Mortgage
Glossary
Over 40 essential mortgage and real estate terms explained in plain language. Bookmark this page and reference it throughout your home buying journey.
Last updated: March 2026
Mortgage Terms
A through D
Annual Percentage Rate (APR)
The total annual cost of borrowing expressed as a percentage. APR includes the interest rate plus lender fees, mortgage insurance, and other costs associated with the loan. APR gives a more complete picture of loan cost than the interest rate alone, making it useful for comparing offers from different lenders.
Amortization
The process of paying off a loan through regular scheduled payments over time. Each payment covers both interest and principal. In early years, most of each payment goes toward interest. Over time, a larger portion goes to principal. An amortization schedule shows exactly how each payment is divided over the life of the loan.
Appraisal
A professional assessment of a property's market value conducted by a licensed, independent appraiser. Lenders require appraisals to ensure the property is worth at least as much as the loan amount. The appraiser evaluates the home's condition, size, location, and comparable recent sales in the area to determine fair market value.
Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on a market index. ARMs typically start with a fixed rate period (3, 5, 7, or 10 years), after which the rate adjusts annually. Rate caps limit how much the rate can change at each adjustment and over the loan's lifetime. Learn more about ARMs
Closing Costs
Fees and expenses paid at the closing of a real estate transaction, beyond the property price itself. Closing costs typically range from 2% to 5% of the loan amount and include origination fees, appraisal fees, title insurance, attorney fees, recording fees, and prepaid items like property taxes and homeowners insurance. Full closing costs guide
Conforming Loan
A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including maximum loan limits. For 2026, the conforming loan limit for most counties is set annually by the Federal Housing Finance Agency (FHFA). Loans that exceed this limit are called jumbo loans and typically require stricter qualifications. Learn more
Conventional Loan
A mortgage not insured or guaranteed by a government agency (FHA, VA, or USDA). Conventional loans are originated and funded by private lenders and can be either conforming or non-conforming. They typically require higher credit scores and larger down payments than government-backed loans but offer more flexibility in terms and conditions. Learn more
Debt-to-Income Ratio (DTI)
The percentage of your gross monthly income that goes toward paying debts. Lenders use DTI to evaluate your ability to manage monthly payments. Front-end DTI includes only housing costs; back-end DTI includes all debt obligations. Most lenders prefer a back-end DTI of 43% or less, though some programs allow up to 50% with compensating factors.
Down Payment
The upfront cash payment made by the buyer toward the purchase price of the home. The remaining amount is financed through the mortgage. Down payment requirements vary by loan type: conventional loans may require as little as 3%, FHA loans require 3.5%, and VA loans may require 0%. A larger down payment reduces the loan amount and may eliminate the need for mortgage insurance.
Mortgage Terms
E through H
Earnest Money
A deposit made by a buyer to demonstrate serious intent to purchase a property. Typically 1-3% of the purchase price, earnest money is held in an escrow account and applied toward the down payment or closing costs at closing. If the buyer backs out without a valid contingency, they may forfeit the earnest money to the seller.
Escrow
A neutral third-party account where funds are held during a real estate transaction. After closing, many lenders require an escrow account to collect and pay property taxes and homeowners insurance on your behalf. A portion of each monthly mortgage payment goes into escrow, and the lender makes tax and insurance payments when they are due.
Equity
The difference between your home's current market value and the amount you owe on your mortgage. Equity increases as you pay down your loan balance and as your home appreciates in value. Equity can be accessed through a cash-out refinance or HELOC and represents your ownership stake in the property. Learn about accessing equity
Federal Housing Administration (FHA)
A government agency within the Department of Housing and Urban Development (HUD) that insures mortgages made by approved lenders. FHA insurance protects lenders against losses if borrowers default, which allows lenders to offer more favorable terms including lower down payments and more flexible credit requirements. Learn about FHA loans
Fixed Rate Mortgage
A mortgage with an interest rate that remains constant for the entire loan term. Monthly principal and interest payments never change, providing complete payment predictability. Available in 10, 15, 20, 25, and 30-year terms. The most popular mortgage type in the United States. Learn about fixed rate mortgages
FICO Score
A credit score created by the Fair Isaac Corporation used by lenders to evaluate creditworthiness. FICO scores range from 300 to 850, with higher scores indicating lower credit risk. Most mortgage lenders use FICO scores from all three major credit bureaus (Equifax, Experian, TransUnion) and typically use the middle score for qualification. Scores above 740 generally qualify for the best rates.
Flood Insurance
Insurance coverage that protects against property damage caused by flooding. If your property is in a FEMA-designated flood zone, your lender will require you to carry flood insurance as a condition of the loan. Flood insurance is separate from standard homeowners insurance, which typically does not cover flood damage. Policies are available through the National Flood Insurance Program (NFIP) or private insurers.
Good Faith Estimate (GFE) / Loan Estimate
A standardized document that provides an estimate of the costs associated with a mortgage loan. Now called the Loan Estimate under TRID rules, this form must be provided within three business days of receiving a loan application. It details the estimated interest rate, monthly payment, closing costs, and other loan terms so borrowers can compare offers from different lenders.
Home Equity Line of Credit (HELOC)
A revolving line of credit secured by your home equity. Unlike a cash-out refinance which provides a lump sum, a HELOC lets you borrow as needed up to a credit limit during a draw period (typically 10 years), followed by a repayment period. HELOCs usually have variable interest rates. Compare with cash-out refinance
Homeowners Insurance
Insurance that covers damage to your home and personal property from covered perils such as fire, theft, windstorms, and certain natural disasters. All mortgage lenders require homeowners insurance as a condition of the loan. The policy must remain active for the life of the mortgage. Premiums are often collected as part of your monthly escrow payment.
Department of Housing and Urban Development (HUD)
The federal government agency responsible for national housing policy and programs. HUD oversees the FHA, enforces fair housing laws, and administers community development programs. HUD sets guidelines for FHA-insured mortgages and works to ensure access to fair and affordable housing for all Americans.
Mortgage Terms
I through N
Interest Rate
The percentage charged by the lender for borrowing money, expressed as an annual rate. The interest rate determines how much you pay in interest each month on the outstanding loan balance. Unlike APR, the interest rate does not include fees or other costs. A lower interest rate means lower monthly payments and less total interest paid over the loan's life.
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by the FHFA. Because jumbo loans cannot be purchased by Fannie Mae or Freddie Mac, they carry more risk for lenders and typically require higher credit scores (usually 700+), larger down payments (10-20%+), and more financial reserves. Jumbo loans are common in high-cost real estate markets. Learn about jumbo loans
Lien
A legal claim against a property that must be satisfied before the property can be sold or refinanced. A mortgage creates a lien in favor of the lender, giving them the right to foreclose if the borrower defaults. Other types of liens include tax liens, mechanic's liens, and judgment liens. A title search identifies any existing liens before closing.
Loan-to-Value Ratio (LTV)
The ratio of the mortgage amount to the appraised value of the property, expressed as a percentage. For example, a $320,000 loan on a $400,000 home equals an 80% LTV. LTV is a key factor in mortgage qualification and pricing. Higher LTV ratios represent more risk for lenders and typically require mortgage insurance. Most conventional loans require an LTV of 97% or less.
Mortgage Insurance
Insurance that protects the lender (not the borrower) in case of default. Required on conventional loans with less than 20% down payment (called PMI) and on all FHA loans (called MIP). VA loans have a funding fee instead. Mortgage insurance adds to your monthly payment but enables you to buy a home with a smaller down payment.
Nationwide Multistate Licensing System (NMLS)
A centralized registration and licensing system for mortgage loan originators and other financial services professionals. Every licensed mortgage professional must have a unique NMLS number, which consumers can use to verify credentials and check disciplinary history at nmlsconsumeraccess.org. Theos Financial's NMLS number is 2685114.
Non-QM (Non-Qualified Mortgage)
A mortgage that does not meet the Consumer Financial Protection Bureau's qualified mortgage rules. Non-QM loans serve borrowers who do not fit standard lending criteria, such as self-employed individuals with complex income, real estate investors, or those with recent credit events. These loans may use bank statements, asset depletion, or other alternative documentation instead of traditional income verification. Learn more
Mortgage Terms
O through R
Origination Fee
A fee charged by the lender for processing a new mortgage application. Typically expressed as a percentage of the loan amount (often 0.5% to 1%), the origination fee covers the lender's costs for underwriting, processing, and funding the loan. This fee is part of closing costs and is disclosed on the Loan Estimate.
PITI (Principal, Interest, Taxes, Insurance)
The four components that make up a typical monthly mortgage payment. Principal is the portion that reduces the loan balance. Interest is the cost of borrowing. Taxes are property taxes collected via escrow. Insurance includes homeowners insurance and, if applicable, mortgage insurance. When lenders calculate your affordability, they look at the total PITI payment.
Private Mortgage Insurance (PMI)
Insurance required on conventional loans when the down payment is less than 20% of the purchase price. PMI protects the lender if you default on the loan. PMI can be paid monthly, upfront, or as a combination. Unlike FHA mortgage insurance, PMI on conventional loans can be removed once you reach 20% equity in your home, either through payments or appreciation.
Points (Discount Points)
Prepaid interest paid at closing to reduce the interest rate on your mortgage. One point equals 1% of the loan amount. For example, one point on a $400,000 loan costs $4,000. Each point typically reduces your rate by 0.25%. Points make sense if you plan to keep the loan long enough for the monthly savings to exceed the upfront cost (the break-even point).
Pre-Approval vs Pre-Qualification
Pre-Qualification: An informal estimate of how much you might be able to borrow, based on self-reported financial information. No credit check or document verification is involved. It provides a general idea of your budget but carries no commitment from the lender.
Pre-Approval: A formal process where the lender verifies your income, assets, credit, and employment to issue a conditional commitment for a specific loan amount. Pre-approval involves a hard credit pull and document review. It carries much more weight with sellers. Get pre-approved
Principal
The original amount of money borrowed in a mortgage, or the remaining balance of the loan excluding interest. Each mortgage payment includes a principal portion that reduces the outstanding balance. Over time, as the balance decreases, more of each payment goes toward principal and less toward interest. Extra principal payments can significantly reduce total interest paid and shorten the loan term.
Rate Lock
A commitment from the lender to hold a specific interest rate and points for a defined period, typically 30 to 60 days. A rate lock protects you from rate increases while your loan is being processed. If rates drop during the lock period, you are generally locked into the higher rate unless you have a float-down option. Rate locks may expire if your loan does not close within the lock period.
Refinance
The process of replacing an existing mortgage with a new one, typically to obtain a lower interest rate, change the loan term, switch from an ARM to a fixed rate, or access equity (cash-out refinance). Refinancing involves a new application, appraisal, and closing costs. It makes financial sense when the savings from the new terms outweigh the costs. Refinance guide
Mortgage Terms
S through Z
Title Insurance
Insurance that protects against financial loss from defects in the title to real property. There are two types: lender's title insurance (required by the lender) and owner's title insurance (optional but recommended). Title insurance protects against undiscovered liens, forged documents, unknown heirs, and other claims that could affect your ownership rights. It is a one-time premium paid at closing.
Underwriting
The process by which a lender evaluates the risk of making a mortgage loan. An underwriter reviews the borrower's creditworthiness, income, assets, employment history, and the property's value to determine whether the loan meets the lender's guidelines. Underwriting may result in approval, conditional approval (with additional documentation needed), or denial. This is the most critical phase of the loan process.
USDA Loan
A government-backed mortgage program administered by the United States Department of Agriculture. USDA loans offer zero down payment for eligible properties in designated rural and suburban areas. They are designed to help low-to-moderate income borrowers achieve homeownership. USDA loans have income limits based on the county and household size, and the property must be in an eligible area. Learn more
VA Loan
A mortgage guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members, National Guard members, reservists, and surviving spouses. VA loans offer zero down payment, no private mortgage insurance, competitive interest rates, and limited closing costs. A VA funding fee may apply but can be financed into the loan. Learn about VA loans
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