Mortgage Glossary

Definitions for common mortgage terms — from application through closing and beyond.

A B C D E F G H I J L M N O P R S T U V

A

Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that changes periodically based on a market index. ARMs typically have a fixed period (e.g., 5/1 ARM = fixed for 5 years, then adjusts annually).
Amortization: The process of paying off a loan through regular payments over time. Early payments are mostly interest; later payments are mostly principal.
Annual Percentage Rate (APR): The total yearly cost of a mortgage expressed as a percentage, including interest rate plus fees. APR is higher than the interest rate and allows for comparison between loans.
Appraisal: An independent professional estimate of a property's market value. Required by lenders to confirm the property supports the loan amount.
Assessed Value: The value assigned to a property by a local government for tax purposes. In Tennessee, residential property is assessed at 25% of appraised value.
Assumable Mortgage: A mortgage that can be transferred from the seller to the buyer. VA and FHA loans are assumable; conventional loans typically are not.

B

Back-End DTI: The ratio of all monthly debt payments (housing + other debts) to gross monthly income. Most conventional loans allow up to 45–50%.
Balloon Mortgage: A mortgage with a large lump-sum payment due at the end of a short term. Less common in residential lending today.
Bridge Loan: Short-term financing used to bridge the gap between buying a new home and selling an existing one.

C

Cash-Out Refinance: A refinance that replaces your existing mortgage with a larger loan, with the difference paid to you in cash.
Certificate of Eligibility (COE): A document from the VA confirming a borrower's eligibility for a VA home loan.
Clear to Close (CTC): The underwriter's final approval indicating all conditions have been met and the loan is ready to fund.
Closing Costs: Fees and expenses paid at closing, including lender fees, title fees, appraisal, and prepaid items. Typically 2–4% of the loan amount.
Closing Disclosure: A required document provided at least 3 business days before closing showing final loan terms, monthly payment, and closing costs.
Conforming Loan: A mortgage that meets Fannie Mae and Freddie Mac guidelines, including loan limits ($766,550 in Tennessee for 2024).
Conventional Loan: A mortgage not backed by a government agency. May be conforming (within Fannie/Freddie limits) or non-conforming (jumbo).
Credit Score: A numerical representation of creditworthiness, typically ranging from 300–850. Higher scores result in better mortgage rates and terms.

D

Debt-to-Income Ratio (DTI): Monthly debt payments divided by gross monthly income. Used by lenders to assess repayment ability.
Deed of Trust: The security instrument used in Tennessee (and most states) instead of a mortgage. Involves three parties: borrower, lender, and trustee.
Discount Points: Prepaid interest paid at closing to reduce the interest rate. One point = 1% of the loan amount.
Down Payment: The portion of the purchase price paid by the buyer at closing. The remainder is financed through the mortgage.
DSCR (Debt Service Coverage Ratio): For investment properties: monthly gross rent divided by monthly PITIA. A DSCR above 1.0 means the property generates enough income to cover the payment.
Due-on-Sale Clause: A mortgage provision requiring the full loan balance to be paid when the property is sold or transferred.

E

Earnest Money: A deposit made by the buyer when submitting an offer, demonstrating serious intent. Typically 1–2% of the purchase price in Tennessee.
Equity: The difference between a property's market value and the outstanding mortgage balance. Equity increases as the loan is paid down and/or the property appreciates.
Escrow: An account held by the lender to collect and pay property taxes and homeowner's insurance on behalf of the borrower.

F

FHA Loan: A mortgage insured by the Federal Housing Administration. Requires as little as 3.5% down and accepts lower credit scores than conventional loans.
Fixed-Rate Mortgage: A mortgage with an interest rate that remains constant for the life of the loan. The most common type in the U.S.
Front-End DTI: The ratio of the housing payment (PITI) to gross monthly income. Most programs target 28–31%.

G

Good Faith Estimate (GFE): A predecessor to the Loan Estimate, replaced in 2015 by the standardized Loan Estimate form.

H

HECM: Home Equity Conversion Mortgage — the FHA-insured reverse mortgage program for homeowners 62 and older.
HELOC: Home Equity Line of Credit — a revolving line of credit secured by home equity, typically with a variable interest rate.
Home Equity Loan: A fixed-rate second mortgage that provides a lump sum based on home equity.
Homeowner's Insurance: Insurance covering the structure and contents of a home against damage and liability. Required by lenders.
HUD-1 Settlement Statement: A closing document replaced in 2015 by the Closing Disclosure for most transactions.

I

Interest Rate: The percentage charged on the loan balance, expressed annually. Different from APR, which includes fees.

J

Jumbo Loan: A mortgage exceeding the conforming loan limit ($766,550 in Tennessee for 2024). Requires stricter qualification and typically a larger down payment.

L

Lien: A legal claim against a property as security for a debt. A mortgage creates a lien on the property.
Loan Estimate: A required disclosure provided within 3 business days of application showing estimated loan terms, monthly payment, and closing costs.
Loan-to-Value Ratio (LTV): The loan amount divided by the property's appraised value, expressed as a percentage. Lower LTV = more equity = better terms.
Lock (Rate Lock): An agreement between borrower and lender fixing the interest rate for a specified period, typically 30–60 days.

M

Mortgage Broker: A licensed professional who works with multiple lenders to find the best loan for a borrower, rather than lending directly.
Mortgage Insurance Premium (MIP): Insurance required on FHA loans. Includes an upfront premium (1.75%) and an annual premium paid monthly.

N

Non-QM Loan: A mortgage that doesn't meet the Consumer Financial Protection Bureau's Qualified Mortgage standards. Includes bank statement loans, DSCR loans, and other alternative products.

O

Origination Fee: A lender fee for processing the loan, typically 0.5–1% of the loan amount.

P

PITIA: Principal, Interest, Taxes, Insurance, and Association dues — the components of a total monthly housing payment.
PMI (Private Mortgage Insurance): Insurance required on conventional loans with less than 20% down. Protects the lender; can be cancelled when equity reaches 20%.
Points: See Discount Points. Also used to refer to origination fees.
Preapproval: A conditional commitment from a lender to fund a loan up to a specified amount, based on a full credit and income review.
Prequalification: An informal estimate of borrowing capacity based on self-reported information, without a credit check or documentation review.
Principal: The original loan amount, or the remaining balance owed on a loan.

R

Rate-and-Term Refinance: A refinance that changes the interest rate, loan term, or both without taking cash out.
Refinance: Replacing an existing mortgage with a new one, typically to obtain a lower rate, change the term, or access equity.
Reserves: Liquid assets remaining after closing. Lenders often require 2–6 months of mortgage payments in reserves.
Reverse Mortgage: A loan for homeowners 62+ that allows access to home equity without monthly payments. The loan is repaid when the home is sold or the borrower moves out.

S

Second Mortgage: A loan secured by a property that already has a first mortgage. HELOCs and home equity loans are second mortgages.

T

Title: Legal ownership of a property. Title insurance protects against claims or defects in the title.
Title Insurance: Insurance protecting against losses from title defects, liens, or ownership disputes. Lender's title insurance is required; owner's title insurance is recommended.

U

Underwriting: The process of evaluating a loan application to determine whether to approve it. The underwriter reviews credit, income, assets, appraisal, and property.
USDA Loan: A zero-down mortgage for eligible rural and suburban properties, guaranteed by the U.S. Department of Agriculture.

V

VA Loan: A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and surviving spouses.