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Dan Green

Dan Green

Since 2003, Dan Green has been a leading mortgage lender and respected industry authority. His unwavering commitment to first-time home buyers and home buyer education has established him as a trusted voice among his colleagues, his peers, and the media. Dan founded Homebuyer.com to expand the American Dream of Homeownership to all who want it. .

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The Home Buyer Glossary of Real Estate & Mortgage Terms

When you buy your first home, you’ll encounter words you’ve never seen before. Words like amortizationescrow, and dual agency. New words feel strange at first. Don’t worry – we’re here to help.

This is the Home Buyer Glossary of Real Estate & Mortgage Terms. 

It’s a giant list that turns complex real estate terms into simple, plain-language explanations. We even included accompanying, real-world context to help with each definition.

Bookmark this page, share it, and be a better first-time buyer.

Let’s begin.

What is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage is a mortgage loan where the interest rate can change over time, causing payments to go up or down. ARMs are alternatives to fixed-rate mortgages. 

More on this: Adjustable-rate mortgages don’t constantly adjust higher. The formula that makes your new mortgage rate is based on the health of the US economy. When the economy is weaker, interest rates tend to drop.

Learn more about adjustable-rate mortgages.

What is All-Inclusive Coverage?

All-inclusive coverage is a type of condo building insurance. It covers common areas of the building and everything inside the individual units, except for personal property such as jewelry or collections.

More on this: Condominium associations purchase insurance for the building, which gets paid using the association dues collected from each owner.

What is Amortization?

Amortization is paying off a mortgage through regular payments over time. As time passes, a greater percentage of each mortgage payment pays down the balance, and a smaller percentage pays for interest until the loan balance is $0.

More on this: In the early years of a mortgage, the percentage of each mortgage payment that goes toward the principal balance can be meager. It may take 20 years to pay off half the balance on a 30-year loan. 

How do you define Annual Income?

Annual income is the amount of money a person earns in one year, from all sources, before taxes. It includes W-2 wages, bonuses, tips, dividends, and other income.

More on this: Lenders consider your annual income and current debts to decide how much you can borrow. Earning a higher income can get you pre-approved for a larger mortgage.

What is Annual Percentage Rate (APR)?

APR is a government calculation intended to show the actual cost of a mortgage loan over time. 

More on this: APR calculations assume you’ll never refinance, sell, or make extra payments. Also, lenders can manipulate APR by adding discount points and other loan features. Buyers should only use APR to compare different mortgages in extreme scenarios. 

What is an Appraisal?

An appraisal evaluates a home’s value based on its condition and recent sales prices of similar, nearby homes. Appraisals are performed by licensed professionals or approved software.

More on this: Appraisers detail their findings on the Uniform Residential Appraisal Report form. This report includes the home’s estimated value, square footage, and photos of the home.

What is an Arms-Length Transaction?

An arms-length transaction is when a home buyer and seller act in self-interest, have no relationship with each other and are not subject to influence from the other party.

More on this: Arm’s length transactions ensure buyers pay a fair market value for a home. When homes are sold in cahoots or between family members, the sale price rarely reflects the home’s actual market value.

What is an Assumable Mortgage?

An assumable mortgage is a mortgage that lets the current homeowner (seller) transfer their mortgage to the new homeowner (buyer). The buyer takes over the seller’s loan instead of applying for a new mortgage loan.

More on this: Assumable mortgages can be beneficial when the existing mortgage has an interest rate lower than the current market rate. All FHA mortgages and VA mortgages are assumable.

What is a Loan Balance?

Loan balance is the amount of money unpaid on a mortgage. As a math formula, it’s the beginning loan size minus the payments made toward the principal.

More on this: When your loan balance exceeds your home’s value, a condition known as being “underwater,” you may have fewer options to refinance or sell your home.

What is a Balloon Mortgage?

A balloon mortgage is a type of mortgage that requires a large final payment, called a balloon payment, at the end of the loan term. Monthly payments are typically low and may not reduce the loan balance.

More on this: Balloon mortgages can appear more affordable because of their lower monthly payments. Making the large final payment may be a financial challenge, though. Have a plan for how you’ll handle a balloon payment.

What is Bare Walls Coverage?

Bare walls coverage is insurance coverage associated with condominiums or co-op buildings. It covers the basic structure of a housing unit, including walls, floors, and ceilings. It does not extend to the unit’s fixtures, improvements, or personal belongings.

More on this: If you own a condominium with bare walls coverage, purchase additional “walls-in” or “all-in” coverage for your home’s interior items, including appliances, flooring, and cabinetry. 

What is a Basis Point?

A basis point is a unit of measure to denote a fraction of a percentage point. One basis point equals 0.01 percentage point or one-hundredth of a percentage point.

More on this: Mortgage professionals use basis points to describe small changes in an interest rate. For example, if mortgage rates go up 25 basis points, today’s mortgage rates are 0.25 percentage points higher, or 0.25%.

What is Boarder Income?

Boarder income is Income earned from renting a portion of a property, typically a room or living space, to a person not part of the household. The property owner receives payment in exchange for providing accommodation and related services.

More on this: Boarder income can be applied to household income totals for home buyers using certain low-down payment mortgages such as HomeReady and Home Possible. 

What is a Cash Gift for Down Payment?

A cash gift for down payment is money given by a family member or acceptable donor toward purchasing a home.

More on this: When home buyers use cash gifts for a downpayment, lenders will request a cash gift letter that lists the gifter, the giftee, and the gift amount, plus a statement that the cash is a gift and not a loan in disguise. Cash gifts are allowed with most first-time buyer mortgages and programs.

What is a Cash-Out Refinance?

A cash-out-refinance is a mortgage refinancing option where the size of the new mortgage loan exceeds that of the existing mortgage loan, and the borrower receives the difference in cash. 

More on this: Homeowners use cash-out refinances to access their home equity. Homeowners can use their cash for home improvement, debt consolidation, retirement planning, and anything else. A refinance is not a cash-out refinance unless the homeowner receives at least $2,000 as cash or payment toward debts. 

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy A type of bankruptcy that liquidates a person’s assets to repay their debts. Certain assets may be exempt. All proceeds go to creditors.

More on this: Filing for Chapter 7 bankruptcy can provide a fresh start for people overwhelmed by debt. However, it affects your credit score and makes getting a mortgage approved more difficult for at least two years.

Learn more about buying a house after bankruptcy.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a form of bankruptcy in the US legal system where the court reorganizes a person’s debt, and a repayment plan is established to pay back their debts over time, usually 3 to 5 years.

More on this: Unlike Chapter 7 bankruptcy which liquidates a debtor’s assets, Chapter 13 bankruptcy lets the debtor keep their property and pay off their debts using future income. Chapter 13 may be better for individuals with a steady income who wish to protect a home from foreclosure.

Learn more about buying a house after bankruptcy.

What does Cleared-to-Close mean?

Cleared-to-close is a mortgage industry term that indicates a loan application is through underwriting with all conditions for approval met so that the loan can close.

More on this: When a lender issues a cleared-to-close, it gives a green light for signing paperwork and transferring funds. Sometimes, lenders abbreviate “cleared-to-close” as CTC.

What is Closing?

Closing is the final step of a real estate transaction where homeownership transfers from the seller to the buyer. 

More on this: Closing is called “settlement” or “escrow” in different parts of the country. At closing, buyers and sellers sign all necessary documents, the title company disburses funds, and the buyer becomes the property’s official owner.

What are Closing Costs?

Closing costs are expenses over and above the property price that home buyers and sellers incur as part of a real estate transaction.

More on this: Closing costs include fees related to home inspections, home appraisals, credit reporting, real estate taxes, and homeowners insurance. Closing costs vary by mortgage lender, property type, and state and county. Closing costs range from $0 to 5 percent of the home’s purchase price.

What is a Co-signer?

mortgage co-signer is a person who chooses to sign a mortgage loan agreement with the primary borrower and takes responsibility for making payments if the borrower defaults.

More on this: Mortgage co-signers are common when the primary applicant’s income or credit history is insufficient for getting pre-approved. Co-signer income and credit history help the primary applicant qualify for a loan.

What is Combined Mortgage Rate?

Combined mortgage rate is the sum of your FHA mortgage rate and your annual FHA Mortgage Insurance Premium (MIP). Combined mortgage rate represents your annual mortgage borrowing rate.

More on this: The FHA Net Tangible Benefit test uses combined mortgage rate to check whether a homeowner’s new, post-refinance mortgage payment will be at least 5 percent below the current one.

What is a Condominium?

A condominium is a legal form of homeownership in which real estate is divided into units individuals can purchase and own. 

More on this: In a condominium, each owner owns the interior of their unit, while the exterior and common areas, including elevators, gyms, and meeting rooms, are owned jointly by all unit owners. Condo owners pay regular homeowners association (HOA) fees for common area maintenance and upkeep. 

What is a Condominium Master Insurance Policy?

A condominium master insurance policy is for the shared areas of a condo community, like the roof, basement, elevator, heating, cooling systems, walkways, and other communal spaces. It covers damage, theft, and injury.

More on this: Condominium associations purchase master insurance because it includes injury coverage, while other policies cover only property.

What is a Conforming Loan Limit?

Conforming loan limits are the maximum amount of money that Fannie Mae and Freddie Mac, two government-sponsored entities, will guarantee for a mortgage. The Federal Housing Finance Agency (FHFA) establishes loan limits annually.

More on this: The government sets each year’s conforming loan limits in November of the preceding year, usually during the week after Thanksgiving. Loan limits vary by county and the number of units in a property. Loans that exceed conforming loan limits are called Jumbo Loans.

What is a Contingency?

A contingency is a required condition for a home purchase transaction to close.

More on this: Common contingencies in real estate contracts include the home inspection, appraisal, and mortgage contingency. When contingencies are not satisfied, they provide a legal pathway for buyers to back out of the contract without losing their earnest money deposit.

Conventional Mortgage

A conventional mortgage is a type of mortgage that is neither insured nor guaranteed by the federal government. Conventional mortgages include conforming mortgages backed by Fannie Mae or Freddie Mac and jumbo mortgages backed by banks or private lenders.

More on this: 71 percent of first-time buyers use conventional loans to finance their homes.

What is a Conventional 97 Mortgage?

Conventional 97 is a brand name for a specific conventional mortgage which allows buyers to make a down payment of 3 percent of the home’s purchase price.

More on this: The “97” in Conventional 97 refers to the program’s maximum loan-to-value ratio. Learn more about the Conventional 97.

What is a Counteroffer?

A counteroffer is the seller’s response to the buyer’s offer to purchase or the buyer’s response to the seller’s offer to sell, with revised terms for accepting an offer.

More on this: Counteroffers often include changes to price, closing date, contingencies, and included items. Multiple counteroffers between buyer and seller are common.

What is a Covered Peril?

A covered peril is a specific risk covered by an insurance policy and reimbursed in the event of a loss.

More on this: Some insurance has specific events that are covered peril, such as electrical fires for fire insurance. Perils that aren’t covered are called policy exclusions. Homeowners can request additional covered perils from their insurance company.

What is a Credit Bureau?

A credit bureau is a company that collects an individual’s credit information and sells that information to banks, lenders, and other creditors for deciding on granting loans.

More on this: Credit bureaus gather data from banks, credit card companies, and public records to create credit reports. These agencies also calculate credit scores, numerical representations of an individual’s creditworthiness. The three largest credit bureaus in the United States are Experian, Equifax, and TransUnion.

What is a Credit Score?

A credit score is a numerical representation of a person’s creditworthiness based on their credit history. 

More on this: Credit bureaus apply proprietary algorithms to credit report information to assign a score between 300 (poor) and 850 (exceptional). High credit scores correlate with low default rates and give buyers access to lower mortgage rates. Buyers with poor credit can build a better credit score in as little as six months.

What does Days on Market mean?

Days on Market is a real estate term describing how many days a home is for sale. It begins counting on the original listing date and stops when the seller accepts a purchase offer.

More on this: When a home’s Days on Market (DOM) is higher than the average Days on Market for a particular area, it may suggest that the home is overpriced or has other issues that make it less appealing. 

What is Debt-to-Income Ratio (DTI)?

Debt-to-income ratio is an equation used to approve mortgages. It compares a home buyer’s monthly income to their monthly debt obligations. DTI is a common abbreviation.

More on this: Debt-to-income ratio measures a person’s capacity to manage monthly payments and repay loans to lenders, so as a home buyer’s DTI reduces, their mortgage application is more likely to get approved. 

What is a Deductible?

A deductible is the amount of money a person pays out-of-pocket before their insurance company covers the remaining costs.

More on this: As a homeowner, you can choose how big or small your deductible is. Deductibles usually range from $500 up to $5,000. As the size of your deductible increases, your insurance premium’s price decreases.

What is a Deed?

A deed is a legal document that establishes ownership of a home. It transfers the title of a home from the seller to the home buyer.

More on this: A deed includes the property’s description, the parties involved in the purchase, and the home seller’s signature. Once the deed is signed, it’s added to the county’s public record.

What is Default?

Default is when a homeowner with a mortgage fails to make monthly mortgage payments in breach of the home loan terms.

More on this: Defaulting on a mortgage sometimes, but not always, leads to foreclosure. Lenders typically consider a mortgage in default when the homeowner misses three consecutive payments.

What is Delayed Financing?

Delayed financing is a mortgage strategy in which a home buyer pays cash to buy a home, then later takes a cash-out refinance mortgage on the home to get their initial cash payment back. 

More on this: Buyers with a strong cash position can use delayed financing to bypass the mortgage process and make an offer more attractive to home sellers. 

What are Discount Points?

Discount points, or mortgage points, are fees paid to a mortgage lender at closing in exchange for a reduced interest rate on a mortgage loan.

More on this: Paying discount points is commonly called “buying down the rate.” Each discount point costs 1 percent of the loan amount. Paying discount points is best for homeowners who plan to keep their mortgage for at least a few years.

What is Down Payment Assistance?

Downpayment assistance is a broad term for programs that give home buyers cash grants or favorable loan terms. A nonprofit organization or a government entity usually sponsors DPA programs. 

More on this: Downpayment assistance programs (DPA) typically target low- to moderate-income families, first-time homebuyers, and buyers with occupations in service to communities, such as teachers and first responders.

What is Dual Agency?

Dual agency is when one real estate agent represents the buyer and the seller in a property transaction.

More on this: Dual agency can streamline communication and negotiation between parties but also presents an apparent conflict of interest. Because a real estate agent cannot advocate for both sides in a negotiation, some states outlawed dual agency.

What does Due on Sale mean?

Due on sale is a mortgage contract provision requiring homeowners to pay off their mortgage when the home is sold or transferred. 

More on this: Due on sale is a standard clause for mortgages backed by Fannie Mae and Freddie Mac. FHA and VA loans do not include the due on sale clause, which means subsequent homeowners can assume the existing loan

What is Earnest Money?

Earnest money is a cash deposit that home buyers put into an escrow account when the contract is signed to demonstrate their desire to follow through on the purchase.

More on this: Earnest money deposits are sometimes called “good faith deposits.” They can range from $500 to 5 percent of the home’s purchase price. The buyer’s earnest money is applied toward its down payment or closing costs at closing. However, per terms in the contract, the seller may be eligible to keep the buyer’s earnest money should the buyer back out.

What is Escrow?

Escrow is a savings account managed by mortgage lenders to pay a homeowner’s property taxes and homeowners insurance premiums.

More on this: Lenders prefer, and usually require, that homeowners use an escrow account to ensure payments get made on time. A lender collects a portion of a home’s annual real estate tax and insurance bill with its monthly mortgage payment, then pays the bills when they come due.

What is Equity?

Equity is the difference between your home’s market value and the amount you owe on mortgage(s) secured by the property.

More on this: Equity is the portion of your home you “own.” Equity can increase as you pay down your mortgage, your home increases in value, or both. Equity is an asset, and homeowners can extract equity as cash via home equity loans, lines of credit, or cash-out refinancing.

What is Fannie Mae?

Fannie Mae is a government-sponsored enterprise (GSE) that buys and packages mortgages from mortgage lenders to sell as mortgage-backed bonds. Fannie Mae’s official name is Federal National Mortgage Association (FNMA).

More on this: When it purchases mortgages from US lenders, Fannie Mae replenishes the cash reserves of the lenders so that the lenders can make more loans. Fannie Mae doesn’t lend directly to borrowers but sets guidelines for the loans it will buy.

What is the Federal Housing Administration (FHA)?

The Federal Housing Administration (FHA) is an insurance agency for mortgage loans within the US Department of Housing and Urban Development.

More on this: The FHA is the largest insurer of mortgages in the world. The agency helped to end the Great Depression with its mortgage insurance product. Since 1934, the FHA has helped US homeowners access affordable homeownership and fair credit.

What is the Federal Reserve?

The Federal Reserve is the central banking system of the United States, responsible for setting monetary policy and regulating financial institutions. The group is often called “The Fed” as shorthand.

More on this: The Federal Reserve doesn’t directly set mortgage rates for US home buyers, but its interest rate decisions influence the economy, affecting mortgage rates. The Federal Reserve’s primary role is to keep inflation in check.

What is an FHA Mortgage?

FHA mortgages are home loans insured by the Federal Housing Administration (FHA). FHA mortgages are available to all US home buyers and are a catch-all mortgage for buyers who may not meet the requirements for other low- and no-downpayment mortgages.

More on this: FHA mortgages are popular among home buyers with lower credit scores and smaller down payments. However, they’re also practical for buyers of two-unit homes and those who receive sizable cash gifts for a downpayment.

Read more about FHA loans.

What are FHA Mortgage Insurance Premiums?

FHA Mortgage Insurance Premiums (FHA MIP) are payments for an insurance policy required by FHA mortgage guidelines. The insurance policy pays mortgage lenders if the homeowner with an FHA-backed mortgage defaults.

More on this: Homeowners with FHA-backed mortgages pay FHA MIP upfront at closing and monthly over the loan’s life. FHA MIP costs vary based on the loan amount, loan term, and loan-to-value ratio. 

What is a FICO Credit Score?

FICO credit score is a numerical representation of a home buyer’s creditworthiness based on credit history. FICO is a brand name and the generic term for “credit score.”

More on this: FICO scores and the FICO scoring algorithm are products of the Fair Isaac Corporation. FICO scores range from 300 (poor) to 850 (exceptional), using data from credit reports, including payment history, amounts owed, length of credit history, new credit, and types of credit used. 

What is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a mortgage where the interest rate cannot change throughout the life of the loan. The interest rate at the beginning is the same as at the end.

More on this: Fixed-rate mortgages are predictable because your principal and interest portion is the same throughout the loan term. The trade-off is that fixed-rate mortgages often start with higher interest rates than comparable adjustable-rate mortgages and may be more expensive over 30 years.

What is a Flipped Home?

A flipped home is a property purchased, renovated, then sold for a profit in a relatively short period.

More on this: Buying a flipped home can be cost-effective and risky for home buyers. Buyers should always hire a licensed home inspector to review a flipped home for safety and quality of renovations.

What is a Foreclosure?

Foreclosure is a legal process by which a lender repossesses a homeowner’s property and sells it on the open market – typically initiated after a mortgage default.

More on this: Foreclosures negatively impact a homeowner’s credit score and ability to secure a mortgage in the future.

What is Freddie Mac?

Freddie Mac is a government-sponsored enterprise (GSE) that buys and packages mortgages from lenders to sell as mortgage-backed bonds. Freddie Mac’s official name is Federal Home Loan Mortgage Corporation (FHLMC).

More on this: Freddie Mac replenishes a lender’s cash reserves when it purchases mortgages so that the lender can make more loans. It doesn’t make loans directly to borrowers but sets the guidelines for loans it will buy.

What is Free-and-Clear?

“Free-and-clear” describes a home completely paid off and not subject to liens or other legal claims.

More on this: When a home is owned free and clear, the homeowner should still insure the home for its replacement value and must make real estate tax payments at least annually.

What does For Sale by Owner (FSBO) mean?

For Sale by Owner (FSBO) is a home sale strategy where the seller lists and sells their home without a real estate agent or broker. FSBO is pronounced: “FIZZ-bo.”

More on this: Home buyers should have real estate agent representation – even when buying by owner. Purchasing real estate can be a complex, time-consuming legal transaction with long-term risks. Professional representation mitigates the risks of buying a home.

What is Gross Income?

Gross income is a home buyer’s total household income before deductions such as taxes, insurance, and retirement contributions are taken out. 

More on this: Gross income includes wages, salaries, bonuses, tips, rental income, investment earnings, and other income. Lenders may use a combination of paystubs, W-2s, tax returns, bank statements, and employment verifications to calculate your gross income. 

What is a High-Cost Area?

A high-cost area is a geographical region where the median home value is 115% or higher than the national conforming loan limit, so local loan limits are adjusted higher.

More on this: The definition of “high-cost” is set by the Federal Housing Finance Agency (FHFA). As of 2023, the FHFA designates 139 high-cost areas in the United States with concentrations in coastal states, including California, New York, and Washington.

What is a Home Equity Line of Credit?

A Home Equity Line of Credit (HELOC) is a mortgage that functions like a credit card, allowing homeowners to borrow money against their home and pay it back at will.

More on this: HELOC credit limits are based on a home’s equity. Interest rates are variable and linked to Prime Rate. Many homeowners open HELOCs against their homes for emergencies and keep a zero balance. 

What is a Home Equity Loan?

A Home Equity Loan (HELOAN) is a fixed-rate mortgage that uses a home’s equity as collateral, similar to how an auto loan works for automobiles.

More on this: Homeowners typically open home equity loans for more considerable expenses like home renovations, college tuition, or debt consolidation. They are an alternative to cash-out refinancing and have fixed rates. Repayment is over a set term – usually ten years. 

What is a Home Inspection?

A home inspection is a comprehensive evaluation of a home and its systems performed by a licensed home inspector.

More on this: A home inspector checks a home’s structure, electrical systems, plumbing, HVAC systems, siding, roofing, and more. A home inspection typically costs $400-700, depending on the home’s size and the report’s complexity.

What is the Home Inspection Clause?

The home inspection clause is a standard contract provision that makes the sale of a home conditional upon a satisfactory home inspection.

More on this: When a contract includes a home inspection clause, and a home inspection reveals significant property issues, the home buyer can renegotiate the sales price or back out of the contract without penalty. Home inspection clauses are standard home buyer protection.

What is a Homeowners Association (HOA)?

A Homeowners Association (HOA) is a self-government organization in a subdivision, planned community, or condominium that enforces rules and manages common areas of the property.

More on this: Homeowners Associations maintain shared spaces in a community, such as landscaping, pools, and gyms. They also write and enforce community rules, including allowable house colors and parking restrictions. Living in an HOA provides a consistent neighborhood aesthetic and may limit individual freedoms.

What is Homeowners Insurance?

Homeowners insurance is a form of property insurance that covers losses and damages to a home and assets within the home. Homeowners insurance is also known as hazard insurance.

More on this: Homeowners insurance generally covers interior and exterior damage to a home, loss or damage to personal belongings, and injury. Lenders require homeowners to carry insurance for at least the home’s replacement value so builders can rebuild it in the event of a catastrophe.

Read more about homeowners insurance.

What is the Housing Market Index (HMI)?

The Housing Market Index (HMI) is a monthly survey that gauges homebuilder sentiment for the new construction single-family housing market. The National Association of Home Builders (NAHB) conducts the survey. 

More on this: The Housing Market Index is a weighted average of three survey questions about current sales volume, sales expectations for the next six months, and foot traffic of prospective buyers. When the Housing Market Index is above 50, more builders view housing conditions as good than poor. 

What is a Housing Start?

A housing start measures when a new home “breaks ground.” 

More on this: Housing Starts is reported monthly by the US Census Bureau, broken down between single-family and multi-unit properties. An approximate 9-month lag exists between when a home starts and when it’s move-in ready.

What is an Interest Rate?

See mortgage rate.

What is an Investment Property?

An investment property is a property that’s purchased to generate income or a return for the homeowner.

More on this: Mortgages for investment properties generally require larger down payments than mortgages for primary and second homes. Interest rates are generally higher, too.

What is a Lease?

A lease is a legally binding agreement between a renter and its landlord that outlines the terms and conditions of the renter’s occupancy and use of the home.

More on this: A lease details the responsibilities of each party in the transaction, the length of the renter’s tenancy, the amount of rent paid monthly, plus any specific rules for the property. 

What is a Lease-Purchase?

See rent-to-own.

What is a Lender Overlay?

Lender overlays are additional requirements that lenders add to approve a mortgage application beyond standard mortgage guidelines. 

More on this: Common lender overlays include stricter credit score requirements for borrowers, additional income verifications, and larger downpayment requirements. Overlays vary from one lender to another, so when Lender A turns down a loan, Lender B may still approve it.

What is a Lien?

A lien is a mortgage lender’s legal claim to a home before its mortgage gets paid off.

More on this: Homes can have multiple liens – one for each outstanding mortgage. For example, a home with a conventional mortgage and a home equity line of credit will have two liens. When the home sells, both liens get paid off and subsequently released. 

What is List Price?

List price is the price at which a home is listed for sale in the MLS or other listing service.

More on this: The home seller sets the home’s list price based on the home’s condition, the recent sale prices of comparable homes in the area, and current market conditions. Buyers can usually negotiate the list price of a home.

What is a Loan Estimate?

A Loan Estimate is a standardized government document detailing the proposed mortgage loan’s estimated costs. “LE” is a common shorthand for a loan estimate.

More on this: Home buyers can get loan estimates from a lender within three days of giving an application. Loan estimates will show the buyer’s projected loan terms, monthly payments, and closing costs.

Read more about loan estimates.

What is Loan Term?

The loan term is the length of a mortgage loan, commonly expressed in months or years.

More on this: The most common mortgage loan terms are 30 years, 20 years, and 15 years, but other durations include ten years. In general, shorter loan terms correlate with lower mortgage rates and less interest paid.

What is Loan-to-Value (LTV)?

Loan-to-Value (LTV) is the ratio of a home’s loan size to its value, expressed as a percentage. 

More on this: When you buy a home, the LTV calculation uses whichever is less – your home’s purchase price or its appraised value. The loan-to-value when you make a 3 percent down payment is 97%.

What is a Low Downpayment Mortgage?

A low downpayment mortgage is a mortgage that lets home buyers make down payments of 5 percent or less. Standard low-downpayment loans include USDA, VA, FHA, and conventional loans. 

More on this: Home buyers can make larger down payments when they use a low downpayment loan, but they’re not required to.

Read more about low downpayment mortgages

What is a Mortgage?

A mortgage is a loan used to purchase a home, including standalone homes, homes with up to four units, condominiums, and co-ops.

More on this: The first government-backed mortgage was issued via the Federal Housing Administration (FHA) in 1934. Today, more than 95 percent of first-time home buyers use a mortgage to purchase their homes.

What are Mortgage Guidelines?

Mortgage guidelines are the checklists that lenders use to approve a home buyer’s mortgage application. 

More on this: Mortgage guidelines vary between loan types and lenders. However, most mortgage guidelines include rules for minimum credit score, maximum debt-to-income ratio, and maximum loan-to-value. 

What is a Mortgage Lender?

A mortgage lender is an entity that facilitates loans for people who want to purchase or refinance real estate.

More on this: Mortgage lending is a broad category that includes banks, credit unions, and online lenders. Studies show that home buyers who talk to two or more lenders save money on their mortgage.

What is a Mortgage Rate?

A mortgage rate is the annual percentage of a home buyer’s loan amount paid for the right to borrow money.

More on this: Mortgage rates directly influence mortgage payments. Lower mortgage rates get you a lower mortgage payment. Mortgage rates can be fixed-rate or adjustable. 

See today’s mortgage rates.

What is a Mortgage Rate Lock?

A mortgage rate lock is an agreement that guarantees that a lender will honor a home buyer’s mortgage rate and discount point combination for a specific number of days.

More on this: Rate locks are honored in 15-day increments, with a rise in loan costs for each additional 15 days requested. Generally, home buyers can only lock a mortgage rate with a signed contract on a home. 

What are Mortgage-Backed Securities (MBS)?

Mortgage-backed securities (MBS) are bonds backed by mortgages. Mortgage-backed securities are the basis for conventional, FHA, VA, and USDA mortgage rates and some non-conforming mortgage rates.

More on this: Bond prices, like stock prices, are unpredictable. Because mortgage rates are based on bond prices, mortgage rates are also unpredictable. 

What is a Move-In Ready Home?

A move-in ready home is a property that meets local municipal guidelines for building codes, safety standards, and habitability. 

More on this: The phrase “move-in ready” is sometimes used in real estate marketing to denote homes that buyers can buy and move into without renovation, update, or repair.

What is the Multiple Listing Service (MLS)?

The Multiple Listing Service (MLS) is a database of homes for sale managed by groups of real estate brokers in a geographic area. Real estate agents use the MLS to find and market properties.

More on this: There are dozens of regional MLSs throughout the United States, and access is typically limited to licensed real estate agents and brokers.

What is a Multi-Unit Home?

A multi-unit home is a residential property with 2, 3, or 4 units where each unit has living facilities, including a kitchen, bathroom, and living area.

More on this: Mortgages on multi-unit homes typically require a larger downpayment than 1-unit homes, with FHA-backed mortgages as the notable exception.

What is the National Association of REALTORS® (NAR)?

The National Association of Realtors (NAR is a professional trade association comprised of real estate agents and brokers, salespeople, property managers, and appraisers.

More on this: NAR members are known as REALTORS®, a trademarked term. The organization promotes professional standards, provides educational opportunities, and lobbies for the interests of its members and the Unites States housing issues.

What does Net Tangible Benefit mean?

Net tangible benefit is the measurable advantage of refinancing a mortgage, such as getting a lower interest rate, lowering your monthly payment, or moving from an adjustable-rate mortgage to a fixed-rate mortgage.

More on this: The net tangible benefit requirement applies to FHA and VA loans and ensures homeowners don’t refinance into predatory or disadvantageous loans. 

What is a Non-Conforming Loan?

A non-conforming mortgage is a mortgage that fails to conform to Fannie Mae and Freddie Mac guidelines, usually because mortgage loan size exceeds conforming mortgage loan limits.

More on this: Non-conforming loans are called “jumbo loans” and may come with higher interest rates and larger down payment requirements. 

What is a Non-Occupant Co-Borrower?

A non-occupant co-borrower is a person who signs a mortgage with a home buyer and shares responsibility for making payments but doesn’t live in the home with the buyer.

More on this:  Home buyers often enlist non-occupant co-borrowers when they can’t qualify for a mortgage because of low household income or below-average credit.

What is a Non-Warrantable Condo?

A non-warrantable condo is a condominium unit or building that fails to meet Fannie Mae’s or Freddie Mac’s condo mortgage guidelines, which renders the home ineligible for conventional mortgage financing. 

More on this: Factors that affect a condo’s warrantability include the percentage of owner-occupied units in a building, insurance coverage, and whether the builder or builder faces pending litigation. Non-warrantable condos y require special mortgage financing. 

What is an Offer Letter?

An offer letter is a document that home buyers present to sellers with proposed purchase terms, including an offered price, a proposed timeline, and contingency clauses.

More on this: A buyer’s offer letter may also contain a personal note to appeal to the seller’s emotions, such as why the buyer loves the home or neighborhood. 

What is an Origination Fee?

An origination fee is a lender’s charge for processing a mortgage. 

More on this: Lenders charge origination fees for administrative mortgage tasks like underwriting, processing, and funding. Fees range from $0 to 5 percent of the loan size. Origination fees are different from discount points.

What is Payment Shock?

Payment shock is when a person’s monthly housing expense increases by at least 50 percent.

More on this: Lenders review the potential for payment shock as part of approving a mortgage, especially for first-time home buyers transitioning from a low-rent or rent-free situation. 

What is Personal Liability Insurance?

Personal liability insurance provides coverage when someone gets injured on your property or if you, a family member, or a pet cause damage to someone else’s property. 

More on this: Personal liability insurance is included with most homeowners insurance policies and covers medical bills, legal fees, and repair costs. It rarely covers injuries to members of your household.

What is PITI?

PITI is an acronym for Principal, Interest, Taxes, and Insurance – the four components of a monthly mortgage payment. Principal and interest repay the loan, while taxes and insurance are escrowed monthly by the lender.

More on this: PITI is pronounced: “pee-eye-TEE-eye.” 

What is a Portfolio Loan?

Portfolio loans are mortgages that lenders make for themselves to hold on their books rather than selling to Wall Street. 

More on this: The availability of portfolio loans varies by bank. Portfolio loans are best for non-standard scenarios, including non-warrantable condos, asset-based loans, and self-employed buyers. 

What is a Pre-Approval?

A pre-approval is an official statement from a mortgage company that says a home buyer’s mortgage application will be approved, assuming no adverse changes in job, salary, or credit rating.

More on this: Pre-approvals show home buyers how much home they can afford and how much mortgage they can get approved.

Get pre-approved now.

What are Prepaid Costs?

Prepaid costs are homeowner expenses, such as property taxes and homeowners insurance, paid in advance at your closing.

More on this: Mortgage lenders estimate a home buyer’s prepaid items in their loan estimate and closing disclosures.

What is a Pre-Qualification?

A pre-qualification is an estimate of a home buyer’s creditworthiness.

More on this: Mortgage pre-qualifications are unreliable as a gauge of how much home you can afford or whether your mortgage will be approved because mortgage lenders don’t verify the information provided.

Read more about pre-qualifications vs pre-approval.

What is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is an insurance policy that pays the lender for its loss when homeowners default on their mortgages.

More on this: Some mortgages require homeowners to pay private mortgage insurance while they build to 20% equity in their homes. PMI cost varies by mortgage type, loan-to-value, loan term, and credit score.

What is a Planned Urban Development (PUD)?

A Planned Unit Development (PUD) is a community of homes governed by a homeowner’s association, similar to condominiums but for houses.

More on this: PUDs homeowners often share amenities such as gyms, pools, and landscaping of common areas. Mortgage lenders may require PUD-specific documentation issuing a cleared-to-close, including financial documentation, owner occupancy rates, and community by-laws.

What is Quantitative Easing?

Quantitative Easing (QE) is when a central bank, such as the Federal Reserve, creates new money for buying specific financial assets, which may include mortgage bonds. 

More on this: When a central bank adds demand to a mortgage bond market, interest rates drop, stimulating home buying and refinancing activity. 

What is a Real Estate Agent?

A real estate agent is a licensed professional representing buyers or sellers in real estate transactions. 

More on this: Real estate agents negotiate home prices and guide their clients through buying and selling homes. A real estate “agent” differs from a real estate “broker,” but the terms are used interchangeably in casual conversation.

What are Real Estate Taxes?

Real estate taxes are semi-annual taxes homeowners pay to support community services, including schools, roads, and public works. They’re commonly known as property taxes.

More on this: Homeowners typically pay property taxes as part of their monthly mortgage payment, which lenders hold in an escrow account until semi-annual tax payments are due. Failure to pay property taxes can result in foreclosure. 

What is a Refinance?

A refinance is when a homeowner replaces their existing mortgage with a new one, often with different terms. 

More on this: Homeowners refinance to get a lower interest rate, change their loan term, or take cash out of their property. 

What is Rent-to-Own?

A rent-to-own agreement is a contract between a renter and a landlord where the renter leases a home and has the option, but not the obligation, to buy the home from the landlord at a pre-determined price.

More on this: Many rent-to-own contracts credit a portion of each rental payment toward the future purchase price or its closing costs.

What is Seasoning?

Seasoning measures how long a homeowner has lived in a home or paid on a mortgage. 

More on this: Mortgage guidelines often impose seasoning requirements of at least six months for refinance and home sale transactions. 

What is a Second Home?

A second home is a residential property that neither functions as a person’s main residence nor an investment property.

More on this: Second homes are often called vacation properties. Second homes are distant from a person’s main residence by mileage or travel time.

What is a Seller’s Agent?

A seller’s agent, or a listing agent, represents a home seller in a real estate transaction. The duties of a seller’s agent include setting the listing price, marketing the home, negotiating offers, and guiding the seller through closing.

More on this: Home sellers pay the seller agent’s commission from the sale proceeds, which the seller’s agent shares with the buyer’s agent. 

What are Seller Concessions?

Seller concessions are when a home seller agrees to pay some or all closing costs on behalf of a home buyer. 

More on this: Home buyers and sellers should negotiate seller concessions as part of the counteroffer process. Seller concessions are limited to the sum of closing costs.

What is Single Entity Coverage?

Single-entity coverage is condominium insurance covering the interior of units and improvements, but not personal property within the unit or liability.

More on this: Homeowners should purchase separate insurance to cover personal belongings and personal liability, which single-entity coverage does not include. 

What is a Soft Credit Pull?

A soft credit pull is a credit report review that does not affect your credit score. Soft credit pulls may be less accurate or complete than hard credit pulls.

More on this: Mortgage lenders may use soft credit pulls to pre-approve a mortgage. Typically, they’ll require a hard credit pull before giving a final mortgage approval.  

What is a Tax Deduction?

A tax deduction is an expense that people can subtract from their taxable income, reducing their annual income subject to tax. Common real estate-linked tax deductions include mortgage interest paid, property taxes, and discount points.

More on this: The tax benefits of homeowners vary by income, location, and property tax rate. First-time home buyers should consult a tax advisor before buying their first home.

What is a Teaser Rate?

A teaser rate, sometimes called a starter rate, is the starting mortgage rate for an adjustable-rate mortgage. 

More on this: Lenders let home buyers choose how long their teaser rate lasts. The most common terms are 5 and 7 years. Usually, shorter terms are linked to lower starting rates.

What is Title?

Title refers to a homeowner’s legal right to ownership of a home. When you buy a home, the seller’s title is transferred to you, proving you are the lawful owner.

More on this: Lenders perform a title search as part of every mortgage approval to check for outstanding liens and ownership disputes that could complicate or halt a home sale. A home purchase can only close once the title report is clean.

What is Title Insurance?

Title insurance is an insurance policy that protects homeowners and lenders from errors on a property title report, such as undiscovered liens.

More on this: There are two types of title insurance: lender’s title insurance and owner’s title insurance. Only lender’s title insurance is required. Home buyers pay for title insurance as a one-time fee at closing.

What is a Townhome?

A townhome, also called a townhouse, is a single-family home, governed by a homeowners association, that shares one or more walls with other townhome units. 

More on this: Unlike condominiums, townhome owners are often responsible for maintaining their home’s exterior and green space. Townhomes usually have lower HOA fees than condos because there are fewer communal areas.

What is a Trust?

A trust is a legal arrangement where one party, known as a trustor, gives control of an asset to a second party, the trustee, to manage for the benefit of a third party, the beneficiary.

More on this: In real estate, homeowners can put property into trust for reasons including avoiding probate, maintaining privacy, and managing estate taxes. Mortgage guidelines often prohibit closing a home in the name of a trust.  

What is Underwriting?

Underwriting is a mortgage lender’s loan approval process. Underwriting a loan includes reviewing the home buyer’s credit history, employment status, and assets and inspecting the subject property.

More on this: The underwriting process treats mortgage guidelines like a checklist. The mortgage loan is approved when every checklist item is verified and satisfactory. Underwriting varies by mortgage type and lender, based on mortgage guidelines. 

What is a USDA Mortgage?

A USDA mortgage is a mortgage guaranteed by the US Department of Agriculture (USDA) that allows for 100% financing. USDA loans are limited to rural and low-density suburban areas.

What Buyers Should Know: USDA mortgages are subsidized for below-market mortgage rates. Approximately 4 percent of all mortgages outstanding are USDA-backed.  

Read more about USDA loans.

What is a VA Mortgage?

A VA mortgage is a mortgage guaranteed by the Department of Veterans Affairs (VA). VA loans allow 100 percent financing with no mortgage insurance required for active duty military and veterans of the armed forces.

Buyers Should Know: A notable VA loan advantage is its leniency toward credit scores and debt-to-income ratios, making homeownership more accessible to veterans and military families. 

Read more about VA mortgages.

What is a Variable Interest Rate Loan?

See Adjustable-Rate Mortgage.

What is a Warrantable Condominium?

A warrantable condo is a condominium unit or building that meets Fannie Mae’s or Freddie Mac’s condo mortgage guidelines and is eligible for conventional mortgage financing. 

More on this: Factors that affect a condo’s warrantability include the percentage of owner-occupied units in a building, insurance coverage, and whether the builder or builder faces pending litigation. 

What is a Zero-Closing Cost Mortgage?

A zero-closing cost mortgage is where the lender pays 100% of the buyer’s closing costs. In return, the borrower agrees to accept a slightly higher interest rate. 

More on this: Zero-closing cost mortgages reduce a home buyer’s cash-to-close and leave them with maximum cash for home repairs, furnishings, and emergencies. 

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