Mortgage glossary
Definitions of common mortgage and real estate investing terms.
1031 Exchange
A tax-deferred exchange of one investment property for another of like kind under Section 1031 of the Internal Revenue Code.
Amortization
Paying a loan off through scheduled payments of principal and interest. Early payments are mostly interest; later payments are mostly principal.
Appraisal
A licensed appraiser’s estimate of a property’s market value, ordered by the lender. On rentals it often includes a rent schedule (Form 1007).
APR (Annual Percentage Rate)
The yearly cost of a loan including the interest rate plus certain lender fees and points, expressed as a percentage. It is higher than the note rate when you pay fees, which makes it the better number for comparing offers.
ARM (Adjustable-Rate Mortgage)
A loan whose rate is fixed for an initial period (for example 5 or 7 years) and then adjusts periodically based on an index plus a margin, within caps.
ARV (After-Repair Value)
The estimated market value of a property after planned renovations are finished. Fix and flip lenders cap loans at a percentage of ARV, often 70–75%.
Asset Depletion
A way to qualify by converting liquid assets into monthly income, typically by dividing eligible assets by 60–120 months.
Assumable Mortgage
A loan a buyer can take over from the seller, keeping its rate and terms. FHA, VA and USDA loans are generally assumable.
Balloon Payment
A large lump-sum payment due at the end of a loan term, common on short-term bridge and flip loans that are interest-only.
Bank Statement Loan
A non-QM mortgage that calculates self-employed income from 12 or 24 months of bank deposits instead of tax returns.
Blanket Loan
A single loan secured by multiple properties, with release clauses that let you sell individual properties.
BRRRR
Buy, Rehab, Rent, Refinance, Repeat: an investing method that recycles capital through a cash-out refinance after renovation.
Cap Rate
Net operating income divided by property value or price, used to compare investment returns.
Cash to Close
The total funds you bring to closing: down payment plus closing costs and prepaids, minus deposits, credits and gifts.
Cash-on-Cash Return
Annual pre-tax cash flow divided by the total cash invested in a property.
Cash-Out Refinance
Replacing a mortgage with a larger one and receiving the difference in cash.
Closing Costs
Fees and prepaid items paid at closing, typically 2–5% of the loan amount: lender fees, title, appraisal, recording, taxes and insurance escrows.
Closing Disclosure
The final five-page statement of your loan terms and costs, delivered at least three business days before closing on consumer loans.
CLTV (Combined Loan-to-Value)
All loans secured by a property, including a HELOC, divided by its value.
Conforming Loan Limit
The maximum loan size Fannie Mae and Freddie Mac will buy, set yearly by the FHFA and higher in high-cost counties. Loans above it are jumbo loans.
Discount Points
Prepaid interest at closing to lower your rate. One point equals 1% of the loan amount.
Draw
A release of renovation or construction funds after an inspection confirms completed work.
DSCR (Debt Service Coverage Ratio)
Monthly rent divided by the monthly mortgage payment including taxes, insurance and HOA (PITIA). Used to qualify investment-property loans without personal income.
DTI (Debt-to-Income Ratio)
Total monthly debt payments, including the new housing payment, divided by gross monthly income.
Earnest Money
A deposit made with a purchase offer to show good faith, credited toward your down payment or closing costs at closing.
Escrow
An account the servicer uses to collect and pay your property taxes and insurance, or a neutral third party holding funds during a purchase.
Expense Factor
The percentage of business bank deposits a lender treats as expenses on a bank statement loan, commonly 50% unless a CPA letter supports a lower figure.
FHA 203(k)
An FHA loan that finances a home’s purchase or refinance plus the cost of repairs in one mortgage.
FHA MIP
Mortgage insurance on FHA loans: an upfront premium of 1.75% plus an annual premium paid monthly.
Form 1007 Rent Schedule
An appraiser’s estimate of market rent for a single-family rental, used to qualify DSCR loans on vacant properties.
Gift Letter
A signed statement from a donor confirming that money given toward a down payment is a gift, not a loan.
Hard Money
Short-term, asset-based financing from private lenders, approved mainly on the property’s value.
HELOC
A home equity line of credit: a revolving second lien you draw on as needed, usually with a variable rate.
Interest-Only
A payment that covers only interest for a period, keeping payments lower but leaving the principal unchanged.
Lender Credit
Money from the lender toward your closing costs in exchange for a higher interest rate.
Lender-Paid Compensation
When the lender, not the borrower, pays the mortgage broker. The cost is reflected in the rate, and the broker cannot also be paid by the borrower on that loan.
Loan Estimate
The three-page standardized form lenders give within three business days of an application, showing rate, payment and costs so you can compare offers.
LTC (Loan-to-Cost)
The loan amount divided by total project cost (purchase plus rehab or construction).
LTV (Loan-to-Value)
The loan amount divided by the property’s value. An $80,000 loan on a $100,000 home is 80% LTV.
Mortgage Recast
Re-amortizing a loan after a large principal payment, which lowers the monthly payment without refinancing.
Net Tangible Benefit
A required, measurable benefit to the borrower from a refinance, such as a lower rate or a move from an adjustable to a fixed rate.
NMLS
The Nationwide Multistate Licensing System, which licenses mortgage companies and loan originators. Anyone can verify a license on NMLS Consumer Access.
NOI (Net Operating Income)
Gross rental income minus vacancy and operating expenses, before debt payments.
Non-QM
A mortgage outside the Qualified Mortgage rules, often using alternative income documentation.
Non-Warrantable Condo
A condo in a project that does not meet Fannie Mae and Freddie Mac standards, requiring specialty financing.
PITI / PITIA
Principal, interest, taxes, insurance (and association dues): the full monthly housing payment lenders use for DTI and DSCR.
PMI
Private mortgage insurance on conventional loans with under 20% down, removable at 80% LTV on request and automatic at 78%.
Pre-Approval
A lender’s conditional commitment after verifying credit, income and assets.
Prepayment Penalty
A fee for paying off a loan early, common on DSCR loans, often stepping down each year.
Rate Lock
A lender’s guarantee of a rate and price for a set period while your loan closes.
Reserves
Liquid funds left after closing, measured in months of payments, that show a lender you can handle surprises.
Seasoning
How long you must have owned a property, held a loan or had funds in an account before a lender counts it.
Seller Concessions
Closing costs a seller agrees to pay for the buyer, subject to limits set by the loan program.
Streamline Refinance
A refinance of an FHA or VA loan with reduced documentation and often no appraisal.
Title Insurance
Insurance that protects the lender (and optionally you) against defects in the property’s ownership history.
Underwriting
The lender’s review of your credit, income, assets and the property to approve the loan.
USDA Guarantee Fee
The fee on USDA loans: 1% of the loan upfront plus an annual fee of 0.35% of the balance.
VA Funding Fee
A one-time fee on VA loans that varies by down payment and prior use, waived for veterans receiving VA disability compensation.
VA IRRRL
The VA Interest Rate Reduction Refinance Loan, a streamlined VA-to-VA refinance with limited documentation.
Wholesale Lender
A lender that funds loans originated by mortgage brokers rather than taking applications directly.