Real estate terminology, demystified. Search our comprehensive dictionary to understand the exact definitions of home lending terms.
A contract provision that requires the borrower to repay the entire balance of the loan immediately if they fail to meet certain conditions, such as missing payments or selling the property.
A mortgage loan where the interest rate can change periodically based on a financial index. This means your monthly payments may go up or down over the life of the loan.
The process of paying off a mortgage with regular monthly payments over a specific time period. Early payments mostly cover interest, while later payments pay down the principal balance.
The total yearly cost of a mortgage expressed as a percentage. It includes the interest rate plus other costs such as origination fees, discount points, and mortgage insurance, providing a true measure of the loan's cost.
The form completed by a prospective borrower that provides the lender with the initial information needed to evaluate creditworthiness and the property to be financed.
A professional estimate of a property's market value based on recent sales of similar properties in the area. Lenders require this to ensure the home is worth the loan amount and acts as sufficient collateral.
The dollar value assigned to a property by a public tax assessor for the purpose of taxation. This value is often different from the market value or the appraised value.
Items of value owned by an individual. Lenders evaluate assets—such as checking and savings accounts, retirement funds, and valuable property—to determine a borrower's financial stability and reserves.
The transfer of a mortgage from one person or entity to another. When a mortgage is assigned, the new holder takes over the rights to collect payment from the borrower.
A mortgage that typically offers low monthly payments for an initial period (often 5 to 7 years) and then requires the borrower to pay off the remaining balance in one lump sum, known as a balloon payment.
A legal proceeding involving a person or business that is unable to repay outstanding debts. Having a bankruptcy on your credit report significantly affects your ability to qualify for a mortgage for a certain number of years.
A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equal to 1/100th of 1%, or 0.01%.
A short-term loan used until a person or company secures permanent financing or removes an existing obligation. In real estate, it is often used to purchase a new home before selling the current one.
A limit on how much the interest rate or the monthly payment of an adjustable-rate mortgage (ARM) can change, either at each adjustment period or over the life of the loan.
A refinancing option in which the new mortgage is for a larger amount than the existing loan. You get the difference between the two loans in cash, leveraging your home's equity. (Note: Texas has strict laws regarding cash-out loans, often known as 50(a)(6) loans, which cap the maximum LTV at 80%.)
The total expected funds the buyer needs to bring to the closing table to complete the real estate transaction. This includes the down payment, closing costs, and prepaid items.
A document issued by the U.S. Department of Veterans Affairs (VA) that confirms a veteran or active-duty service member meets the eligibility requirements for a VA loan.
A title free of liens, defects, or legal encumbrances. A clear title is required to prove undisputed ownership of a property, allowing it to be sold or mortgaged.
The final step in executing a real estate transaction. During closing, the buyer signs all final mortgage documents, pays closing costs, and ownership of the property is officially transferred.
Fees paid at the closing of a real estate transaction. They usually range from 2% to 5% of the purchase price and include lender fees, title insurance, appraisal fees, establishing an escrow account, and local taxes.
A standardized, five-page document provided to the borrower at least three business days before closing. It outlines the final details of the mortgage loan, including the exact terms, projected monthly payments, and total cash required to close. (Required under TILA-RESPA Integrated Disclosure rule).
An additional individual who shares responsibility for the loan and is listed on the mortgage and title. Their income, assets, and credit history are used to help qualify for the loan.
An asset that a lender accepts as security for a loan. In the case of a mortgage, the home being purchased or refinanced serves as collateral. If the borrower defaults, the lender can seize the home through foreclosure.
A formal document provided by a lender to a borrower, stating that the lender has approved the mortgage application under specific terms and conditions, subject to the final clearing of any outstanding requirements.
Recently sold properties in a specific neighborhood that are similar in size, style, and features to a property being evaluated. Appraisers use comps to determine the fair market value of a home.
A conventional mortgage loan that meets the guidelines and maximum loan limits set by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
A type of mortgage not insured or guaranteed by the federal government (unlike FHA, VA, or USDA loans). Conventional loans are typically offered by private lenders and follow guidelines set by Fannie Mae or Freddie Mac.
A detailed record of an individual's credit history, including current and past debts, payment habits, and bankruptcies. Lenders use this to gauge a borrower's financial reliability.
A numerical representation of a borrower's creditworthiness, primarily based on their credit report. FICO scores, the most commonly used credit scores, range from 300 to 850, with higher scores indicating lower risk to lenders.
A percentage calculated by dividing your total recurring monthly debt by your gross monthly income. Lenders use DTI to measure your ability to manage monthly payments and repay the money you plan to borrow.
A legal document that officially transfers ownership or title of real estate from the seller to the buyer.
A legal document used in some states (including Texas) instead of a mortgage. It involves three parties: the borrower, the lender, and a neutral third party (trustee). The trustee holds the deed until the loan is paid in full.
The failure to fulfill a legal obligation, such as failing to make a scheduled mortgage payment. Persistent default can lead to foreclosure.
A decrease in the value of an asset over time due to wear and tear, age, or poor market conditions. (Conversely, Appreciation is an increase in value).
Optional upfront fees paid directly to the lender at closing in exchange for a lower interest rate over the life of the loan. One point generally equals 1% of the total loan amount. Also known simply as "Points".
An upfront partial payment made at the time of purchase. For a home, it is generally expressed as a percentage of the total purchase price. A larger down payment reduces the principal amount borrowed.
A deposit made to a seller to show the buyer's good faith and serious intent to purchase the home. It is typically held in a trust or escrow account until closing, at which point it is applied toward the cash-to-close.
A federal law prohibiting lenders from discriminating against credit applicants based on race, color, religion, national origin, sex, marital status, age, or because an applicant receives income from a public assistance program.
The difference between the current market value of your home and the amount you still owe on your mortgage. As you pay down your loan or property values rise, your equity increases.
An arrangement where a neutral third party handles the exchange of money and documents during a real estate transaction. Post-closing, an "escrow account" holds a portion of a borrower's monthly payments to pay for property taxes and homeowners insurance when they come due.
A federal law that regulates the collection, dissemination, and use of consumer credit information, ensuring fairness, accuracy, and privacy.
The Federal National Mortgage Association. A government-sponsored enterprise created by Congress to keep money flowing to mortgage lenders, helping them to finance more homes. Fannie Mae buys conventional loans from lenders, packages them into securities, and sells them on the secondary market.
An agency within the U.S. Department of Housing and Urban Development (HUD) that insures mortgages made by approved lenders, protecting the lender against losses if the borrower defaults.
A mortgage insured by the Federal Housing Administration. Designed for low-to-moderate-income borrowers, FHA loans often require a lower minimum down payment (as low as 3.5%) and lower credit scores than conventional loans.
A type of home loan with an interest rate that remains exactly the same for the entire lifespan of the loan, resulting in predictable monthly principal and interest payments.
An interest rate that has not yet been locked and can fluctuate with current market conditions. Borrowers can choose to let their rate float while their loan is being processed, gambling that rates might go down before they lock.
A temporary agreement between a borrower and lender to pause or reduce mortgage payments for a specific period during financial hardship, avoiding immediate foreclosure.
The legal process by which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments, by forcing the sale of the asset used as the collateral for the loan.
The Federal Home Loan Mortgage Corporation. Similar to Fannie Mae, it is a government-sponsored enterprise designed to support the secondary mortgage market, buying mortgages from smaller banks and lenders to increase the availability of mortgage credit.
The exact moment when a lender transfers the loan amount to the title or escrow company to pay the seller and complete the purchase transaction. In many states (like Texas), keys cannot be handed to the buyer until the loan has officially funded.
(Historical/Niche Term) A form that was historically used to list the estimated fees a borrower would pay at closing. For most residential transactions, this has been replaced by the Loan Estimate (LE) under TRID guidelines. It is still used primarily for Reverse Mortgages.
A specified period of time after a payment due date during which a borrower can make a payment without incurring a late fee. In mortgages, payments are typically due on the 1st of the month with a grace period extending to the 15th.
The total amount of income earned in a month before any taxes or deductions are removed. Lenders use this figure to calculate debt-to-income ratios.
Coverage that protects a property owner against damage caused by fires, severe storms, earthquakes or other natural events. It is a subset of a standard homeowners insurance policy.
A revolving line of credit that allows a homeowner to borrow money repeatedly against the available equity in their home, functioning similarly to a credit card. The home serves as collateral.
A rigorous visual examination of a property's physical structure and systems, from roof to foundation, conducted by a licensed, independent inspector before the final purchase to identify any major defects or needed repairs.
A monthly, quarterly, or annual fee paid to an organization (HOA) that manages the upkeep of common areas, amenities, and landscaping in a planned community, condominium suite, or subdivision.
A comprehensive property insurance policy that provides financial protection against disasters, theft, and some liabilities regarding a home and its contents. Mortgage lenders require proof of this coverage before closing.
A published financial benchmark or indicator used to adjust the interest rate of an adjustable-rate mortgage (ARM). Common indices include the U.S. Prime Rate, SOFR, or Treasury Bill rates.
The cost of borrowing money, usually expressed as an annual percentage of the principal amount borrowed.
The specific percentage charged by a lender to a borrower for the use of assets. For mortgages, it is the rate applied to the principal balance to calculate the interest portion of the monthly payment, excluding other fees.
Real estate property purchased with the primary intention of earning a return on the investment, either through rental income, future resale, or both. These loans hold higher risk and typically have higher interest rates than primary residence loans.
A mortgage loan that exceeds the conforming loan limits set annually by the Federal Housing Finance Agency (FHFA). These are used to finance luxury or highly expensive properties and generally require stricter underwriting and larger down payments.
A financial institution (bank, credit union, or private entity) that provides the funds for a mortgage loan with the expectation that the funds will be repaid with interest.
A legal claim or right against a property by a creditor if a debt is not repaid. A mortgage is a type of voluntary lien. The property cannot be sold with a clear title until all liens are paid off or resolved.
A standard three-page disclosure provided by a lender within three business days of receiving your loan application. It provides estimated interest rate, monthly payment, and total closing costs for the loan, allowing borrowers to easily compare offers from different lenders.
A financial ratio used by lenders to assess the risk of a loan. It compares the amount of the mortgage loan to the appraised value of the property, represented as a percentage. An LTV over 80% usually requires private mortgage insurance (PMI).
The duration of time for which a lender guarantees a specified interest rate to a borrower. Rate locks normally last between 30, 45, or 60 days.
A fixed percentage that a lender adds to the index rate to determine the fully indexed interest rate of an adjustable-rate mortgage (ARM). The margin remains constant over the life of the loan.
A legal agreement in which a person borrows money to buy property (such as a house) and the property serves as collateral for the loan.
An independent professional or firm that acts as an intermediary between borrowers and lenders. Brokers shop around to multiple lenders on behalf of the borrower to find the best rates and terms.
The insurance paid on FHA loans to protect the lender from losses if a borrower defaults. MIP consists of two parts: an upfront premium paid at closing (which can be rolled into the loan) and an annual premium paid monthly.
A scenario where the monthly mortgage payments are not large enough to cover the interest due. As a result, the unpaid interest is added to the principal balance, causing the total amount owed to increase rather than decrease.
A legally binding document that contains the borrower's written promise to repay the loan amount under specified terms and conditions, including the interest rate and payment schedule.
An upfront fee charged by a lender for evaluating, processing, and approving a new mortgage loan. It is typically expressed as a percentage of the total loan amount and compensates the loan officer and underwriter.
An acronym summarizing the four primary elements of a monthly mortgage payment: Principal, Interest, Taxes, and Insurance (which includes homeowners insurance, and if applicable, mortgage insurance and HOA dues).
A comprehensive evaluation of a borrower's financial health by a lender indicating a willingness to lend a specific amount under specific terms. It requires verification of income, assets, and credit history, making the buyer's offer much stronger to sellers.
An initial, less rigorous assessment by a lender to determine generally how much money a person may be able to borrow based on self-reported financial information. It is not a guarantee of a loan.
A fee that a lender charges if a borrower pays off their mortgage loan early, significantly ahead of the scheduled term, or refinances within a certain timeframe. Note: Conforming, FHA, and VA loans rarely have prepayment penalties today.
The lowest interest rate that commercial banks charge their most creditworthy corporate customers. It often serves as a benchmark for consumer loans, such as HELOCs.
The outstanding underlying balance of a loan, excluding interest and other charges. Your monthly mortgage payments chip away at the principal over time, slowly building equity.
Insurance provided by a private mortgage insurance company to conventionally required by lenders if the borrower's down payment is less than 20%. It protects the lender from loss if the borrower stops making payments.
Taxes levied by a local government on the assessed value of real estate property. These taxes fund municipal services like public schools, road maintenance, and fire departments. They are commonly collected monthly as part of your escrow payment.
A legally binding contract between a buyer and a seller outlining the terms and conditions of a property sale, including the purchase price, closing dates, contingencies, and earnest money deposit.
A formal commitment by a lender to guarantee a specific interest rate for a borrower for a specified number of days, protecting the borrower against market fluctuations prior to closing.
A federal law designed to protect consumers by mandating full disclosure of all closing costs, preventing kickbacks or referral fees among settlement service providers, and defining standards for escrow accounts. Enforced by the CFPB.
The process of paying off an existing mortgage by replacing it with a new one under different terms. It is typically done to secure a lower interest rate, change the loan duration, switch from an ARM to a fixed-rate, or cash out home equity.
A special type of loan specifically for homeowners aged 62 and older, allowing them to convert a portion of their home equity into cash without having to sell the home or take on new monthly mortgage payments.
A consumer protection provision under TILA that grants borrowers of certain types of loans (like a refinance on a primary residence or a HELOC) a three-day "cooling-off" period during which they can cancel the loan transaction without penalty.
A loan taken out against a property that already has a primary mortgage. In the event of default, the first mortgage is paid off before the second mortgage. Examples include home equity loans and HELOCs.
The sale of real estate in which the net proceeds are less than the balance owed on the property's mortgage. The lender must approve the sale and agree to accept the lesser amount to avoid entering a foreclosure process.
A professional measurement of property boundaries, land topography, and existing improvements (like fences or structures). Lenders and title companies often require a survey to confirm what exactly is being purchased and to identify any boundary encroachments.
The legal concept of ownership rights to a property, giving the owner the right to use, control, and dispose of the property.
Insurance that protects the lender (Lender's Policy) or the buyer (Owner's Policy) against financial loss from defects or hidden claims on the property's title, such as unknown liens, unpaid prior taxes, or legal ownership disputes.
An examination of public records to ensure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other encumbrances that would prevent the secure transfer of ownership.
A federal law demanding that lenders disclose key terms and costs of a credit agreement, including the Annual Percentage Rate (APR). TILA ensures that consumers are protected against deceitful lending practices and can accurately gauge the true cost of credit.
The detailed, rigorous process a lender uses to assess the risk of offering a mortgage. An underwriter deeply analyzes the borrower's credit, income, assets, and the property's appraisal to ensure they meet strict lending guidelines before issuing final loan approval ("Clear to Close").
A one-time premium paid by borrowers obtaining an FHA loan, currently set at 1.75% of the base loan amount. It can be paid at closing or financed into the total loan balance.
A mortgage loan guaranteed by the U.S. Department of Veterans Affairs. It offers exclusive benefits—such as $0 down payment, no private mortgage insurance (PMI), and competitive interest rates—to eligible veterans, active-duty service members, and surviving spouses.
A final, brief inspection of a property by the buyer, usually conducted right before the closing. It ensures that the house is in the agreed-upon condition and that any required repairs laid out in the contract have been completed.