Mortgage Glossary

A mortgage with an interest rate that changes periodically based on a financial index. ARMs typically start with a lower rate than fixed-rate mortgages for an initial period (e.g., 5/1 ARM means fixed for 5 years, then adjusts annually). After the initial period, your rate and payment can increase or decrease based on market conditions. ARMs often have caps limiting how much the rate can change per adjustment period and over the life of the loan.

The process of paying off a loan through regular payments over time. Each payment includes both principal and interest. Early in the loan, most of your payment goes to interest; over time, more goes to principal. A fully amortizing loan is completely paid off at the end of the term.

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. The appraisal considers comparable sales, property condition, and market trends. Cost typically $400-$800.

The total cost of borrowing expressed as a yearly rate, including interest rate plus fees and other charges. APR is designed to help compare loan offers by showing the true cost of borrowing. A loan with a lower interest rate but higher fees may have a higher APR than one with a slightly higher rate but lower fees.

A loan qualification method that converts liquid assets into monthly income. Lenders divide your eligible assets by a set number of months (typically 360) to calculate qualifying income. Ideal for retirees, high-net-worth individuals, or those with significant savings but limited traditional income.

A NON-QM loan that uses 12-24 months of personal or business bank statements to verify income instead of tax returns. Ideal for self-employed borrowers whose tax returns show lower income due to business deductions. Lenders typically apply an expense ratio (commonly 50% for business accounts) to calculate qualifying income from deposits.

A short-term loan used to 'bridge' the gap between buying a new property and selling an existing one. Bridge loans typically have higher interest rates and shorter terms (6-12 months). They allow buyers to make non-contingent offers and move quickly in competitive markets.

Final approval from underwriting indicating all conditions have been satisfied and the loan is ready to close. After CTC, closing documents are prepared and a closing date is scheduled.

A 5-page form provided at least 3 business days before closing that details final loan terms, projected payments, and closing costs. Compare it to your Loan Estimate to identify any changes. You must sign acknowledging receipt before closing.

Taking title to a property in the name of an LLC, corporation, or trust rather than personally. Common for investment properties for liability protection and tax benefits. Requirements typically include: Articles of Organization/Incorporation, Operating Agreement, EIN letter, Certificate of Good Standing, and Resolution authorizing the purchase.

The total of all loans secured by a property divided by its value. If you have a $300,000 first mortgage and $50,000 HELOC on a $500,000 home, CLTV = 70%. Used when there are multiple liens on a property.

A letter from a Certified Public Accountant verifying self-employment income, business operations, or financial information. For P&L loans, the CPA prepares and signs the Profit & Loss statement. The letter confirms whether returns were 'prepared' (CPA prepared them) or 'reviewed' (CPA examined client-prepared returns).

A numerical rating (typically 300-850) representing your creditworthiness based on credit history. FICO scores are most commonly used. Factors include payment history (35%), amounts owed (30%), length of history (15%), new credit (10%), and credit mix (10%). Higher scores qualify for better rates. NON-QM loans may accept scores as low as 500-620.

A non-cash expense that reduces taxable income but doesn't affect actual cash flow. For mortgage qualification, depreciation from rental properties (Schedule E) and business assets (Section 179, K-1) can often be added back to income, increasing qualifying income.

Upfront fees paid to the lender at closing to reduce your interest rate. One point equals 1% of the loan amount and typically reduces the rate by 0.25%. Buying points makes sense if you plan to keep the loan long enough to recoup the upfront cost through lower monthly payments. Also called 'buying down the rate.'

For investment properties, the ratio of rental income to debt obligations. Calculated as: Gross Rental Income ÷ (Principal + Interest + Taxes + Insurance + HOA). A DSCR of 1.25 means the property generates 25% more income than needed to cover expenses. Most lenders require 1.0-1.25 minimum.

Debt Service Coverage Ratio loan - an investment property loan where qualification is based on the property's rental income rather than the borrower's personal income. The DSCR compares the property's gross rental income to its total debt obligations (mortgage, taxes, insurance, HOA). A DSCR of 1.0 means the property breaks even; most lenders require 1.0-1.25. No tax returns or employment verification required.

The percentage of your gross monthly income that goes toward debt payments. Front-end DTI includes only housing costs; back-end DTI includes all debts. Most conventional loans require back-end DTI under 43-45%. NON-QM loans may allow higher DTIs. Calculated as: (Monthly Debt Payments ÷ Gross Monthly Income) × 100.

The difference between your property's market value and what you owe on it. If your home is worth $500,000 and you owe $300,000, you have $200,000 in equity (40%). Equity builds through price appreciation and paying down principal.

1) A neutral third party that holds funds and documents during a real estate transaction until all conditions are met. 2) An account held by the lender to pay property taxes and insurance on your behalf. Monthly escrow payments are added to your mortgage payment.

A letter documenting the expense ratio used for bank statement loan qualification. States the percentage of deposits that represent business expenses versus income. For example, a 50% expense ratio means half of deposits are considered qualifying income.

For bank statement loans, the percentage of deposits assumed to be business expenses. A 50% expense ratio means only 50% of deposits count as qualifying income. Personal bank statements typically use lower expense ratios (0-10%) since deposits are assumed to be net income.

Generally defined as someone who hasn't owned a home in the past 3 years. First-time buyers may qualify for special programs with lower down payments, reduced fees, or down payment assistance. Some programs have income limits.

A mortgage where the interest rate remains constant for the entire loan term. Your monthly principal and interest payment never changes, providing predictable budgeting. Common terms are 15, 20, and 30 years. While initial rates may be higher than ARMs, you're protected from future rate increases.

A non-U.S. citizen who doesn't reside in the United States. Foreign national loan programs allow international buyers to purchase U.S. property, typically requiring larger down payments (25-30%), foreign credit reports or references, and valid passport/visa documentation.

Increasing non-taxable income by a percentage (typically 15-25%) to account for the fact that it's not subject to income tax. Social Security, disability, and some other income types can be grossed up for qualification purposes.

A revolving credit line secured by your home's equity. Unlike a traditional loan, you can borrow, repay, and reborrow up to your credit limit during the draw period (typically 10 years). After the draw period, you enter the repayment period where you can no longer borrow and must pay down the balance. Interest rates are usually variable.

A loan where you only pay interest for a specified period (typically 5-10 years), with no principal reduction. After the interest-only period, payments increase significantly as you begin paying both principal and interest. Popular with investors for maximizing cash flow, but requires planning for the payment increase.

A property purchased to generate income or profit, not as a primary residence. Investment properties typically require larger down payments (15-25%), have higher interest rates, and may require reserves. Rental income can be used for qualification with proper documentation.

A borrower using an Individual Taxpayer Identification Number instead of a Social Security Number. ITINs are issued by the IRS to individuals who need to file taxes but aren't eligible for SSN. ITIN loan programs serve immigrants and non-residents who may not have traditional credit history.

IRS form reporting a partner's or shareholder's share of income, deductions, and credits from a partnership, S-corporation, or trust. K-1 income can be complex to calculate for mortgage qualification, often requiring analysis of the associated business tax return.

A business structure that provides liability protection for owners while offering tax flexibility. Many real estate investors hold properties in LLCs to protect personal assets from property-related lawsuits. Some loan programs allow LLC ownership; others require personal guarantees.

The length of time you have to repay the loan. Common mortgage terms are 15, 20, and 30 years. Shorter terms have higher monthly payments but lower total interest costs. Longer terms have lower payments but more interest paid over time.

The loan amount divided by the property's appraised value or purchase price (whichever is lower), expressed as a percentage. An $400,000 loan on a $500,000 property = 80% LTV. Lower LTV means more equity and often better rates. LTV above 80% typically requires mortgage insurance.

For adjustable-rate mortgages, the fixed percentage added to the index rate to determine your interest rate. For example, if the index is 3% and the margin is 2.75%, your rate would be 5.75%. The margin remains constant throughout the loan; only the index changes.

Non-Qualified Mortgage - a loan that doesn't meet the Consumer Financial Protection Bureau's (CFPB) qualified mortgage standards. NON-QM loans offer flexible qualification criteria for borrowers who don't fit traditional lending guidelines, such as self-employed individuals, investors, or those with non-traditional income documentation. Examples include Bank Statement loans, DSCR loans, and Asset Depletion loans.

A condominium that doesn't meet conventional lending guidelines, often due to: high investor concentration, pending litigation, single-entity ownership of multiple units, or commercial space exceeding limits. NON-QM lenders offer financing for non-warrantable condos.

A legal document outlining how an LLC is managed, including member ownership percentages, voting rights, and profit distribution. Required when closing in an LLC name to verify authorized signers and ownership structure.

A fee charged by the lender for processing and underwriting your loan application. Typically 0.5-1% of the loan amount. Some lenders advertise 'no origination fee' but may charge higher rates or other fees to compensate.

A loan that uses a Profit & Loss statement prepared by a CPA or tax professional to verify income, without requiring full tax returns. The P&L must typically cover 12-24 months and be prepared by a licensed professional. Popular with self-employed borrowers who want to avoid submitting complete tax documentation.

Insurance required when your down payment is less than 20% on a conventional loan. PMI protects the lender if you default. Monthly premiums are added to your payment. Can be removed once you reach 20% equity (80% LTV).

A fee charged by some lenders if you pay off your loan early, typically within the first 2-5 years. Prepayment penalties compensate lenders for lost interest income. They're common in NON-QM loans and may be 'hard' (applies to any payoff) or 'soft' (only applies if refinancing, not selling). Always understand the penalty terms before accepting a loan.

The home where you live most of the time. Primary residences receive the best loan terms, lowest rates, and smallest down payment requirements. You can only have one primary residence at a time. Lenders verify occupancy intent.

The original loan amount borrowed, excluding interest. Each mortgage payment includes principal (reducing your loan balance) and interest (the cost of borrowing). Early in the loan, most payment goes to interest; over time, more goes to principal.

A loan that meets specific guidelines set by the CFPB, including debt-to-income limits, documentation requirements, and restrictions on risky features. QM loans offer lenders legal protection and are considered safer for consumers. Most conventional and government loans are QM loans.

Limits on how much an ARM's interest rate can change. Caps typically include: initial adjustment cap (first change after fixed period), periodic cap (each subsequent adjustment), and lifetime cap (total change over loan life). Example: 2/2/5 means max 2% initial change, 2% per adjustment, 5% total.

A lender's commitment to hold a specific interest rate for a set period (typically 30-60 days) while your loan is processed. Rate locks protect you from rate increases during processing. Longer locks may cost more. Some locks include a 'float down' option if rates drop.

Liquid assets remaining after closing, expressed in months of mortgage payments. If your total payment is $3,000/month and you have $18,000 in savings after closing, you have 6 months of reserves. Lenders require reserves to ensure you can make payments if income is interrupted. Investment properties typically require more reserves.

IRS tax form used to report rental property income and expenses. Underwriters analyze Schedule E to calculate qualifying rental income by adding back non-cash expenses like depreciation. Net rental income from Schedule E is used in DTI calculations.

A property you occupy part of the year that's not your primary residence, typically a vacation home. Must be a reasonable distance from primary residence and suitable for year-round use. Cannot be rented full-time. Better terms than investment properties but not as favorable as primary residence.

A mortgage that is subordinate to (ranks behind) the first mortgage. If the property is sold or foreclosed, the first lien is paid before the second. Second liens include home equity loans and HELOCs. They're often used for debt consolidation, home improvements, or accessing equity without refinancing the first mortgage.

An IRS provision allowing businesses to deduct the full purchase price of qualifying equipment in the year purchased, rather than depreciating over time. For mortgage qualification, Section 179 deductions can often be added back to income since they're non-cash expenses.

Someone who owns 25% or more of a business or works as an independent contractor. Self-employed borrowers typically need 2 years of tax returns for conventional loans, but NON-QM options like bank statement and P&L loans offer alternatives with less documentation.

Insurance protecting against losses from defects in title, such as undisclosed liens, forgery, or errors in public records. Lender's title insurance protects the lender; owner's title insurance protects the buyer. Purchased at closing with a one-time premium.

The process of evaluating a loan application to determine risk and whether to approve the loan. Underwriters verify income, assets, credit, and property value. They may issue conditional approval requiring additional documentation before final approval.

How title to a property is held, including the names of owners and the type of ownership. Common vesting types include: sole ownership, joint tenancy (equal shares with right of survivorship), tenants in common (can have unequal shares), and community property (married couples in certain states).

Documentation confirming your employment status, position, and income. Can be a letter from your employer, recent pay stubs, or third-party verification. For self-employed borrowers, a VOE letter from a CPA confirms business operations and income.