Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically after an initial fixed period. For example, a 5/1 ARM has a fixed rate for 5 years, then adjusts annually. Initial rates are often lower than fixed rates.
Amortization
The process of paying off a loan through regular payments over time. Early payments are mostly interest; later payments become mostly principal. A 30-year mortgage has 360 amortized payments.
Annual Percentage Rate (APR)
The true annual cost of a loan, expressed as a percentage. Includes the interest rate plus fees (origination, mortgage insurance, etc.). APR is always higher than the interest rate and is the best number for comparing loans.
Appraisal
An independent estimate of a property's market value, conducted by a licensed appraiser. Lenders require an appraisal to confirm the home is worth at least the loan amount.
Assumable Loan
A mortgage that can be transferred from the seller to the buyer, with the buyer taking over the original loan's interest rate and terms. VA and FHA loans are assumable; conventional loans typically are not.
Bridge Loan
A short-term loan used to bridge the gap between buying a new home and selling an existing one. Typically 6–12 months, interest-only, secured by the existing property.
Buydown
Paying upfront (via discount points or seller/lender credits) to temporarily or permanently reduce the interest rate. A 2-1 buydown reduces the rate by 2% the first year, 1% the second year, then returns to the note rate.
Cash-Out Refinance
Refinancing for more than the current mortgage balance, receiving the difference in cash. Used to access home equity for home improvements, debt consolidation, or other purposes.
Certificate of Eligibility (COE)
A document from the VA confirming a veteran's or service member's eligibility for a VA home loan. Required for all VA loan applications.
Closing Disclosure
A 5-page document provided at least 3 business days before closing that outlines all final loan terms, monthly payment, and exact closing costs. Compare it carefully to your Loan Estimate.
Conforming Loan
A mortgage that meets Fannie Mae and Freddie Mac guidelines, including the loan limit ($766,550 for most CA counties in 2024). Conforming loans typically offer the best rates.
Debt-to-Income Ratio (DTI)
Your total monthly debt payments divided by gross monthly income. Includes the new mortgage payment, car loans, credit cards, student loans, etc. Most programs cap DTI at 43–50%.
Deed of Trust
The legal document used in California (instead of a mortgage) that pledges the property as collateral for the loan. Involves three parties: borrower (trustor), lender (beneficiary), and a neutral trustee.
Discount Points
Fees paid at closing to reduce the interest rate. One point = 1% of the loan amount. Reduces your rate by approximately 0.25% per point. Best if you plan to keep the loan long-term.
Down Payment
The portion of the purchase price you pay in cash. The rest is financed through the mortgage. Down payments range from 0% (VA, USDA) to 3.5% (FHA) to 3–20% (conventional).
DSCR (Debt Service Coverage Ratio)
A metric used for investment property loans. DSCR = monthly rent ÷ monthly PITIA. A DSCR of 1.0 means the rent exactly covers the payment; above 1.0 means positive cash flow.
Earnest Money Deposit (EMD)
A deposit made by the buyer at the time of offer, showing serious intent to purchase. Typically 1–3% of purchase price in California. Applied to closing costs or returned if contingencies are not met.
Escrow
A neutral third party that holds funds and documents until closing conditions are met. In California, escrow companies (not attorneys) typically handle closings. Also refers to the lender-managed account for tax and insurance payments.
Fixed-Rate Mortgage
A mortgage with an interest rate that never changes. The most common types are 30-year and 15-year fixed. Monthly principal and interest payments remain constant for the life of the loan.
Funding Fee (VA)
A one-time fee paid to the VA to fund the loan program. Ranges from 1.25%–3.3% of the loan amount. Can be financed. Waived for veterans with a service-connected disability rating of 10%+.
Gift Funds
Money given (not loaned) to a borrower by a family member, employer, or nonprofit to use toward the down payment or closing costs. Requires a gift letter stating no repayment is expected.
Guarantee Fee (USDA)
USDA's equivalent of PMI/MIP. 1% upfront (can be financed) and 0.35% annual fee added to monthly payments. Significantly lower than FHA MIP.
Hard Money Loan
A short-term, asset-based loan secured by real estate. Qualification is primarily based on the property's value, not the borrower's income or credit. Used by investors for fast acquisitions and fix-and-flip projects.
HOA (Homeowners Association)
An organization that manages a community or development, funded by monthly dues. HOA dues are included in your DTI calculation and escrow account when evaluating affordability.
Impound Account
See Escrow. A lender-managed account where monthly portions of property taxes and homeowners insurance premiums are held and paid on your behalf.
Interest Rate
The annual cost of borrowing, expressed as a percentage of the loan balance. Does not include fees. Compare APR for a true apples-to-apples loan comparison.
Jumbo Loan
A mortgage that exceeds the conforming loan limit ($766,550 in most CA counties for 2024). Not purchased by Fannie Mae or Freddie Mac; lenders hold on their own books with stricter requirements.
Loan Estimate
A standardized 3-page document provided within 3 business days of application, showing estimated interest rate, monthly payment, and closing costs. Required by TRID regulations.
Loan-to-Value Ratio (LTV)
The loan amount divided by the property's appraised value, expressed as a percentage. LTV of 80% means you are borrowing 80% of the home's value and have 20% equity.
Lock (Rate Lock)
An agreement from the lender guaranteeing a specific interest rate for a set period (typically 30–60 days) while your loan is processed. Protects against rate increases before closing.
MIP (Mortgage Insurance Premium)
FHA's mortgage insurance. Required on all FHA loans regardless of down payment. Upfront MIP: 1.75%. Annual MIP: ~0.55% (paid monthly). Permanent for loans with less than 10% down.
Non-QM Loan
Non-Qualified Mortgage. A loan that does not meet the CFPB's Qualified Mortgage standards, which require standard income documentation. Includes bank statement loans, DSCR loans, hard money, and others.
Origination Fee
A fee charged by the lender or broker for creating the loan. Can be expressed as a percentage of the loan amount or a flat dollar amount. Disclosed on the Loan Estimate.
PITIA
Principal, Interest, Taxes, Insurance, and HOA dues. The total monthly housing cost used to calculate DTI and qualify borrowers.
PMI (Private Mortgage Insurance)
Insurance required on conventional loans when the down payment is less than 20%. Protects the lender, not the borrower. Can be removed when LTV reaches 80%; automatically cancels at 78% LTV.
Pre-Approval
A conditional commitment from a lender stating how much you can borrow, based on a credit pull and income/asset review. Stronger than pre-qualification. Valid for 60–90 days.
Pre-Qualification
A preliminary estimate of borrowing power based on self-reported information — no credit pull, no document review. Less reliable than pre-approval and not typically accepted by sellers.
Principal
The original loan amount borrowed, excluding interest. As you make payments, the principal balance decreases (amortizes). Extra principal payments reduce the loan term and total interest paid.
Rate-and-Term Refinance
Refinancing to change the interest rate, loan term, or loan type without taking cash out. The goal is typically a lower rate, lower payment, or switching from ARM to fixed.
Title Insurance
Protects the buyer (owner's policy) and lender (lender's policy) against claims on the property's ownership — unpaid liens, forged documents, errors in public records. One-time premium paid at closing.
Underwriting
The process by which a lender evaluates a loan application to determine the risk of lending. The underwriter reviews credit, income, assets, property, and appraisal before issuing a final approval or denial.
Still Have Questions?
Omar explains every term in plain English — before, during, and after closing.
My Mortgage Company, Inc. · CA DRE #02168831 · NMLS #2269164 · Broker: Omar L. Ortiz, NMLS #951384, DRE #02056548. Definitions are provided for educational purposes only. Specific terms and conditions vary by loan program and lender. All examples are illustrative and not a guarantee of rates, fees, or loan terms. This is not financial or legal advice. This is not a commitment to lend.