an examination of a home’s physical condition in connection with its sale. The purpose is to uncover any potential issues with the home before finalizing the purchase. There are no federal regulations governing home inspectors, and licensing requirements vary by state.
- Homeowners Association (HOA)
- A homeowners association (HOA) oversees the development and enforcement of rules, regulations, and day-to-day operations for a community.
The HOA is also responsible for maintaining community spaces. HOA fees may are either on a monthly or annual basis.
- Homeowners insurance
- Homeowners insurance is a form of financial protection against loss or damage to your home in the event of a burglary, fire, or natural disaster.
Most lenders require proof of a homeowners insurance policy before closing. Lenders want to protect their investment as much as you do—and
if something ever happened to your home, they want to know that you will have the resources to pay off your loan.
- Investment property
- An investment property is a real estate with the exclusive purpose of generating a profit. Unlike a primary residence or a secondary home, an investment property is not something you would typically own for personal use. The property would likely be rented out, sold for a return on investment, or both. Investment properties tend to have the highest interest rates and down payment requirements of all property types.
- Jumbo loan
- A jumbo loan (also known as a non-conforming loan) is a home loan that exceeds the maximum Federal Housing Administration (FHA) limit. Fannie Mae or Freddie Mac do not guarantee Jumbo loans, so the lender has no protection if the borrower defaults. The maximum limit depends on the home’s location and the conforming loan limit for that area. Typically, more expensive areas of the country have higher conforming loan limits.
- A lien is a legal claim to an item of the property until the borrower pays an overdue debt. When you take out a home loan, your lender has a lien on your home. If you fail to repay your loan, the bank will seize your home.
- Listing agent
- Listing agents (also known as seller’s agents) work on behalf of selling a property.
They are authorized to handle negotiations and meet with potential buyers on behalf of the property owner.
- Loan Estimate (LE)
- A loan estimate (also known as an LE) is a standardized 3-page form that details the interest rate, term,
monthly payment, and closing costs associated with your loan. The law requires lenders to provide you with a loan estimate
within three days of your application.
- Loan Officer
- A Loan Officer is a lender representative who serves as your primary point of contact until you lock a rate.
- Loan Processor
A Loan Processor is responsible for preparing your mortgage application and documentation before it goes to the Underwriter.
Their job is to collect and review your income, credit, and asset documentation and ensure that everything aligns with
what you stated on the application.
- Loan Processor
- A Loan Processor is responsible for preparing your mortgage application and documentation before it goes to the Underwriter.
Their job is to collect and review your income, credit, and asset documentation and ensure that everything aligns with
what you stated on the application.
- Loan commitment
- After the lender reviews your loan application to completion,
you will receive a loan commitment letter indicating your eligibility for a home loan and loan terms.
- Loan term
- A loan term is the length of time to repay the loan.
- Loan-to-value (LTV
- A loan-to-value (LTV) ratio is an equation that lenders use to assess the risk associated with a home loan.
Calculate LTV by dividing the total home loan amount by the appraised market value of the home. Typically, suppose the LTV ratio is higher than 0.8.
In that case, lenders require private mortgage insurance (PMI) to offset the default risk.
- Market value
- Market value is how much you can sell a property on the open market. An appraiser determines a house’s worth based on its condition and comparable properties that have recently sold. Note that market value may not match the purchase price.
- Mortgage insurance premium (MIP)
- Mortgage insurance premium (MIP) is upfront and annual insurance premium required for any Federal Housing Administration (FHA)
home loan regardless of the down payment size. It protects the lender in case the borrower defaults on the loan. MIP differs
from private mortgage insurance (PMI), meant for conventional loans.
- Mortgage note
- A mortgage note (also known as a “note”) outlines your new home loan’s complete terms. You sign this document at closing.
Think of it like an official “IOU.” A mortgage note states how much you borrow from the lender,
whether the loan has a fixed or adjustable interest rate, and when you pay it back.
- Occupancy date
- Your occupancy date is the day you will be able to move into your new home. It may not align with closing day, despite the transfer of ownership that is taking place. Some counties require the title deed to be recorded in court before the new homeowner can move in.
- Origination fee/loan origination fee
- Origination fees are the one-time costs you pay to a lender for processing your home loan.
These fees may be itemized or bundled into one line item.
- Owner-occupancy refers to the concept of living in the home that you own. If you do not intend on making the home your primary residence,
it may be considered an investment property. Investment Properties or Secondary properties are not
eligible for the same rates available for a primary residence.
- PITI is short for Principal, Interest, Taxes, and Insurance—the four aspects of a monthly home loan payment.
The loan amount and terms of your mortgage determine principal and interest. Property Value and your local government determine the
amount of your tax and insurance.
- Pest inspection
- A certified pest inspector determines whether a property has an active or previous infestation in the due diligence process. Pest inspections are a part of closing costs but may be paid for by the buyer or seller.
- Planned unit development (PUD)
- A planned unit development (PUD) is a cohesively designed community consisting of townhouses,
detached homes, condos, public spaces, and commercial real estate.
- Points (also known as discount points and mortgage points) are a way to lower the interest rate on your home loan by agreeing to pay more at closing.
One mortgage point is equal to 1% of the mortgage amount and can lower your interest rate by up to 0.25%. The more points you pay,
the lower your payment and rate will be. Points are the inverse of credits.
- Pre-approval letter
A pre-approval letter is a document from a lender stating the exact amount you are approved to borrow once your stated information is verified.
Getting a pre-approval letter is an essential time-saving first step in the home shopping process.
- Pre-paid costs
- Pre-paid costs are payments made at closing for upcoming line items of your new home loan before they are technically due.
The most common kinds of pre-paid costs are homeowners insurance, property taxes, and mortgage interest.
These are paid into an escrow account to ensure that you have money to pay your bills when they become due.
- Prepayment penalty
- A prepayment penalty is a fee that’s charged when you pay off your mortgage early.
- Primary residence
- A primary residence is a home in which you live for the majority of the year. It could be a free-standing home, condo, co-op, or boat,
but you can only have one primary residence. Home loan rates tend to be lower for primary homes, so you must let your lender know this
information in your application. The interest that you pay on a home loan for a primary residence may also be tax-deductible.
- When referring to a home loan, the principal is the amount borrowed, excluding taxes, interest, or homeowners insurance.
In other words, it is what you originally borrowed from your lender when you first took out your home loan. If you borrowed $250,000,
then your principal is $250,000.
- Private mortgage insurance (PMI)
- Private mortgage insurance (PMI) is insurance required by lenders when a borrower puts less than 20% down on a conventional loan.
PMI protects the lender if the borrower defaults. You can cancel at least 20% equity in the property. Many different factors
determine PMI—including FICO score, loan-to-value ratio, debt-to-income ratio, property type, and occupancy.
- Purchase contract
- A purchase contract (also known as a contract to purchase real estate) is a legal written agreement between a buyer and a seller.
Purchase contracts vary from state to state, depending on local law. When both the buyer and seller finish negotiating terms and stipulations,
they sign the purchase contract. It becomes legally binding. Some states allow real estate agents to draw up purchase contracts,
but others only allow lawyers to write contracts.
- Rate lock
- When a lender locks a rate, the interest rate for a mortgage is confirmed so long as the financial information the borrower provides is accurate. Rate locks have a pre-set length of time, such as 30, 45, or 60 days.
- Real estate agent
- Real estate agents are the state-licensed officials authorized to act as buyers’ agents to negotiate and purchase a home.
- A refinance (also known as a refi) is the process of applying for a new home loan to replace an existing home loan. Homeowners generally refinance,
changing the rate or term of their home loan (rate/term refinance) or taking cash out of the equity they have built (cash-out refinance).
- Secondary home
- A secondary home is, simply put, a vacation home. You must have sole control over the property, meaning that it cannot be a full-time rental, timeshare, or managed by a property management company. Secondary homes must be suitable for year-round occupancy. It can be seen as investment property if you intend to rent for most of the year.
- Settlement costs
- Settlement costs (also known as closing costs) are the fees that the buyer and seller must pay to complete the property’s sale. Depending on the lender,
these may include origination fees, credit report fees, and appraisal fees, as well as property taxes and recording fees.
- Short sale
A short sale is when a homeowner sells their home for a price less than their current mortgage balance. Suppose a lender agrees to a quick deal.
In that case, the homeowner will typically owe the bank or lender the remaining balance due on their home loan after the sale. Once you have a short deal,
there is a 4-year waiting period to qualify for a new mortgage.
A survey is a drawing of your property that details the lot’s location, property lines, home, and any other structures within its bounds.
The purpose of a survey is to confirm land boundaries in the event of a legal dispute. The local county tax collector surveys and is part
of the closing costs of buying a free-standing home.
- Termite letter
- A termite letter is a document issued by a professional inspector to verify the property has no termites or wood-boring insects such as powder-post beetles. Pest inspections are a part of closing costs but may be paid for by the buyer or seller.
- Third-party fees
- Third-party fees are the fees not paid to the lender to complete the sale of the property. Depending on the lender,
these fees may cover your credit report, appraisal, land survey, recording fee for the county, and transfer taxes.
- The title is a record of ownership and ensures that the deed person is the uncontested legal owner.
States and counties require legal recording of property ownership for tax purposes.
- Title insurance
- Title insurance (also known as owner’s title insurance) protects borrowers and lenders against financial loss from past defects or
problems with property ownership, typically back taxes, liens, and conflicting wills. Most lenders require title insurance to protect their
property interest until you pay off the home loan. You can also purchase a borrower’s title insurance to protect yourself.
- Title vesting
- Title vesting defines who owns a specific property and thus who is liable for property taxes and other legal matters,
as well as the option to sell the property. There can be multiple owners of a single property.
- Transfer taxes
- A transfer tax is a real estate tax usually paid at closing to facilitate the property deed transfer from the seller to the buyer.
Depending on where you live, you may have to pay transfer taxes at the city, county, and state levels. In particular circumstances—such as the
inheritance of a property—you may also encounter transfer taxes at a federal level.
- An Underwriter is a member of your loan team who assesses your loan application and appraises the property you are trying to finance. It is their job to determine whether or not you qualify for a home loan.
Underwriting is the process of evaluating a complete and verified home loan application and the appraisal of financing the property.
Underwriting is the assessment of risk in a home loan and a borrower’s ability to repay it. The process ends with an approval or denial of a home loan.
- VA loans
- VA loans are home loans with lenient qualifying guidelines and favorable terms for active military service members, veterans, and eligible military spouses. The federal government backs these loans; lenders and banks can offer reduced interest rates.
- Verified pre-approval
- A verified pre-approval letter provides you and your real estate agent the most transparent idea of what you can afford. It is based on verified
information and requires a hard credit check.