HomeGlossary
Mortgage words, A to Z.
Common words that come up when you buy, refinance or invest in a home, each in a sentence or two. These are general definitions. Limits, fees and requirements vary by program and lender and change over time, so where a figure matters, check the agency's own page. How a term applies to your own situation is something Joe can go through with you.
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- 203(k) consultant
- A consultant on HUD's roster who, on an FHA 203(k) loan, writes up the work, reviews the plans and costs, and inspects the work at each stage before money is paid out. One is required on a standard 203(k), and optional on a limited 203(k), though a lender may require one.
A
- Amortization
- How each payment splits between interest and paying down the loan, and how that split shifts over the life of the loan.
- Appraisal
- An independent estimate of a home's value, ordered for the lender, that the loan is measured against. It isn't the same as a home inspection, which looks at the home's condition for the buyer.
- As-completed value
- The appraiser's estimate of what a home will be worth once planned work is finished, based on the scope of work and the contractor's bid. It's sometimes called the after-improved value. It's an estimate made before the work starts, not a promise of what the finished home will be worth.
- Assumable loan
- A mortgage a buyer can take over from the seller, if the loan allows it and the buyer qualifies with the servicer. Government-backed loans (FHA, VA, USDA) are generally assumable; most conventional loans aren't.
C
- Closing costs
- The fees and prepaid items due at closing. Fees include lender, title and government charges; prepaid items include interest, the first homeowners insurance premium and the first escrow deposit.
- Contingency reserve
- Money set aside in a renovation or construction budget for costs that turn up once the work starts. How much is set aside depends on the program, the lender and the home. On a renovation loan, what isn't used generally goes toward the loan balance rather than being paid out.
- Conventional loan
- A mortgage that isn't insured or guaranteed by a government agency. Many follow Fannie Mae and Freddie Mac guidelines. Borrower-paid mortgage insurance, when there is any, can come off once enough equity is built.
D
- Draw
- On a renovation or construction loan, a payment of the money set aside for the work, generally made after an inspection shows that stage is done. How many draws there are, and when, depends on the program, the lender and the job. With a HELOC, "draw" means borrowing from the line.
- DSCR loan
- For investment property only. Debt service coverage ratio: the lender looks at whether the property's rent covers its monthly debt, instead of the owner's personal income. Credit and the property are still reviewed.
E
- Earnest money
- A good-faith deposit the buyer makes once an offer is accepted, usually held by a title company, attorney or broker, and credited toward the buyer's cash at closing. The contract decides when it can be returned.
- Escrow account
- An account the loan servicer uses to pay property taxes and homeowners insurance, funded by a deposit at closing and part of each monthly payment. It's reviewed each year, so the amount can change. It isn't the same as the escrow that holds earnest money during a purchase.
F
- FHA loan
- A mortgage insured by the Federal Housing Administration and made by private lenders, for a home the borrower will live in. It isn't only for first-time buyers.
H
- HELOC
- Home equity line of credit. A revolving line of credit secured by the home you live in, usually behind your first mortgage. You draw on it as you need it, then pay it back.
L
- Loan Estimate
- A standard form for most home loans, given after an application, showing the loan's estimated terms and costs so two loans can be compared side by side. Home equity lines of credit, and some loans made for a business purpose, come with different disclosures.
P
- Private mortgage insurance
- Insurance that protects the lender, required on many conventional loans depending on the down payment or equity. Borrower-paid PMI can come off once enough equity is built; FHA's mortgage insurance usually stays.
- Pre-approval
- A conditional yes, given in a letter, generally after income, assets, credit and debts have been reviewed from documents, often along with an underwriting decision, automated or manual. It isn't a final approval, and neither it nor a pre-qualification is a commitment to lend. Lenders use the two names differently, so it's worth asking what was actually checked.
R
- Rate lock
- An agreement that holds an interest rate for a set period, if the loan closes within that period. The rate can still change if the loan itself changes. A pre-approval doesn't lock a rate.
- Renovation loan
- A mortgage that puts the purchase or refinance of a home and the cost of the work it needs into one loan, with one closing. The loan can count what the home is expected to be worth after the work, and the money for the work is generally paid out in stages as the work is done and inspected.
S
- Scope of work
- The written description of the work planned for a home: what will be done, and what each part costs, generally built from the contractor's bid. On a renovation loan, the appraisal and the payouts are based on it.
T
- Title insurance
- Insurance that protects the lender, and optionally the owner, against problems with the home's ownership history.
U
- Underwriting
- The lender's review of your documents, the property and the loan before it makes a final decision.
- USDA loan
- A mortgage guaranteed by USDA Rural Development and made by private lenders, for a home the borrower will live in. Both the address and the household's income are tested, and USDA's eligibility site is the place to check them.
V
- VA loan
- A mortgage partly guaranteed by the Department of Veterans Affairs and made by private lenders, for eligible veterans, service members and some surviving spouses. There's no monthly mortgage insurance; there's a one-time funding fee instead, and some borrowers are exempt from it. The benefit can be used more than once.